Operating activities definition
/What are Operating Activities?
Operating activities are those functions of a business that are required for it to provide goods and services to its customers. These constitute its core operating activities. Operating activities is also a classification of cash flows within the statement of cash flows. Items classified within this area are an entity’s primary revenue-producing activity, so cash flows are generally associated with revenues and expenses. Examples of cash inflows from operating activities are cash receipts from the sale of goods and services, and receipts from the collection of accounts receivable. Other cash inflows may come from lawsuit settlements or the settlement of insurance claims. In addition, a business might obtain cash receipts from supplier refunds or licensees.
Presentation of Operating Activities
The cash flows from operating activities are listed first in the statement of cash flows, followed by cash flows from investing activities and then cash flows from financing activities. The operating activities section tends to be the largest, with more line items than the other sections of the report. A sample presentation of the cash flows from operating activities appears in the following exhibit.
Examples of Operating Activities
There are many types of operating activities that may be listed in the statement of cash flows. Here are the most common classifications:
Cash receipts from customers. This is cash inflows generated from the sale of goods or services to customers. It represents the primary source of cash for most businesses and is crucial for sustaining day-to-day operations.
Cash payments to suppliers. This is cash paid to suppliers covers purchases of inventory, raw materials, or other goods necessary for production and sales. These payments are a significant cash outflow and directly impact working capital management.
Cash payments to employees. This is cash payments to employees include wages, salaries, bonuses, and payroll taxes. They are a regular and essential operating cash outflow necessary to maintain business operations and employee relations.
Cash payments for operating expenses. These payments include cash spent on rent, utilities, insurance, and administrative costs. They are necessary to support the infrastructure and basic functioning of the business.
Cash receipts of interest and dividends. This is interest and dividends received on investments are considered operating activities for companies that treat these items as part of their main revenue-generating activities. These inflows contribute additional cash resources to the business.
Cash payments for interest. This is cash payments for interest on loans and other borrowings are classified as operating activities under U.S. GAAP. They represent the cost of financing business activities and affect net cash from operations.
Cash payments for income taxes. This is cash payments for income taxes include payments to government authorities based on taxable income. These outflows are necessary to comply with legal obligations and are part of routine operating activities.
Other Types of Cash Flows
The other two classifications used in the statement of cash flows are investing activities and financing activities. The operating activities classification is the default classification, so if a cash flow does not belong in either of the other classifications, it is placed in operating activities.