Correct Answer:
B. Payment of dividends
The statement of cash flows categorizes cash movements into three main activities: operating, investing, and financing. Financing activities involve transactions related to debt and equity, essentially how a company raises capital and repays its investors. A payment of dividends represents a distribution of a company's earnings to its shareholders, which is a direct outflow related to its equity financing. Therefore, it is correctly classified as a cash outflow from financing activities.
- Purchase of machinery is an investing activity because it involves the acquisition of long-term assets.
- Increase in inventory is an operating activity, as it relates to the day-to-day business operations and working capital management.
- Sale of investments is an investing activity, representing a cash inflow from the disposal of long-term assets or securities.
Understanding these classifications is crucial for analyzing a company's financial health and liquidity.