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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.
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:
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 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.
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.
Here’s a real-world example to show cash flow from operating activities. Consider the fiscal year 2017 10-K from Apple (AAPL).
The company recorded an annual net income of $48.4 billion and net cash flows from operating activities of $63.6 billion. This includes a:
Changes in operating assets and liabilities include a $2.1 billion cash outflow for AR, which corresponds to a decrease of 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 $9.6 billion 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.
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:
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.
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, and interest paid to lenders.
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.
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.
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