What Is Cash flow From Investing Activities?
Cash flow from investing activities typically refers to cash generated in a company by making or selling investments and/or earning from it. Cash flow from investing activities is a major component of cash flow statement which is one of the four annual financial statements that are prepared by companies at the end of the year.
Cash flow from investing activities involves the amount invested in fixed assets and in long-term securities (Cash outflow), and the amount realized from the sale of these items (Cash inflow).
The four financial statements are the Income Statement, Statement of Financial Position, Statement of Cash Flow, and Statement of Changes in Equity. These financial statements systematically present the financial performance of the company throughout the year.
Income Statement reports the revenue and expenditure of a company during a specific period whereas Balance Sheet reports the assets, liabilities, and capital. Similarly, the Statement of Cash Flow portrays the net cash flow of the company during a certain financial period. It provides insight of all the cash that is entering and leaving the business through operating activities, investing activities, and financing activities.
The cash flow from investing activities comprises of all transactions involving buying and selling of non-current assets from which future economic benefits are expected. In other words, such assets will deliver value and benefits in the long run.
Formula and Format:
On the statement of cash flow, investing activities are reported between operating activities and financing activities. The sum of all three results in the net cash flow of the company for the year.
The format of a cash flow statement is as follows:
Cash Flow from Operating Activities:
This section reconciles the net profit to net cash flow from operating activities by adjusting items on theincome statement that are non-cash in nature. For example, depreciation is added back and income receivable is reduced.
Cash Flow from Investing Activities:
Cash flow from investing activities comprises of all the cash purchases and disposal of non-current assets that derive value and benefits for the company in the long run.
Usually, when companies are expanding they invest in property, plant, and equipment, and investors or shareholders of the company can easily find all these transactions in the cash flow from investing activities section of the cash flow statement.
This segment also includes any cash spent on purchases of stocks in other companies from which dividends are earned.
Examples of investing activities include:
- Acquisition of non-current assets including, both, PPE and intangible assets (cash outflow)
- Disposal of non-current assets including,both, PPE and intangible assets (cash inflow)
- Investment in marketable stocks, bonds, and securities (cash outflow)
- Disposal of investments in marketable stocks, bonds and securities (cash inflow)
- Acquisition of businesses (cash outflow)
- Loans given (cash outflow)
However, you need to keep in mind that investing activities does not include any dividends paid, debts acquired, equity financing, and interest earned or paid.
Cash Flow from Financing Activities:
Cash flow from financing activities include cash transactions increasing or decreasing the equity and/or liabilities of the company. It typically includes issuing and buying back of shares, acquiring loans, and payments of dividends.
Calculation of cash flow from investing activities
In our example, we have used Walmart Inc.’s statement of cash flows for the year 2019. As you can see, it is segmented into three parts where investing activities comes in between operating activities and financing activities.
In the cash flow from investing activities, Walmart has three negative cash flows as follows:
- Paid $10,344 Million for property, plant, and equipment,
- Paid $14,656 Million for acquiring businesses,
- And paid $431 Million for other investing activities
Simultaneously, there were two positive cash flows in investing activities as follows:
- Received $519 Million by selling off property, plant, and equipment,
- And received $876 Million by disposing off certain operations.
Walmart made significant capital expenditure since it has a net cash outflow of $24,036 Million in investing activities. The net cash used in investing activities was calculated by subtracting the positive cash flow of $1,395 Million with the negative cash flow of $25,431 Million.
Even though the cash flow from investing activities gives a clear picture of a company’s investments, it is necessary to look at both the income statement and balance sheet too to get a better understanding of its financial position.