Certified Compensation Professional (CCP) 2025 Practice Exam – Comprehensive All-in-One Guide for Mastering Accounting & Finance in HR

The financing section of a cash flow statement focuses on transactions that affect the equity and debt of the company. This includes inflows from issuing stock or borrowing money, as well as outflows related to repaying debts or paying dividends.

The correct choice pertains to cash repayment of the principal of debt, which is a clear indicator of financing activity. When a company pays off its debt, it directly impacts its financing structure by reducing liabilities. This kind of transaction reflects the company's management of its financing strategies, as it signifies a commitment to fulfilling its financial obligations.

In contrast, cash payments to acquire equipment belong to the investing section, as this involves the purchase of long-term assets. Cash purchases of inventory are part of operating activities, which relate to the day-to-day functioning and revenue generation of the business. Cash refunds for sales returns are also operating activities, as they affect the revenue recognition of sales previously made. These activities affect operating cash flows rather than financing cash flows, which is why they are not classified under financing.