By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Investing transactions involve the purchase and sale of noncurrent assets. Noncurrent assets are assets the company anticipates owning for more than one year past the date of the balance sheet. Examples of noncurrent assets are long-term debt and equity investments; property, plant, and equipment; and intangible assets such as patents and copyrights.

What exactly are debt and equity investments?

  • Common stock is an example of an equity investment. Equity refers to ownership in a company. Suppose you buy AT&T common stock. As a shareholder, you’re an investor who gets paid back for the purchase of the stock only if you sell it to someone else.

  • Bonds are debt investments. Corporations generally issue bonds to raise money for capital expenditures, operating expenses, and acquisitions. Because the investors are owed the principal amount they invest with the company, they’re company creditors.

    For example, a municipality sells bonds to the public for the purpose of financing a new hospital. Bondholders receive interest payments at the bond’s stated interest rate. When the bond matures, the company pays the bondholder the face amount of the bond.

Investing sources of cash

Investing transactions show up as sources of cash in the following ways:

  • Long-term debt sales and collection: A company’s investments in debt may fall into three categories: loans, held-to-maturity debt investments, and available-for-sale debt portfolios. Here’s how they differ:

    • Loans are easy to understand; they’re merely money the company loans to others that won’t be repaid within 12 months of the balance sheet date. You know from your own personal debts (such as car loans) that when you owe money, you periodically have to make payments on the principal portion of the loan.

      The same holds true with businesses. So any collection of principal on loans is a cash source for the company lending the money.

    • Held-to-maturity debt investments are those the company anticipates holding onto until the debt matures. For example, ABC Corp. buys five-year bonds issued by the city of Orlando to build a new sports arena. When the bonds mature, the cash proceeds go in the investing section.

    • Available-for-sale debt investments are one of those accounting topics defined by what they aren’t rather than what they are. They don’t fall into the held-to-maturity or trading category. However, as with the held-to-maturity investments, any cash the company receives from their sale or collection of principal at maturity reflects as a cash source in the investing section of the statement of cash flows.

  • Sales of equity investments: If the company sells stock it owns in other corporations, the cash it receives is an investing source. So suppose your company owns 500 shares of ABC Corp. common stock, and you decide to sell all 500 shares. Any money you receive for the sale of your shares goes in the investing section.

  • Sales of property, plant, and equipment (PP&E) and intangibles: The cash proceeds from any PP&E the corporation sells (such as cars, buildings, and equipment) is an investing source of cash. Ditto if the company sells an intangible asset such as a patent. (A patent provides licensing for inventions or other unique processes and designs.)

Investing uses of cash

Here are the potential uses of cash that appear in the investing section of the statement of cash flows:

  • Loans and debt purchases: Any cash the company loans to another company is a cash outlay. So is any cash the company uses to buy bonds.

  • Purchase of equity investments: This category includes any cash the company uses to buy stock in another corporation.

  • Purchase of PP&E: If the business pays cash for any fixed asset acquisition or an intangible asset, this outlay of cash must appear in the investing section.