The cash flow statement says a lot about the financial health and well-being of a company. It provides management, analysts, and investors with a window into the movement of cash and cash equivalents in and out of a company. It helps measure how well (or how poorly) a company is able to manage its cash and pay off its financial obligations. While there are three main areas of the cash flow statement, this article focuses on just one: cash flow from operating activities.
Key Takeaways
- The cash flow statement provides others with insight into a company's financial well-being.
- The statement shows how well a company is able to manage its cash and pay off its debts.
- It includes cash flow from investing, cash flow from financing, and cash flow from operations.
- The cash flow from operations is the first section of the cash flow statement and includes money that goes into and out of a company.
- Net income, adjustments to net income, and changes to working capital are included in operating cash flows.
What Is Cash Flow From Operating Activities?
A company's cash flow is the amount of money that goes through it. This includes anything that comes into and goes out of the company's coffers. When cash flows are positive, it means that the company's assets are increasing. When its outflows are higher than its inflows, the company's cash flows are negative.
There are three types of cash flows: cash flow from investing, cash flow from financing, and cash flow from operating activities. The cash flow from operating activities section appears at the top of a company's cash flow statement. It is used to explain where a company gets its cash from ongoing regular business activities, such as sales and manufacturing, and how it uses that capital during any given period of time.
The cash flow statement typically includes:
- Net income, which can be located from the income statement
- Adjustments to net income
- Changes in working capital
As such, you can calculate cash flow from operating activities using the following formula:
Net Income + Adjustments to Net Income (non-cash items) + Changes in Working Capital
Net Income
Net income is typically the first line item in the operating activities section of the cash flow statement. This value, which measures a business's profitability, is derived directly from the net income shown in the company's income statement for the corresponding period.
The cash flow statement must then reconcile net income to net cash flows. This is done by adding back non-cash expenses like depreciation and amortization. Similar adjustments are made for non-cash expenses or income such as share-based compensation or unrealized gains from foreign currency translation.
Working Capital
The cash flow from operating activities section also reflects changes in working capital. This figure represents the difference between a company's current assets and its current liabilities.
A positive change in assets from one period to the next is recorded as a cash outflow, while a positive change in liabilities is recorded as a cash inflow. Inventories, accounts receivable (AR), tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value is reflected in cash flow from operating activities.
Accounts payable, tax liabilities, and accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow from operations.
Cash flow from operating activities is also called cash flow from operations or operating cash flow.
Example of Cash Flow From Operating Activities
Here's a real-world example to show demonstrate cash flow from operating activities. Consider the fiscal year 2017 10-K from Apple (AAPL).
The company recorded an annual net income of $48.4billion and net cash flows from operating activities of $63.6billion. This includes a:
- $10.2billion adjustment for depreciation and amortization
- $4.8 billion adjustment for share-based compensation expense
- $6billion for deferred income tax expense
Changes in operating assets and liabilities include a $2.1 billion cash outflow for AR, which corresponds to a decreaseof equal value in the accounts receivable asset on the balance sheet, indicating a net decrease in charged sales that were not collected by Apple at the time.
The company also reported a $9.6billion cash inflow from accounts payable. This corresponds to an increase in accounts payable liability on the balance sheet, which indicates a net increase in expenses charged to Apple that were not yet paid.
Cash flow from investing and cash flow from financing activities are not considered part of ongoing regular operating activities.
Cash Flows From Other Activities
Many line items in the cash flow statement do not belong in the operating activities section. For instance, the following are examples of entries that should be included in the cash flow from investing activities section:
- Additions to plant, property, and equipment (PP&E)
- Capitalized software expense
- Cash paid in mergers and acquisitions (M&A)
- Purchase of marketable securities
- Proceeds from the sale of assets
Similarly, proceeds from the issuance of stock, proceeds from the issuance of debt, dividends paid, cash paid to repurchase common stock, and cash paid to retire debt are all entries that should be included in the cash flow from financing activities section.
What Are Typical Cash Flow From Operating Activities?
Cash flow from operations indicates where a company gets its cash from regular activities and how it uses that money during a particular period of time. Typical cash flow from operating activities include cash generated from customer sales, money paid to a company's suppliers, interest paid to lenders,
How Do You Find Cash Flow From Operating Activities?
You can find the cash flow from operating activities on a company's cash flow statement. This section normally appears at the top of the statement. You can also calculate operating cash flow by adding together a company's net income, non-cash items (adjustments to net income), and working capital.
What Does a Company’s Net Cash Flow From Operating Activities Include?
A company's net cash flow from operating activities indicates if any additional cash came into or went out of the business. This includes any changes to net income (sales less any expenses, such as cost of goods sold, depreciation, taxes, among others) as well as any adjustments made to non-cash items.
FAQs
Cash outflows (payments) from operating activities include:
Cash payments to employees for services. Cash payments considered to be operating activities of the grantor. Cash payments for quasi-external operating transactions. Cash payments for program loans.
Which is an example of a cash flow from an operating activity? ›
Cash outflows (payments) from operating activities include:
Cash payments to employees for services. Cash payments considered to be operating activities of the grantor. Cash payments for quasi-external operating transactions. Cash payments for program loans.
