Operating activities are the routine transactions and events that generate revenue and expenses for a business. They include activities such as selling products, providing services, and managing inventory and accounts payable/receivable.
5 Must Know Facts For Your Next Test
Operating activities are reported on the statement of cash flows under the 'Cash Flows from Operating Activities' section.
Examples of operating activities include receipts from sales of goods and services, payments to suppliers, and wages to employees.
Depreciation expense is added back in the operating activities section because it does not involve actual cash outflow.
Changes in working capital components like inventory, accounts receivable, and accounts payable affect cash flows from operating activities.
Net cash flow from operating activities is a critical measure of a company's ability to generate sufficient cash to maintain operations.
Review Questions
What types of transactions are included in operating activities on the statement of cash flows?
How does depreciation expense affect the calculation of net cash flow from operating activities?
Why is net cash flow from operating activities important for assessing a company's financial health?
Related terms
Investing Activities: Transactions involving the acquisition or disposal of long-term assets such as property, plant, equipment, or investments.
Financing Activities: Transactions that result in changes in the size and composition of the equity capital and borrowings of an entity.
Net Income: The total profit or loss after all revenues and expenses have been accounted for within a specific period.