What Is Cash Flow From Opera𓃲ting Activities (CFO)?

Cash flow from operating activities (CFO) indicates the amount of money a company generates from its ongoing, primary business activities, such as selling products or providing services. It is the first section depicted on a company's 澳洲幸运5官方开奖结果体彩网:cash flow statement.

Cash flow from operating activities does not include long-term 澳洲幸运5官方开奖结果体彩网:capital expenditures or investment revenue and expense. CFO focuses only on t🤡he core business, and 🦋;is also known as operating cash flow (OCF) or net cash from operating activities.

Und🌄erstanding Cash Flow From O🌼perating Activities (CFO)

澳洲幸运5官方开奖结果体彩网:Cash flow forms one of the most important parts of business operations and accounts for the total amount of money being transferred into and out of a business. Since it affects the company's 澳洲幸运5官方开奖结果体彩网:liquidity, it has significance for multiple reasons. It allows business owners and operators to check where the money is coming from and going to, it helps them take steps to generate and maintain sufficient cash n♋ecessary for operational efficienc🐈y and other necessary needs, and it helps in making key and efficient financing decisions.

The details about the cash flow of a company are available in its cash flow statement, which is part of a company's quarterly and 澳洲幸运5官方开奖结果体彩网:annual reports. The cash flow from operating activities depicts the cash-generating abilities of a company's core business activities. It typically includes 澳洲幸运5官方开奖结果体彩网:net income from the 澳洲幸运5官方开奖结果体彩网:income statement and adjustments to modify net income from an 澳洲幸运5官方开奖结果体彩网:accrual accounting basis to a 澳洲幸运5官方开奖结果体彩网:cash accounting basis.

Cash availability allows a business the option to expand, build and launch new products, buy back shares to affirm their strong financial position, pay out 澳洲幸运5官方开奖结果体彩网:dividends to rewarဣd and bolster shareholder confidence, or reduce debt to save on interest payments. Investors attempt to look for companies whose share prices are lower and whose cash flow from operations is showing an upward trend over recent quarters. The disparity indicates that the company has increasing levels of cash flow, which, if better utilized, can lead to higher share prices in the near future.

Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving. It provides as an additional measure/indicator of the profitability potential of a company, in addition to the traditional ones like net income or EBITDA.

Cash Flow Statement

The cash flow statement is one of the three main 澳洲幸运5官方开奖结果体彩网:financial statements required in standard financial reporting, in addition to the income statement and 澳洲幸运5官方开奖结果体彩网:balance sheet. The cash flow statement is divided into three sections: cash flow from operating activities, 澳洲幸运5官方开奖结果体彩网:cash flow from investing a𒈔ctivities, and 澳洲幸运5官方开奖结果体彩网:🐈cash flow from financing activities. Collectively, all three sections provide a picture of where the company's⛄ cash comes from, how it is spent, and the net change in cash resulting from the firm's activities during a given accountin💝g period.

The cash flow from investing section shows the cash used to purchase fixed and long-term assets, such as 澳洲幸运5官方开奖结果体彩网:plant, property,💦 💛and equipment (PPE), as well as any proceeds from the sale of these assets. The cash flow from the financing section shows the source of a company's financing and capital, as well as its servicing and payments on the loans. For example, proceeds from the issuance of stocks and bonds, dividend payments, and interest payments wil🌠l ꦗbe included under financing activities.

Investors examine a company’s cash flow from operating activities, within the cash flow statement, to determine where a company is getting its money from. In contrast to investing and financing activities, which may be one-time or sporadic revenue, the operat꧂ing activities are core to the business and are recurring in nature.

Types of Cash Flow From Operating Activities

The cash flow 🍌from operating activities section can be displayed on the cash flow stateme🏅nt in one of two ways.

Indirect Method

The first option is the 澳洲幸运5官方开奖结果体彩网:indirect method, where the company begins with net income on an accrual accounting basis and works backwards to achieve a cash basis figure for the period. Under the accrual method of accounting, revenue is recognized when earned, not necessarily when cash is received.

For example, if a customer buys a $500 widget on credit, the sale has been made, but the cash has not yet been received. The revenue♋ is still recognized by the company in the month of the sale, and it shows up i🌌n net income on its income statement.

Therefore, net income was overstated by this amount on a cash basis. The offset to the $500 of revenue would appear in the accounts receivable line item on the balance sheet. On the cash flow statement, there would need to be a reduction from net income in the amount of the $500 increase to accounts receivable due to this sale. It would be displayed on the cash flow statement as "Increase in Accounts Receivable -$500."

Direct Method

The second option is the 澳洲幸运5官方开奖结果体彩网:direct method, in which a company records all transactions on a cash basis and displays the information on the cash flow statement using actual cash inflows and outflows during the 澳洲幸运5官方开奖结果体彩网:accounting period.

