What is cash from operating activities?

Definition of Cash from Operating Activities

Cash from operating activities usually refers to the first section of the statement of cash flows. Cash from operating activities focuses on the cash inflows and outflows from a company's main business activities of buying and selling merchandise, providing services, etc.

Basically, the cash from operating activities includes the company's cash flows except for those reported as cash flows from 1) investing activities (buying and selling property, plant and equipment, buying and selling long-term investments), and 2) financing activities (borrowing and repaying short-term and long-term debt, issuing and buying back shares of stock, paying dividends).

Examples of Reporting the Cash from Operating Activities

In the U.S., the cash from operating activities can be presented using either of the following methods:

  • Indirect method (almost always used)
  • Direct method (rarely used)

The indirect method begins with the company's net income based on the accrual method. That amount is then converted to the cash from operating activities by adding back depreciation expense and adjusting for the changes in accounts receivable, inventory, accounts payable, and most other current assets and current liabilities.

The direct method for reporting the cash from operating activities lists the following: the amounts collected from customers, the payments to suppliers, the payments for operating expenses, payments for interest expense, and payments for income taxes.

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