Loading the player...

What are 'Operating Activities'

Operating activities are the functions of a business directly related to providing its goods and/or services to the market. These are the company's core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide the majority of a company’s cash flow and largely determine whether it is profitable. Some common operating activities include cash receipts from goods sold, payments to employees, taxes, and payments to suppliers. These activities can be found on a company's financial statements, and in particular the income statement and cash flow statement.

Operating activities are distinguished from investing or financing activities, which are functions of a company not directly related to the provision of goods and services. Instead, financing and investing activities help the company function optimally over the longer term. This means that the issuance of stock or bonds by a company are not counted as operating activities.

BREAKING DOWN 'Operating Activities'

Operating Activities and the Income Statement

In the event of ambiguity, operating activities can readily be identified by classification in financial statements. Many companies report operating income or income from operations as a specific line on the income statement. Operating income is calculated by subtracting cost of sales (COGS); research and development (R&D) expenses; selling and marketing expenses; general and administrative expenses; and depreciation and amortization expenses. Operating income excludes interest income or expenses. For example, an apparel store's operating activities might include buying materials from suppliers and paying for labor to produce clothing; paying to transport the materials to the factory and the clothes from factories to warehouses; arranging transport from warehouses to retail stores and mail-order customers; paying employees to work in warehouses and retail stores; paying managers to oversee operations; paying taxes; and paying rent on warehouse and retail facilities. Other less common operating activities include fines or cash settlements from lawsuits, refunds and money collected from insurance claims.

Operating Activities and the Cash Flow Statement

Cash flows from operating activities are among the major subsections of the statement of cash flows. It is separate from the sections on investing and financing activities. Investing activities refer to earnings or expenditures on long-term assets, such as equipment and facilities, while financing activities are the cash flows between a company and its owners and creditors from activities such as issuing bonds, retiring bonds, selling stock or buying back stock.

To get an accurate picture of a company’s cash flow from operating activities, accountants add depreciation expenses, losses, decreases in current assets and increases in current liabilities to net income, and then subtract gains, increases in current assets and decreases in current liabilities. Investors examine a company’s cash flow from operating activities separately from the other two components of cash flow to see where a company is really getting its money. Investors want to see positive cash flow because of positive income from operating activities, which are recurring, not because the company is selling off all its assets, which results in one-time gains. The company’s balance sheet and income statement help round out the picture of a its financial health.

RELATED TERMS
  1. Business Activities

    Business activities are any activity that is engaged in for the ...
  2. Cash Flow From Investing Activities

    Cash flow from investing activities reports the total change ...
  3. Cash Flow

    Cash flow is the net amount of cash and cash-equivalents being ...
  4. Operating Cash Flow Ratio

    The operating cash flow ratio is a measure of how well current ...
  5. Common Size Financial Statement

    A common size financial statement allows for easy analysis between ...
  6. Operating Income

    Operating income is the amount of money a company generates from ...
Related Articles
  1. Investing

    Cash flow statements: Reviewing cash flow from operations

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
  2. Investing

    Corporate Cash Flow: Understanding the Essentials

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. Learn how to read the cash flow statement.
  3. Investing

    Analyze cash flow the easy way

    Learn the key components of the cash flow statement, how to analyze and interpret changes in cash, and what improved free cash flow means to shareholders.
  4. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  5. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  6. Investing

    Understanding the Income Statement

    The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it.
  7. Tech

    Cash Flow Is King: How to Keep it Running

    Why is cash flow so important, and what steps can a business take to improve it?
RELATED FAQS
  1. What are some examples of cash flow from operating activities?

    Learn about cash flow statement and cash flows from operating activities. Understand how these examples differentiate investing, ... Read Answer >>
  2. How do net income and operating cash flow differ?

    Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
  3. What is the difference between a cash flow statement and an income statement?

    Learn how a cash flow statement measures the sources and uses of a company's cash, while an income statement measures a company's ... Read Answer >>
  4. How are cash purchases recorded on a company's income statement?

    Take a deeper look at the treatment of cash payments on a company's financial statements, including how specific purchases ... Read Answer >>
  5. What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based ... Read Answer >>
Trading Center