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A cash flow statement consists of three categories: operating, investing and financing activities. In this piece, we will focus on investing activities.

What is Cash Flow from Investing Activities?

A company lists any investments made with cash on its cash flow statement. This section represents the amount of cash used or generated from investment-related activities in a specific period.

Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses.

Other items to include are a sale of a division, proceeds from the sale of PP&E, and proceeds from the sale of marketable securities and other businesses.

Some companies will have items not mentioned above, so it’s important to look at the balance sheet of a company to determine the line items.

Formula

Cash Flow from Investing Activities =

(Purchase)/Sale of Long-Term Assets (Capex)

+ (Purchase)/Sale of Other Businesses (M&A)

+ (Purchase)/Sale of Marketable Securities

Example

Company XYZ had the following transactions for year-ending 2017:

$
Purchased a crane 500.0
Sold a manufacturing machine 20.0
Purchased a division of another company 2,000.0
Sold marketable securities 30.0
Purchased marketable securities 10.0

The above example would reflect in the investing activities of a cash flow statement as:

INVESTING ACTIVITIES: $
Purchases of Property and Equipment (500.0)
Proceeds from property and equipment incentives (20.)
Acquisitions, net of cash acquired, and other (2,000.0)
Sales and maturities of marketable securities 30.0
Purchases of marketable securities (10.0)
Net cash provided by (used in) in investing activities (2,460.0)

Points to Note

  • Purchases of the crane, a division of another company and marketable securities are an outflow of cash.
  • Sales of the manufacturing machine and marketable securities is an inflow of cash.

What Not to Include in Investing Activities

  • Debt, equity or other forms of financing.
  • Interest payments or dividends.
  • Income or expenses related to regular business operations.
  • Depreciation and amortization expenses on non-current assets.

Why is Cash Flow from Investing Activities Important?

Although a company may report a negative cash flow in investing activities, it doesn’t necessarily mean that it’s going to have a negative impact on the business.

In the short-term, the company has faced a negative impact on cash flow due to the purchase of property, plant and equipment, but in the long-term the assets could help generate growth in a company’s revenue.

In summary, investing activities provide an insight into how effectively the company is keeping its asset base up to date, and investing for future growth.

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