Q.While preparing a Cash Flow Statement as per AS-3, 'Purchase of machinery for cash' is classified under:

Purchase of a fixed asset such as machinery is the acquisition of a long-term asset, which AS-3 classifies under investing activities.

AS-3 classifies every cash flow into one of three activities. Investing activities are the acquisition and disposal of long-term assets and investments (other than cash equivalents). The purchase of machinery is precisely the acquisition of a long-term asset, so the cash paid for it is a cash outflow under investing activities.

Why the other options are wrong:

• (a) Operating activities cover the principal revenue-producing activities — cash from customers, cash to suppliers and employees, tax paid. Buying a machine is not part of day-to-day trading, so it is not operating.
• (c) Financing activities change the size and composition of owned and borrowed funds — issue/repayment of shares and loans, dividend paid. Buying a machine changes neither share capital nor borrowings, so it is not financing. …

A common error is to classify the purchase of machinery under operating activities because it is an ordinary business outlay — but under AS-3, acquiring a long-term asset is always investing, not operating. Only if t …