What are investing activities on the statement of cash flows?

What is “Cash Flow from Investing Activities”?

A company lists any investments made with cash on its cash flow statement. This section represents the amount of cash used or generated from investment-related activities in a specific period.

Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses.

Other items to include are a sale of a division, proceeds from the sale of PP&E, and proceeds from the sale of marketable securities and other businesses.

Some companies will have items not mentioned above, so it’s important to look at the balance sheet of a company to determine the line items.

The Coca-Cola Company – Cash Flow from Investing Activities Extract

Key Learning Products

• Cash flow from investing activities represent the amount of cash used or generated from investment-related activities (purchase of PP&E etc.)
• A positive cash flow indicates the company is divesting, a negative number indicates the company is investing heavily in its asset base to help generate growth in revenue
• The net cash flow includes the sum of all investing related activities for the accounting period

Formula

Cash Flow from Investing Activities = (Purchase)/Sale of Long-Term Assets (Capex) + (Purchase)/Sale of Other Businesses (M&A) + (Purchase)/Sale of Marketable Securities

Example

Company XYZ had the following transactions for year-ending 20X7:

The above example would reflect in the investing activities of a cash flow statement as:

Points to Note

• Purchases of the crane, a division of another company and marketable securities are an outflow of cash and must be recorded using a negative sign
• Sales of the manufacturing machine and marketable securities is an inflow of cash

What Not to Include in Investing Activities

• Debt, equity or other forms of financing
• Interest payments or dividends
• Income or expenses related to regular business operations
• Depreciation and amortization expenses on non-current assets

Why is Cash Flow from Investing Activities Important?

Although a company may report a negative cash flow in investing activities, it doesn’t necessarily mean that it’s going to have a negative impact on the business.

In the short-term, the company has faced a negative impact on cash flow due to the purchase of property, plant and equipment, but in the long-term the assets could help generate growth in a company’s revenue.

In summary, investing activities provide an insight into how effectively the company is keeping its asset base up to date, and investing for future growth.

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3. What Are Investing Activities? How to Report Investment Activities on the Cash Flow Statement

March 28, 2019

Investing activities are one of the main categories of net cash activities that businesses report on the cash flow statement. Investing activities in accounting refers to the purchase and sale of long-term assets and other business investments, within a specific reporting period. A business’s reported investing activities give insights into the total investment gains and losses it experienced during a defined period. Investing activities are a crucial component of a company’s cash flow statement, which reports the cash that’s earned and spent over a certain period of time.

These topics will help you understand what investing activities are and why they’re important for financial statements:

What Is Cash Flow from Investing Activities?

What Are Examples of Investing Activities?

Why Are Investing Activities Important?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Is Cash Flow from Investing Activities?

Cash flow from investing activities is a line item on a business’s cash flow statement, which is one of the major financial statements that companies prepare. Cash flow from investing activities is the net change in a company’s investment gains or losses during the reporting period, as well as the change resulting from any purchase or sale of fixed assets.

What Are Fixed Assets?

Fixed assets are property and equipment that a business owns and uses to help generate revenue. Fixed assets are less liquid than current assets and are not meant to be converted into cash within a year. Some examples of fixed assets include:

• Buildings and property
• Vehicles
• Machinery
• Computers
• Software
• Furniture

What Are Examples of Investing Activities?

When a business buys or sells an investment, that activity will result in either a gain or loss in the company’s cash flow. Some of the most common accounting transactions that appear in the investing activities section of the cash flow statement include:

• The Purchase of Investments: If a business purchases an investment in cash, whether it’s stocks, bonds or another type of investment, the cost of that investment will mean a decrease in the company’s cash flow from investing activities. That’s because cash is flowing out of the business to cover the purchase.
• Proceeds from the Sale of Investments: When a company sells off one of its investments for cash, the sale will result in an increase in cash flow from investing activities. Even in the case where a company loses money on an investment by selling it for less than the purchase price, the cash flow from investing will still increase.
• The Purchase of Fixed Assets: Fixed assets, including buildings, land and vehicles, are usually purchased on credit, not using cash. Because of that, the purchase of fixed assets usually shows up in the cash flow from investing activity section slowly over time. Every time the company makes a cash payment toward the credit purchase (for example, $1,000 per month over the span of a year), it will show up as a decrease on the cash flow from investing activity line item.
• Proceeds from the Sale of Fixed Assets: When a company sells a fixed asset, whether its a property, a used vehicle or a computer for parts, the proceeds of the sale are recorded as an increase in its cash flow from investing activity.

Why Are Investing Activities Important?

Investing activities are one of the most important line items reported on a business’s cash flow statement. They can give you insights into how a business might grow in future and earn more revenue.

If a company reports a negative amount of cash flow from investing activities, that’s a good clue that the business is investing in capital assets, which means in the future, you can expect their earnings to grow. That’s especially true in capital-driven industries like manufacturing, which require big investments in fixed assets to grow their businesses.

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