In the direct method statement of cash flows, the primary component of investing cash flow is typically
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A. B. C. D. E.C
Capital expenditures for long-term assets such as plant and machinery are usually the primary component of investing cash flow.
In the direct method statement of cash flows, the primary component of investing cash flow is typically capital expenditures for long-term assets.
The statement of cash flows is a financial statement that presents the cash inflows and outflows of a company during a specific period, categorizing them into three main sections: operating activities, investing activities, and financing activities. The investing activities section focuses on cash flows related to the acquisition or disposal of long-term assets and investments.
The direct method of preparing the statement of cash flows involves presenting the actual cash inflows and outflows from operating activities and investing activities. This method provides a more detailed view of the cash flows and is considered more informative but less commonly used compared to the indirect method.
The investing activities section of the direct method statement of cash flows captures cash flows related to investments in long-term assets, which are essential for a company's operations and growth. Capital expenditures refer to the cash outflows incurred for acquiring or improving long-term assets such as property, plant, and equipment (PP&E). Examples of capital expenditures include the purchase of manufacturing equipment, construction of a new building, or investment in technology infrastructure.
Dividend payments, which represent cash outflows to shareholders, are categorized under financing activities rather than investing activities. Dividends are distributions of a company's earnings to its shareholders as a return on their investment.
Long-term investments in securities and investments in affiliates are also separate categories of investing activities but are typically not the primary component of investing cash flow in the direct method statement of cash flows. Long-term investments in securities refer to the purchase or sale of stocks, bonds, or other financial instruments that the company intends to hold for an extended period. Investments in affiliates represent cash flows related to the acquisition or disposal of equity or debt securities of companies in which the reporting company has significant influence but does not control.
Repayment of debt is classified as a financing activity rather than an investing activity since it involves the repayment of borrowed funds, such as loans or bonds, which are typically used to finance the company's operations or investments.
To summarize, in the direct method statement of cash flows, the primary component of investing cash flow is typically capital expenditures for long-term assets.