Loading the player...

What are 'Operating Activities'

Operating activities are the functions of a business related to the provision of its offerings. These are the company's core business activities, such as manufacturing, distributing, marketing and selling a product or service. Operating activities should generally provide the majority of a company’s cash flow and largely determine whether a company is profitable.

BREAKING DOWN 'Operating Activities'

Operating activities can be 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.

Operating Activities and the Income Statement

In the event of ambiguity, operating activities can be identified by classification in financial statements. Many companies report operating income or income from operations as a discrete line of the income statement. Operating income is calculated by subtracting cost of sales; research and development 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 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; and paying rent on warehouse and retail facilities.

Operating Activities and the Cash Flow Statement

Cash flows from operating activities is one of the major subsections of the the statement of cash flows. It is separate from the sections on investing activities 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 company’s financial health.

RELATED TERMS
  1. Cash Flow From Operating Activities ...

    Cash Flow From Operating Activities (CFO) is an accounting item ...
  2. Business Activities

    Business activities are any activity that is engaged in for the ...
  3. Cash Flow

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

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
  5. Non-Operating Cash Flows

    Non-operating cash flows are inflows and outflows of cash that ...
  6. Active Investing

    Active investing refers to an investment strategy that involves ...
Related Articles
  1. Investing

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  2. 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.
  3. Investing

    What Is a Cash Flow Statement?

    The Cash Flow Statement measures whether a company generates enough cash to meet its operating expenses.
  4. Investing

    Cash flow statement: Analyzing cash flow from investing activities

    Here, you'll find an overview of cash flow from investing activities — one of three primary categories in the statement of cash flows.
  5. Investing

    Fundamental Case Study: Is Amazon's Cash Flow Actually Solid? (AMZN)

    Review Amazon's cash flow situation, including its free cash flow yield, operating cash flow from organic growth and cash flow from debt financing.
  6. Investing

    Evaluating A Statement Of Cash Flows

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

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  8. 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?
  9. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
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. What are examples of key operating activities in a company?

    Discover the things that make up a company's operating activities, including examples of some the key operating activities ... Read Answer >>
  3. Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for a firm's operating cash flow, and the overall significance of operational ... Read Answer >>
  4. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center