Investing Activities Summary

Brian Krogol
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All right, let's move on to the next section on the statement of cash flows, cash flows from investing activities. So in the cash flows from investing activities, what part of our balance sheet did that relate to? It? Was our long term assets? Right. Our long term assets are our investing activities. Okay, so that's what we're dealing with purchasing long term assets or selling long term assets. For the most part, it's going to be things like equipment, land, but it could also be for investments. So the cash inflows. Well, that's gonna be when we sell our plant assets, such as land or equipment, sell plant assets intangibles or long term investments. Right. If we have some sort of long term investment barely fit there. And what about our cash outflows? That's when we purchase, Right. We're gonna give out cash and purchase these same things. So, purchase plant assets, intangibles and long term investments. Okay, so notice we're dealing with those long term assets here. Plan assets, intangibles, long term investments. So let's go ahead and see how you might have to deal with this in the investing section. So, when we talk about the investing section, we're going to have to think about the journal entry when we sell. Okay, this is gonna be the most important part of figuring out the investing cash flows, is working out the sale. Journal entry for a plant asset. So, you could imagine that we would have some sort of journal entry where we have, Uh, let's say equipment that we purchased for 20,000 and it had accumulated depreciation of 14,000, and then we sell it for $8,000. So what do you think the cash flow is in this situation? We sold it for $8,000. So $8,000 is the cash flow? This $8,000. That is the investing cash flow. Okay, That is the investing cash flow. But sometimes they don't tell you that selling price straight away, they might tell you the gain or the loss on the sale, they'll give you the other information, but not the cash flow itself. So you want to be very familiar with your journal entry for the sale. So you're always gonna have cash received during the sale. Right? And that's gonna be the $8,000 in this case there's gonna be the, the accumulated depreciation and the cost, right? The cost is sitting in the equipment account, the accumulated depreciation in its respective account as well. So we're gonna have to get these numbers off of the books. And if this gives you trouble, I would suggest going back to your long term assets chapter and reviewing the sale of your plant assets. So we have to get rid of the accumulated depreciation with a debit And that's gonna be 14,000. In this case, we have to get rid of the equipment since it had a debit balance, we get rid of it with a credit at its historical cost of 20,000. Okay, so now we have to balance out this entry, right? We're gonna have a gain or a loss depending on if the credits are too much or the debits are too much. So here we have more debits than credits. We need additional credits. So we're gonna need another 2000 and credits to balance this out, right? We have 22,000 and debits. We need 22,000 in credits. And when it's a credit, it's gonna be a gain on the sale. Right? So you guys should be familiar with this journal entry already. If you're not, I really suggest going back to that chapter and reviewing it. Okay, so what could happen is in this situation they can give you these three numbers right here. They give you the gain, they give you the historical cost of the machine and the accumulated depreciation. And you have to solve for the cash, right? Remember this cash amount. This 8000 that's going to the cash flow statement under your investing activities. Okay, so that's the important number. You received $8,000 in the sale of of a plant asset. Now the same thing could happen. We could have a loss on a sale. So let's review that journal entry real quick. So we have the same numbers except we have a lower selling price over here. Right? So notice we have very similar journal entry except now we receive 4000 in cash. We still have to get the accumulated depreciation off our books with a debit, we still get the equipment off of our books with a credit. But now, to balance the equation, we need additional debits, right? Our debits are less than our credits. We need more debits. So we're gonna need 2000 as a debit there. And since it's a debit, it's going to be a loss on the sale. Right? The debit means it's a loss on the sale. Okay, so the same situation there, notice the cash flow statement is still going to get this amount. We would have an inflow of cash for 4000 regardless of if it was a gain or a loss, this is still an inflow. We sold our equipment, well, we're gonna get some cash from it. Right? So even if it was a loss, we're still going to have an inflow on the cash flow statement. Okay, so that's where a lot of students get tripped up there. Let's do one more thing right here. Let's talk about the flow of transactions through the equipment PPE accounts such as equipment, but it could be buildings, it could be land improvements, whatever it is. The most common one is equipment. And let's talk about accumulated depreciation alongside it. So remember that this accumulated depreciation, it's a contra asset to the equipment account. So the equipment account is gonna have some beginning balance in it. And then how do we increase the equipment account? We increase it with purchases right, we purchase more equipment and that would increase our equipment account. And I want to note that a purchase of equipment. That's an investing outflow, right? Because we're purchasing equipment. Well, that's an outflow on our investing section. Right now. We're not done here in the equipment account. How do we lower the equipment account? And that's when we sell the equipment, right? We sell the equipment and that will get us to our ending balance here. Okay, now, I want to note that this selling of equipment, this is not necessarily the cash flow. The cash flow is what amount we bring in the selling of equipment here. This is gonna get rid of the historical cost, just like we saw in our journal entries up above. It doesn't necessarily mean that it's the cash flow. Okay, So with the the accumulated depreciation, we have similar accounts going on. Now, this is going to have a credit balance, right? Because it's a contra asset. So the beginning balance is a credit, and what increases our accumulated depreciation? Well, that's when we take depreciation expense. Okay? And what's gonna decrease our accumulated depreciation? Well, what decreases it is when we sell the asset and we get rid of it off of our books. Right? So the sale of the asset gets rid of both accumulated depreciation and the equipment value, right? We have to get rid of both of these in the sale and that can be very important when you're figuring out what the cash amount is during a transaction. So you might have to analyze the changes in the accumulated depreciation account based on depreciation expense, based on the beginning and ending balance, and finding these sale prices. To help you find the journal entry that we were dealing with above and find the cash flows. Okay, so it can be a little tricky. Let's go ahead and continue on the next page in the next video.