What is the difference between investing and financing activities?

August 5, 2012

What do investing and financing activities and related cash flows represent? How are they different? Why are non-cash activities presented as part of the cash flow statement? Answers to these questions are available in this article.

1. Nature of investing activities

(For the discussion of operating activities, refer to the article What are operating activities in accounting?)

Investing activities are business activities that involve buying and disposing long-lives assets, buying and selling equity securities of other companies, and making and collecting loans.

In general investing activities involve purchasing and disposing assets necessary for business operations. Different businesses need to acquire different types of assets such as land, property, plant, equipment, patents, copyrights, cash, accounts receivable, etc.

Investing activities is one of the ways to acquire assets.

Cash flows from investing activities are usually reported in the second section of the statement of cash flows. Typical investing cash flows are presented below.

Cash inflows from investing activities:

  • Selling fixed assets
  • Selling intangible assets
  • Selling investments
  • Collecting principal on loans made to other entities*

(*) Collecting interest payments on loans made to other entities is reported as an operating activity because interest revenue involves income determination.

Cash outflows from investing activities:

  • Payments to purchase fixed assets
  • Payments to purchase intangible assets
  • Payments to purchase investments (i.e., equity securities of other entities)
  • Making loans to other entities
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