Operating, Investing and Financing Activities Classification of Cash Flows

It usually involves the sale and purchase of long-term investments in debt and equity instruments of other entities. Examples of debt instruments (also known as debt securities) are government bonds, corporate bonds, mortgages, etc. The holder of such instruments is generally entitled to receive periodic interest income at some specified rate.

Purchase and sale of intangible assets

A reduction, on the other hand, signifies that the asset has been sold during the period. Such acquisitions and sales of long-term or fixed assets are known as investing activities. The rest of this article explains how inflows and outflows of cash caused by such activities are computed and reported in the statement of cash flows. Investing activities often refers to the cash flows from investing activities, which is one of the three main sections of the statement of cash flows (or SCF or cash flow statement).

Operating Activities and Financing Activities

While this signals a negative cash flow from investing activities in the short term, it may help the company generate cash flow in the long term. Below is the cash flow statement from Apple Inc. according to the company’s 10-Q report issued on Nov. 2, 2023. The three sections of Apple’s statement of cash flows are listed with operating activities at the top and financing activities at the bottom of the statement. While preparing the statement of cash flows, the treatment of amortization of intangible assets is similar to the treatment of depreciation on fixed assets. It is a non-cash expense and is added back to the net income in the operating activities section under the indirect method. Like depreciation, amortization has nothing to do with the investing activities section.

How Is Cash Flow From Investing Activities Calculated?

The company realized a positive inflow of $3 billion from the sale of investments. To calculate the cash flow from investing activities, the sum of these items equals -$33 billion. Investments are a little more complicated than the long-term assets because it depends on the source of the investment.

Definition of Investing Activities

This may include cash from the sale of goods, interest payments, employee salaries, inventory payments, or income tax payments. Cash flow from investing activities (CFI) is one section of a company’s cash flow statement. It reports how much cash has been generated or spent https://www.bookstime.com/ from investment-related activities in a specific period.

• Likewise, FASB requires that all interest payments and receipts be classified as operating activities.
• When a company sells any of its long-term investments or sells any of its property, plant and equipment, it is assumed to be providing or increasing the company’s cash and cash equivalents.
• Examples of debt instruments (also known as debt securities) are government bonds, corporate bonds, mortgages, etc.
• In general, negative cash flow can be an indicator of a company’s poor performance.
• Investing activities include purchases of long-term assets (such as property, plant, and equipment), acquisitions of other businesses, and investments in marketable securities (stocks and bonds).
• Cash flows from investing activities provide an account of cash used in the purchase of non-current assets, also known as long-term assets, that will deliver value in the future.

Cash Flow from Investing Activities

Therefore, the cash received from the sale unearned revenue of these long-term assets will be reported as positive amounts in the cash flows from investing activities section of the SCF. The acquisition or sale of long-term assets and investments during a specific period can be determined by analyzing their opening and closing balances. An increase in the balance of a long-term asset indicates that the company has acquired or constructed the asset during the period.

Any changes in the values of these long-term assets (other than the impact of depreciation) mean there will be investing items to display on the cash flow statement. The patent is being amortized over its economic useful life of 5 years using a straight-line method. On December 31, 2023, the company’s income statement showed a net income of $350,000. The company is ready to prepare its statement of cash flows for the year 2023. A change to property, plant, and equipment (PPE), a large line item on the balance sheet, is considered an investing activity.

• While preparing the statement of cash flows, the treatment of amortization of intangible assets is similar to the treatment of depreciation on fixed assets.
• When we prepare a statement of cash flows, we are concerned only with cash transactions.
• In financial modeling, it’s critical to have a solid understanding of how to build the investing section of the cash flow statement.
• Operating activities include any inflow or outflow that is part of a company’s daily operations.
• Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.

Sale and purchase of investments

Equity instruments (also known as equity securities) are the stocks of other companies that entitle the holder to receive dividend income. Long-term productive assets (also known as non-current assets or fixed assets) are purchased to be kept and used in business for a long period of time. They are capital assets and are purchased to maintain or enhance the production or trading capabilities of the entity. Examples of such what are investing activities assets include plant and machinery, equipment, tools, buildings, vehicles, furniture, land, etc.

• Overall, Apple had a positive cash flow from investing activity despite spending nearly $30 billion on the purchase of marketable securities.
• The loans and advances given to others are investing activities, and the cash outflows resulting from such activities are shown in the investing activities section.
• The patent is being amortized over its economic useful life of 5 years using a straight-line method.
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• The acquisition or sale of long-term assets and investments during a specific period can be determined by analyzing their opening and closing balances.
• There are more items than just those listed above that can be included, and every company is different.

As a result, these investments and capital expenditures are reported as negative amounts in the cash flows from investing activities section of the SCF. When a medium other than cash is used to acquire an asset, we call it a non-cash investing activity. When we prepare a statement of cash flows, we are concerned only with cash transactions. The significant non-cash investing activities are, however, disclosed in the footnotes under the caption “non-cash investing and financing activities”. Suppose a company spent $30 billion on capital expenditures, of which the majority were fixed assets. It also purchased $5 billion in investments and spent $1 billion on acquisitions.