Corporate Finance For Dummies
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Any cash flow changes that result from the purchase or sale of investment assets belong in the investing activities cash flows portion of the statement of cash flows.

Whenever a company purchases or sells any form of investment, including large, long-term assets, the cash flows result in either a gain or loss in cash from the total cash and cash equivalents (although they could also break even). Some of the most common transactions that show up in this section are

  • Purchases of investments: When a company purchases an investment with cash, the price of that purchase decreases the amount of cash available to the company. No matter what type of investment (stock, bond, or something else) it is, the impact on cash influences the cash flows from investing activities.

  • Proceeds from sale of investments: When a company sells the investments it already owns for cash or partially for cash, whatever cash increase the sale generates is considered proceeds from investing activities.

    Even if the company sells the investment at a net loss (the company paid more for the investment than what it sold for), overall, the sale still increases cash relative to the company’s cash levels before the sale because the company already accounted for the cash decrease when it purchased the investment. Remember that the statement of cash flows focuses only on cash levels, not company value.

  • Purchase of property, plant, and equipment (PPE): The purchase of PPE refers to the times when a company purchases long-term assets, usually of a large and/or expensive nature. Because companies often make PPE purchases on credit, the impact on cash usually happens a little at a time over several periods.

    Say, for example, a company purchases a $100,000 piece of equipment and plans to pay it off over the course of ten years (with no interest). The annual impact on cash flows is a $10,000 annual reduction as the company makes its payments.

  • Proceeds from sale of PPE: Companies can usually sell any used machinery and equipment they don’t need anymore (at least for scrap if not whole), and they can even sell land and buildings at a profit as property values increase. The proceeds companies make from these types of sales go into the investing activities cash flows.

Add up all the positive values from the investing activities portion of the statement of cash flows and then subtract the negative values. The final answer is the total amount of change in cash the company has had as a result of its investing activities (called the net cash provided by investing activities).

This number usually appears at the end of the investing activities portion of the statement of cash flows.

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Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

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