Question

All of the following are examples of operating activities except

a. Making loan payments
b. Receiving payments from customers toward accounts receivable balances
c. Cash received from cash sales
d. Cash paid out toward operating expenses

Answer 1

Making loan payments is not an operating activity; it is classified as a financing activity. Operating activities include day-to-day business functions like receiving payments from customers, cash sales, and operating expenses, not long-term debt management like loan repayments. Option a is the correct answer.

Step-by-step explanation:

All of the following are examples of operating activities except making loan payments. Operating activities are the day-to-day functions of a business that relate to producing and selling its goods and providing its services. They are part of a section found on the company's cash flow statement, which reflects the cash generated or used during a specified period by the company's core business operations. Receiving payments from customers toward accounts receivable balances, cash received from cash sales, and cash paid out toward operating expenses are all core to the operational transactions of a company.

However, making loan payments is not an operating activity. Instead, it is classified as a financing activity because it relates to the management of the long-term capital of the company. Financing activities include transactions involving debt, equity, and dividends.

For reference:

• Payments to customers, expenses, and profits or losses associated with an insurance company relate to the cash flows in and out of the company.
• The money listed as assets on a bank balance sheet may represent loans made to customers, which means the cash that was lent is no longer residing in the bank.

When evaluating loans in the secondary market, there are several factors that would influence your willingness to pay more or less for a loan. For instance:

1. If a borrower has been late on a number of loan payments, the loan becomes riskier, resulting in a potential buyer willing to pay less due to the increased risk of default.
2. Interest rates in the economy as a whole have risen since the loan was made, meaning new loans would have higher interest rates, potentially making the existing loan less attractive.
3. If the borrower is a firm that has just declared a high level of profits, the loan is less risky and hence, more valuable.
4. When interest rates in the economy as a whole have fallen since the loan was made, the current loan's fixed interest rate could be higher than new loans, making it more valuable.