Investing Activities, Definition and Examples

Investing Activities are an essential aspect of accounting, focusing on how businesses manage their long-term assets and investments. Investing activities involve buying and selling things not meant for quick resale, like buildings, machinery, or stocks in other companies. By looking at investing activities, we can see if a company is making smart decisions with its resources. Check out the article to learn more about investing activities, its definition, and activities of cash flow below.

Investing Activities Definition

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What is Investing Activities In Cash Flow?

Understanding Cash Flow From Investing Activities

• Balance Sheet : This document provides a snapshot of your company's assets, liabilities, and equity as of a particular date.
• Income Statement : An income statement overviews your company's revenues and expenses over a defined period.
• Cash Flow Statement : This statement acts as a bridge between your balance sheet and income statement, illustrating the amount of cash generated and spent on operating, investing, and financing activities within a specific timeframe.

Positive and Negative Cash Flow In Investing Activities

• Negative cash flow arises from the acquisition of fixed assets.
• Negative cash flow is evident from purchasing bonds, debentures, stocks, or similar instruments.
• Positive cash flow results from the sale or leasing of fixed assets.
• Positive cash flow is generated by the sale of securities.

Lists of Investing Activities in Accounting

• Acquisition of property, plant, and equipment (PP&E), commonly referred to as capital expenditures.
• Receipts from the sale of PP&E.
• Acquisitions of other businesses or companies.
• Proceeds from the sale of other businesses (divestitures).
• Purchases of marketable securities such as stocks, bonds, and similar instruments.
• Receipts from the sale of marketable securities.

Items to be Excluded When Calculating Cash Flow from Investing Activities

• Cash flows from operating activities : Cash flows related to day-to-day operating activities, such as sales revenue, expenses, and taxes, are excluded from cash flow from activities.
• Cash flows from financing activities : Cash flows associated with raising capital or repaying debt, such as issuing or repurchasing shares, borrowing or repaying loans, and paying dividends, are excluded from activities.
• Non-cash investing and financing activities : Transactions not involve cash, such as exchanging non-monetary assets or converting debt to equity, are excluded from the cash flow from investing activities.
• Interest and dividends : Cash flows related to interest received or paid on investments, as well as dividends received, are typically classified under operating activities or financing activities, depending on the nature of the transaction.
• Changes in cash equivalents : Changes in cash equivalents, such as short-term investments or marketable securities, are typically reported separately on the cash flow statement and may not be included in cash flow from activities unless they involve buying or selling such assets.

Example of Cash Flow from Investing Activities

XYZ Corporation - Cash Flow Statement (Extract)

Explanation :

1. Cash Inflows :
   • Sale of Equipment (₹50,00,000): XYZ Corporation sold some of its old equipment for ₹50,00,000.
   • Sale of Investments (₹30,00,000): The company sold some of its long-term investments for ₹30,00,000.
   • Sale of a Subsidiary (₹1,20,00,000): XYZ Corporation sold one of its subsidiaries and received ₹1,20,00,000.
2. Cash Outflows :
   • Purchase of Machinery (₹80,00,000): The company invested ₹80,00,000 in new machinery to upgrade its production capabilities.
   • Purchase of Land (₹1,50,00,000): XYZ Corporation bought a new piece of land for ₹1,50,00,000 to expand in the future.
   • Purchase of Intangible Assets (Patents) (₹20,00,000): The company acquired new patents for ₹20,00,000 to enhance its intellectual property portfolio.
3. Net Cash Flow from Investing Activities :
   • The total cash inflows from investing activities are ₹2,00,00,000.
   • The total cash outflows from investing activities are ₹2,50,00,000.
   • Therefore, the net cash flow from investing activities is a negative ₹50,00,000, indicating that XYZ Corporation spent more on investments than it received from selling investments and assets during the year.

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