Definition:

Purchase/Sale of Investments refers to the buying or selling of financial assets such as stocks, bonds, or other securities by an individual or organization. This activity is typically recorded in the cash flow statement under investing activities, reflecting the cash inflow or outflow associated with these transactions.

Examples

1. A company sells a portion of its stock portfolio to raise cash for a new project.
2. An individual purchases government bonds as part of their retirement savings plan.
3. A mutual fund buys shares in a tech company to diversify its investment portfolio.

Formula:

Net Purchase/Sale of Investments = Total Sales of Investments - Total Purchases of Investments

How to use the metric:

This metric is used to assess the cash flow impact of an entity's investment activities. Positive values indicate net sales (cash inflow), while negative values indicate net purchases (cash outflow). It helps stakeholders understand how much cash is being generated or used by investment activities.

Limitations:

1. Does not provide insight into the profitability or performance of the investments.
2. May not reflect the strategic intent behind the transactions, such as long-term growth or short-term liquidity needs.
3. Can be influenced by market conditions, which may not be under the control of the entity.

Applies to:

Industries with significant investment activities, such as finance, insurance, and real estate, where managing investment portfolios is a core part of operations.

Doesn't apply to:

Industries with minimal investment activities, such as certain service sectors, where the primary focus is on operational cash flows rather than investment transactions.

Summary:

The Purchase/Sale of Investments metric provides insight into the cash flow impact of an entity's investment activities, reflecting the net cash generated or used by buying and selling financial assets. While useful for understanding cash flow dynamics, it does not offer information on the performance or strategic intent of these investments. It is most relevant in industries with significant investment activities.