The Statement of Cash Flow: Operating Activities

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The Statement of Cash Flow: Operating Activities

McDonald’s makes hamburgers. Ford makes automobiles. Poof Products makes slinky toys. Operating activities refer to the making and selling of a firm’s goods or services. This section of the statement of cash flow encompasses all cash inflows and outflows related to the production and sales of a firm’s goods or services.

To calculate a firm’s cash flow from its operating activities, you start with the net income and make adjustments. Net income includes non-cash revenues and expenses such as depreciation and sales made on credit. Depreciation is a major expense that reduces a firm’s net income. However, cash is not paid out for depreciation. Therefore, depreciation must be added back to net income on the statement of cash flow.

When adjustments are needed

There are a number of adjustments that must also be made for certain assets and liabilities that you will find on the balance sheet. These adjustments include any changes on the balance sheet to accounts receivable, inventory, and accounts payable. After you make all of these adjustments to net income, you will have calculated the net cash provided (or used) by operating activities.