Cash from operating activities is a section in the cash flow statement that some people find hard to understand. However, once you grasp the logic and know where to look to find your data, it’s actually fairly easy! I will help you understand what cash from operating activities (sometimes called cash flow from operations) means, and how to put it together.

The definition of cash flow from operating activities is: a section of a company's #cashflowstatement that explains the sources and uses of cash from ongoing regular business activities in a given period. Ongoing regular business activities means selling products and services to customers and receiving cash from these sales, purchasing goods and services from suppliers and paying for them, paying salaries to employees, stuff like that. Depending on the state of maturity and the level of success of the company or business unit you are looking at, cash flow from operations can either be a net cash inflow (a positive number) or a net cash outflow (a negative number).

⏱️TIMESTAMPS⏱️
00:00 Introduction
00:21 Cash from operating activities definition
01:07 Cash flow statement example
03:24 Cash flow direct method
03:51 Cash flow indirect method
04:34 Understanding net income
05:31 Adjustments from net income to CFOA
06:05 Adding back depreciation
07:36 Adding back share-based compensation expense
08:02 Change in accounts receivable balance
09:20 Change in accounts payable balance
10:24 Change in deferred revenue balance
10:48 Cash flow statement indirect method summary

Most companies report cash from operating activities using the indirect method. Here’s our $81 billion of CFOA for Apple (that we saw earlier) at the bottom of the page, which is the operational net cash generated. What does “indirect” refer to in the term “indirect method”? Indirect means we start off from the income statement metric called net income (also known as the “bottom line” of the income statement), which is a calculation of revenues earned minus expenses incurred, and then make adjustments to arrive at the cash from operating activities number. In our case study here, these adjustments add up to $23.3 billion.

If you want to be able to use the indirect method of reporting cash from operating activities, then you have to understand the starting point first. Net income for Apple in FY20 consisted of $275B of revenue earned, most but not all of which was collected in the same year, and $218B of expenses incurred, most but not all of which were paid in the same year. $275B in revenues minus $218B in expenses equals $57B of net income. This “most but not all” in both revenue and expenses is key: most revenue and most expenses affect profit as well as cash flow in the same year, but some revenue and some expenses affect cash flow in a different year than they affect profit!

Now that we understand the starting point of net income, what are the categories of adjustments we need to make? The first category, named here “adjustments to reconcile net income to cash generated by operating activities” consists of adjustments from the profit view of a company to the cash view of a company that come out of analyzing the income statement in more detail. The second category, named here “changes in operating assets and liabilities” consists of adjustments that come out of analyzing the balance sheet in more detail.

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through [ Ссылка ]

свернуть