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What are investing activities?
What are the essential elements you must know!
In this article, we will break down the definition of Investing Activities so you know all there is to know about it!
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What Are Investing Activities
In accounting, investing activities (or cash flow from investing activities) refer to a cash activity category found on a company’s cash flow statement.
In other words, companies must report their net cash activities in the “investing activities” line item on their cash flow statement from time to time.
The information that you can get from analyzing a company’s investing activities cash flow is to better understand the company’s investment gains and losses or the cash impact of the purchase and sale of long-term assets.
Although you may find a wide range of investing activities for different companies, generally you should expect to find the purchase of the following long term assets:
- Business acquisitions
- Marketable securities investments such as stocks and bonds
Every company’s investing activities are different.
One sign that a company may have to report on a statement of cash flows investing activities is to look at the balance sheet.
On the balance sheet, if you notice that there’s a difference between the non-current assets over two periods of time or there’s a change in value of the long-term assets without considering depreciation, you can expect to see some investing activities to be reported on the cash flow statement.
Cash Flow Statement
The cash flow statement is one of several statements issued by companies to report on their revenues, asset position, cash position.
Generally, there are three types of statements issued by companies:
- Balance sheet
- Income statement
- Cash flow statement
The cash flow statement is a statement that shows how a company used its cash to build assets or generate revenues and vice versa (it bridges the gap between the balance sheet and the income statement).
Particularly, the cash flow from “investing activities” is reported by companies in their cash flow statement.
Types of Cash Flow
What are the different types of cash flows that you may find in a company’s cash flow statement?
The cash flow statement provides a lot of useful information on how a company use cash or available capital in its business operations.
You can expect to find the following types of cash flow reported on a company’s cash flow statement:
- Operating cash flows
- Financing cash flows
- Investing cash flows
Operating activities are cash flows generated or spent by the company with regards to its normal business operations and its day-to-day activities.
Financing activities include money the company receives or spends in the company’s financing operations such as dividend income or funding operations by issuing bonds.
The investing activities reports on how a company used capital for non-current assets intended to provide growth and value to the company over time.
Investing activities can include:
- Purchase of property, plant, and equipment (PPE)
- Sale of PPE
- Capital investments
- Capital expenditures (CapEx)
- Purchase of fixed assets
- Money lending
- Purchase and sale of investments
- Loan and insurance cash flows
- Buildings and properties
Investing Activities Definition
According to Investopedia, cash flow from investing activities is defined as follows:
Cash flow from investing activities (CFI) is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.
Here is a quick summary of the meaning of investing activities:
- It’s a line item on a company’s balance sheet
- It provides information about a company’s cash flow
- It provides insights into a company’s use or generation of cash for its investing activities
Investing Activities Examples
Let’s look at a few examples of investing activities to better illustrate the concept.
Let’s first look at an accounting example.
Imagine a company performs the following investing operations:
- Purchases marketable securities for $500,000
- Purchases a manufacturing plant for $2,500,000
- Sells a subsidiary (divestiture) for the sum of $5,000,000
So what’s the impact on the company’s net cash flow from investing activities?
By purchasing marketable securities and a manufacturing plant, the company incurs a negative cash flow of $3,000,000.
However, by selling a business subsidiary, the company receives $5,000,000 resulting in a positive cash flow to the business.
The net cash provided by investing activities therefore amounts to $2,000,000.
In this case, we can suspect that the company may have sold a subsidiary that was not part of its core business operations and used the divestiture proceeds to purchase a manufacturing plant that may be more closely related to the company’s core business focus.
In this scenario, the net cash used in investing activities appears to show a company trying to better focus on its strengths to grow the business in the long term.
Now, let’s look at other examples (cash flow from investing activities example):
- Purchase of fixed assets resulting in a negative cash flow
- Sale of fixed assets resulting in positive cash flow
- Purchase of investment instruments like stocks and bonds resulting in negative cash flow
- Sale of investment instruments resulting in positive cash flow
- Lending of money resulting in negative cash flow
- Collection of loans resulting in positive cash flow
- Collection of insurance proceeds resulting in positive cash flow
Why Are Investing Activities Cash Flow Important
Investing activities statement of cash flows reporting is crucial as it shows how companies are using their cash to invest for the long term.
Since the cash flows from investing activities include the cash impact of investments in long-term assets like properties, plants, and equipment, these are important expenditures for a company to grow and scale its business.
Also, if a company is using cash to acquire other businesses, in many cases business acquisitions are positive for companies.
If you just look at a company’s cash flow and see that there are signs a company has experienced negative cash flows, it does not necessarily mean that the company is at risk.
A negative cash flow resulting from investments in long-term assets is actually a positive thing as the company is using its cash to plan for the future and generate more revenues.
How To Calculate Cash Flow From Investing Activities
To give investors the ability to assess a company’s financial health and their cash flows, companies are required to report on their cash from investing activities.
To calculate the accounting investing activities, you can consider the following cash flow from investment activities formula:
CFI = Capex + M&A + MS
- CFI = Cash flow from investing activities
- Capex = Purchase and sale of long-term assets
- M&A = Purchase and sale of businesses
- MS = Purchase and sale of marketable securities
As you can see, investing activities include the following:
- The cash flow resulting from the purchase (capital investment) or sale of property, plant, and equipment (capital expenditures)
- The cash flow resulting from the purchase (acquisition) and sale of businesses (divestiture)
- The cash flow resulting from the purchase or sale of marketable securities (such as stocks or bonds)
On the other hand, investing activities do not include the following:
- Interest payments
- Dividend payments
- Debt financing
- Equity financing
- Asset depreciation
- Business income and expenses
Cash Flow From Investing Activities Takeaways
So, what is investing activities?
In a nutshell, investing activities refers to how the company may have received or used cash to acquire non-current assets intended to generate profits in the future.
In this article, we’ve looked at investing activities and cash flow from investing activities in detail hoping to give you a better understanding of the concept.
Let’s look at a summary of our findings.
Investing Activities Meaning
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