Final answer:
When a firm's statement of cash flows shows cash used for investments, it suggests the firm is allocating resources towards growth opportunities, which can be funded by reinvesting profits, borrowing, or issuing stock. The choice depends on various factors, including a firm's profitability and desire to maintain control.
Step-by-step explanation:
If a company's statement of cash flows shows cash was used for investments, it is most likely that the firm is spending money to grow and potentially increase profits in the future. This can include purchasing assets like machinery, building new facilities, or engaging in research and development. Firms can acquire the financial capital for such investments through different channels: reinvesting profits, borrowing through loans or bonds, selling stock, or through early-stage investors such as venture capitalists.
Deciding between these options often depends on the firm's current profitability, the cost of borrowing, and the desire to maintain control of the company. Reinvesting profits or issuing stock might be more favorable for a small company not wanting to bear the burden of loan repayments, especially if the company is currently earning little to no profit.
On the other hand, some companies may want to avoid diluting their ownership and thus might prefer borrowing, despite the interest payments. Companies considering investment opportunities, like an investment with a 6% return when they would have to pay 8% interest on a loan, should analyze if the potential return outweighs the cost of capital if they were to borrow.