Cash Flow from Investing Activities

The movement of cash & cash equivalents or inflow and outflow of cash is known as Cash Flow. Cash inflows are the transactions that result in an increase in cash & cash equivalents; whereas, cash outflows are the transactions that result in a reduction in cash & cash equivalents. Hence, a statement showing flows of cash & cash equivalent during a specified time period is known as a Cash Flow Statement. One can prepare a cash flow statement if the two comparative balance sheets of a company are given. The transactions of a cash flow statement are categorised into three activities; namely, Cash flow from Operating Activities, Cash flow from Investing Activities, and Cash flow from Financing Activities. The Institute of Chartered Accountants in India has issued Accounting Standard AS – 3 revised for the preparation of cash flow statements. Besides, with the introduction of the Companies Act 2013, the preparation of a Cash Flow Statement is now mandatory for every type of company except OPC (One Person Company) [Section 2(40)].

What are Investing Activities?

The sale and purchase of investments and fixed assets, which are not held by a company for resale purposes are covered under Investing Activities. Cash flow from investing activities also discloses the expenditures incurred for the resources intended to generate future income and cash flows of the company. Some examples of cash flows arising from investing activities are as follows:

• Cash receipts from the sale of fixed assets (including intangibles).
• Cash payments for acquiring fixed assets (including intangibles).
• Cash receipts from the sale of shares, warrants, or debt instruments of other organisations (other than receipts for those instruments that are considered to be cash & cash equivalents).
• Cash payments for acquiring shares, warrants, or debt instruments of other organisations (other than payments for those instruments that are considered to be cash & cash equivalents).
• Cash receipts of insurance claims for the property involved in an accident.
• Cash advances and loans made to third parties. However, in the case of financial organisations, cash advances and loans will be treated as cash flows from operating activities. 
• Cash receipts from the repayment of advances and loans made to third parties. However, in the case of financial organisations, cash receipts and repayments of advances and loans will be treated as cash flows from operating activities. 
• Cash receipts of interest and dividends. However, in the case of financial organisations, cash receipts of interest and dividends will be treated as cash flows from operating activities. 

Format of Cash Flow from Investing Activities:

Illustration 1:

Calculate Cash flow from Investing Activities from the following information:

Additional Information:

1. Interest Received on debentures held as investment ₹5,000

2. Dividend paid on Equity Shares ₹30,000

3. Dividend received on Shares held as investment ₹40,000

4. Interest paid on debentures issued ₹12,000

5. The firm also purchased land out of the surplus funds for investment purposes and was let out for commercial use. Rent received for the same was ₹50,000

Solution:

Note: We will not record Interest Paid (₹12,000) and Dividend Paid (₹30,000) in Cash flow from Investing Activities. It will be recorded in Cash flow from Financing Activities. 

Illustration 2:

Calculate Cash Flow from Investing Activities from the following information:

Additional Information:

1. During the year, a machine costing ₹50,000 with accumulated depreciation of 20,000 was sold for ₹40,000.

2. Patents written off were ₹30,000, and some patents were sold at a profit of ₹10,000. 

Solution:

Working Note 1:

*Gain on Sale of Machinery = Sale Price – Book Value of Machinery

= ₹40,000 – ₹30,000 (₹50,000 – ₹20,000)

= ₹10,000

Working Note 2:

Working Note 3: