Which item is a source of cash from a financing activity?

Which item is a source of cash from a financing activity?

• A. Borrowing money
• B. Paying dividends
• C. Purchasing inventory
• D. Collecting cash from customers

Answer: (A)

Financing activities cover cash transactions with lenders and owners. Borrowing money increases cash because you receive cash from a lender, which is an inflow from a financing activity and thus a source of cash. Paying dividends also involves financing, but it uses cash rather than provides it, so it’s not a source. Purchasing inventory and collecting cash from customers are operating activities, related to day-to-day business operations, not financing. So borrowing money is the source of cash from a financing activity.

Financing activities cover cash transactions with lenders and owners. Borrowing money increases cash because you receive cash from a lender, which is an inflow from a financing activity and thus a source of cash. Paying dividends also involves financing, but it uses cash rather than provides it, so it’s not a source. Purchasing inventory and collecting cash from customers are operating activities, related to day-to-day business operations, not financing. So borrowing money is the source of cash from a financing activity.