In this article, we’re looking at the second section of a statement of cash flows which is for investing activities.
So what are investing activities?
Investing activities are those activities, which relate to ‘the acquisition and disposal of long-term assets and other investments not included in cash equivalents’.
This will include things like:
- Cash receipts and payments from buying or selling non-current assets such as property, plant and equipment or intangible assets
- Cash receipts and payments from buying or selling investments and shares
- Cash receipts and payments from forward contracts, option contracts, or other trading contracts
- Dividends or interest received from investments
Disposal of non-current assets
In the exam, if you’re trying to calculate how much cash was received from the sale of an asset, but it’s not clear from the question then:
- look at the carrying amount of the asset at the date of sale
- add any gain on disposal or take away any loss on disposal
- this should equal the cash received
If you can’t figure out the carrying amount of the asset, take the cost of the asset and deduct any accumulated depreciation.
This will give you the carrying amount at the date of disposal.
|Deduct: Accumulated depreciation at date of disposal||(X)|
|Carrying amount at date of disposal||X|
|Gain on disposal||(X)|
|Cash received from disposal||X|
Acquisition of non-current assets
In the exam, If you need to calculate the amount of cash paid to acquire non-current assets, but it’s not clear from the question then:
- Take the closing asset balance
- deduct the opening balance
- add back the depreciation charged
- and add back the amount of any disposals during the period.
- This will give you the amount of any asset acquisitions during the period.
Also remember that the entity may have obtained the asset on a finance lease, so deduct this from the calculation, to get the actual cash paid.
In the exam, if you’re trying to calculate the amount of cash paid for assets during the year, and assets were revalued during the period then adjust your calculations for the revalued amount. So:
- if the revaluation resulted in the assets being worth more, deduct it from your calculation.
- but if the value of the assets went down, add it back to the calculation.
This will help you work out the actual amount of cash paid for the assets in the period.
This is the type of calculation I recommend you write out on a flash card, so it if comes up in the exam you’ll be able to attempt it.
|Opening balance of assets||X|
|Deduct: Closing balance of assets||(X)|
|Deduct: Assets acquired on a finance lease||(X)|
|Deduct: Revaluation increase in period||(X)|
|Add back: Depreciation in period||X|
|Add back: Disposals in period||X|
|Add back: Revaluation decrease in period||X|
|Cash paid for asset acquisitions||X|
Non-cash purchase of assets
I mentioned earlier if assets are purchased using finance leases or other non-cash methods, they should be excluded from the statement of cash flows.
IAS 7 states the purchase of these assets should be noted elsewhere in the financial statements, possibly as a disclosure note.