Hello all, I am working on the FRA questions from Elan’s 2K QB. I am doing reading 30 questions and I am getting confused between these two questions and the answers that Elan has provided. Q12 - Which of the following is the most likely classification for a cloth manufacture borrowing funds to purchase raw material. A - Operating. B- Investing. C- Fianancing. The answer to Q12 is given as C - Financing. (My answer was Operating). Q13- Which of the following is least likely an investing activity. A. Interest received on a bond investment by the clothing manufacturer. B- Purchase of computer chips for a a computer mfg C- Purchase of cars for the company directors. Answer is B - purchase of computer chip for computer manufacturer is operating activity for the firm. How in Q13 purchase of computer chips (which I am guessing is raw material) classified as operating and in Q12 borrowing funds for purchase of raw material is classified as financing. Can someone explain please, I am very confused. Thanks in advance.
In Q12, the firm borrows to finance their operations. Q13 does not state anything about the computer manufacturer obtaining any sort of outside financing to purchase the computer chips. Purchasing computer chips is a regular operating activity for them (as would be for a bank to loan funds). Hopefully that helps.
Hi Q12 - Which of the following is the most likely classification for a cloth manufacture borrowing funds to purchase raw material. A - Operating. B- Investing. C- Fianancing. In this case if u have cash outflow / inflow (cash paid to raw material supplier for purchasing Cloth Raw MAterial / Cash received for selling finished cloth to customers) that would have been Operating outflow/inflow respectively, however if you are borrowing any funds, that would be a financing Inflow always. Q13- Which of the following is least likely an investing activity. A. Interest received on a bond investment by the clothing manufacturer. B- Purchase of computer chips for a a computer mfg C- Purchase of cars for the company directors. In the above question A. Interest received is CFO as per US GAAP and under IFRS u have the option of considering it as either CFO/CFI B. Purchase of Computer Chips is an Operating Activity for sure since the same is treated as good as Inventory(Raw Material) and not an Asset(not capitalised) since you are not going to derive benefit and is definitely an Operating Outflow. C.Purchase of cars is definitely a Ibvesting Activity since it will be capitalised. Since the Q asks which is least likely and since A has some chances of being defined as CFI under IFRS i would go for B which is definitely an Operating Activity.
Thank you both I think I get it now. Q12- For some reason I was thinking borrowing funds for raw materials is basically borrwing funds for your regular operating activities like having a credit limit and that should fall under operating. Financing I thought was more like for PP&E and stuff. Q13- Thanks for clearing that as well. I was refering to Q13- as it referred to Purchase4 computer chips as operating (probably that was done with cash so it might be operating). Thanks again both for clearing that.