Q.For a company manufacturing garments, procurement of raw material, incurrence of manufacturing expenses, sale of garments are classified as ___________ activities.
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Start your 14-day free trial to unlock the full solution →For a garment manufacturing company, the procurement of raw material, incurrence of manufacturing expenses, and sale of garments are classified as Operating Activities.
When preparing a Cash Flow Statement, activities are categorised into three main types: Operating, Investing, and Financing. This classification helps users understand how a company generates and uses cash from its core business operations, its investments, and its financing activities.
The fundamental idea is to distinguish between activities that relate to the company's primary business function (what it was set up to do) and those that relate to acquiring or disposing of long-term assets, or raising and repaying capital.
- Operating Activities: These are the principal revenue-generating activities of the enterprise and other activities that are not investing or financing activities. Essentially, these are the day-to-day transactions that create profit or loss for the business. For a manufacturing company, this includes everything involved in producing and selling its goods.
- Investing Activities: These involve the acquisition and disposal of long-term assets (like property, plant, and equipment) and other investments not included in cash equivalents.
- Financing Activities: These are activities that result in changes in the size and composition of the owner's capital (equity) and borrowings of the enterprise.
For a company manufacturing garments:
- Procurement of raw material: This is a direct input for the production process. Without raw materials, garments cannot be manufactured. This is a core activity in the production cycle.
- Incurrence of manufacturing expenses: These are costs directly associated with converting raw materials into finished garments (e.g., wages for factory workers, factory rent, utilities). These expenses are essential for the production process.
- Sale of garments: This is the ultimate goal of a garment manufacturing company – to sell its finished products to generate revenue. This is the primary revenue-generating activity. …
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