{"id":862,"date":"2015-05-13T18:37:44","date_gmt":"2015-05-13T18:37:44","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=862"},"modified":"2015-06-08T21:01:02","modified_gmt":"2015-06-08T21:01:02","slug":"cash-flows-from-investing-and-financing","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/cash-flows-from-investing-and-financing\/","title":{"raw":"Cash Flows From Investing and Financing","rendered":"Cash Flows From Investing and Financing"},"content":{"raw":"Cash flows from investing and financing are prepared the same way under the direct and indirect methods for the statement of cash flows.\u00a0 To put it simply, if we RECEIVE CASH in the transaction we ADD the cash amount received and if we PAY CASH in the transaction we SUTRACT the cash amount paid.\r\n

Investing Activities<\/h2>\r\nInvesting activities would include any changes to long term assets including fixed assets (also called property, plant and equipment), long term investments in notes receivable, or stocks or bonds of other companies, and intangible assets (patents, trademarks, etc.).\u00a0 Where would we find this information?\u00a0 We would look on the balance sheet.\u00a0 If there was a change in any long term asset (increase or decrease during the year), we need to account for that item in the Investing section.\u00a0 For our purposes, we will use the balance sheet and any additional information provided to us.\r\n\r\nWhen analyzing the investing section, a negative cash flow is not necessarily a bad thing -- you would need to look into the individual items of the investing section.\u00a0 We could have a negative cash flow if we purchased a new building for cash but this would be a good thing for our company and should not been determined to be bad since the cash flow from investing could be negative.\u00a0 Same if the reverse were true, what if we sold all of our long term assets and did not purchase any new assets -- would this be a good thing for our company since we have a positive cash flow or a signal that something is going very wrong?\r\n\r\nHere is a video to explain both investing and financing and then we will look at financing:\r\n\r\nhttps:\/\/youtu.be\/VUbMq50rZGo\r\n

Financing Activities<\/h2>\r\nFinancing activities would include any changes to long term liabilities (and short term notes payable from the bank) and equity accounts (common stock, paid in capital accounts, treasury stock, etc.).\u00a0 We would get most of the information from the balance sheet, but it may be necessary to use the Statement of Retained Earnings as well for any information on dividends.\u00a0 As with investing, if there has been a change in a long term liability or equity (increase or decrease during the year), we must account for the item in the Financing section of the statement of cash flows.\r\n\r\nWhen analyzing the financing section, just like with investing, a negative cash flow is not necessarily a bad thing and a positive cash flow is not always a good thing.\u00a0 Once again, you need to look at the transactions themselves to help you decide\u00a0how\u00a0the positive or negative cash flow would affect the company.\r\n\r\nTo summarize our investing and financing sections, review this chart (remember, use the wording \"provided\" if positive cash flow and \"used\" if negative cash flow):\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Cash flows from Investing activities:<\/td>\r\n<\/tr>\r\n
+ cash received from sale of long term assets<\/td>\r\n<\/tr>\r\n
- cash paid for purchase of new long term assets<\/td>\r\n<\/tr>\r\n
Net cash provided (used) by Investing Activities<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/tr>\r\n
Cash flows from Financing activities:<\/td>\r\n<\/tr>\r\n
+ cash received from long term liabilities<\/td>\r\n<\/tr>\r\n
- cash paid on\u00a0 long term liabilities<\/td>\r\n<\/tr>\r\n
+ cash received from issuing stock<\/td>\r\n<\/tr>\r\n
- cash paid for dividends<\/td>\r\n<\/tr>\r\n
- cash paid to purchase treasury stock<\/td>\r\n<\/tr>\r\n
Net cash provided (used) by Financing Activities<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

Non-cash investing and financing activities<\/h2>\r\nWhat happens if we purchase a building by signing a mortgage with no cash down payment?\u00a0 Or if we convert bonds payable to common stock, how would we account for these transactions?\u00a0 These transactions do not involve cash but they are significant enough for investors to need to know.\u00a0 We will report them in a separate section at the bottom of the statement of cash flows.\u00a0 For example, assume a company did purchase a $100,000 building by paying $20,000 down in cash and signed a note for the balance of $80,000.\u00a0 This would be reported as follows (note, the $20,000 down payment would be including in the investing section of the statement of cash flows):\r\n\r\n\r\n\r\n\r\n
Noncash investing and financing activities:<\/td>\r\n<\/tr>\r\n
Purchased building for $100,000 by signing a note and a downpayment of $20,000<\/td>\r\n$80,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe will prepare a complete statement of cash flows in the next section.","rendered":"

Cash flows from investing and financing are prepared the same way under the direct and indirect methods for the statement of cash flows.\u00a0 To put it simply, if we RECEIVE CASH in the transaction we ADD the cash amount received and if we PAY CASH in the transaction we SUTRACT the cash amount paid.<\/p>\n

Investing Activities<\/h2>\n

Investing activities would include any changes to long term assets including fixed assets (also called property, plant and equipment), long term investments in notes receivable, or stocks or bonds of other companies, and intangible assets (patents, trademarks, etc.).\u00a0 Where would we find this information?\u00a0 We would look on the balance sheet.\u00a0 If there was a change in any long term asset (increase or decrease during the year), we need to account for that item in the Investing section.\u00a0 For our purposes, we will use the balance sheet and any additional information provided to us.<\/p>\n

When analyzing the investing section, a negative cash flow is not necessarily a bad thing — you would need to look into the individual items of the investing section.\u00a0 We could have a negative cash flow if we purchased a new building for cash but this would be a good thing for our company and should not been determined to be bad since the cash flow from investing could be negative.\u00a0 Same if the reverse were true, what if we sold all of our long term assets and did not purchase any new assets — would this be a good thing for our company since we have a positive cash flow or a signal that something is going very wrong?<\/p>\n

Here is a video to explain both investing and financing and then we will look at financing:<\/p>\n