How does a $100 bailout from the government affect the cash flow statement?

• A. Cash flow from operations increases by $100
• B. Cash flow from investing decreases by $100
• C. Cash flow from financing increases by $100
• D. No impact on cash flow

Answer: (C)

When the government provides a bailout of $100, this amount typically falls under cash flows from financing activities. This is because the bailout represents capital that is being injected into the company, either as a direct financial support or as a governmental loan that the company may use to stabilize its operations.

In the cash flow statement, cash flows from financing activities include transactions related to the raising and repaying of funds, such as issuing equity or debt, receiving government bailouts, or making dividend payments. The $100 bailout effectively adds to the company's cash reserves, thereby increasing the overall cash flow from financing by that amount.

The other options do not accurately capture the impact of a bailout on the cash flow statement. For instance, cash flow from operations typically reflects the money generated or spent in day-to-day business activities, and a government bailout does not directly relate to these operational flows. Similarly, cash flow from investing relates to the purchase or sale of long-term assets, which is unrelated to a bailout scenario. Lastly, claiming no impact on cash flow ignores the clear injection of capital provided by the bailout, which does indeed have a significant influence.