Cash Flows from Investing Activities
International Accounting Standard 7 (IAS 7) defines investing activities as the activities that “are the acquisition and disposal of long-term assets and other investments not included in cash equivalents”.
Cash flows mean the inflows and the outflows of cash and cash equivalents. By cash we mean cash on hand and demand deposits. While the cash equivalents comprise short-term liquid investments that are quickly convertible to cash and which are subject to very little risk of changes in value.
Investing activities encompass disposal and purchase of property, plant and equipment and other non-current assets such as investment property and machinery. Cash flows from investing activities represent the change in an entities cash position resulting from investments in the financial markets and operating subsidiaries, and changes resulting from funds spent on investments in capital assets such as plant and equipment.
Following are some of the common examples of cash flows from investing activities.
Examples of Inflows:
- Proceeds from disposal of property, plant and equipment
- Cash receipts from disposal of debt instruments of other entities
- Receipts from sale of equity instruments of other entities
Examples of Outflows:
- Payments for acquisition of property, plant and equipment
- Payments for purchase of debt instruments of other entities
- Payments for purchase of equity instruments of other entities
Sale and purchase of debt instruments and equity instruments of other entities is considered to be investing activity only if they are not held for the purpose of trading or if they are not considered to be cash equivalents.
Investing activities also include cash advances and collections on loans made to other entities. This does not include loans and advances made by banks and other financial institutions to their customers. Loans and advances by banks and other financial institutions will be classified as “cash flows from operating activities” because these cash flows are from their principal revenue-generating activities.
Cash flows from investing activities are important because they give indications of future growth in revenues. A negative amount of cash flows from investing activities indicate that the company is investing in capital assets therefore it future earnings are expected to grow.