Calculating Cash Flow from Investing Activities

Cash flow from investing activities involves transactions related to the purchase and sale of long-term assets, such as property, plant, and equipment (PP&E), investments, and intangible assets. In this case, we are dealing with a machine, which is a long-term asset.

To calculate the cash flow from investing activities, we need to determine the cash received from the sale of assets and the cash paid for the purchase of assets during the period.

Analyzing the Provided Data

We are given the following information for Machine at Cost and Accumulated Depreciation:

• Machine at cost (Opening): ₹5,00,000
• Machine at cost (Closing): ₹9,00,000
• Accumulated depreciation (Opening): ₹3,00,000
• Accumulated depreciation (Closing): ₹4,50,000

Additional information for the year:

• Machine sold: Costing ₹2,00,000
• Profit on sale of machine: ₹1,50,000
• Depreciation charged during the year: ₹2,50,000

Step-by-Step Calculation of Cash Flow from Investing Activities

Step 1: Calculate Accumulated Depreciation on the Machine Sold

The change in the Accumulated Depreciation account is affected by the depreciation charged during the year and the accumulated depreciation related to assets sold.

We can use the following formula or a T-account approach:

\(\text{Closing Accumulated Depreciation} = \text{Opening Accumulated Depreciation} + \text{Depreciation Charged During Year} - \text{Accumulated Depreciation on Asset Sold}\)

Plugging in the values:

\(₹4,50,000 = ₹3,00,000 + ₹2,50,000 - \text{Accumulated Depreciation on Asset Sold}\)

\(₹4,50,000 = ₹5,50,000 - \text{Accumulated Depreciation on Asset Sold}\)

\(\text{Accumulated Depreciation on Asset Sold} = ₹5,50,000 - ₹4,50,000 = ₹1,00,000\)

Step 2: Calculate the Book Value of the Machine Sold

The book value of an asset is its original cost less its accumulated depreciation.

\(\text{Book Value} = \text{Cost of Asset Sold} - \text{Accumulated Depreciation on Asset Sold}\)

\(\text{Book Value} = ₹2,00,000 - ₹1,00,000 = ₹1,00,000\)

Step 3: Calculate the Sale Proceeds (Cash Inflow from Sale)

The sale proceeds are the cash received from selling the asset. This is calculated as the book value plus any profit or minus any loss on sale.

\(\text{Sale Proceeds} = \text{Book Value} + \text{Profit on Sale}\)

\(\text{Sale Proceeds} = ₹1,00,000 + ₹1,50,000 = ₹2,50,000\)

This ₹2,50,000 represents a cash inflow from investing activities.

Step 4: Calculate the Cost of Machines Purchased (Cash Outflow from Purchase)

The change in the Machine at Cost account reflects purchases and the cost of assets sold.

We can use the following formula or a T-account approach:

\(\text{Closing Machine at Cost} = \text{Opening Machine at Cost} + \text{Cost of Machines Purchased} - \text{Cost of Machines Sold}\)

Plugging in the values:

\(₹9,00,000 = ₹5,00,000 + \text{Cost of Machines Purchased} - ₹2,00,000\)

\(₹9,00,000 = ₹3,00,000 + \text{Cost of Machines Purchased}\)

\(\text{Cost of Machines Purchased} = ₹9,00,000 - ₹3,00,000 = ₹6,00,000\)

This ₹6,00,000 represents a cash outflow for purchasing assets.

Step 5: Calculate the Net Cash Flow from Investing Activities

The net cash flow from investing activities is the total cash inflows from investing activities less the total cash outflows from investing activities.

\(\text{Net Cash Flow from Investing Activities} = \text{Cash Inflow from Sale} - \text{Cash Outflow from Purchase}\)

\(\text{Net Cash Flow from Investing Activities} = ₹2,50,000 - ₹6,00,000 = -₹3,50,000\)

A negative result indicates a net cash outflow.

Thus, the cash flow from investing activities is a ₹3,50,000 outflow.

Summary of Cash Flow Calculation

Revision Table: Key Concepts for Cash Flow Investing Activities

Additional Information: Understanding Investing Activities

Investing activities section of the Cash Flow Statement shows how a company spends or receives cash related to its long-term assets. These are typically assets expected to provide benefits for more than one year. The main types of transactions included are:

• Acquiring or disposing of property, plant, and equipment (PP&E).
• Acquiring or disposing of intangible assets (like patents, trademarks).
• Purchasing or selling debt or equity instruments of other entities (investments).
• Making or collecting loans to other entities (excluding trade receivables).

The purpose of the investing activities section is to show the cash used for investments that will generate future income and cash flows. A large net cash outflow often indicates that a company is investing heavily in its future growth, while a large net inflow might suggest the company is selling off assets, perhaps to raise cash or restructure its operations.