Investing Activities

Question: In studying the statement of cash flows, a company’s individual cash flows relating to selling inventory,

advertising, selling land, buying a building, paying dividends, and the like can be readily identified. For example, when the statement indicates that $120,000 was the “cash received from bank on a loan,” a decision maker should

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have a clear picture of what happened. There is no mystery.

All the cash flows are divided into one of the three categories:

1. Operating activities

2. Investing activities

3. Financing activities

How are these distinctions drawn?

On a statement of cash flows, what is the difference in an operating activity, an investing activity, and a financing


Answer: Cash flows listed as operating activities relate to receipts and disbursements that arose in connection

with the central activity of the organization. For Davidson Groceries, these cash changes resulted from the daily

operations carried out by the convenience store and include selling goods to customers, buying merchandise,

paying salaries to employees, and the like. This section of the statement shows how much cash the primary

function of the business was able to generate during this period of time, a figure that is watched closely by many

financial analysts. Eventually, a company is only worth the cash that it can create from its operations.

Investing activities report cash flows from events that (1) are separate from the central or daily operations of the

business and (2) involve an asset. Thus, the amount of cash collected when either equipment or land is sold is

reported within this section. A convenience store does not participate in such transactions as a regular part of

operations and both deal with an asset. Cash paid to buy a building or machinery will also be disclosed in this

same category. Such purchases do not happen on a daily operating basis and an asset is involved.

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