Cash flows from operating activities is a section of a company's cash flow statement that explains the sources and uses of cash from ongoing regular business activities in a given period. This typically includes net income from the income statement, adjustments to net income, and changes in working capital.
Examples of Cash Flows
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 by adding back non-cash expenses such as 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 flows from the operating activities section also reflect changes in working capital. 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, tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value will be 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.
Consider Apple's (AAPL) fiscal year 2017 10-K. Apple recorded annual net income of $48.4 billion and net cash flows from operating activities of $63.6 billion. This includes a $10.2 billion adjustment for depreciation and amortization—a $4.8-billion adjustment for share-based compensation expense and $6.0 billion for deferred income tax expense.
Changes in operating assets and liabilities include a $2.1-billion cash outflow for accounts receivable, which corresponds to a decrease of equal value in the accounts receivable asset on the balance sheet, indicating a net decrease in charged sales which have not yet been collected by Apple.
Similarly, there is a $9.6 billion cash inflow from accounts payable. This corresponds to an increase in accounts payable liability on the balance sheet, indicating a net increase in expenses charged to Apple that have not yet been paid.
Cash Flows From Other Activities
Many line items in the cash flow statement do not belong in the operating activities section. Additions to property, plant, equipment, capitalized software expense, cash paid in mergers and acquisitions, purchase of marketable securities, and proceeds from the sale of assets are all examples of entries that should be included in the cash flow from investing activities section.
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 flows from investing and financing activities are not considered part of ongoing regular operating activities.