Cash flow from investing activities is the section of cash flow statement consists of investments made in assets which in short or long run will generate profit and cash flows for the entity. Assets here would mean and include fixed assets purchased for the business, purchase of shares in other companies and business, placing funds with banks in different term deposit receipts and other forms of investments made during the life of business.
Definition
According to IAS-7, investing activities are the acquisition and disposal of long term assets and other investment not included in cash equivalents.
When an investment takes place, it is shown as ‘cash outflow’ under cash flow from investing activities. Similarly when any proceed from investments is received whether on account of profit earned or sale of investment or portion thereof, the same is shown as ‘cash inflow’ under the investing activities. While preparing cash flow statement, care should be taken to exclude items of investing activities from net profit for the period and show them under investing activities.
As per the International Accounting Standards containing provisions and guidelines for statement of cash flow, the following are the examples of events which generate cash flow investing activities.
- Cash payments to acquire fixed assets like property, plant, equipment etc
- Cash payments to acquire other tangible and intangible assets
- Cash payments to acquire shares and debentures of other business or companies
- Cash advances and loans made to other parties/enterprises
- Cash receipts from sale of tangible and intangible assets
- Cash receipts from sale of shares or debentures
- Cash receipts in shape of dividend or profit
- Cash receipts from repayment of advances and loans given to other parties
Generally, both cash outflow and inflow under investing activities are considered healthy signs for the business. Cash outflow from investing activities indicates investments habits of the business from its idle or superfluous funds. Cash inflow indicates that business has invested its funds in profitable and gainful activities.
Example and Preparation
To understand the investing cash flow activities, consider the following example. The following are the changes in balance sheet of A Traders for year ended December 31, 2015.
| Account Heads |
Debit
|
Credit
|
|
Cash
|
1,000
|
|
|
Accounts Receivables
|
15,800
|
|
|
Inventories
|
10,000
|
|
|
Goodwill
|
|
12,000
|
|
Building
|
35,000
|
|
|
Machinery
|
4,000
|
|
|
Equipment
|
1,500
|
|
|
Allowance for depreciation (Building & Machinery)
|
|
1,400
|
|
Allowance for depreciation (equipment)
|
|
1,500
|
|
Discount on issuance of debentures
|
1,200
|
|
|
Accounts Payable
|
|
2,000
|
|
Debentures
|
|
44,600
|
|
Preferred Shared
|
6,000
|
|
|
Ordinary Shares
|
|
8,000
|
|
Premium on ordinary shares
|
|
2,000
|
|
Retained earnings
|
|
3,000
|
|
74,500
|
74,500
|
Addtional information
- Disposal of part of building
Book value$ 20,000
Sales proceeds$ 22,000
- Preference shares were redeemed $ 7,500
- Interim dividend paid $ 8,000
- Goodwill written off against retained earnings
- Exchange of machinery:
Old machinery cost$ 4,000
Acc: depreciation$ 1,000
New machinery cost$ 8,000
Cash paid$ 5,000
From the above give data, students will learn to prepare cash flow from investing activities..
| CASH FLOW FROM INVESTING ACTIVITIES |
$
|
$
|
|
Sale proceeds of building
|
22,000
|
|
|
Adjustments for:
|
|
|
|
Machinery Exchanged
|
5,000
|
|
|
Purchase of building
|
-60,000
|
|
|
Net cash used in Investing activities
|
|
-33,000
|
Working on Purchase of Building
|
Purchase of Building
|
$
|
|
Cost of disposal
|
25,000
|
|
Net increase in cost (given)
|
35,000
|
|
Cost of building purchased
|
60,000
|