Operating Activities

Operating Activities Definition

Operating activities generates the majority of the cash flows for the company as it is directly linked to the core business activities of the company like sales, distribution, production and so on, these activities also determine the profitability of the company and items categorized under this head are the primary revenue units of the company.

Explanation

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For eg:
Source: Operating Activities (wallstreetmojo.com)

What is Included in Operating Activities?

It includes two sections Operating RevenueOperating RevenueOperating revenue is defined as revenue earned by an individual, corporation, or organization from the core activities that they undertake on a regular basis. There are several methods to earn revenue, but operational revenue is earned by the core business activities that the organization undertakes in its daily operations.read more and Operating Expenses, through which we will get to operating income. Let us understand these two heads with the activities categorized under each of them;

#1 – Operating Expenses (Cash outflow)

  • Employee Salary Payments
  • Interest expense to the creditors
  • Interest on Loan and Dividends
  • Taxes
  • Lawsuit fine or fees for legal settlements
  • Advertising Expenses

#2 – Operating Income (Cash Inflow)

These are only some examples of the operating costs and revenue listed above, where after deducting the operating expense from the operating income, we can get to the Net Operating Revenue.

Example of Operating Activities

Let us see an example to understand the concept in an illustrative manner; below is the data available from the financial statements of Tesla. Let us see what kind of operating activities a company like Tesla reports.

Solution

Step 1: Let us calculate Total funds from operation i.e Net Income + Depreciation, Depletion & amortization + Other funds which comes to -1063 + 1901 + 1201 = 2039

Operating Activities Example

Step 2: Now we calculate changes in working capital i.e. Receivables + Inventories + Accounts PayableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more + Other assets/liabilities which comes to (-497) + (-1238) + 1723 + 70 = 58

Operating Activities Example 1

Step 3: And finally, calculate the Net Operating Cashflow we have add Total funds from operations + Networking capital = 2039 + 58 = 2097

Operating Activities Example 2

So, 2097 is the Net Operating cash flow for Tesla for that period.

Why are Operating Activities Important?

Conclusion

Operating activities are the core activities of any company like Sales, administration, marketing and some other depending on the company’s operations, this activity and the operating income assists us to analyze any company from the investment or functional perspective.

Recommended Articles

This has been a guide to Operating Activities and its definition. Here we discuss why operating activities are important along with its list and an example. You may learn more about financing from the following articles-

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