Learning Outcomes
- Calculate cash flows from investing activities
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.). Where would we find this information? We would look on the balance sheet. 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. For our purposes, we will use the balance sheet and any additional information provided to us.
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. 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 be determined to be bad since the cash flow from investing could be negative. 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?
Here is the balance sheet for Rumble Corp.:
| Description | Amount | Total |
|---|---|---|
| In millions | ||
| Panel A – Balance Sheet | 12/31/X1 | 12/31/X0 |
| Cash | $5,040 | $1,640 |
| Accounts Receivable | 1,735 | 1,750 |
| Equipment | 24,920 | 24,500 |
| Accumulated Depreciation | (1,565) | (1,540) |
| Total Assets | Single line $30,130 Double line |
Single line $26,350 Double line |
| Accounts Payable | $1,039 | $1,007 |
| Wages Payable | 135 | 55 |
| Income Taxes Payable | 60 | 42 |
| Note Payable – Long Term | 500 | 0 |
| Total Liabilities | Single line 1,734 |
Single line 1,104 |
| Common Stock | 13,500 | 12,500 |
| Retained Earnings | 14,896 | 12,746 |
| Total Liabilities and Owner’s Equity | Single line $30,130 Double line |
Single line $26,350 Double line |
Purchases of equipment are investing activities. We would know from an analysis of the general ledger that there were both increases and decreases in the equipment account(s).
That account decreased by the cost basis of the assets we sold at a gain that had a cost basis of $160 and increased by new purchases of $580. Thus, the net increase of $420.
Let’s look at that calculation of the gain on sale of assets:
| Cost basis | $ 160 |
|---|---|
| Less accumulated depreciation | 100 |
| Book value | 60 |
| Proceeds from sale | 150 |
| Gain on sale of assets | $ 90 |
Proceeds from the sale of assets are cash flows FROM investing activities.
Therefore, the investing section of the statement of cash flows for Rumble Corp. would look like this:
| Description | Amount | Total |
|---|---|---|
| Cash flows from investing activities | ||
| Purchase of property, plant, and equipment | (580) | |
| Proceeds from sale of equipment | 150Single Line | Single Line |
| Net cash used in investing activities | (430) |
The net change in the fixed asset accounts was an increase of $430, but that corresponds to a decrease in cash. If we had financed these purchases, we would have to disclose the non-cash portion of the increase in the fixed asset accounts in a supplementary disclosure.
practice question