What is included in cash flows from operating activities? ›
Cash flow from operations is the section of a company's cash flow statement that represents the amount of cash a company generates (or consumes) from carrying out its operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital.
What is operating cash flow example? ›
What are examples of operating cash flow? Interest and dividends were received. Employees' salaries are paid. Income tax and interest have been paid.
What are examples of operating activities? ›
Operating activities examples include:
- Receipt of cash from sales.
- Collection of accounts receivable.
- Receipt or payment of interest.
- Payment for materials and supplies.
- Payment of salaries.
- Payment of principal and interest for operating leases. ...
- Payment of taxes, fines, and license costs.
Cash Flow from Operating Activities (also known as Operating Cash Flow or OCF) is a process that converts Net Income (found on the Income Statement) to a “Cash Income” by adding back non-cash items and then taking the change in the balances of operating assets and liabilities.
What is cash inflow and outflow from operating activities? ›
Cash inflow is the money going into a business which could be from sales, investments, or financing. It's the opposite of cash outflow, which is the money leaving the business. A company's ability to create value for shareholders is determined by its ability to generate positive cash flows.
Where can I find cash flow from operating activities? ›
You can find the cash flow from operating activities on a company's cash flow statement. This section normally appears at the top of the statement. You can also calculate operating cash flow by adding together a company's net income, non-cash items (adjustments to net income), and working capital.
How to prepare cash flow from operating activities? ›
Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.
What is a positive cash flow from operating activities? ›
The cash flow from operating activities formula shows you the success (or not) of your core business activities. If your business has a positive cash flow from operating activities, you may be able to fund growth projects, launch new products, pay dividends, reduce the company's debt, and so on.
Operating cash flow is equal to revenues minus costs, excluding depreciation and interest. Depreciation expense is excluded because it does not represent an actual cash flow; interest expense is excluded because it represents a financing expense.
Which of the following is not a cash flow from operating activities? ›
Cash inflows from the sale of property, plant, and equipment is not a typical cash flow under operating activities.
What is a good example of cash flow? ›
Some examples of investing cash flows are payments for the purchase of land, buildings, equipment, and other investment assets and cash receipts from the sale of land, buildings, equipment, and other investment assets.
Which of the following is an example of a cash flow from an operating activity? ›
Payment of interest is an example of cash flow from operating activity for financing company.
What is an example of a cash outflow from operating activities? ›
It refers to the amount of cash businesses spend on operating expenses, debts (long-term), interest rates, and liabilities. Examples of cash outflow include salary paid to employees, dividends paid to shareholders, reinvestment in business, rent paid for office premises, and more.
What is included in cash flow from operations? ›
The cash flow from operating activities depicts the cash-generating abilities of a company's core business activities. It typically includes net income from the income statement and adjustments to modify net income from an accrual accounting basis to a cash accounting basis.
Is paying utilities an operating activity? ›
Paying utility bills is an operating activity.
Paying utility bills falls under this category as it is an essential part of running the day-to-day operations of the business and is considered an expense in the income statement.
Is paying rent an operating activity? ›
Cash paid for rent is reported as an operating activity. Cash contributed to the business by an owner is an investing activity. Cash paid on a long-term note payable is a financing activity.
What impacts cash flow from operating activities? ›
1 As operating cash flow begins with net income, any changes in net income would affect cash flow from operating activities. If revenues decline or costs increase, with the resulting factor of a decrease in net income, this will result in a decrease in cash flow from operating activities.
What do operating activities include? ›
Key operating activities for a company include manufacturing, sales, advertising, and marketing activities. Cash flows from operations are an important metric used by financial analysts and investors. Operating activities can be contrasted with the investing and financing activities of a firm.
The cash flow from operating activities of the banks includes the receipts, payments and affecting current assets and current liabilities.
How to calculate cash flow from operating activities? ›
The cash flow from operations can be calculated in this way:
- Cash flow from operations = Funds from operations + changes in working capital.
- Funds in operations = Net income + depreciation + amortisation + deferred taxes + investment tax credit + other funds.
Under the indirect method, a company calculates cash flow from operating activities by first taking the net income from its income statement. This method allows you to see how operating activities may affect the net profits of a company, specifically the changes in assets and liabilities.
Which activities are cash inflows from operating activities quizlet? ›
Cash inflows from operating activities include cash sales, collections on accounts and notes receivable arising from sales, dividends on investments, and interest on loans to others and investments.
Which is an example of a cash flow from a financial activity? ›
Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity, payment of dividends, issuance and repayment of debt, and capital lease obligations.
What is an example of cash flow from operating activities mcq? ›
Solution. Cash flow example from an operating activity is Interest Paid on Term Deposits by a Bank.
What is an example of operating cash flow ratio? ›
Here's the formula for calculating the operating cash flow ratio:Operating cash flow ratio = CFO / liabilitiesExample: A company has a CFO of $150,000 and current liabilities of $120,000 at the end of the second quarter. If you divide the company's CFO by its liabilities, its operating cash flow ratio is $1.25.
