06 July 2024
In a cash flow statement, current investments are generally categorized based on their liquidity and purpose. Here’s how current investments are treated under the investing activities section:
1. **Definition of Current Investments**: Current investments typically refer to short-term investments that are readily convertible into cash within one year. They are often held for trading or to meet short-term liquidity needs.
2. **Treatment in Cash Flow Statement**: - **Cash Inflows**: Any cash received from the sale or maturity of current investments is classified as a cash inflow from investing activities. This includes the proceeds received from selling these investments.
- **Cash Outflows**: Cash paid to acquire current investments is considered a cash outflow from investing activities. This includes the initial purchase of short-term investments.
3. **Examples of Current Investments**: - Treasury bills - Marketable securities - Bank deposits with maturity periods of less than one year - Money market funds
4. **Reporting in Cash Flow Statement**: Current investments are reported under the investing activities section of the cash flow statement because they involve changes in the composition of short-term assets that affect cash and cash equivalents. The cash flow statement categorizes these activities to provide transparency into how the company is managing its short-term liquidity and investment strategies.
5. **Link to Financial Statements**: The cash flow statement complements the balance sheet and income statement by showing how changes in balance sheet accounts and income affect cash and cash equivalents. For current investments, it provides insight into the company's liquidity management and short-term investment decisions.
In summary, current investments are treated as investing activities in the cash flow statement because they involve transactions related to short-term assets that affect cash flows. Whether cash inflows from the sale of these investments or cash outflows from their purchase, these activities are crucial for understanding a company's short-term investment strategy and liquidity management.
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