Question

Consider the follow events

cash of $112 was used to purchase a used truck

cash of $80,000 was used to retire bonds

cash of $50,000 was received from the sale of an investment at a loss

cash dividends of $28,000 were received from an investment

plant assests were depreciated $12,000, under the straight-line method

compute the net cash flow from Investing activities

The answer is (62,000). Could you please explain how to solve this problem. I get confused between operating, investing and financing activities. If you could also explain the differences between them briefly I would appreciate it.

Answer 1

Computation of Net Cash flows from Investing activities:-

particulars	Amount in $'s
1) Cash used to purchase used truck(*)	(112,000)
2) Cash received from the sale of an investment at a loss	50,000
Net Cash flows from Investing activities	(62,000)

Note point: * The amount actually given in question is $ 112 but the amount which we have to consider is $112,000 if you want to get the answer desired by you in the question i.e (62000).

Cash flows are broadly divided into 3 types

They are,

1) Cash flows from operating activities.

2) Cash flows from investing activities.

3) cash flows from finanacing activities

A small explanation of above three:-

a) We do buisiness to earn profits. Profits can be earned only when there are enough sales. To sell any product we have to purchase some product and sell it with profit. This is how a business operates in general. All inflows and out flows of cash in this regard are items in "Cash flows from operating activities"

Eg:- Purchase of goods for cash - cash out flow

Payment to labour - cash out flow

Sales to customers - cash in flow

So, net of all inflows with out flows are shown in this Cash flows from operating activities ( after adjusting non cash items and working capital)

b) To do business we purchase (for cash) Land, plant and machinery, and we also invest some capital in Shares, bonds, deentures etc. In case of any asset was in problem we may sell it and we may sell our shares bonds or debentures. All these activities comes under Cash flows from investing activities.

Eg:-

Purchase of plant and machinery for cash - cash out flow

Sale of plant and machinery for cash - Cash in flow

c) At the same time we may issue Share or debentures to public to collect capital,and we pay interest on Debentures issued and dividends on shares issued, it is cash in flow. And we reedeem shares and debentures, it is cash out flow. and net is cash flows from finanacing activities.

Note point:

Interest received from investments should be shown under " investing activities", Because it is a income form Investing activity.

Interset and dividend paid should be shown under " financing activities" because it is an expenditure incurred from Issue of Debentures and Shares which are financing activities.