Question

Suppose you noticed a cash deficit in investing activities. What would cause a cash deficit in this section?

1) A decrease in the sale of investments
2) An increase in the purchase of investments
3) An increase in the sale of investments
4) A decrease in the purchase of investments

Answer 1

A cash deficit in investing activities can occur when there is an increase in the purchase of investments. When a company purchases investments, such as stocks or bonds, it requires cash to make the purchase. If the amount spent on purchasing investments exceeds the cash generated from the sale of investments, it can result in a cash deficit in the investing activities section of the cash flow statement.

Step-by-step explanation:

A cash deficit in investing activities can occur when there is an increase in the purchase of investments.

When a company purchases investments, such as stocks or bonds, it requires cash to make the purchase. If the amount spent on purchasing investments exceeds the cash generated from the sale of investments, it can result in a cash deficit in the investing activities section of the cash flow statement.

For example, if a company buys $10,000 worth of stocks but only receives $8,000 from selling other investments, it would have a cash deficit of $2,000 in investing activities.