When a company pays its vendors for previously purchased inventory, how is this activity classified on the statement of cash flows?

When a company pays its vendors for previously purchased inventory, this activity is classified as operating activities on the statement of cash flows. Operating activities include the cash transactions that relate to the day-to-day operations of the business. This encompasses cash received from sales of goods and services, as well as cash payments to suppliers and vendors for inventory, labor, and other operating expenses.

The reason this payment is not classified under investing activities is that investing activities are related to the acquisition and disposition of long-term assets, such as property, plant, and equipment, or investment securities. Financing activities focus on transactions involving debt and equity, including cash received from issuing shares or cash paid for dividends or repaying loans. Non-cash activities refer to significant financial transactions that do not involve cash exchanges, such as leasing assets or exchanging stock for services.

Since the payment to vendors for inventory directly relates to the operational cycle of the business and impacts the cash used in operating activities, it is appropriately classified under operating activities.