As we have discussed in previous articles that cash flow statement consists of three components: Operating, financing and investing. Here we will pour light on Cash Flows from Investing Activities.
Cash flow from investing activities arises from long term investments in financial markets and in capital assets. Investment in subsidiaries also causes an effect in the statement of cash flows of the parent company as well.
Purpose
The purpose of presenting this section separately in the cash flow statement is to let the users of the financial statement about the company’s performance over its investment. Whether, the entity is investing more money or just selling out its investments to continue its operations. If the entity is selling its investment frequently, then it is a clear indication that the entity is suffering from severe cash flows and that is why it is disposing assets to pay its liabilities to remain in the business.
Types of Transactions
Following are the most common transactions which are reported under investing activities:
- Payments made to purchase or acquire fixed assets such as vehicle, machinery, fixture etc,
- Cash received from sale of fixed assets such as vehicle, machinery, fixture etc,
- Payments made to purchase shares of another entity,
- Payment made against loan acquired,
- Cash received from sale of shares of other companies
- Cash received against insurance claim for the damaged asset.
IFRS and US GAAP
IFRS allows dividend income and interest earned on loan as operating activities or as investing activities. On the other hand, as per US GAAP, you must have to report these items under the operating activities.
Example
Alpha industry is engaged in manufacturing of plastic chairs. It has acquired new machinery costing $500 million for the factory. After dismantling the old machinery, it was sold for $20 million. Alpha has also dispose-off its investment in one of its subsidiaries for $30 millions. The dividend paid during the year is $6 million. The entity has also recieved interest income from loan given to a subsidiary amounting to $3 million. Prepare cash flow from investing activities section of the cash flow statement.
Solution
Cash Flow from Investing Activities
| IFRS | US GAAP | |
| Acquisition of machinery | (500) | (500) |
| Sale proceed from sale of old machinery | 20 | 20 |
| Proceed from investment dispose-off | 30 | 30 |
| Dividend paid | (6) | – |
| Interest received | 3 | – |
| Cash flow from investing activities | (453) | (450) |
We have not included dividend and interest in US GAAP because under the said framework, Alpha has to report these two items in cash flow from operating activities.