Certified Financial Management Specialist Practice Exam

Which cash flow type would be primarily affected by issuing new stock?

1. Operating Cash Flows

2. Investing Cash Flows

3. Financing Cash Flows

4. None of the above

The correct answer is: Financing Cash Flows

Issuing new stock directly impacts financing cash flows, as this activity falls under the broader category of financing activities within the statement of cash flows. Financing cash flows include transactions that affect the company’s equity and debt. When a company issues new shares, it raises capital, which is a key component of how businesses finance their operations and growth strategies. This cash inflow from the issuance of stock adds to the company’s equity, indicating that the firm has secured funds to invest in various aspects of its operations or to pay down debt. Therefore, financing cash flows are primarily affected by the issuance of new stock since they reflect the changes in funding sourced from equity investors. Operating cash flows, on the other hand, mainly involve cash generated from the core business operations, while investing cash flows pertain to cash used for or generated from investments in assets. Since issuing stock does not fit into these two categories, the strongest connection is with financing cash flows.