A cash flow statement shows a company’s cash inflows and outflows during an accounting period. The section for reporting cash flows from investing activities shows inflows and outflows from buying and selling equipment, land and other assets. When a company buys these assets, it is investing money in its business. The net cash flow from investing activities equals the cash inflows from selling assets minus the cash outflows from purchasing assets. You can calculate the change in net cash flow from investing activities between two accounting periods to compare how these activities affect the company’s cash.
1. Obtain the company’s cash flow statement for the most recent accounting period and the previous quarter by researching the company’s 10-Q quarterly or 10-K annual filings. Download these documents from the investor relations section of the company’s website or from the U.S. Securities and Exchange Commission’s online EDGAR database.
2. Identify the cash used to purchase assets, which is listed in the cash flows from investing activities section of the cash flow statement for each period. These amounts are enclosed in parentheses to denote cash outflows. For example, assume a company purchased equipment for $50,000 in the most recent period and purchased a building for $80,000 in the previous period.
3. Determine the cash received from selling assets, listed in the cash flows from investing activities section of the cash flow statement for each period. For this example, assume the company sold $110,000 in land in the most recent period and sold $100,000 in equipment in the previous accounting period.
4. Subtract the purchases from the sales in each period to calculate the net cash flow from investing activities for that accounting period. A positive number reflects net cash flow from investing activities, while a negative number represents net cash flow used by investing activities. Continuing the example, subtract $50,000 from $110,000 to get $60,000 in net cash flow provided by investing activities in the most recent period. Subtract $80,000 from $100,000 to get $20,000 in net cash flow provided by investing activities in the previous period.
5. Subtract the net cash flow for the previous period from the net cash flow for the most recent period to calculate the change in net cash flow from investing activities. A positive result represents an increase in net cash flow between periods; a negative result represents a decrease. Concluding the example, subtract $20,000 from $60,000 to get an increase in net cash flow from investing activities of $40,000. This means the company generated $40,000 more in net cash flow from investing activities than in the previous period.
- Calculating a change in cash flow from investing activity may be inconclusive by itself in determining whether a company is using its cash wisely. Read the management’s discussion in the company’s quarterly or annual report to gain more insight into how the company invests in its business.
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