In financial reporting, business activities are often classified into operating, investing and financing activities. This classification helps analysts and investors better understand the nature of a company’s cash flows and how they impact the financial statements. When assessing a company’s investing activities, it is important to understand they relate to the acquisition and disposal of long-term, non-current assets. Examples include purchases or sales of property, plant and equipment, intangible assets like patents, as well as investments in bonds, stocks and other securities. The key is that these transactions involve long-term assets not directly related to the company’s central operations. So when analyzing financial statements, acquisitions and disposals of long-term, non-current assets should be classified as investing activities.
Purchases of property, plant and equipment are investing activities
One of the most common investing activities is the purchase of property, plant and equipment (PP&E) like land, buildings, machinery and equipment. These represent long-term, tangible assets used in operations and production. When a company buys a new factory, new equipment or expands its facilities, cash spent on those PP&E acquisitions are investing cash outflows on the statement of cash flows. These investments can grow operations but do not directly generate revenues in the current period.
Sales of property, plant and equipment are investing activities
On the flip side, when a company sells part of its PP&E, those divestments also qualify as investing activities. For example, a manufacturer that sells old equipment to upgrade to newer models will record cash proceeds from the sale as an investing cash inflow. The key is that cash from sales of PP&E represent disposal of long-term assets, not routine transactions that generate revenues.
Purchases and sales of investment securities are investing activities
In addition to PP&E, purchases and sales of investment securities like stocks, bonds, and other long-term financial assets are also investing activities. If a company buys shares of another company’s stock as a long-term investment, it records the cash outflow in the investing section of the cash flow statement. Conversely when it divests part of its investment portfolio, the resulting cash proceeds also get classified as cash inflows from investing. These transactions do not relate to central operations.
Investments in intangible assets are investing activities
Purchases of long-term, intangible assets like patents, licenses, trademarks, and other intellectual property also qualify as investing cash outflows. These assets do not have physical substance but provide economic benefits over multiple years, so acquisitions represent investing activities. For example, a pharmaceutical company buying drug patents and a software firm acquiring technology licenses classify those purchases as investing activities on the statement of cash flows.
In summary, acquisitions and disposals of long-term, non-current assets like property, plant and equipment, investment securities and intangible assets represent investing activities on the statement of cash flows. Analyzing a company’s investing cash flows provides insight into how much it spends on growing operations and expanding capacity versus acquiring short-term assets to generate revenues and profits.