Purchases of Investments refer to the cash spent by a company to acquire financial assets during a reporting period. These assets can include marketable securities, debt instruments, equity securities, or other investment vehicles, classified based on their intended holding period.
Why are Purchases of Investments Important?
Understanding Purchases of Investments is important because it:
Shows Capital Allocation: Indicates how a company deploys surplus cash to generate returns or support strategic partnerships.
Impacts Liquidity: Reflects cash outflows in the investing activities section of the cash flow statement, affecting overall liquidity.
Guides Portfolio Management: Helps assess the company’s risk exposure and diversification of its financial asset holdings.
How are Purchases of Investments Calculated?
On the cash flow statement, Purchases of Investments are reported in the investing activities section and calculated as:
Purchases of Investments = Cash Paid for Acquisition of Marketable Securities and Other Financial Assets
Where cash outflows include:
Acquisition Cost: Purchase price paid for securities or equity interests.
Transaction Fees: Brokerage or advisory fees directly attributable to investment purchases.
Principal Amounts: For debt instruments, the face value or principal amount of bonds or notes acquired.
Additional Considerations
Classification: Separate purchases into short-term (≤ 12 months) and long-term (> 12 months) categories for balance sheet presentation.
Fair Value Accounting: Investments classified at fair value through profit or loss or other comprehensive income may generate unrealized gains or losses affecting the income statement or equity.
Disclosure Requirements: Companies must disclose the nature, amount, and fair value changes of investment purchases in the notes to the financial statements.