Professional Documents
Culture Documents
02 09 Investments After
02 09 Investments After
($ in Thousands)
Concept: We take a step back to look at our company's cash flows and how much money we're actually making with it…
And we notice that we have a large cash balance, and our generating more cash flow than we need each year!
So, what to do about this? Many options (we'll cover some of them in the upcoming lessons)…
We could hire more employees and spend more on sales & marketing, research & development, and so on…
Or we could spend more on Capital Expenditures (CapEx) and ramp up our purchases of equipment, classrooms, etc. to do
But another option is to buy other types of "investments" - stocks, bonds, real estate, stakes in other companies, etc.
So you'll often see a line item for this, called "Purchases of (Long-Term / Short-Term) Investments."
Question: How does this impact a company's cash and Net Income vs. cash generated?
It doesn't appear on the Income Statement because it has NOTHING to do with the company's core business operations… b
These purchases are not taxable events. Think about when you buy a stock: you're taxed if you sell the stock for a profit…
So for purchases, the treatment is pretty simple: reflect a use of cash on the Cash Flow Statement, and increase the corresp
So, as always, as an asset increases, our cash generated from the business decreases.
These are ASSETS because they could potentially generate cash for us in the future (via interest or dividends, selling them f
2. When we start earning interest on these investments, or otherwise start receiving income from them.
Just like how you have to report your own interest income when filing taxes, companies must do the same… and pay taxes
Here's our super-aggressive example of putting a lot of our company's cash flows into "investments"!
Equity:
When a company starts amassing a cash balance or generating excess cash flow, it can start putting some of that cash in
(stocks, bonds, money-market accounts, real estate, etc.).
Purchasing them makes no impact on the IS, but it does reduce cash flow on the CFS, and increases the relevant BS line
And if you earn interest, you ARE taxed on that, so it does show up on the Income Statement.
You may also be taxed when you sell off the investments, but we'll look at that later.
Bottom-line: Purchasing these investments can substantially decrease cash flow, so there better be a good reason for d
Yes, you'll get some income from them eventually… but uncertain as to when, how, and how much.
And in big enough quantities, you can easily "over-spend" on these investments and run into a cash flow shortfall
e're actually making with it…
you sell the stock for a profit… but not if you just buy and hold it.
e from them.
- -
m Liabilities: - -
300 516
$ 300 $ 546
how much.