In the cash flow statement, what is the effect of purchasing short-term securities or fixed assets?

The correct option is this Decreased cash.

In Finance MCQs, understanding how different business transactions affect the cash flow statement is extremely important because the cash flow statement reflects the real movement of cash in and out of a company. When a company purchases short-term securities or fixed assets, it uses its available cash to complete the transaction. As a result, the company’s cash balance decreases. This is why the correct answer in this Finance MCQ is decreased cash.

To understand this concept clearly, it is important to first understand the structure of the cash flow statement. The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Each section reports different types of cash inflows and outflows. Operating activities relate to daily business operations. Financing activities involve borrowing money, issuing shares, or paying dividends. Investing activities include buying and selling long-term assets and investment securities.

When a company purchases fixed assets such as machinery, equipment, land, or buildings, the transaction is classified under investing activities. These purchases are commonly referred to as capital expenditures. Even though buying fixed assets may improve the company’s future production capacity and long-term profitability, the immediate effect is a reduction in cash. The company exchanges cash for another asset. Therefore, from a cash flow perspective, it is a cash outflow.

Similarly, when a company purchases short-term securities, such as marketable securities or temporary investments, it also uses cash. Although the company still owns an asset (the securities), the actual cash available in the bank decreases. In Finance MCQs, this distinction is very important. The company’s total assets may remain the same or even increase in value over time, but the immediate effect on cash is negative. Hence, decreased cash is the correct answer.

Students preparing for finance exams are often tested on the difference between profit and cash flow. Purchasing fixed assets does not immediately reduce net income, except through future depreciation expenses. Depreciation is recorded gradually over the useful life of the asset. However, the cash outflow occurs immediately at the time of purchase. This is why the cash flow statement is considered different from the income statement. Finance MCQs frequently check whether students understand that asset purchases reduce cash but do not immediately reduce profit.

The incorrect options also help clarify the concept. Increased cash would occur if the company sold assets rather than purchased them. Increased liabilities would happen if the company borrowed money to finance the purchase. Increased equity would occur if new shares were issued to raise funds. However, if the purchase is made directly using available cash, the only immediate impact is a decrease in cash and an increase in another asset category.

From a financial management perspective, managing cash flows is critical for business survival. Large capital expenditures must be planned carefully because they reduce liquidity. In Finance MCQs related to free cash flow, capital expenditures are deducted from operating cash flow to determine the company’s remaining cash after investments. This shows how important asset purchases are in financial decision-making.

In conclusion, when a company purchases short-term securities or fixed assets using cash, the immediate effect on the cash flow statement is decreased cash. This transaction represents a cash outflow under investing activities. Mastering this Finance MCQ concept strengthens your understanding of cash flow management, financial statement analysis, and investment decisions, which are essential topics in finance and accounting examinations.