What is the difference between investing and financing activities?

3. Noncash investing and financing activities

There are investing and financing activities that do not affect cash flows. For example, retiring long-term debt by issuing common stock is a noncash financing activity. Other example of noncash investing and financing activities include: acquiring land by issuing common stock, purchasing a building by issuing a note payable, acquiring equipment in exchange for land, etc.

Because noncash investing and financing activities indirectly affect cash flows, they are reported in a separate section of the statement of cash flows.

Important noncash investing and financing activities provide valuable information about overall investing and financing activities of an entity and must be reported either:

  • At the bottom of the statement of cash flows, or
  • In the notes to the financial statements.

Usually noncash investing and financing activities are reported in a separate section at the bottom of the statement of cash flows. This section lists important noncash investing and financing activities and offsets these transactions against each other.

In other words, noncash financing/investing “outflows” offset financing/investing cash “inflows”, and vice versa. As the result, cash is not affected.

Examples:

  • Financing cash “outflow” from retiring debt is offset by financing cash “inflow” from issuing stock.
  • Investing cash “outflow” from acquiring land is offset by financing cash “inflow” from issuing stock.
  • Investing cash “outflow” from acquiring equipment is offset by investing cash “inflow” from selling land.

The above-listed examples are summarized in the table below.

“Outflow”

“Inflow”

Retiring debt by issuing common stock

Retiring debt: financing cash “outflow”

Issuing common stock: financing cash “inflow”

Acquiring land by issuing common stock

Acquiring land: investing cash “outflow”

Issuing common stock: financing cash “inflow”

Acquiring equipment in exchange for land

Acquiring equipment: investing cash “outflow”

Selling land: investing cash “inflow”

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