The cash flows from investing activities section would include

For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. Note that interest received from loans is included in operating activities. Note that interest paid on long-term debt is included in operating activities.

Figure Likewise, payments of cash for interest on loans with a bank or on bonds issued are also included in operating activities because these items also relate to net income. Question: Which section of the statement of cash flows is regarded by most financial experts to be most important? Answer: The operating activities section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business.

The operating activities section allows stakeholders to assess the ongoing viability of the company. We discuss how to use cash flow information to evaluate organizations later in the chapter. Business in Action A review of the statements of cash flows for both companies reveals the following cash activity. Positive amounts are cash inflows, and negative amounts are cash outflows.

Amounts are in millions. It is interesting to note both companies spent significant amounts of cash to acquire property and equipment and long-term investments as reflected in the negative investing activities amounts. For both companies, a significant amount of cash outflows from financing activities were for the repurchase of common stock.

Apparently, both companies chose to return cash to owners by repurchasing stock. Source: The Home Depot Inc. Key Takeaway The three categories of cash flows are operating activities, investing activities, and financing activities. This line item contains the sum total of the changes that a company experienced during a designated reporting period in investment gains or losses, as well as from any new investments in or sales of fixed assets. Items that may be included in the investing activities line item include the following: Purchase of fixed assets negative cash flow Sale of fixed assets positive cash flow Purchase of investment instruments, such as stocks and bonds negative cash flow Sale of investment instruments, such as stocks and bonds positive cash flow Lending of money negative cash flow Collection of loans positive cash flow Proceeds of insurance settlements related to damaged fixed assets positive cash flow If a company is reporting consolidated financial statements, the preceding line items will aggregate the investing activities of all subsidiaries included in the consolidated results.

How to Interpret Cash Flows from Investing Activities The cash flows from investing activities line item is one of the more important items on the statement of cash flows, for it can be a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations.

It is particularly important in capital-heavy industries, such as manufacturing, that require large investments in fixed assets. When a business is reporting persistently negative net cash flows for the purchase of fixed assets, this is a strong indicator that the firm is in growth mode, and believes that it can generate a positive return on additional investments.

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