The book states that purchasing/acquiring of trading securities belongs to CFO outflows, rather than CFI, but why is this? The firm’s operating activities is to manufacture and sell its products, if they use money to invest in stocks it’s the investment activity right?
If theyt are buyign it for “trading” then it is operations. “trading” is not long term investments.
Do you know the companu referred to is a manufacturing company?
It didn’t say it’s a financial company like banks, so I assume it’s a normal company.
As they are for “trading” - short term profit. Theya re considered currenct assest and cash flow is part of CFO.
You’re absolutely right.
This is why when doing M+A and proper valuation work, you use a free cash flow to equity / enterprise concept rather than fiddle with CFO or CFI.
The accounting treatment might put them in the CFO box even though its not the right financial treatment.
If you look closely, there are other line items where the axcounting treatment can be unhelpful. This includes leases, dividends, interest on debt and convertible debt just to name a few.
You won’t hold the entire operating cash flows in form of cash. You may invest some into money funds which could transfer to cash quickly meanwhile generating some profits. The main intention you hold this fund or some other securities is for operating need.