What is Cash flow from Investing Activities?

It provides information on cash inflow and outflow related to purchases and sales of assets (Property, Plant & Equipment, etc.), loans made to suppliers or the ones received from the customer, and any payments related to merger & acquisitions.

In a nutshell, we can say that cash flow from investing activities reports the purchase and sale of long-term investments, property, plants, and equipment.

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List of Items Included in Cash Flow from Investing Activities 

Cash flow from Investments includes all the transactions involving acquiring and selling long-term investments, property, plants, and equipment.

These items are found in the non-current portion of the balance sheet.

  • Purchase of property, plant, and equipment (cash outflow)Sales of property, plant, and equipment (cash inflow)Investment in joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.read more and affiliates (cash outflow)Payments for business acquired (cash outflow)Proceeds from sales of assets (cash inflow)Investments in marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company’s balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more (cash outflow)

It is always easier to understand when we create and answer some questions. So here are a few questions that, when answered, would help us understand the topic more easily.

  1. What happens to the cash account of the company that has purchased land?

  2. What happens to the cash account of the company that sold land?

Answer to Question 1: In this case, the cash account would decrease, as the company would need to pay cash for the land purchased. The double-entry accounting system would lead to an increase in asset accounts. In this case, the, asset accountAsset AccountAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. read more under consideration is Property, Plant & Equipment.

Answer to Question 2: In this case, the cash account would increase, as the company would get cash for the land sold. The double-entry accounting system would lead to a decrease in asset accounts. In this case, the asset account under consideration is Property, Plant & Equipment.

Cash Flow from Investment Example (Basic)

Let us assume that Mr. X has started a new business and has planned that he will prepare his financial statements like income statement, balance sheet, and cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more at the end of the month.

1st month: There was no revenue in the first month and no such operating expenseSuch Operating ExpenseOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more; hence, the income statement will result in zero net income. In cash flow from investing activities, there was no activity, too. Hence it will remain at zero.

2nd Month: The Company made some investments in land and property during the month, amounting to $100000. It is cash outflow and hence negative.

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How to Calculate Cash Flow from Investments?

Let’s calculate CFI when we have the balance sheet data.

Also, assume that the gain on the sale of land is $20,000

As we already know that CFI is related to non-current asset portions of the balance sheetNon-current Asset Portions Of The Balance SheetNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company’s investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more. There are two main items in non-current assets – Land and Property, Plant and Equipment.

  • Cash inflow from sale of Land  = Decrease in Land (BS) + Gain from Sale of Land = $80,000 – $70,000 + $20,000 = $30,000Cash outflow from purchase of property plant and equipmentProperty Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more (PPE) = $120,000 – $170,000 = -$50,000Cash flow from Investments formula = Cash inflow from Sale of Land + Cash outflow from PPE = $30,000 – $50,000 = -$20,000

CFI is an outflow of $20,000

Cash Flow from Investing Activities Example (Apple)

Now let us have a look at a few more sophisticated cash flow statements for companies that are listed entities on NYSE.

source: Apple 10K Filings 

  • Apple’s cash flow from investment activities was an outflow of $45.977 bn.Apple is heavily investing in purchasing marketable securities (cash outflow). Apple purchased $142.428 bn worth of marketable securities in 2015!In addition, Apple generated cash inflows by selling these marketable securities (cash inflows). Apple sold its marketable securities and generated $90.536 bn as cash inflows.In addition, Apple invested in acquiring property, plants, and equipment to the tune of $12.73bn in 2015.

Cash Flow from Investing Activities Example (JPMorgan Bank)

Below is the CFI from JPMorgan Chase.

source: JPMorgan SEC Filings

Now let us interpret the above statements and how indicative it is of the company’s situation. Since this entity is a bank, many line items will be completely different from what it is for others. Many line items are only applicable to banks or companies in financial services. Some important points from JPMorgan’s cash flow from investing activities are:

  • JPMorgan’s investing activities predominantly include loans originated to be held for investment, the investment securitiesInvestment SecuritiesInvestment securities are purchased by investors, with or without the assistance of a middleman or agent, solely for the purpose of investment and long-term holding. These are recorded in the financial statements as non-current investments and comprise fixed income and variable income bearing securities.read more portfolio, and other short-term interest-earning assets.Also, note that the cash flow from investments was $106.98 bn (cash inflow) in 2015, primarily because of the deposits with the bank to the tune of $144.46 bn.Other changes in loans resulted in a cash outflow of $108.9 bn in 2015 compared to a much lower number in prior years.

What analyst should know?

Until now, we have seen three companies in three different industries and how cash means different things for them. For a product company, cash is the king. For the service company, it is a way to run a business; for a bank, it is all about cash. These three companies have different things to offer in the cash flow from Investing activities part of the cash flow statement. However, it is imperative to understand the statement should not be singled out and seen. They should always be seen in conjunction with other statements and management discussionManagement DiscussionMD&A or management discussion and analysis is the part of financial statements where the company’s management discusses the company’s current performance using qualitative and quantitative measures to realize the details that otherwise would not have been available for analysis.read more & analysis.

Also, you should note that cash flow from investments provides a trend analysis of the companies capital expenditureAnalysis Of The Companies Capital ExpenditureCapex or Capital Expenditure is the expense of the company’s total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more (which will help us understand if the company is growing or in a steady phase). It is very useful when projecting the financial statements of the companyThe Financial Statements Of The CompanyFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

Another interesting aspect to look into this CFI is the column of proceeds from the disposal of fixed assets and proceeds from the disposal of a business. If the figures are substantially high, it can help visualize why the company is disposing of assets.

Conclusion

Cash flow from Investing Activities is the second of the three parts of the cash flow statement that shows the cash inflows and outflows from investing in an accounting year; investing activities includes cash flows from the sale of fixed asset, purchase of a fixed asset, sale and purchase of investment of business in shares or properties, etc. Investors used to look into the income statement and balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more for clues about the company’s situation. However, over the years, investors have now also started looking at each of these statements alongside the conjunction of cash flow statements. This helps in getting the whole picture and also helps to take a much more calculated investment decision.

As we have seen throughout the article, we can see that cash flow from investing activities is a great indicator of the core investing activity of the company.

Video on Cash Flow from Investing Activities

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