What Are Operating Activities in a Business?

Cash from operating activities focuses on the cash inflows and outflows from a company’s main business activities of buying and selling merchandise, providing services, etc. Cash flows from operating activities result from providing services and producing and delivering goods. Assume you are the chief financial officer of T-Shirt Pros, a small business that makes custom-printed T-shirts. While reviewing the financial statements that were prepared by company accountants, you discover an error. During this period, the company had purchased a warehouse building, in exchange for a $200,000 note payable. The company’s policy is to report noncash investing and financing activities in a separate statement, after the presentation of the statement of cash flows.

Operating activities are the functions of a business directly related to providing its goods and/or services to the market. These are the company’s core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide the majority of a company’s cash flow and largely determine whether it is profitable.

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Attracting lenders and investors requires the current or future ability to generate cash flow from operating activities. Maximizing cash flow from operating activities is critical at every point in a business’s life cycle. Interest and dividend income, while part of overall operational cash flow, are not considered to be key operating activities since they are not part of a company’s core business activities. The key operating activities that produce revenues for a company are manufacturing and selling its products or services. Sales activities can include selling the company’s own in-house manufactured products or products supplied by other companies, as in the case of retailers.

• This noncash investing and financing transaction was inadvertently included in both the financing section as a source of cash, and the investing section as a use of cash.
• Administrative activities include secretarial, accounting, finance and security functions.
• 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.
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• In the statement of cash flows the operating activities section identifies the cash flows involved with these activities by focusing on net income and the changes in the current assets and current liabilities.
• The related expenses include rent, utilities, supplies, insurance and licenses.

When it’s negative, the company spends money to finance business activities. In such situations, the company must borrow from creditors or sell its fixed assets. The financial statements, especially the cash flow and income statements, detail the firm’s operating activities. It also determines a firm’s capacity to cover existing costs like debt repayment https://www.bookstime.com/articles/cash-flows-from-operating-activities and personnel costs. Once net income is adjusted for all non-cash expenses it must also be adjusted for changes in working capital balances. Since accountants recognize revenue based on when a product or service is delivered (and not when it’s actually paid), some of the revenue may be unpaid and thus will create an accounts receivable balance.

Operating Cash Flow

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