Cash Flow From Operating Activities (CFO)

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What is 'Cash Flow From Operating Activities (CFO)'

Cash flow from operating activities (CFO) is an accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes.

Also called operating cash flow or net cash from operating activities, it can be calculated as follows:

Cash Flow From Operating Activities = EBIT + Depreciation - Taxes

BREAKING DOWN 'Cash Flow From Operating Activities (CFO)'

Cash flow from operating activities is reported on the cash flow statement in a company's quarterly and annual reports. Cash flow from operating activities also includes changes in working capital (current assets minus current liabilities), such as increases or decreases in inventory, short-term debt, accounts receivable and accounts payable. Income that a company receives from investment activities is reported separately, since it is not from business operations.

Comparing cash flow from operating activities with EBITDA can give insights into how a company finances short-term capital. Also, investors will examine a company’s cash flow from operating activities separately from the other two components of cash flow - investing and financing activities - to determine from where a company is really getting its money. Investors want to see positive cash flow because of positive income from recurring operating activities. Positive cash flow that results from the company selling off all its assets, or because it has recently issued new stocks or bonds, results in one-time gains and is not an indicator of financial health. Investors will also examine the company’s balance sheet and income statement to get a fuller picture of company performance. Similarly, cash flow from operating activities excludes dividends paid to stockholders and money spent to purchase long-term capital, such as equipment and facilities, because these are also one-time or infrequent expenses.

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