'Interest received on investments by a trading company' comes under which category of activity while preparing the cash flow statement?

Investing activity

The correct answer is option 2- Investing activity.

"Interest received on investments by a trading company" would fall under the category of investing activity when preparing the cash flow statement.

Investing activities involve the acquisition and disposal of long-term assets and other investments. Interest received on investments represents income generated from the company's investment activities, such as interest earned on bonds, deposits, or other interest-bearing securities. Therefore, it is considered part of the investing activities section of the cash flow statement.

INVESTING ACTIVITY- As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

* Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue-generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities.

* Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc. As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.