4. Investing Cash Flows

Let's talk about the investing section of the statement of cash flows. Now, a statement of cash flows has three sections. It's got operations, investing, and then financing. In this video, we're just looking at the investing part. Now, hopefully you'll remember from operations that we normally use something called the indirect method, where we start with net income and then make some adjustments to finally get down to cash flow from operations.

We're not gonna do this at all in the investing section. In the investing section, we start at 0, and all we care about is cash coming in or cash going out. And I like to think of these as receipts and payments.

So we are only worried about the cash we receive or the cash we pay. Let's take a look at what actually falls into the investment section. Now, since I said I like to think about it in terms of cash receipts and cash payments, let's start by putting cash receipts here. Now, there are three different categories of cash receipts. You could have a receipt from the sale of plant, property, and equipment or from the sale of an investment.

And finally, on the collection of a loan or a note receivable. Now, why did I put this over here instead of just saying these three things? Why does it matter that it's cash receipts from the sale of plant, property, and equipment, cash receipts from the sale of investment, and cash receipts from the collection of a loan? Well, because it's entirely possible that you could have a sale of plant, property, and equipment and not get cash for it, or you could have the sale of an investment and not get cash for it. For example, if you sold some investment and instead of getting cash, you received, let's say, stock in another company.

So you traded one asset, an investment, for another asset, capital stock in some other company, that did not affect cash at all. And since this whole chapter is about the statement of cash flows, it would be silly to include something that you sold for a non-cash asset. So on the test, you need to look out for, did I sell this plant, property, and equipment for cash, or did I just sell it? Because it's entirely possible that you sold it, but you sold it for something besides cash. Okay, let's look at the payment section. We're gonna do the exact same thing. We're gonna say cash payments for three things.

One is, you guessed it, the purchase of plant, property, and equipment. The second one would be the purchase of, exactly, investments. And this can include intangibles, patents, and that sort of thing. And then finally, hopefully you're catching on now, the making of a loan or the creation of a note receivable. And the same rule applies. We are looking for cash payments for the purchase of plant, property, and equipment. We're looking for the cash payment for the purchase of an intangible. So in the same way, if you buy some sort of intangible investment, but you issue stock to another company and they give you a patent, well, that's very good.

That is a good thing. You just increased your patents account by some amount, and you issued some capital stock, and you may have some APIC as well. I don't see cash anywhere in here, so if there's no cash, it doesn't go on the statement of cash flows. That's why these two things over here are very important, the cash payments for these things or the cash receipts for these things. So if you make a loan to someone, you make a note receivable, and you give them the cash, well, this is a cash outflow of $100,000, so this is a cash payment for the making of a note receivable.

So that would go in this section of investments. Now, if you bought that patent, instead of using capital stock, you used cash, well, look at that. This is a cash outflow, so that qualifies for this section. So when you see all of these things on the test, please pay very careful attention to the cash part because there will be some on there where you purchase an investment, but you don't use cash, or you purchase plant, property, and equipment, but you don't use cash. And if this is all you remember, you're gonna miss some because some of these things will not have cash included.