Definition of Cash Flows from Operating
Activities
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Definition of Cash Flows from Operating Activities |
Cash flows from operating activities are defined as the cash amounts related to a company's core business operations. These cash flows include cash receipts from the sale of goods or services and cash payments made to suppliers for the purchase of raw materials or merchandise.
They also include cash payments to employees for wages, salaries, and bonuses, as well as cash payments for taxes due, in addition to cash payments for other operating costs such as utilities, rent, marketing expenses, and more.
In summary, cash flows from operating activities encompass all cash receipts and payments from non-investing and non-financing activities. The net cash flow from these activities reflects the company’s operational performance: if total receipts or revenues exceed total payments, the company has achieved a positive cash flow from operating activities, and vice versa.
What is the term for the total cash value of all resources coming into the company from operating activities?
The term “total cash value of all resources coming into the company from operating activities” is commonly known as Net Cash Flow from Operating Activities. This term represents the net cash amounts received or paid by the company in its operating activities over a specific accounting period and serves as an indicator of the company’s ability to generate cash from its core operations.
How do changes in operating assets and liabilities affect current-year operating cash flow?
Operating cash flow is influenced by changes in operating assets or liabilities, as follows:
Changes in Operating Assets (Inventory and Accounts Receivable):
An increase in operating assets, such as inventory or raw materials, means the company spent cash to purchase these assets, which decreases cash flow from operating activities. Conversely, a decrease in operating assets indicates that the company has sold its goods, thereby increasing cash flow from operating activities during the accounting period.
Changes in Operating Liabilities (Accounts Payable):
An increase in operating liabilities indicates that the company has received credit from suppliers and postponed payment. In this case, cash flow from operations increases. Conversely, a decrease in operating liabilities indicates that the company has paid its suppliers, reducing cash flow from operations.
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In summary:
An increase in operating assets decreases cash flow from operations, while an increase in operating liabilities increases cash flow from operations. The opposite occurs when these balances decrease.
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