This is a full guide to cash flow from investing activities.
If you want to know which activities are included, their importance, and more, this article is for you. So let’s start from the basics.
What is Cash Flow from Investing Activities
Cash flow from investing activities is a section of cash flow statements that reports where a company spent money on investment property. It includes fixed assets and securities, among others.
Normally, spending cash reports negative cash flow, while generating cash reports positive cash flow. Negative cash flow indicates the company’s performance is poor, but it’s not always accurate. When a company spends a lot of money on fixed assets, it shows negative cash flow.
Investing activities are important because when a company spends money on non-current assets, it reports negative cash flow temporarily, but this will be beneficial for the company in the long term.
But this is not enough to understand cash flow from investing activities; we need to know the basics in short.
Understanding Cash Flow
There are three statements in the financial world: Balance Sheet, Income Statement, and Cash Flow Statement.
Balance sheets provide data on a company’s assets, liabilities, and equity, while income statements show the revenues and expenses of the company.
But the cash flow statement connects both of them. It provides data on cash generated and paid by the company. In other words, it shows cash outflow and inflow. Also, remember, all three statements show data in a time period.
Types of Cash Flow
Any corporation’s cash flow statement shows three parts, each indicating different types of activities.
1. Cash flow from operating activities: This section includes all activities involved in generating or spending cash on the company’s day-to-day activities, like salaries and goods and services.
2. Cash flow from financial activities: This section includes activities related to financial matters, such as buying or selling stock and paying dividends.
3. Cash flow from investing activities: This section shows where a company spent money on non-current assets or long-term assets. Lending money and collection of loans are examples of these activities.
Example of Cash Flow from Investing Activities
Here we consider the example of Amazon company’s 2017 statement:
Let’s discuss what to include in investing activities:
– Purchase of property, equipment, software: $7.8B outflow
– Proceeds from property and equipment incentives: $1.06B inflow
– Acquisitions, net of cash acquired: $116M outflow
– Sale of marketable securities: $4.73B inflow
– Purchase of marketable securities: $7.75B outflow
Here, it’s clear that the company spent a lot of money on property and equipment.
Also, note that negative value or outflow is indicated in parentheses in the sheet. In the Amazon 2017 period, the company had a $9.7B negative cash flow, but actually, the company spent a lot of money on fixed assets, which will help the company to grow in the future.
Cash Flow from Investing Activities Formula
The formula is simple:
Cash Flow from Investing Activities = (CapEx) + (Purchase of Long-Term Investments) + (Business Acquisitions) – Divestitures
Remember: items in parentheses should be negative because they indicate cash outflow.
Activities Included in CFI
Activities included as cash flow from investing activities:
– Capital expenditures
– Lending money
– Sale of investment securities
– Expenditures in property, plant, and equipment (PPE)
– Acquisitions of other businesses
– Purchases of marketable securities
– Purchase of stock and bonds
Also, consider that interest payments, dividends, debt, and equity are not included.
Why Cash Flow from Investing Activities is Important
It’s important because it shows the reality of the company. When a company spends too much money on fixed assets, it indicates negative cash flow on sheets. So, in conclusion, the company’s performance seems poor. But in reality, the company expands its assets and will grow in the future, which is a positive point of the company in the long term. Investors and stockholders use this data to conclude whether the company is good or bad for future investment.
Conclusion
So, that’s all the information about cash flow from investing activities, including examples and importance.
Now, your turn. Which company’s statement will you want to try? Tell me in the comment section.