Source: Chapter 21, Intermediate Financial Accounting II
Tags: investing activities, cash flows, capital expenditures, asset sales, short-term investments, ACCTG 471, Penn State
Difficulty: Intermediate | Prerequisites: Operating Activities study notes (Part 1 of this set), understanding of T-accounts and balance-sheet relationships.
The investing section of the statement of cash flows captures every cash movement tied to long-term assets: buying or selling investments, land, buildings, and equipment. These are the transactions that shape a company's productive capacity. Where the operating section (covered in Part 1) deals with day-to-day cash generation, the investing section reveals whether the company is expanding, contracting, or simply maintaining its asset base. You need to be comfortable with book value, accumulated depreciation, and gain/loss calculations before this section will click.
Investing activities on the cash flow statement track cash spent on acquiring long-term assets and cash received from selling them. Each balance-sheet account for a long-term asset must be fully accounted for: purchases are cash outflows, sales proceeds are cash inflows, and non-cash transactions (like acquiring equipment by issuing a note payable) are disclosed separately but do not appear in the cash flows section.
Investing Activities
Cash flows related to the acquisition and disposal of long-term assets and investments. Think of it as every cash movement tied to things the company buys or sells for long-term use, not for resale to customers.
Short-Term Investments
Securities (such as shares in another company) purchased with the intent to hold for less than one year. Purchases are cash outflows; sales are cash inflows. Both are reported as investing activities.
Capital Expenditure (CapEx)
Cash spent to acquire or improve long-term assets such as land, buildings, or equipment. In simple terms, this is the money a company spends to buy or upgrade the things it uses to run the business.
Non-cash Investing and Financing Activities
Significant transactions that do not involve cash, such as acquiring equipment by issuing a long-term note payable. These are disclosed in a supplemental schedule or note, not in the body of the cash flow statement.
Accumulated Depreciation
The total depreciation expense recognised on an asset since it was placed in service. It reduces the asset's cost to arrive at book value.
Book Value (BV) of a Disposed Asset
Cost of the asset minus its accumulated depreciation at the date of disposal. This is the amount the company "gives up" on its books when it sells or retires the asset.
The investing section requires you to account for every change in every long-term asset account on the balance sheet. Each account is worked through individually.
Purchasing short-term investments is a cash outflow from investing activities
Selling short-term investments is a cash inflow from investing activities
Journal entry for a purchase: Debit Short-term investments, Credit Cash
If the beginning balance is zero, the debit side of the T-account represents total purchases (cash outflow) and the credit side represents total sales proceeds (cash inflow)
Example from the lecture: common shares purchased for $12 million as a short-term investment. Entry: Debit Short-term investments $12M, Credit Cash $12M
Purchases of land are cash outflows from investing activities
Sales of land produce cash inflows from investing activities
When analysing the land account, you must separate the effect of purchases from sales to explain the net change in the account balance
Example from the lecture: land originally purchased for $10 million was sold for $18 million (generating an $8 million gain reported in operating). A separate $30 million purchase of land explains the remaining increase in the account. Entry for purchase: Debit Land $30M, Credit Cash $30M
Acquiring new buildings or equipment is a significant investing activity
If the acquisition is financed by issuing a long-term note payable, this is a non-cash transaction: Debit Buildings and equipment, Credit Note payable
Non-cash investing/financing transactions do not appear in the cash flows section of the statement. They are disclosed separately (typically in a supplemental schedule)
When equipment is sold, you need three figures:
Cost of the equipment (from the asset account)
Accumulated depreciation on that equipment
Book value removed = Cost - Accumulated depreciation
Cash inflow from the sale = Book value removed - Loss on sale (or + Gain on sale)
T-account for buildings and equipment: Beginning balance + Acquisitions - Cost of assets removed = Ending balance
T-account for accumulated depreciation: Beginning balance + Depreciation expense - Accumulated depreciation on assets removed = Ending balance
Example from the lecture: cash inflow from sale of equipment = BV removed - Loss on sale = $5 million
Book value of a disposed asset:
BV = Cost - Accumulated depreciation
Cash proceeds from sale of an asset:
Cash received = BV + Gain on sale, or Cash received = BV - Loss on sale
Buildings and equipment T-account:
Beginning balance + Acquisitions - Cost of assets removed = Ending balance
Accumulated depreciation T-account:
Beginning balance + Depreciation expense - Accum. depreciation on assets removed = Ending balance
Land account analysis:
Beginning balance + Purchases - Cost of land sold = Ending balance
Solve for purchases or cost of land sold (whichever is unknown) to identify the investing cash flows.
