What activity is cash proceeds from sale?

Cash flow from investing activities refers to cash inflow and outflow of cash from investing in assets (including intangibles), purchasing of assets like property, plant and equipment, shares, debt, and from sale proceeds of assets or disposal of shares/debt or redemption of investments like a collection from loans advanced or debt issued.

It provides information on cash inflow and outflow related to purchases and sales of assets (Property, Plant & Equipment, etc.), loans made to suppliers or the ones received from the customer, and any payments related to merger & acquisitions.

In a nutshell, we can say that cash flow from investing activities reports the purchase and sale of long-term investments, property, plants, and equipment.

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Source: Cash Flow from Investing Activities (wallstreetmojo.com)

List of Items Included in Cash Flow from Investing Activities 

Cash flow from Investments includes all the transactions involving acquiring and selling long-term investments, property, plants, and equipment.

These items are found in the non-current portion of the balance sheet.

It is always easier to understand when we create and answer some questions. So here are a few questions that, when answered, would help us understand the topic more easily.

1. What happens to the cash account of the company that has purchased land?

2. What happens to the cash account of the company that sold land?

Answer to Question 1: In this case, the cash account would decrease, as the company would need to pay cash for the land purchased. The double-entry accounting system would lead to an increase in asset accounts. In this case, the, asset accountAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. read more under consideration is Property, Plant & Equipment.

Answer to Question 2: In this case, the cash account would increase, as the company would get cash for the land sold. The double-entry accounting system would lead to a decrease in asset accounts. In this case, the asset account under consideration is Property, Plant & Equipment.

Cash Flow from Investment Example (Basic)

Let us assume that Mr. X has started a new business and has planned that he will prepare his financial statements like income statement, balance sheet, and cash flow statementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more at the end of the month.

1st month: There was no revenue in the first month and no such operating expenseOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more; hence, the income statement will result in zero net income. In cash flow from investing activities, there was no activity, too. Hence it will remain at zero.

2nd Month: The Company made some investments in land and property during the month, amounting to $100000. It is cash outflow and hence negative.

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How to Calculate Cash Flow from Investments?

Let’s calculate CFI when we have the balance sheet data.

Also, assume that the gain on the sale of land is $20,000

As we already know that CFI is related to non-current asset portions of the balance sheetNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more. There are two main items in non-current assets – Land and Property, Plant and Equipment.

• Cash inflow from sale of Land  = Decrease in Land (BS) + Gain from Sale of Land = $80,000 – $70,000 + $20,000 = $30,000
• Cash outflow from purchase of property plant and equipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more (PPE) = $120,000 – $170,000 = -$50,000
• Cash flow from Investments formula = Cash inflow from Sale of Land + Cash outflow from PPE = $30,000 – $50,000 = -$20,000

CFI is an outflow of $20,000

Cash Flow from Investing Activities Example (Apple)

Now let us have a look at a few more sophisticated cash flow statements for companies that are listed entities on NYSE.

source: Apple 10K Filings 

• Apple’s cash flow from investment activities was an outflow of $45.977 bn.
• Apple is heavily investing in purchasing marketable securities (cash outflow). Apple purchased $142.428 bn worth of marketable securities in 2015!
• In addition, Apple generated cash inflows by selling these marketable securities (cash inflows). Apple sold its marketable securities and generated $90.536 bn as cash inflows.
• In addition, Apple invested in acquiring property, plants, and equipment to the tune of $12.73bn in 2015.

Cash Flow from Investing Activities Example (Amazon)

source: Amazon SEC filings

Now let us interpret the above CFI and how indicative it is of the company’s situation. Some important points on Amazon’s CFI are:

• Amazon has continuously invested in the Purchase of property and equipment, including software and web development. Amazon’s cash outflow for this was $4.590bn and $4.893 bn in 2015 and 2014, respectively.
• It would be best if you were mindful that expenses under this head could indicate where the company is heading.
• The quality of Capex can be determined by reading the management discussion & analysis. This will provide great insights into where the company plans to be in the next few years. Some important points to look at in Capex are (i) quality of Capex, (ii) business proposition of the linked Capex (iii) proportion of the maintenance CAPEX.
• Another important point about Amazon’s cash outflows is that they have acquired smaller companies yearly. They made acquisitions worth $795 million in 2015.
• Amazon has been generating cash inflows by selling its marketable securities. Amazon sold $3.025bn dollars of marketable securities in 2015.

Cash Flow from Investing Activities Example (JPMorgan Bank)

Below is the CFI from JPMorgan Chase.

source: JPMorgan SEC Filings

Now let us interpret the above statements and how indicative it is of the company’s situation. Since this entity is a bank, many line items will be completely different from what it is for others. Many line items are only applicable to banks or companies in financial services. Some important points from JPMorgan’s cash flow from investing activities are:

What analyst should know?

Until now, we have seen three companies in three different industries and how cash means different things for them. For a product company, cash is the king. For the service company, it is a way to run a business; for a bank, it is all about cash. These three companies have different things to offer in the cash flow from Investing activities part of the cash flow statement. However, it is imperative to understand the statement should not be singled out and seen. They should always be seen in conjunction with other statements and management discussionMD&A or management discussion and analysis is the part of financial statements where the company’s management discusses the company’s current performance using qualitative and quantitative measures to realize the details that otherwise would not have been available for analysis.read more & analysis.

Also, you should note that cash flow from investments provides a trend analysis of the companies capital expenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more (which will help us understand if the company is growing or in a steady phase). It is very useful when projecting the financial statements of the companyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

Another interesting aspect to look into this CFI is the column of proceeds from the disposal of fixed assets and proceeds from the disposal of a business. If the figures are substantially high, it can help visualize why the company is disposing of assets.

Conclusion

Cash flow from Investing Activities is the second of the three parts of the cash flow statement that shows the cash inflows and outflows from investing in an accounting year; investing activities includes cash flows from the sale of fixed asset, purchase of a fixed asset, sale and purchase of investment of business in shares or properties, etc. Investors used to look into the income statement and balance sheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more for clues about the company’s situation. However, over the years, investors have now also started looking at each of these statements alongside the conjunction of cash flow statements. This helps in getting the whole picture and also helps to take a much more calculated investment decision.

As we have seen throughout the article, we can see that cash flow from investing activities is a great indicator of the core investing activity of the company.

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This has guided Cash Flow from Investing Activities, formula, and its calculations. Here we also look at Cash Flow from Investments, examples of Apple, Amazon & JPMorgan.