Consider these three cash flows: cash paid to repay a loan; cash paid for purchase of a building for use in operations; cash paid for inventory purchases. Which sequence represents the correct categorization of these three cash flows?

• A. Loan repayment—financing; building purchase—investing; inventory purchase—operating
• B. Loan repayment—investing; building purchase—financing; inventory purchase—operating
• C. Loan repayment—operating; building purchase—financing; inventory purchase—investing
• D. Loan repayment—operating; building purchase—investing; inventory purchase—financing

Answer: (A)

In a cash flow statement, activities are grouped into operating, investing, and financing categories. Paying back a loan is a financing activity because it affects the capital structure and debt, not day-to-day operations. Buying a building for use in operations is an investing activity since it involves acquiring a long-term asset. Purchasing inventory is an operating activity because it relates to the core business operations and the cost of goods sold cycle. Therefore, the correct sequence is financing, investing, operating.