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Cash Flow from Investing Activities

CASH FLOW FROM INVESTING ACTIVITIES- ALL ABOUT INVESTING ACTIVITIES WITH EXAMPLE AND MCQs

 

What is a cash flow statement?

A cash flow statement is simply an analytical statement that exhibits the flow of incoming and outgoing cash and cash equivalent. It assesses the ability of the enterprise to generate cash and utilise cash. A Cash Flow Statement is one of the tools for assessing the liquidity and solvency of the enterprise.

Cash flow statement is a required financial statement under US GAAP, Indian AS, Indian Companies Act 2013 and IFRS whenever a company presents its results of operations for a period. A Cash Flow Statement is considered to be a summarized statement showing sources of Cash Inflows and the application of cash outflows of an enterprise during a particular period of time. It is prepared on the basis of the published data as disclosed by the financial statements of two different financial periods.

Classification of activities in a cash flow statement

The various activities of an enterprise that result in cash flows (inflows or receipts and outflows or payments) which is the subject matter of a cash flow statement, are to be classified into three categories:

  • Cash flow from operating activities,
  • Cash flow from investing activities, and
  • Cash flow from financing activities

cash flow from operating activities

Recommended read on business finance

What is cash flow from investing activities?

Investing cash flows are the cash flows generated from the investing activities of a firm. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. In other words, investing activities include transactions and events that involve the purchase and sale of long-term productive assets (e.g. land, building, plant and machinery etc.) not held for resale and other investments.

Transactions related to long-term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

Examples of cash flow from investing activities

The following are examples of cash flows arising from investing activities:

  • Cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalized research and development costs and self-constructed fixed assets;
  • Cash receipts from disposal of fixed assets (including intangibles);
  • Payments of cash to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes);
  • Cash receipts from disposal of shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes);
  • Advances and loans in cash made to third parties (other than advances and loans made by a financial enterprise);
  • Cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise);
  • Receipts and payments of cash relating to future contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes or the transactions are classified as financing activities.
  • Acquisition or disposal of available for sale or held-to-maturity investments (not for trading)
  • Acquisition and disposal of subsidiaries and other business units.
Practice questions – MCQs on investing activities

 

Question 1

The following events occurred during the accounting period: Cash of $33,000 was used to purchase a second-hand forklift. Cash of $12,000 was received from the sale of an investment at a loss. Cash dividends of $6,000 were received from an investment. Payment of cash of $15,000 was used to retire bonds. Plant assets were depreciated for $7,000 on the declining balance method. Cash provided or used by investing activities was:

A. $ 21,000 used

B. $ 15,000 used

C. $ 7,000 used

D. $ 7,000 received

 

Answer: Option A- $ 21,000

Explanation: The investing activities were the purchase of the forklift ($33,000 used) and the sale of an investment ($12,000 provided). $33,000-$12,000 = $21,000 used.

 

Question 2

Which of the following activities would not be reported as an investing activity on a statement of cash flows?

A) Collection of the principal amount owed on a long-term note receivable

B) Purchase of a patent from an inventor

C) Sale of a plant asset at a price equal to its book value

D) Cash dividends received from an investment made in another company

 

Answer: Option D

Explanation: The collection of dividends earned is classified as an operating activity since dividend revenue enters into the determination of net income.

 

Question 3

When a long-term asset is sold for cash at a price in excess of its book value, the sale should be reported as an inflow of cash from an investing activity equal to the:

A) Selling price (proceeds)

B) Book value

C) Selling price less the amount of the gain

D) Selling price plus the amount of the gain

 

Answer: Option A- Selling price (proceeds)

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