Print this chapterPrint this chapter

The Statement of Cash Flows

Cash flow from investing results from activities related to the purchase or sale of assets or investments made by the company.


LEARNING OBJECTIVE

  • Distinguish investing activities that affect a company's cash flow statement from the business's other transactions


KEY POINTS

    • Assets included in investment activity include land, buildings, and equipment.
    • Receiving dividends from another company's stock is an investing activity, although paying dividends on a company's own stock is not.
    • An investing activity only appears on the cash flow statement if there is an immediate exchange of cash.

TERMS

  • investing activities

    actions where money is put into something with the expectation of gain, usually over a longer term

  • purchase return

    merchandise given back to the seller from the buyer after the sale in return for a refund

  • merger

    The legal union of two or more corporations into a single entity, typically assets and liabilities being assumed by the buying party.

  • investing activity

    An activity that causes changes in non-current assets or involves a return on investment.


One of the components of the cash flow statement is the cash flow from investing . An investing activity is anything that has to do with changes in non-current assets -- including property and equipment, and investment of cash into shares of stock, foreign currency, or government bonds -- and return on investment -- including dividends from investment in other entities and gains from sale of non-current assets. These activities are represented in the investing income part of the income statement.


Cash Flow Statement: Example of cash flow statement (indirect method)

It is important to note that investing activity does not concern cash from outside investors, such as bondholders or shareholders. For example, a company may decide to pay out a dividend. A dividend is often thought of as a payment to those who invested in the company by buying its stock. However, this cash flow is not representative of an investing activity on the part of the company. The investing activity was undertaken by the shareholder. Therefore, paying out a dividend is a financing activity.

Some examples of investment activity from the company's perspective would include:

  • Cash outflow from the purchase of an asset (land, building, equipment, etc.).
  • Cash inflow from the sale of an asset.
  • Cash outflow from the acquisition of another company.
  • Cash inflow resulting from a merger.
  • Cash inflow resulting dividends paid on stock owned in another company.

It is important to remember that, as with all cash flows, an investing activity only appears on the cash flow statement if there is an immediate exchange of cash. Therefore, extending credit to a customer (accounts receivable) is an investing activity, but it only appears on the cash flow statement when the customer pays off their debt.