Examples of the d🎉irect method of 🐻cash flows from operating activities include:

• Salaries paid out to employees
• Cash paid to vendors and suppliers
• Cash collected from customers
• Interest income and dividends received
• Income tax paid and interest paid

Indirect Method vs. Direct Method

M♌any accountants prefer the indirect method because it is s♍imple to prepare the cash flow statement using information from the income statement and balance sheet. Most companies use the accrual method of accounting, so the income statement and balance sheet will have figures consistent with this method.

The 澳🐻洲幸运5官方开奖结果体彩网:Financial Accounting Standards Board (FASB) recommends that companies use the direct method as it offers a clearer picture of cash flows in and out of a business. However, as an added complexity of the direct method, the FASB also requires a business using the direct method to disclose the reconciliation of 澳洲幸运5官方开奖结果体彩网:net income to the cash flow from operating activities that would have been reported if the indirect method had been used to prepare the statement.

The 澳洲幸运5官方开奖结果体彩网:reconciliation report is used to check the accuracy of the cash from operating activities, and it is similar to the indirect method. The reconciliation report begins by listing the net income and adjusting it for noncash transactions and changes in the balance sheet accounts. This🐎 added task makes the direct method unpo💝pular among companies.

Indirect Method Formulas for Calculating Cash 🐠Flow From Operating Activities

Different reporting standards are followed by companies as well as the different reporting entities which may lead to different calculations unde🐟r the indirect method. Depending upon the available figures, the CFO value can be calculated by one of the following formulas, as both yield the same result:

Cash Flow from Operating Activities = Funds from Operations + Changes in 澳洲幸运5官方开奖结果体彩网:Working Capital

where, Funds from Operations = (Net Income + Depreciation, Depletion, & Amortization + Deferred Taxes & Investment Tax Credit + Other Funds)

This﷽ format is used for reporting Cash Flow details by finance portals like MarketWatch.

Or

Cash Flow from Operating Activities = Net Income + Depreciation, Depletion, & Amortization + Adjustments To Net Income + Changes In Accounts Receivables + Changes In Liabilities + Changes In Inventories + Changes In Other Operating Activities

T✃his format is used for r🦩eporting Cash Flow details by finance portals like Yahoo! Finance.

All the above-mentioned figures included above🎃 are available as standard line items in the cash flow statements of various companies.

The net income figure coღmes from the income statement. Since it is prepared on an accrual basis, the noncash expenses recorded on the income statement, such as depreciation and amortization, are added back to the net income. In addition, any changes in balance sheet accounts are also added to or subtracted from the net income to account for the o🥀verall cash flow.

Inventories, tax assets, 澳洲幸运5官方开奖结果体彩网:accounts receivable, and 澳洲幸运5官方开奖结果体彩网:accrued revenue are common items of assets for which a change in value will be reflected in cash flow from operating activities. 澳洲幸运5官方开奖结果体彩网:Accounts payable, tax liabilities, 澳洲幸运5官方开奖结果体彩网:deferred revenue, and 澳洲幸运5官方开奖结果体彩网:accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow fr🐲om operations.

From one reporting period to the next, any positive change in assets is backe🎃d out of the net income figure for cash flow calculations, while a positive change in liabilities is added back into net income for cash flow calculations. Essentially, an increase in an asset account, such as accounts receivable, means that revenue has been recorded that has not actually been received in cash. On the other hand, an increase in a liability account, such as accounts payable, means that an expense has been recorded for which cash has not yet been paid.

Example of Cash Flow From Operating Activities

Let’s look at the cash flow details of the leading technology company, Apple Inc. (AAPL), for the 澳洲幸运5官方开奖结果体彩网:fiscal year ended September 2018. The iPhone maker had a net income of $59.53 billion, Depreciation, Depletion, & Amortization of $10.9 billion, Deferred Taxes & Investment Tax Credit of -$32.59 billion, and Other Funds of $4.9 billion.

Following the first formula, the summation of these numbers brings the value for Fund from Operations as $42.74 billion. The net Change in Working Capital for the same period was $34.69 billion. Adding it to Fund from Operations gives the Cash Flow from Operating Activities for Apple as $77.43 billion.

For the second method, summing up the available values from Yahoo! Finance portal that reports Apple's FY 2018 Net Income $59.531 billion, Depreciation $10.903 billion, Adjustments To Net Income -$27.694 billion, Changes In Accounts Receivables -$5.322 billion, Changes In Liabilities 9.131 billion, Changes In Inventories $.828 billion, and Changes In Other Operating Activities $30.057 billion gives the net CFO value as $77.434 billion.

Both methods yield the same value.

Special Considerations

One must note that working capital is an important component of𒉰 cash flow from operations, and companies can manipulate working capital by delaying the bill payments to suppliers, accelerating the collection of bills from customers, and delaying the purchase of inventory. All these measures allowཧ a company to retain cash. Companies also have the liberty to set their own capitalization thresholds, which allow them to set the dollar amount at which a purchase qualifies as a capital expenditure.

Investors should be aware of these considerations when comparing the cash flow of different companies. Due to such flexibility, where managers are able to manipulate these figures to a certain extent, the cash flow from operations is more commonly used for reviewing a single company's performance over two reporting periods, rather than comparing one company to another, even if the two belong in the same industry.