Cash flow - Investments

This reports the purchase and sale of long-term investments and property, plant, and equipment. This includes:

• Capital expenditures
• Short-term investments sold

Cash flow and investments

Capital Expenditures
This describes the amount spent for all fixed assets that are not charged to expense when purchased but are recorded on the organization's balance sheet. That is, they are capitalized and then depreciated over the amount of time they are used for.

How equipment purchase is dealt with on the cash flow statement

The cash flow statement considers the purchasing of equipment and borrowing the money for the purchase as two separate things.

Although the organization might have recovered the purchase cost by borrowing the money, the decision to purchase the equipment represents a commitment of cash and appears as a deduction on the cash flow statement. If the organization financed the purchase, an offsetting item would appear in the financing section of the cash flow statement.

Short-Term Investments Sold
An organization can invest excess cash so that the money is gaining interest until it is needed for operations. This type of investment is usually short term and uses vehicles like bank certificates or securities, which the organization sells when it needs the cash.

How short-term investments are dealt with on the cash flow statement

When such an investment is purchased it appears as a cash expenditure that would be shown in this section as a reduction in cash. When investment is sold the net proceeds of the sale, except for the gain or loss on sale (which appears in the income statement), become an additional source of cash.

Companies that have undergone a successful IPO (Initial Public Offering) often raise a lot of cash before they are ready to use it. Short-term investments are a way to earn income from these otherwise idle cash balances.

You may also be interested in:
Cash Flow Analysis Definition | Managing Working Capital | Cash Flow | Changes in the Cash Account | Direct Format Cash Flow Statement | Indirect Format Cash Flow Statement | Cash Flow from Operations | Cash Flow from Financing.


Key Points

  • Capital expenditures describes the amount spent for all fixed assets that are not charged to expense when purchased but are recorded on the organization's balance sheet.
  • When investment is sold the net proceeds of the sale, except for the gain or loss on sale (which appears in the income statement), become an additional source of cash.
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