Investing activities reveal a company's growth strategy. A company spending heavily on new equipment and property is investing for future capacity, while one that is mostly selling assets may be shrinking or restructuring. Analysts compare investing cash outflows to operating cash inflows to judge whether a company can fund its own growth internally or needs external financing.
The non-cash disclosure requirement exists because transactions like acquiring a factory by issuing debt are economically significant even though no cash changes hands. Investors need to see these to understand the full picture of how a company is financing its expansion.
Students often include non-cash investing/financing transactions (such as equipment acquired by issuing a note payable) in the investing section. These do not belong there. They are disclosed in a separate supplemental schedule.
Students sometimes report the gain or loss on an asset sale as the investing cash flow. The investing section reports the actual cash proceeds, not the gain or loss. The gain/loss is an operating-section adjustment under the indirect method.
Students frequently forget that the land account can have both purchases and sales in the same period. A net increase in the land balance does not mean the company only bought land; it may have sold some and bought more.
Students sometimes confuse cost with book value when calculating proceeds from an equipment sale. The relevant figure is book value (cost minus accumulated depreciation), not the original cost alone.
⚠️ Calculating cash proceeds from an equipment sale is a high-probability exam question. You will typically be given cost, accumulated depreciation, and the gain or loss, and asked to find the cash received.
⚠️ Know the difference between a cash investing transaction and a non-cash investing/financing transaction. If equipment is acquired by issuing a note, no cash flow is reported, but the transaction must still be disclosed.
⚠️ When the land account has both purchases and sales in one period, expect a question that requires you to reconstruct both transactions from the net change in the account balance plus additional information.
⚠️ Short-term investment purchases and sales are investing activities, not operating. Do not confuse investment revenue (operating) with the purchase/sale of the investment itself (investing).
True or False: Buying short-term investments is reported as an operating activity.
False. It is an investing activity.
Fill in the blank: Cash proceeds from selling equipment = Book value ______ gain on sale (or ______ loss on sale).
Plus; minus.
True or False: Acquiring a building by issuing a long-term note payable appears in the investing section of the cash flow statement.
False. It is a non-cash transaction disclosed separately.
Fill in the blank: Book value of a disposed asset = ______ minus ______.
Cost; accumulated depreciation.
True or False: If a company sells land for more than its cost, the entire cash received is reported as an investing inflow.
True. The full cash proceeds go into investing. The gain is removed from the operating section.
Q: Equipment costing $60,000 with accumulated depreciation of $45,000 is sold at a loss of $3,000. What are the cash proceeds?
A: $12,000. Book value = 60,000 - 45,000 = 15,000. Cash received = 15,000 - 3,000 = 12,000.
Q: The land account shows a beginning balance of $50,000 and an ending balance of $70,000. During the year, land costing $10,000 was sold for $18,000. What was the cost of land purchased?
A: $30,000. Beginning (50,000) + Purchases - Cost sold (10,000) = Ending (70,000). Purchases = 70,000 + 10,000 - 50,000 = 30,000.
Q: A company acquired a new factory building by issuing a $500,000 long-term note payable. How is this reported on the statement of cash flows?
A: It is not reported in the cash flows section at all. It is disclosed as a significant non-cash investing and financing activity in a supplemental schedule.
Q: Short-term investments had a beginning balance of $0 and an ending balance of $12,000,000. No investments were sold during the year. What investing cash flow is reported?
A: A cash outflow of $12,000,000 for the purchase of short-term investments.
Q: Equipment costing $80,000 with accumulated depreciation of $50,000 is sold for $35,000. Is this a gain or a loss, and how much?
A: A gain of $5,000. Book value = 80,000 - 50,000 = 30,000. Cash received (35,000) exceeds book value by 5,000. The $35,000 is reported as an investing inflow; the $5,000 gain is subtracted from net income in the operating section.
The investing section links back to the operating section covered in Part 1. Gains and losses that are removed from operating cash flows reappear here as part of the calculation of actual cash proceeds from asset sales. Understanding both sections together is essential for reconstructing the full statement.
This material also connects to the financing section (dividends, debt issuance, share transactions), which completes the three-part structure of the cash flow statement. Non-cash transactions disclosed in the supplemental schedule often straddle investing and financing (e.g. acquiring an asset by issuing debt), so the supplemental disclosure ties the two sections together.
Depreciation concepts from earlier chapters (asset cost, useful life, salvage value) are prerequisites for the accumulated-depreciation T-account work required here.
Investing activities, cash flow from investing, capital expenditures, CapEx, asset disposal, sale of equipment, sale of land, short-term investments, non-cash investing and financing, supplemental schedule, book value, accumulated depreciation, gain on sale of asset, loss on sale of asset, T-account analysis, ACCTG 471, intermediate accounting, Penn State, Chapter 21