Investing Activities: Videos & Practice Problems

Cash flows from investing activities relate to long-term assets on the balance sheet, including plant assets, intangibles, and long-term investments. Cash inflows occur when selling these assets, while cash outflows happen during their purchase. Understanding journal entries for sales is crucial, as they determine cash flow amounts. For example, selling equipment for $8,000 results in an inflow of that amount, regardless of any gain or loss. Accumulated depreciation must also be accounted for, as it affects the equipment's carrying value and overall cash flow statement.

Investing Activities Summary

Alright, 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 when 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 going to 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, it barely fits there. And what about our cash outflows? That's when we purchase, right? We're going to give out cash and purchase these same things. So purchase, plant assets, intangibles, and long-term investments. So notice, we're dealing with those long-term assets here. Plant 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 going to 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, 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 going to have cash received during the sale, right, and that's going to be the $8,000 in this case. There's going to be 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 going to 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 going to be $14,000 in this case and we have to get rid of the equipment since it has 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 going to 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 going to need another $2,000 in credits to balance this out. Right? We had $22,000 in debits. We need $22,000 in credits. And when it's a credit, it's going to 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 $8,000, 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 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 a very similar journal entry, except now we receive $4,000 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 going to need $2,000 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 $4,000 regardless of if it was a gain or a loss, this is still an inflow. We sold our equipment. Well, we're going to 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 account 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 going to 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'll 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 going to 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 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 going to 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.

Investing Activities

All right, so now let's do an in-depth example about the Investing Activities calculation. Remember, we're looking for the cash flows from investing activities. This involves the purchase and sale of our long-term assets. Here we have a comparative balance sheet for ABC Company showing this year and last year's balance, alongside an income statement. The first thing I notice when thinking about the investing section is that there have been changes in my long-term assets. Land has changed, equipment has changed, and accumulated depreciation has changed. We would expect accumulated depreciation to change due to depreciation expense. But, changes in the land account or the equipment account mean there must have been some sort of purchase or sale of equipment for that change to happen.

Let's calculate our changes in account balances for each of these. Notice in 2018, land was \$130,000, and in 2017 it was \$20,000. It has increased by \$110,000. Equipment has also increased. It was \$50,000 last year, and now it's up to \$187,000. That's a \$137,000 increase. And how about accumulated depreciation? It was \$6,000 last year and now it's \$14,000; it has also increased, even though it's a contra asset account, its account balance has increased by \$8,000. We see increases in all of these accounts. Let's look at this income statement. The first thing I notice is a depreciation expense of \$9,000. And if we look at accumulated depreciation, it changed by \$8,000 not \$9,000. Also, I see a loss on the disposal of plant assets, so I can expect there to be some sort of sale of plant assets going on in this period.

Now that I've seen this information related to investing activities, let's check out the additional information in our example. 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. The company sold equipment with a book value of \$7,000, so the cost was \$8,000 less accumulated depreciation of \$1,000 for \$4,000 in cash. The company issued \$110,000 of long term bonds and used the proceeds to purchase land. This means cash from the bond issue wasn't just an exchange; it was used to purchase land amounting to \$110,000 as an outflow. The company also purchased new equipment totaling \$145,000. This is another outflow of cash. Common stock issuance and dividends paid, which are \$20,000 and \$29,000 respectively, are financing activities and thus do not get included in our investing activities.

In summary, we had a sale of equipment which brought in \$4,000 and then we purchased land costing \$110,000 and purchased equipment costing \$145,000. Thus, from investing activities, we had an outflow of cash of \$251,000. This analysis and understanding of cash flows are crucial for investors. They can use this data to gauge potential growth and make informed investment decisions. So, let's go ahead and verify our figures by examining the T accounts for each of these long-term asset accounts and ensure we haven't missed anything in the process. Once you get a hang of it, try some practice problems related to investing activity.

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

• A. The purchase of merchandise for resale
• B. Sale of a piece of land no longer used in retail
• C. Payment of a note payable
• D. Issuance of common stock

Answer: (B)

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

• A. Operating Activity
• B. Investing Activity
• C. Financing Activity
• D. None of the Above

Answer: (B)

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?

