Among the three different types of cash flow activities, cash flow from operating activities is the first part of an income statement. It presents the cash inflows and cash outflows of the business that arise from its operating activities. The cash flow from these activities includes the amount of money the business has received from its sales, as well as the expenses that the company has paid for various costs. The accounting (Also see An Overview of Accounting Procedures) records related to these business transactions are quite complicated and time-consuming to handle, particularly if your company has a large transaction volume. Thus, you may consider hiring an accounting firm in Johor Bahru to let the professionals help you out.
Cash flow from operating activities focuses on the inflows and outflows of cash arising from the primary business operations of the company. Hence business owners get to know the amount of cash their business has spent on the production and the cash the company has generated from the sales of its goods and services. By studying the operating activities section, one will be able to know the changes that have taken place in cash, depreciation, accounts payable, accounts receivables, inventories and so on.
Most financial analysts will focus on the cash flow from operating activities as this indicates the company’s ability to conduct the business operations successfully. For the business to remain solvent, business owners need to make sure that the company’s cash flow from operating activities remains positive. This means that they should ensure that operating activities that the business has carried out must generate positive cash flows.
The accountants may use two different methods to calculate the company’s cash flow, which is the direct method and the indirect method. If an accountant chooses to use the direct method, he needs to extract information regarding various cash receipts and payments from the company’s income statement. This includes the amounts that the company has paid to its suppliers and employees, as well as the cash that it has received from its customers. Then, the net of cash receipts and cash payment will be the company’s operating cash flow.
On the other hand, if the accountant prefers using the indirect method, he should take the company’s net income from its income statement. As most companies would prepare their financial statements by using the accrual basis, they will recognise their revenue (Also see How to Differentiate Revenue and Income?) when they have earned it, but not when they receive it. Thus, net income (Also see The Difference Between Net Income and Operating Income) will not be able to reflect the cash flow related to their operating activities. Therefore, the accountant should adjust the company’s earnings before taxes for the items that bring an impact on the net income (Also see Mistakes To Avoid When Filing Self-employed Income) of the company even though there is no cash receipts or payments for that transaction. Besides, by using the indirect method, the accountant needs to add back the cash flow from non-operating activities as the cash flow related to these activities will not influence the operating cash flow of the business.
In short, cash flow from operating activities plays a role as a crucial indicator of the company’s core operations. By studying this, the investors will be able to analyse the company’s operations so that they can determine whether the core business activities of the company are generating income for the business.