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.