Alright, let's see how you guys did with this in-depth practice problem. Spooky Company is preparing its Statement of Cash Flows and gathered the following information. So we're dealing with investing activities here, right? Let's see what information we've got. Since the previous year, the cash account increased by $35,000, the land increased by $40,000, the equipment decreased by $15,000, accumulated depreciation on equipment increased by $6,000, and bonds payable increased by $100,000. It's a lot of information already, but remember we are focused on investing activities. So it tells us: depreciation expense for equipment totaled $16,000. Equipment with a purchase price of $15,000 was sold for a $2,000 gain. So we know that there's going to be a sale there. Spooky loaned $24,000 to Which Company, signing a Long Term Note Receivable. And finally, Spooky declared and paid dividends of $32,000. Net income was $420,000. Okay. So the first thing I want to do is get rid of this extraneous information. We don’t need dividends or net income when we're dealing with investing activities. If we're only focused on investing activities, all we want are long-term assets. These bonds payable over here, this also includes extraneous information. It also told us that the cash account increased. That's important for the statement of cash flows, but that's for the statement of cash flows as a whole. We’re only focused on investing activities. There’s also operating activities and financing activities. That’s going to make total cash increase. So $35,000 isn’t going to be our answer here. Everything else seems to be related to any sort of long-term asset. Let's start with the land. It says that land increased by $40,000. So what I want to do is make T accounts for each of these things, and we’ll start first with the land. What can increase a land account would be purchasing more land, and what could decrease a land account would be selling land. So it told us that the land account increased by $40,000, so it went from $0 to $40,000. That's the easiest way to deal with an increase if they don't give you a beginning and ending balance. That means there was a cash outflow to purchase this land. Now, let's deal with the equipment account and the associated accumulated depreciation account. The equipment decreased by $15,000, so if we started with a beginning balance of $15,000, we know the ending balance would be $0. The accumulated depreciation for the equipment increased by $6,000. So we could say we started with $0, and it got to $6,000. We know about these accounts. With equipment, it increases when we purchase equipment and decreases when we sell equipment. For accumulated depreciation, when we take a depreciation expense, that’s going to increase our accumulated depreciation. Note that depreciation expense totaled $16,000. We'll add that into our accumulated depreciation account. Now notice that these figures don't have to be entirely correct, but we use simple figures to facilitate our explanation. Now, about the equipment sale: equipment with a purchase price of $15,000 was sold with a $2,000 gain, which would correlate to a sale price of $17,000. This tells us that the cash inflow was $17,000 from the sale. Finally, Spooky loaned $24,000 to Which Company, signing a long-term note receivable. This is a long-term investment, and the $24,000 is a cash outflow from the investing activities. In conclusion, regarding investing activities, we had a cash outflow of $40,000 for the purchase of land, a cash inflow of $17,000 from the sale of equipment, and a cash outflow of $24,000 from the loan to Which Company, totaling a net cash outflow of $47,000 in the investing activities.

Here’s what students ask on this topic:

What are cash flows from investing activities?

Cash flows from investing activities relate to transactions involving long-term assets on the balance sheet, such as plant assets, intangibles, and long-term investments. Cash inflows occur when these assets are sold, while cash outflows happen during their purchase. For example, selling equipment for $8,000 results in an inflow of that amount. Understanding these cash flows is crucial for analyzing a company's investment decisions and overall financial health.

How do you calculate cash flows from the sale of a plant asset?

To calculate cash flows from the sale of a plant asset, you need to understand the journal entry for the sale. For instance, if equipment purchased for $20,000 with accumulated depreciation of $14,000 is sold for $8,000, the cash flow is $8,000. The journal entry would include debiting accumulated depreciation and crediting the equipment account at its historical cost. Any gain or loss on the sale is also recorded to balance the entry.

What is the impact of accumulated depreciation on cash flows from investing activities?

Accumulated depreciation affects the carrying value of long-term assets and must be accounted for when calculating cash flows from investing activities. When an asset is sold, accumulated depreciation is removed from the books, impacting the journal entry and the resulting cash flow. For example, if equipment with $14,000 in accumulated depreciation is sold, this amount is debited to remove it from the books, affecting the overall cash flow calculation.

How do you record a gain or loss on the sale of a long-term asset?

To record a gain or loss on the sale of a long-term asset, you need to balance the journal entry. If the credits (sale price) exceed the debits (historical cost minus accumulated depreciation), you record a gain. Conversely, if the debits exceed the credits, you record a loss. For example, selling equipment for $8,000 with a historical cost of $20,000 and accumulated depreciation of $14,000 results in a $2,000 gain, recorded as a credit.

What are common examples of cash inflows and outflows in investing activities?

Common examples of cash inflows in investing activities include selling plant assets, intangibles, or long-term investments. Cash outflows typically involve purchasing these same types of assets. For instance, selling equipment for $8,000 is an inflow, while purchasing new equipment for $10,000 is an outflow. These transactions are crucial for understanding a company's investment strategies and financial health.