Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

13. Statement of Cash Flows

Investing Activities

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concept

Investing Activities Summary

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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.
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example

Investing Activities

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Alright, so now let's do an in depth example about the investing activities calculation. Alright, so remember, we're looking for the cash flows from investing activities. This is gonna be the purchase and sale of our long term assets. So here we have a comparative balance sheet for abc company and it shows this year and last year's balance, and it's got our balance sheet there, and then we've got an income statement as well. So the first thing I noticed when I'm thinking about the investing section is there have been changes in my investing account here. Excuse me. In my long term assets, right, Land has changed, equipment has changed and accumulated depreciation has changed. Now we would expect accumulated depreciation to change because of depreciation expense. Right? Um, but the other accounts, if we see changes in the land account or the equipment account, that means there must have been some sort of purchase or sale of equipment for that change to happen. Okay, so let's go ahead and see what we've got going on here. Let's calculate our changes in account balances for each of these. So, we see that land has increased notice in 2018, it's 100 and 30,000, 2017, 20,000. So it has increased by 100 and 10,000 Equipment has also increased. It was 50,000 last year. Now it's up to 187,000. So that's 137,000 increase. And how about accumulated depreciation? It was 6000 last year, and now it's 14,000, it has also increased, even though it's a contra asset account, it's account balance has increased, right? It increased by 8000. So we see increases in all of these accounts. Let's go ahead and go to our example. Usually when you're dealing with an investing activity, they're gonna have to give you additional information so that you can finish solving this. Uh so actually before we get to the example, let's look at this income statement. The first thing I notice is a depreciation expense of 9000, right? And if we look at accumulated depreciation, it changed by 8000, not 9 9000. So something else must have happened in the accumulated depreciation account other than just the depreciation expense. Also, I see a loss on the disposal of plan assets. So I can expect there to be some sort of sale of plant assets going on in this period. Okay, so now that I've seen these this information related to investing activities, Let's check out the additional information in our example. So it says, calculate abc company's net cash provided or used by investing activities using the financial information on the previous page. And then it gives us additional information. So let's check it out. The company sold equipment with a book value of 7000. So the cost was 8000 less accumulated depreciation of 1000 for 4000 in cash. So notice it told us the cash value here already. We don't have to do a specific calculation to find out what the cash was in this sale will go through the details to, to link everything together? But notice if they tell you the cash amount, this is the investing cash flow already, right here. This is the investing cash flow related to that sale. Okay, so we found the 4000 there. The company issued 100 10,000 of long term bonds and used the proceeds to purchase land. So they issued bonds and then they bought some land. So this sounds like it's going to be related to our purchase of land and it would be related to this financing activity for long term bonds as well. But we purchased land with 100 and $10,000 of cash. It's not that we exchanged it right? It's not like we had long term bonds and exchange them for land. No, we we put out long term bond, we got this cash and then we use that cash to purchase land. Cool. So we're going to purchase land and we purchase land at 100 and $10,000. So right here again for the land we've got our investing cash flow as well. Now this one is an outflow, right? Because we purchased it. So this was an outflow of cash. We have 100 10,000 there. The company purchased new equipment totaling $145,000. So we have this investing cash flow as well. We purchased equipment. That's a long term asset. So that's an outflow of cash to purchase this equipment. The company issued common stock for 20,000 in cash. Well, what do you think about that common stock? That's equity. Right. And when we deal with equity, that's a financing activity. So that has nothing to do with us. The company declared and paid a dividend of 29,000. Again, that's a financing activity. We're dealing with our equity there. So that does not get including included in our investing activities. Okay, So just knowing that we should be pretty much ready to prepare our investing section. It's never that difficult as long as you focus on the cash flows in this situation. We had a sale of equipment Which brought in $4000 and then we purchased land And that cost us 110,000. And we purchased equipment as well. Okay. And that was 145,000. Right? So this will be our operate are investing cash flows here. But I'm gonna go ahead and double check our T accounts for each of these long term asset accounts and make sure we didn't miss anything in the process. So let's find our cash flow here and I'll grab my calculator. What do we have? We had 4000 minus 110,000 minus 100 and 45,000. So this means we had a decrease in cash of 251,000 because of our investing activities. So notice this is a negative number. This means that from investing activities, we had an outflow of cash of $251,000. Now that's not necessarily a good thing or a bad thing. This could just mean we're investing right? We're purchasing equipment, purchasing land, so we're possibly growing our business. And this could mean future cash flows are going to be stronger, right? So an investor can use this information to their advantage. Now let's go ahead and analyze the T. Accounts for each of those accounts, those long term asset accounts and make sure that we haven't missed anything. So let's start with land over here and let's scroll up and see our beginning and ending balances of land. And it tells us land was 20,000 last year and 100 30,000 this year. So there was 100 and 10,000 difference. And I remember that we purchased land. So this should probably work out just right. So it started at 20,000 last year, right? We had a beginning balance of 20,000 And then we purchase land. So it says we purchase land here, right? 