How to Calculate Cash Flows From Investing Activities

The Statement of Cash Flows is a financial report providing a comprehensive view of how a company generates and uses cash over a specific period. This statement is divided into three main sections: operating, investing, and financing activities. Understanding these sections offers insights into a company’s financial health, particularly its liquidity and solvency. This article focuses on calculating cash flows from investing activities, which reveals how a company manages its long-term assets and investments.

Identifying Investing Activities

Investing activities on the Statement of Cash Flows primarily involve the acquisition and disposal of long-term assets and other investments. These assets are held for more than one year and are not intended for resale in the ordinary course of business. Companies engage in these activities to support operations, expand capabilities, or generate future income.

Transactions that generate cash inflows from investing activities include the sale of property, plant, and equipment (PP&E), such as buildings, machinery, and land. Selling investment securities, which can include stocks, bonds, or mutual funds, also generates cash. The collection of principal on loans previously made to other entities is another cash inflow.

Cash outflows from investing activities include purchasing long-term assets. This includes acquiring new PP&E. Purchasing investment securities is another outflow. Providing loans to other businesses or individuals is also a cash outflow, as the company disburses funds with the expectation of future repayment and interest.

Locating Relevant Financial Data

To calculate cash flows from investing activities, specific financial statements provide the necessary data. The balance sheet is a primary source, as it presents a company’s assets, liabilities, and equity at a specific point in time. By comparing the beginning and ending balances of non-current asset accounts like Property, Plant, and Equipment (PP&E), Investment Securities, and Loans Receivable, changes in these accounts can be identified.

The income statement provides details on any gains or losses recognized from the sale of assets. These gains or losses, while affecting net income, are non-cash items for the cash flow statement and require adjustment. Notes to the financial statements provide detailed breakdowns of asset purchases, sales, and depreciation.

For example, a change in the PP&E balance on the balance sheet might indicate purchases or sales. However, the notes to the financial statements disclose the cash paid for new assets or the proceeds received from asset disposals, along with accumulated depreciation and any related gains or losses. Using these sources ensures an accurate calculation of investing cash flows.

Calculating Cash Inflows from Investing Activities

Cash inflows from investing activities represent money received by the company from the sale of its long-term assets or investments. A common source is the sale of property, plant, and equipment (PP&E). To determine the cash received from selling PP&E, consider the asset’s book value and any gain or loss on the sale. The book value is the asset’s original cost less its accumulated depreciation.

If an asset is sold for more than its book value, a gain on sale occurs. If sold for less, a loss on sale occurs. The cash proceeds from the sale are calculated by adding any gain on sale to the asset’s book value, or subtracting any loss on sale from the book value. For instance, if an asset with a book value of $50,000 is sold for $60,000, the cash inflow is $60,000, representing a $10,000 gain.

Selling investment securities, such as stocks or bonds, generates cash inflows. The cash received from these sales is the selling price of the securities. For example, if a company sells shares it held as an investment for $100,000, that entire amount is a cash inflow. Gains or losses on these sales are reported on the income statement but the full cash proceeds are included in the investing section.

Collecting principal on loans previously made to other entities is another source of cash inflow. When a borrower repays the principal portion of a loan, that amount increases the company’s cash. For example, if a company had loaned $20,000 to a supplier and the supplier repays $15,000 of the principal, this $15,000 is recorded as a cash inflow. Interest received on such loans is typically classified under operating activities.

Calculating Cash Outflows from Investing Activities

Cash outflows from investing activities represent money spent by the company on acquiring long-term assets or making investments. Purchasing property, plant, and equipment (PP&E) is a significant outflow. These expenditures are identified by analyzing changes in the gross PP&E account on the balance sheet, alongside information about depreciation and asset sales.

The cash paid for new PP&E can be determined by taking the ending gross PP&E balance, adding the original cost of any assets sold during the period, and then subtracting the beginning gross PP&E balance. For example, if gross PP&E increased from $500,000 to $600,000, and an asset with an original cost of $30,000 was sold, the cash spent on new purchases would be $130,000 ($600,000 + $30,000 – $500,000). This calculation isolates the cash spent on acquiring new assets.

Purchasing investment securities is another common outflow. When acquiring securities, the cash paid for these investments is recorded as an outflow. For instance, if a company buys $75,000 worth of corporate bonds, this amount is a cash outflow from investing activities.

Making loans to other entities is also a cash outflow. When a company extends a loan to another business or individual, the principal amount disbursed is a use of cash. For example, if a company provides a $10,000 loan to a new vendor, this $10,000 is an investing cash outflow.

Net Cash Flow from Investing Activities

The net cash flow from investing activities is calculated by combining total cash inflows with total cash outflows. Cash inflows increase the net figure, while cash outflows decrease it.

The calculation sums all cash received from selling long-term assets and investments, then subtracts all cash paid for purchasing long-term assets and making new investments. A positive net cash flow indicates that the company generated more cash from its investing activities than it spent. Conversely, a negative net cash flow signifies that the company used more cash to acquire assets and make investments than it received from selling them.

For example, if a company had $150,000 in cash inflows from selling assets and $200,000 in cash outflows from purchasing assets, the net cash flow from investing activities would be a negative $50,000. This net figure is a key component of the overall Statement of Cash Flows, summarizing how a company’s long-term asset management impacts its cash position.