The statement of cash flows is divided into three categories:
operating activities, investing activities, and financing activities.
This video will focus on the Investing Activities section.
Investing activities relate to transactions effecting cash inflows and outflows for long-term assets.
In order to prepare a Statement of Cash Flows, we need some financial information.
Specifically, we need the current year’s Income Statement,
a comparative Balance Sheet, and some additional financial data.
A comparative Balance Sheet is just a balance sheet that compares two years of data.
So let’s use the example of Apu’s Quick-E-Mart
Here is the Income Statement we will reference.
Here is the comparative Balance Sheet and you can see the years 2015 and 2016.
And finally some additional financial data.
Many assignments you might encounter will provide this information to you.
But I'm going to show you how to calculate that information
in case you run into a problem that doesn't present all the pertinent financial data needed.
The items highlighted in red are those related to long-term assets,
which I’ve identified as PP&E.
Recall that stands for “Property, Plant, & Equipment."
So a partial Statement of Cash Flows is shown here.
The Investing Activities section is shown directly after the Operating Activities section.
I’ve identified a couple of items that will go into this section.
Now let’s look back at the additional data.
The first items I’ve identified is some information about the sale of PP&E.
In this case, we are given a lot of information,
but really only need the cash amount.
So the sale and disposal of PP&E for $150
is added in the investing activities section because cash is being received.
The next item is a purchase of PP&E for $800.
Since cash is being paid for the purchase of PP&E,
$800 is deducted in the investing activities section.
And actually that is it for this section.
But let me explain why the other long-term asset items aren’t listed here.
Let’s look at each one.
When PP&E is scrapped, there is no cash impact.
In fact, I’ve shown the journal entry to emphasis this point.
So this transaction doesn’t affect the Cash account.
And, therefore, doesn’t go on the Statement of Cash Flows.
The next one is a little trickier.
We issued Bonds in exchange for PP&E.
Again, I’ve shown the journal entry here so you can see that the Cash account is not involved.
In fact, this is called a non-cash investing and financing transaction.
And there is a separate video that explains how to report
these type of transactions on the Statement of Cash Flows.
But since cash isn't involved, it doesn't go in this section.
Finally, you may encounter questions in which you are not given all the information you need,
with the additional financial data.
When this happens I would strongly encourage you to write out the "T" account
with the data that you do know.
and then start to solve for what you weren’t given.
Here I’ve listed all the items.
But if some things were missing,
So here is what our Statement of Cash Flows looks like
after the completing the Operating and Investing Activities sections.
You see we have negative net cash flow from investing activities of $650.
Don’t be alarmed by this.
Investors and creditors expect to see negative cash flows in this section.
Negative cash flows mean a company is buying more fixed assets than it is selling.
Positive cash flows could mean that a company
is selling fixed assets to help with cash flows.
That could be a problem if it was happening a lot.
So please watch the financing activities section to see this statement completed.