Which category of cash flows—operating, investing, or financing activities—do you think is most likely to have a net cash outflow over a number of years? Explain

Answer 1

Companies cannot remain in business if they do not generate positive cash flows from operating activities. Also, over a period of years, a company cannot continue to borrow more than it repays, nor can it issue capital stock indefinitely. Thus, you would not expect a net cash outflow from financing activities over a sustained period of time. However, many companies regularly experience a net cash outflow from investing activities. A company must at a minimum replace existing assets and in many cases acquire additional plant and equipment to remain competitive. At the same time, disposals of long- term assets may be fairly common, but usually they will not generate significant amounts of cash inflow.