Question

Assertion (A): Purchase of marketable securities will be classified as cash outflow under investing activities.

Reason (R): Marketable securities are considered as cash and cash equivalents. Hence, they do not affect cash flows. 

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct, and (R) is the correct reason of (A).

• Both (A) and (R) are correct, but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct, but (R) is not the correct reason of (A).

Explanation:

• Assertion (A) states that “Purchase of marketable securities will be classified as cash outflow under investing activities.” This is true because purchasing marketable securities is an investing activity that results in a cash outflow.
• Reason (R) states that “Marketable securities are considered as cash and cash equivalents. Hence, they do not affect cash flows. ” This is incorrect. Marketable securities are not always considered as cash and cash equivalents; typically, only very short-term marketable securities qualify as cash equivalents. The purchase of marketable securities generally affects cash flows and is recorded under investing activities as a cash outflow.