Cash flow from investing activities appears as the second part of the cash flow statement. It reflects the inflows and outflows of cash arising from the investing activities that have taken place in a company. Cash flows that are related to the investments of tangible and intangible assets, asset procurement, the purchase of property, plant and equipment or shares, earnings from the sale or disposal of assets, and so on, are all in the category of cash flow from investing activities.
Apart from investing activities, the other two types of cash flow activities include operating activities and financing activities. Classifying business activities into the right category may not be an easy task for business owners who do not know accounting well. If you are one of them, feel free to contact an accounting firm in Johor Bahru if you need assistance on this matter.
Cash flow from investing activities takes into account all business transactions that are related to the sale and acquisition of plant, property and equipment. In the company’s balance sheet, one will be able to find these items in the non-current parts. Investing activities that will lead to cash inflow are the sales and disposals of property, plant and equipment. On the other hand, the activities that will bring about a cash outflow include the property, plant and equipment procurement, investments made in joint ventures or the acquisition of a business, as well as the payments for the investment in the marketable securities.
As an example, XYZ Corporation is a newly incorporated firm. In the first month after it started running the business, it did not earn any revenue, and there is not related operating expense. Also, it did not get involved in any investing activities. Hence, its cash flow from investing activities will be zero too. Then, in the second month, it has invested in a property worth RM200,000. In this transaction, the business needs to spend cash. Thus, this is an example of cash outflow for investing activities.
By studying the cash flow from investing activities, one will get to know the trend of the capital expenditures of a company. Thus, he can determine whether the company’s current condition and stage, whether it is growing rapidly or in a stable phase. Knowing this will be very helpful when we want to forecast the company’s financial statements and its performance in the future. Besides, another aspect that one may focus on is the earnings that the company has obtained from the disposal of fixed assets. If the earnings from the disposal are abnormally high, one may need to study why the business has disposed of those assets.
In short, cash flow from investing activities includes the sales and purchases of property, plant and equipment, as well as the investments made. By studying this section in the statement of cash flow, one will be able to know the primary investing activities that the company has carried out. If one intends to assess the financial position of a business, besides looking at the statement of cash flow, he should study the balance sheet and profit and loss statement as well.