100 and 10,000 of land purchases. And that gets us to our ending balance, which was 130,000. So it sounds like we've figured everything out. Everything has been accounted for here in the land account. So everything looks good here. Let's try the next account. We'll do it over here, I'll do it in blue still equipment. Let's see everything that's happened in the equipment account. So this one's gonna be a little trickier. We're gonna have our beginning balance, We're gonna purchase equipment, right? That's what would increase the equipment account. What could decrease it sales of equipment. And that will get us to our ending balance. So let's go ahead and find our beginning and ending balance in the equipment account from our balance sheet. So the equipment account started at 50,000 and it went up to 187,000. So let's fill that in right here. 50,000 beginning balance 187,000 ending balance. And let's see what kind of transactions affected our equipment account. So it says that we purchase new equipment for 100 and 45,000. So that would be an increase to our investment to our equipment account, right? So that would have increased our equipment account by 100 and 45,000 right here. But notice 50,000 plus 100 45,000, that does not equal our ending balance of 187,000. We must have had some sales and we do right remember from our problem, we had a sale of equipment. And notice what it says, the book value of the equipment was 7000. But that book value is a net of the $8000 cost and the $1000 in accumulated depreciation. So when we sold the equipment, we would have taken the cost, the $8000 off of our books. So we would have had this $8000 credit to equipment when we sold the equipment. Right? Let me make that journal entry up here. So for for item one here, we would have had a journal entry That we would debit cash for 4000. We would debit accumulated depreciation to get it off of our books for 1000. We would credit the equipment to get it off of our books for 8000. And then we would balance the equation with the loss on the sale for 3000. Right? So notice that loss on the sale of 3000? It doesn't really matter in our investing section. Right? Are investing section is only worried about that cash of 4000. Cool. So this equipment 8000 decrease. That's the 8000 decrease we see here in our T account. Okay, so now let's make one more T account for the accumulated depreciation, just so you can see how this all flows. So we'll have accumulated depreciation over here, and we'll make it's the account. So let me get out of the way. So how do we set this up? We would have a beginning balance on the credit side. And what increases our accumulated depreciation is our depreciation expense, right? When we take depreciation expense, it will increase, our accumulated depreciation, and what decreases it when we sell an asset and take the accumulated depreciation off of our books. And that'll leave us with our ending balance in our accumulated depreciation right there. Okay, So let's go ahead and look up our beginning and ending balances on our balance sheet, Which were 6,014,000. So let's go ahead and put those into our T. Account. We had 6000 beginning balance 14,000 ending balance, right? So we can also find our depreciation expense. That is gonna be on our income statement. So let's grab that from the income statement up here. And we see depreciation expense was 9000. And there's the loss. The $3000 loss from our journal entry. There's the $3000 loss that we that we put into our journal entry down here. Right? So it should all be making sense together. Now all the pieces are fitting together And we have our depreciation expense of 9000 that came from our income statement right there. Cool. And what's left? This doesn't balance right? The 6000 in the beginning balance plus the 9000 and depreciation expense. Well, that's 15,000. That's too much right. We need to get 1000 out of there. And guess where that comes from? Right here? In our sales journal entry, we sold equipment that had 1000 in accumulated depreciation. And that's exactly what decreased our accumulated depreciation account, that $1000 sale and that gets us to the correct ending balance. So now that we've seen the T. Account for each of the accounts and accounted for all the changes in every account, we should feel pretty good that we've dealt with all the different transactions dealing with our investing activities. So in this example, our answer was a decrease of cash of 251,000. And that's because we sold equipment that gave us cash of 4000 And then we purchased land that cost us 110,000 and purchased equipment that costs us 145,000. So we had a net decrease from investing activities of 251,000. Cool, why don't you guys try some practice problems related to investing activity?
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Problem

Which of the following is a cash flow from investing activities?

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Problem

The cash received from the sale of factory equipment no longer in use would be reported in the cash flow statement as an:

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Problem

Spooky Company is preparing its Statement of Cash Flows and gathered the following information: 

1. Since the previous year:the cash account increased by $35,000, land increased by $40,000, Equipment decreased by $15,000, Accumulated Depreciation – Equipment increased by $6,000, and Bonds Payable increased by $100,000 

2. Depreciation expense for Equipment totaled $16,000. 

3. Equipment with a purchase price of $15,000 was sold for a $2,000 gain. 

4. Spooky loaned $24,000 to Witch Company signing a long-term note receivable. 

5. Spooky declared and paid dividends of $32,000. Net income was $420,000. 

What is Spooky Company’s net cash flow from investing activities?

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