Cash Flows from Investing Activities

RECENT NEWS
The Hindu Business Line  Jul 17  Comment 
In the previous article of this series, we had take...




 

Cash Flows from Investing Activities represent the net change in cash from the use or sale of income-generating assets

Cash Flows from Investing Activities (alternately "Investing Cash Flow") is a measure (listed on a company's Cash Flow Statement) of the total cash generated or lost by a company's investments (items purchased with the purpose of generating future cash returns). Typically included in this calculation are cash flows from stocks, bonds, physical property (such as plants and equipment) and money made (or lost) from the buying and selling of subsidiaries.

Different accounting standards vary as to exactly what items can be classified as investments. For example, International Financial Reporting Standards (IFRS) hold that because certain research and development expenditures can be itemized on a balance sheet, they are investing activities. U.S. Generally Accepted Accounting Principles (GAAP) dictate that all research and development costs must be instantly expensed on a company's income statement and appear as a cash outflow for that accounting period.

Unlike most other metrics, negative Cash Flows from Investing Activities are not necessarily bad, nor are positive Cash Flows from Investing Activities necessarily good. Negative Cash Flows from Investing Activities may simply mean the company is purchasing long-term investments for the future health of the company, while positive Cash Flows from Investing Activities may mean the company has sold off investments to generate short-term cash, potentially even at a loss from the original price paid for the investment.

Because of the ambiguous nature of the metric, Cash Flows from Investing Activities must be considered alongside other metrics such as Cash Flows from Operating Activities.

Examples

  • Company A purchases a profitable subsidiary. The net income generated by that subsidiary after its acquisition by Company A will be considered part of Company A's investing cash flow (as a cash inflow).
  • In fiscal 2007, Company B purchased $1,000,000 in government bonds as a low-risk investment for the future. On it's annual Cash Flow Statement, this $1,000,000 is recorded as a negative Cash Flow from Investing Activities (or cash outflow). In early 2009, in the wake of the 2008 Financial Crisis, Company B sells off these bonds to generate much needed cash for continued operations. The value of the sale is reported as a positive cash inflow, listed under Cash Flow from Investing activities, regardless of whether the final value is greater than or less than the initial purchase value of the bonds.
Please install Flash Player to view this chart.
Please install Flash Player to view this chart.
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki