Companies commonly buy and sell securities as investments, such as stock in other corporations or corporate or government bonds. It stands to reason, then, that cash profits from such investments would go on the company's cash flow statement as proceeds from investing activities. In general, that's what happens, however, there are exceptions.
Cash Flow Categories
Cash flow statements separate cash flows into three categories: operating activities, financing activities and investment activities. Operating cash flows consist of revenue and expenses associated with the company's normal business, such as making sales, buying inventory and paying wages. Financing cash flows are related to how a company raises money, such as issuing stock or bonds, paying dividends, taking out loans and paying off debt. Investing cash flows relate to both the investments a company makes in itself, such as purchasing new equipment, and external investments such as purchasing securities. On the balance statement, these cash flows are described in varying levels of detail, with the bottom line of each category giving you the net change in cash flow from those activities.
Sale of Securities
When a company buys and sells securities, it records the transactions as cash flows from investing activities. Purchasing securities produces a cash outflow, and selling them produces a cash inflow. Whether the company sells securities at a profit or loss is irrelevant on the cash flow statement. All the statement tells is how much cash goes out for a purchase or comes in from a sale. Of course, if securities are bought and sold on credit, or traded for something other than cash, such as the company's own stock, such transactions won't appear on the cash flow statement.
On a company's balance sheet, marketable securities are listed as current assets, meaning they can be readily converted to cash. Marketable securities are the securities a company buys as profit-making investments, rather than to gain influence with another company. On cash flow statements, transactions involving current assets usually fall under operating activities. Marketable securities are an exception to this rule.
Dividends and Interest
Companies commonly buy securities not just to profit off trades, but also to generate income -- namely dividends from stock investments and interest from bonds. In a quirk of the rules governing U.S. corporate accounting, these payments, even though clearly generated by investments, are considered cash flows from operating activities. This makes it easier for companies to reconcile their cash flow statements with their income statements, which track revenue and expenses from operations. Dividends and interest that a company receives appear on its income statement as revenue, so the cash flow statement includes them as operational cash flows.
Changes in Market Value
U.S. accounting rules require a company to report its marketable securities at fair market value. This is different from other assets, which are reported on the balance sheet only at the cost the company originally paid for them. When a security's market value rises or falls, then that security must be marked to market. This means it is recalculated based on the new price on the balance sheet. However, this increase or decrease exists only on paper. The security hasn't been sold, so the company has received no cash. Thus, marking securities to market doesn't appear on the cash flow statement.
- University of Northern Iowa/John Pappajohn Entrepreneurial Center: Cash Flow Statement
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton et al; 2010
- Investopedia; What Is a Cash Flow Statement?; Reem Heakal; May 2010