Investing activities are among the primary categories of net cash activities that businesses report on the cash flow statement.
From the definition we gathered, investing activities can be described as the second major category of net cash activities listed on the statement of cash flows and deal with buying and selling long-term assets and some other investments.
We can equally say it is the net amount of cash received and paid during an accounting period for long-term assets and investments.
Now, a business’s reported investing activities provide insights into the total investment profits and losses it experienced during a specific period.
Then we can say investing activities are a vital component of a company’s cash flow statement that records the cash that is earned and has been spent over some time.
Meaning of cash flow from investing activities
The meaning goes this way. Cash flow from investing activities can be described as a line item on a business’s cash flow statement, one of the significant financial statements that most firms prepare.
We can also say cash flow is the net change in most company’s investment profits or losses during the reporting period or change from any purchase or sale of fixed assets.
Examples of cash flows and outflows
- Cash collected from:
- Selling trading, held for sale, and available for sale securities
- Selling discounted notes
- Selling long-term productive assets
- Collecting principle on the third party notes that don’t generate sales
- Cash paid to:
- Purchase trading, held for sale, and available for sale securities
- Purchase long-term productive assets
- Pay principle on the third party notes that don’t generate sales
Definition of Fixed Assets
It can be defined as the property and equipment a business owns and uses to help generate revenue. Then fixed assets are most less liquid than current assets and are not meant to be converted into cash within a year. Fixed assets include some examples:
- Buildings and property
Examples of investing activities
These examples will shed more light as it explained that is when a business buys or sells an investment, it is more likely that the activity will result in a profit or loss in the company’s cash flow.
Let’s see some frequent accounting transactions that show in the investing activities section of the cash flow.
- Proceeds from the Sale of Investments: This explained that when a company sells off one of its investments for cash, the investment sale will later increase cash flow from investing activities.
- The Purchase of Investments: Anytime a business buys a cash investment, either it’s stocks, bonds, or another type of investment, it just means that the cost of that investment will decrease in its cash flow from investing activities. Because cash is flowing out totally in the business to cover the purchase.
- The Purchase of Fixed Assets: This includes land, building, and vehicles that are generally purchased on credit by not using cash in the deal; because of this, the purchase of fixed assets will show up in the cash flow investing activities section gradually over time. It means anytime the company makes a cash payment toward the credit purchase, and it will show up as a decrease in the cash flow.
- Proceeds from the Sale of Fixed Assets: If a company sells a fixed asset, it can be a property, a used vehicle, or a computer for parts, the proceeds of the sale are recorded as an increase in its cash flow statement.
Important of investing activities
Investing activities can refer to one of the essential items reported on a business’s cash flow statement.
The great advantage of this is that it can give you insights into how a business might grow in the future and get more revenue.
Another part is that if a company eventually reports a negative amount of cash flow from investing activities, it shows that it is investing in capital assets. You can expect their earnings to grow in the future.
This can only happen in capital-driven industries like manufacturing that require significant investments.