Definition
Investing activities represent a section of the cash flow statement that encompasses the cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. As mandated by Financial Reporting Standard (FRS) 1, these activities include transactions related to fixed assets or current-asset investments, ensuring stakeholders can discern the financial health and strategic investments of the organization.
Examples
- Purchase of Machinery: When a manufacturing company buys new machinery, the expense is recorded under investing activities.
- Selling Real Estate: If a corporation sells a portion of its land, the income from this sale is recorded under investing activities.
- Acquisition of Another Company: The cash used to acquire another business is reported in this section.
- Purchase of Marketable Securities: Cash spent on acquiring marketable securities that are not considered cash equivalents is also included.
- Investment in Research and Development Equipment: Any cash flow used for buying equipment for research purposes falls under investing activities.
Frequently Asked Questions
What are investing activities in a cash flow statement?
Investing activities in a cash flow statement refer to the section that records cash flow from purchases and sales of long-term assets and investments that are not considered cash equivalents.
Why are investing activities important?
Investing activities are crucial as they reflect an organization’s long-term growth strategy, showing investments in assets that will generate future income.
How do investing activities differ from operating activities?
Investing activities relate to the acquisition and disposal of long-term assets, while operating activities include cash flows related to the day-to-day operations of the business.
Can negative cash flow from investing activities be a good sign?
Yes, negative cash flow from investing activities can indicate that a company is investing heavily in its future growth, such as purchasing new equipment or technology.
Does the sale of stock appear in investing activities?
No, the sale of stock does not appear under investing activities. It is reported under financing activities.
How are dividends received treated in the cash flow statement?
Dividends received are usually listed under operating activities but can sometimes appear in investing activities based on how they are reported by the company.
How are loans provided to other entities reported?
Cash outflows from providing loans to other entities are recorded in investing activities.
What is the significance of FRS 1 in relation to investing activities?
FRS 1 mandates the disclosure of cash flow information, including investing activities, ensuring transparency and standardization in financial reporting.
Do investing activities affect net income?
No, cash flows from investing activities do not directly affect net income. They are part of the cash flow statement, influencing the cash position of the organization.
How are gains or losses from asset disposal reported?
The gain or loss from asset disposals is reported in the income statement, while the actual cash flow from the transaction appears in the investing activities section of the cash flow statement.
Related Terms
- Financial Reporting Standard (FRS) 1: A standard for preparing cash flow statements, ensuring consistency in financial reporting.
- Fixed Assets: Long-term tangible assets used in business operations, such as machinery and buildings.
- Current-Asset Investment: Assets that are expected to be converted into cash within one year.
- Cash Equivalents: Highly liquid investments that are readily convertible to known amounts of cash.
Online References
Suggested Books for Further Studies
- “Financial Accounting and Reporting” by Barry Elliott & Jamie Elliott
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Financial Statement Analysis and Security Valuation” by Stephen H. Penman
- “Accounting for Dummies” by John A. Tracy
Accounting Basics: “Investing Activities” Fundamentals Quiz
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