Cash flow statements include a category of cash flow from investing activities. Cash flow from investing activities gives the total change in a company’s finances resulting from investments. The change resulting from investments may be a gain or a loss. “Investing” in this context has a broad meaning. Investing refers to the purchase of securities and estate, as well as investments in infrastructure (PPE: Property, Plant, and Equipment) or research activities.
What is Cash Flow from Investing Activities?
Cash flow from investing activities is a category on cash flow statements. The cash flow from investing activities sum is calculated by determining gains or losses from investments. Here, “investments” refers to an extensive set of expenditures. Cash flow from investing activities includes gains and losses supervening from the purchase and sale of corporate stock or land. It also includes outlays spent on necessary buildings, land, or tools, and also on research and development.
What is an Example of Cash Flow from Investing Activities?
An example of cash flow from investing activities occurs when a company buys shares in another company. The purchase of shares would be included as negative cash flow on the cash flow statement. The price of the shares fluctuates with time. Happily, let’s say, the price of the shares increases, and their value goes up. The company then sells the shares. The returns from the purchase are positive. The cash flow from investing activities on the cash flow statement would then include the difference between the price for which the company sold the shares and the price for which it sold them.
What is Included in Cash Flow from Investing Activities?
Listed below are things that are included in Cash Flow from Investing Activities.
- Capital Expenditure: Companies make capital expenditures. These are included in the cash flow statement.
- Lending Money: Companies borrow money. Lending money is included in the cash flow statement.
- Property Expenditures: Companies buy property. Property expenditures are included in the cash flow statement.
- Sale of Investment Securities: Companies sell investment securities, and it is part of the cash flow statement.
- Plant Expenditures: Companies invest in infrastructure: Plant expenditure is included in the cash flow statement.
- Equipment Expenditures: Companies invest in equipment, and it is included in the cash flow statement.
1. Capital Expenditures
Capital expenditures is a broad term. It includes all sorts of different outlays. These are typically defined as purchases of items that will be owned over the long term (years). Investment in property is included in capital expenditures. Investment in equipment is as well.
2. Lending Money
Companies lend money. The money a company lends is included in its cash flow statement as a loss. The money that companies lend will be paid back. When a company is paid back, the money it receives is included in its cash flow statement as a gain. Lending money is considered to be an investment.
3. Property Expenditures
Property has many benefits for companies. Companies buy property. When a company buys property, it is considered an investment. Investment in property is included in capital expenditures. The money a company spends on a property is represented as a loss on the cash flow statement.
4. Sale of Investment Securities
Companies buy and sell investment securities. The purchase of investment securities is included as a loss on the cash flow statement. The sale of investment securities is included as a gain on the cash flow statement. The prices of the investment securities that companies buy fluctuate. This fluctuation results in profits and losses for companies. These profits and losses are reflected in the cash flow statement.
5. Plant Expenditures
“Plant” refers to apparatus used in carrying out the business of a company. The plant includes equipment. Companies need plants. Companies buy plants. When companies buy plants, the outlays made are included in the cash flow statement as losses.
6. Equipment Expenditures
“Equipment” refers to the tools and machines a company uses. Another word for “equipment” is “plant”. Companies need equipment. Companies buy equipment. The money a company spends on equipment is included in its cash flow statements as a loss.
What are the Types of Cash Flow from Investing Activities?
Cash flow from investing activities has several types.
- Operating expenditures are outlays made in connection to operating the business.
- Investing occurs when money is invested in securities.
- Financing includes loans.
How is Cash Flow from Investing Activities Calculated?
Some accounting software calculates cash flow from investing activities automatically. To calculate cash flow from investing activities, you can purchase a copy of this kind of software. Cash flow from investing activities can also be calculated in an old-fashioned way. To calculate cash flow from investing activities, add up the amount of money you’ve gained from your investments. Then add up the amount of money you’ve lost in making investments. The difference between these two sums is your cash flow from investing activities.
Are Investing Activities Considered a Business Expense?
Yes, investing activities are considered a business expense. The distinction between investment and expense is an obscure one. It is important to remember the difference between securities investments and business expenses for tax purposes. Yet, at the same time, many expenses also need to be considered from the perspective of the long-term benefit that they will have on your company. This broader sense of the term “investment” is reflected in the variety of items included in the cash flow from investing activities section of the cash flow statement.
Is Cash Flow from Investing Activities Always Negative?
No, cash flow from investing activities is not always negative. A large sale of market securities might bring in an amount of money to the company that outweighs outlays in the other categories. Yet it is common for cash flow from investing activities to be negative. Many of the categories of cash flow from investing activities represent expenditures on items that will have long-term benefits for the company. These tend to be large outlays whose impact on the company’s bottom line will only show up later.
Is Positive Cash Flow from Investing Activities Good?
Yes, positive cash flow from investing activities is good. The nature of a good company is to be profitable. Yet positive cash flow from investing activities can also indicate a problem. Companies need sustained investment in infrastructure and research to grow. Positive cash flow from investing activities may indicate that too little is being spent on the long-term health of the company.
Is Negative Cash Flow from Investing Activities Bad?
No, negative cash flow from investing activities is not bad. Investing activities often involve large outlays on items that will have beneficial effects on the company over the long term. Without these kinds of investments, the company would not be as profitable over time. An initial sacrifice allows for greater gain later on. Don’t sorrow overmuch when you see a negative sum on the cash flow from investing activities line of the cash flow statement.
What is the Difference between Cash Flow from Operating Activities and Cash Flow from Investing Activities?
Cash flow from investing activities represents the gains and losses taken from the company’s investments. Cash flow from operating activities represents the gains and losses taken from the company’s day-to-day operations. The main difference between them is a temporal one. Cash flow from investing activities relates to long-term investments. Cash flow from operating activities relates to short-term exchanges of money, goods, and services.
