Certified Financial Management Specialist Practice Exam

Which of the following cash flows involves the purchase and sale of assets?

1. Operating Cash Flows

2. Investing Cash Flows

3. Financing Cash Flows

4. Operating and Financing Cash Flows

The correct answer is: Investing Cash Flows

Investing cash flows are specifically related to the purchase and sale of long-term assets, such as property, equipment, and investments in other companies. These transactions are crucial for a company's growth and operational capacity, as they dictate the allocation of resources into areas that will generate future economic benefits. When a company acquires assets, it is using cash to invest in its capabilities, while the sale of assets generates cash inflow. This distinction is important because it categorizes cash flows based on the purpose behind the financial activities, separating them from operating and financing activities. Operating cash flows relate to the day-to-day functions of the business, including revenue from sales and expenses. Financing cash flows pertain to transactions involving equity and debt, such as issuing stock or taking loans. Therefore, while all cash flows are integral to a company's financial health, investing cash flows are uniquely tied to asset management, making them the correct answer in this context.