A:

When examining a company's cash flow from operating activities on its cash flow statement, an investor is able to understand the cash-generating activities and abilities of the company's core activities. A company's cash flow from operating activities can be calculated by the following equation:

Cash flow from operating activities = (net income) + (noncash expenses) + (changes in working capital)

Net Income

Net income is a good indicator of the profitability of a company. If a company has a high net income, it has a large amount of revenue or very efficient operations, or both.

Noncash Expenses

Noncash expenses are normally depreciation and amortization and are added back to a company's cash flow to show a more accurate depiction of its sources and uses of cash in its operating activities. When it comes to operating cash flow, a company should not be judged based on its monthly depreciation or amortization expenses. This is because depreciation and amortization are associated with long-term assets accounted for in the investing portion of a company's cash flow statement.

Changes in Working Capital

Changes in working capital show an investor how efficiently a company is using its capital and current assets. A negative change in working capital is not inherently good or bad but signals to an investor that a company could be investing in current assets. In the same vein, a positive change in working capital is not good or bad either but signals to an investor that a company's short-term assets are generating cash.

Cash Flow From Operating Activities

In its entirety, a company's cash flow from operating activities shows an investor how well the company is able to generate cash. A company with a high operating cash flow usually has high revenues, low overhead and efficient operations. A negative operating cash flow, however, is not a bad thing in moderation, because a company could be investing in its short-term assets.

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