Common Examples of Operating Activities

Operating activities are the principal revenue-producing functions of a business, representing the day-to-day actions a company takes to generate income. These activities are a main component of the Statement of Cash Flows, which shows how cash moves into and out of a company. Understanding these cash effects helps assess a company’s ability to maintain operations, repay obligations, and make new investments without external financing.

Common Cash Inflows from Operations

A primary source of cash inflow is the receipt of money from the sale of goods or the rendering of services. When customers purchase products or pay for services, the cash collected increases the company’s operational cash balance.

Many businesses extend credit to their customers, creating accounts receivable. The collection of these outstanding balances is another cash inflow from operations. Although revenue was recognized when the sale was made, the cash is not received until the customer pays the invoice.

Companies can generate operating cash from other sources related to their main business, including royalties for intellectual property, fees, and commissions. For some entities, like financial institutions, interest received on loans is a principal revenue-producing activity and classified as an operating inflow. Dividends received from equity investments are also classified as operating cash inflows, representing a return on an investment. However, if a dividend is a return of an investment, it is classified as an investing cash flow.

Common Cash Outflows from Operations

A major cash outflow is payments made to suppliers for raw materials, components for manufacturing, or finished goods for resale. These payments for inventory are a direct cost of generating revenue.

Another substantial cash outflow is the payment of employee salaries, wages, and other benefits. Businesses also incur other expenses to sustain daily functions, leading to cash outflows for rent, utility bills, and marketing or advertising costs.

Companies also make operational cash payments for income taxes to government authorities. Likewise, interest paid on loans, bonds, and other debt is an operating cash outflow under U.S. GAAP, as it finances assets used in revenue-generating activities.

Presentation on the Statement of Cash Flows

The net result of all operating inflows and outflows is presented in the operating activities section of the Statement of Cash Flows. U.S. GAAP allows for two presentation methods, the direct and indirect method, which both arrive at the same final figure.

The direct method presents a summary of cash movements, listing major categories of gross cash receipts and gross cash payments. This format directly shows where cash came from and where it went. Despite being encouraged by accounting standard-setters, the direct method is less commonly used.

The more prevalent approach is the indirect method, which begins with a company’s net income from the income statement. It adjusts this figure by adding back non-cash expenses, like depreciation and amortization, to arrive at the net cash flow from operations.

After adjusting for non-cash items, the indirect method accounts for changes in operating working capital accounts. For example, an increase in accounts receivable is subtracted from net income because the company earned more revenue than it collected in cash. Conversely, an increase in accounts payable is added back because the company incurred more expenses than it paid in cash. This process links accrual-based net income to the actual cash generated.