Corporate Finance For Dummies
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In essence, operating activities cash flows include any increases or decreases in cash that result from the primary functions of the company. Here are some of the most common changes in cash you may see in the operating activities portion of the statement of cash flows:

  • Cash received from customers: When a customer pays in cash (including via an electronic transfer made between accounts), you count that transaction as a cash increase in the operating activities cash flows. The ultimate purpose of any company that makes something is to eventually trade that something for money, and when that trade happens as a cash transaction, it qualifies as a cash flow.

  • Cash paid to suppliers and employees: To make the products being sold to customers, companies have to pay their employees, as well as any other companies that provide supplies. The cash paid to employees and suppliers counts as cash flow, but it doesn’t include only cash paid for direct labor. It includes cash paid to everyone involved in keeping the company operating.

  • Interest received: Savings accounts, some types of short-term money-market investments, and a number of other types of accounts generate interest. This interest always comes in the form of cash, so the interest a company earns on these accounts and investments contributes to a positive net cash flow from operations.

    Note: This category doesn’t include interest generated from investments because investing isn’t part of the company’s primary operations (unless the company is a bank or some other financial type of company). Holding cash in an account, on the other hand, is a primary necessity of business operations, so the interest generated in that regard counts as an operational cash flow.

  • Interest paid: A number of transactions related to operations influence a company’s cash balance. These may include interest financing for the purchase of equipment and inventory or some other short-term loan or repayment plan. As long as the loan or repayment plan is directly related to operations instead of financing growth and expansion, it contributes to the value of cash that must be subtracted from operating cash flow.

  • Income taxes paid: Income taxes are considered a part of operations because they’re the taxes that result from selling goods at a profit. Companies have to subtract this number from the cash flows from operations.

The total amount of cash gained or lost by operations is the net cash provided by operations. To calculate it, add up the positive values from the preceding list of cash flows from operations and subtract the negative values. This number usually appears at the end of the operating activities portion of the statement of cash flows.

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Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

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