Just like people, businesses make money from investments. Any time your company spends or gains money by investing, you report it on the cash flow statement. Calculating the cash flow from investing activities is simple. Add up any money received from the sale of assets, paying back loans or the sale of stocks and bonds. Subtract money paid out to buy assets, make loans or buy stocks and bonds. The total is the figure that gets reported on your cash flow statement.
TL;DR (Too Long; Didn't Read)
Calculate cash flow from investments by adding together the gains and losses from your various investments and entering the total on the cash flow statement.
Understanding the Cash Flow Statement
Unlike the income statement, the cash flow statement only reports money that's paid to you or by you. Suppose a borrower is scheduled to pay a $5,000 loan back at the end of March but pays in April instead. The March income statement would list the $5,000 as revenue, but it wouldn't go on the cash flow statement until the April payment.
What is an Investing Activity?
The cash flow statement reports cash flow from three types of activities, operating, financing and investing. Operating activities are your regular line of business such as retail sales, housekeeping services or building houses. Finance cash flows include buying and selling of your stocks and bonds and paying out dividends. Investing covers several different activities:
- Buying or selling fixed assets such as buildings, land or equipment.
- Buying and selling stocks and bonds.
- Lending out money and collecting loans.
Standard accounting practice treats buying fixed assets as an investment. If you spend $300,000 this month to purchase updated equipment for your factory, that's a $300,000 negative entry on the cash-flow statement. If you also sell the old equipment for $175,000, that's a positive entry. If those are the month's only investment activities, you'd report -$125,000 in investment cash flow for the month.
What It All Means
Operational cash flow shows how much money you generate from your company's core purpose. The cash flow statement separates operational and investment income because income from profitable investments could hide that your company doesn't get much revenue the regular way. If you've made significant expenditures for fixed assets, the opposite could happen, and it would make your cash flow from operations look worse than it is. Cash flow from investing activities is critical because it shows you have resources, even if cash flow from operations is low. If you're in an industry that requires substantial investment in fixed assets, negative cash flow from investments can be a good sign that shows you're investing in your business's equipment.