Wayne Deng is reviewing the statement of cash flows for his technology business. The Statement has...

Wayne Deng is reviewing the statement of cash flows for his technology business. The Statement has been provided by his accountant. He is dismayed that the statement shows net cash outflows for investing activities.

Marks: 10

Explain to Wayne what the cash flow from investing activities section of the cash flow statement shows.

Marks: 2

Should Wayne be concerned by reported net cash outflows for investing activities? Discuss and defend your conclusion. Include an example to illustrate your conclusion

Marks: 8

Solutions

Expert Solution

a. Investing activities involve acquiring and disposing of fixed assets and debt and equity securities, and the making of and collecting loans and advances.

Cash inflows from investing activities would include:

Sale of fixed assets
Collection of loans
Sale of shares or bonds of other enterprises
Interest and dividends received on loans and investments.

Cash outflows from investing activities would include:

Payments for acquiring fixed assets
Disbursement of loans
Payments to purchase shares and bonds of other enterprises.

b. No, Wayne should not be concerned by reported net cash outflows for invsting activities because:

If cash has been paid for acquiring fixed assets, then the company is in the expansion/ diversification mode, which means that it is on course to business growth, as sooner or later, these outflows will translate into increased revenues.
If cash has been paid for making loans, the company would earn interest income on such loans.
If cash has been paid for acquiring shares and bonds of other enterprises, first of all, it means that the company has spare investible surplus cash on its balance sheet. Secondly, these investments are going to generate income in the form of interest or dividends.

ekkarill92 answered 1 year ago

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