Investing Activities

Investing activities are the transactions through which a business acquires and disposes of long-term assets and investments that are not part of its everyday operations. They include buying and selling property, plant and equipment, purchasing and selling securities of other entities, making and collecting loans to others, and acquiring or selling subsidiaries and other businesses. On the statement of cash flows, cash flows from investing activities form one of three sections, alongside operating activities and financing activities.

The investing section shows how a company is deploying its cash to build or reshape its productive capacity. A growing company typically reports net cash outflows from investing activities because it spends more on new assets than it receives from selling old ones. The rules are set by ASC 230 in US GAAP and IAS 7 under IFRS.

Common cash outflows from investing activities include:

• Payments for capital expenditure, such as buildings, machinery, vehicles and capitalized software.
• Purchases of intangible assets, such as patents and licences.
• Purchases of debt and equity securities held as investments, other than cash equivalents or securities held for trading.
• Loans made to other parties.
• Payments to acquire businesses, net of cash acquired.

Common inflows include proceeds from selling fixed assets, from selling investments and businesses, and from collecting the principal of loans made to others. Purchases and sales of trading securities are normally classified as operating activities, because they are part of the company's trading operations, and changes in cash and cash equivalents themselves are not cash flows at all.

A logistics company records the following during the year: it buys new trucks for $4,200,000, sells old trucks with a book value of $300,000 for $450,000, buys corporate bonds as a long-term investment for $1,000,000 and receives $250,000 when another bond it holds matures. It also acquires a small competitor for $2,000,000, which held $200,000 of cash.

• Outflows are $4,200,000 for trucks, $1,000,000 for bonds and $1,800,000 for the acquisition net of cash acquired, a total of $7,000,000.
• Inflows are $450,000 from truck sales and $250,000 from the maturing bond, a total of $700,000.
• Net cash used in investing activities is therefore $6,300,000.

The $150,000 gain on the truck sale is not an investing cash flow. Under the indirect method it is subtracted from net income in the operating section, and the full $450,000 of proceeds appears under investing, as explained in the entry on disposal of fixed assets.

US GAAP and IFRS largely agree on investing activities, with some differences. Under US GAAP, interest and dividends received are operating cash flows, while IFRS has allowed them to be classified as operating or investing; IFRS 18, effective from 2027, generally places them in investing for most companies. Significant non-cash investing transactions, such as acquiring equipment by signing a note or obtaining a right-of-use asset under a lease, are excluded from the statement itself but must be disclosed, so readers can see the full extent of investment.

Analysts read the investing section alongside cash from operating activities and cash from financing activities. A company that funds heavy investment from operating cash flow is generally in a stronger position than one that must borrow or issue shares to do so. Capital expenditure is also used to calculate free cash flow. Large, continuing inflows from asset sales may mean a company is shrinking or raising cash under pressure, while unusually low capital spending compared with depreciation can signal underinvestment that will hurt future performance. Comparing investing outflows over several years gives a better picture than a single year, since major projects and securities purchases are often lumpy.