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Transactions That Affect Long-Term Investments

Transaction 1

The company purchased long-term investments in the amount of $100,000. You would record this transaction in the general journal as follows:

-	Debit	Credit
Long-term investments	$100,000	-
Cash	-	$100,000

You are preparing the statement of cash flows; therefore, you are interested in the amount of cash disbursed or received. In this case, $100,000 was disbursed in exchange for long-term investments.

Transaction 2

The company sold, for $90,000, long-term investments that cost $83,000. You would record this transaction in the general journal as follows:

-	Debit	Credit
Cash	$90,000	-
Long-term investments	-	$83,000
Gain on sale	-	$7,000

In this case, $90,000 was received from the sale of long-term investments.

Transactions 1 and 2 explain the $17,000 increase in long-term investments shown below:

Long-term investments (January 1, 2016)	$45,000
Add: purchase of long-term investments	$100,000
Deduct: sale of long-term investments	($83,000)
Long-term investments (December 31, 2016)	$62,000

The ending balance ($62,000) minus the beginning balance ($45,000) equals a $17,000 increase.

These transactions will appear in the Cash Flows From Investing Activities section of the statement of cash flows as follows:

Cash payment for long-term investments	($100,000)
Cash receipt from sale of long-term investments	$90,000

Note that a positive number represents a cash inflow, and a negative number represents a cash outflow.

Transactions That Affect Plant Assets

Transaction 3

The company purchased plant assets in the amount of $200,000. You would record this transaction in the general journal as follows:

-	Debit	Credit
Plant assets	$200,000	-
Cash	-	$200,000

In this case, $200,000 was disbursed in exchange for plant assets.

Transaction 4

The company sold, for $40,000 cash, plant assets that had a cost of $50,000 and a balance in accumulated depreciation of $5,000. You would record this transaction in the general journal as follows:

-	Debit	Credit
Cash	$40,000	-
Accumulated depreciation	$5,000	-
Loss on sale	$5,000	-
Plant assets	-	$50,000

In this case, $40,000 was received from the sale of plant assets.

Transaction 5

The company purchased $50,000 of plant assets in exchange for notes payable. You would record this transaction in the general journal as follows:

-	Debit	Credit
Plant assets	$50,000	-
Notes payable	-	$50,000

In this case, no cash was disbursed or received. This transaction will appear in the Non-cash Investing and Financing Section of the statement of cash flows.

Transactions 3, 4, and 5 explain the $200,000 increase in plant assets as shown below:

Plant assets (January 1, 2016)	$320,000
Add: purchase of plant assets	$200,000
Deduct: sale of plant assets	($50,000)
Add: purchase of plant assets in exchange for notes payable	$50,000
Plant assets (December 31, 2016)	$520,000

The change in the accumulated depreciation account can be explained as follows:

Accumulated depreciation (January 1, 2016)	$35,000
Add: depreciation for the current year	$20,000
Deduct: accumulated depreciation from the sale of plant assets	$5,000
Accumulated depreciation	$50,000

These transactions will appear in the Cash Flows From Investing Activities section of the statement of cash flows as follows:

Cash payment for purchase of plant assets	($200,000)
Cash receipt from the sale of plant assets	$40,000

Recall that a positive number represents a cash inflow, and a negative number represents a cash outflow.  

Putting It All Together

Cash Flows From Investing Activities

Cash payment for long-term investments	($100,000)
Cash receipt from sale of long-term investments	$90,000
Cash payment for purchase of plant assets	($200,000)
Cash receipt from sale of plant assets	$40,000
Net cash flows from investing activities	($170,000)