Cash Flows from Investing Activities
Cash flows from investing activities are those involving noncurrent capital assets used in the firm’s operations, such as property, plant, equipment (PP&E) and intangible assets. When a company invests in new long-term capacity by acquiring either PP&E or another company, the investment is a cash outflow from investing activities. Disposals of these types of assets for cash generate inflows. Accounting standards differ somewhat as to which activities can be classified as investing. For example, under IAS, some research and development expenditures can be capitalized on the balance sheet and would thus be considered investing activities. Under U.S. GAAP, research and development costs must all be expensed immediately on the income statement and appear as operating cash outflows regardless of whether the research will result in long-term benefits to the firm.
Note that the investing activities section does not necessarily provide a complete listing of all capital asset activity because only acquisitions or disposals involving cash appear here. Noncash acquisitions, such as acquisition of a building using a mortgage, are disclosed in supplemental information to the cash flow statement. Under both U.S. GAAP and IAS, a specific provision is made for these types of noncash financing and investing transactions. They are typically simultaneous, arising from an acquisition of a capital asset funded solely by incurring debt, such as the mortgage used to acquire property. Conceptually, it can be argued that a company receives cash from incurring the debt and then spends the cash on the acquisition. Nevertheless, if cash does not actually change hands, both sets of standards treat these as noncash transactions that must be disclosed separately from cash transactions. The disclosure could appear either at the end of the cash flow statement or in the notes to the statements. Another common noncash financing transaction, which is disclosed in the same manner, is the conversion of convertible debt or preferred stock into common equity.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
