Cash flow from operating activities involves cash generated by producing and delivering goods and providing services. Cash inflow includes receipts from customers for sales of goods and services (including collection of debtors). Cash outflow from operating activities include payments to suppliers for purchase of material and for services, payment to employees for services and payment to governments for taxes and duties. Then by comparing the inflow and outflow of cash we can determine the net value of cash flows. If the inflows are more than outflows then it is called cash generated from operating activities or if cash outflows are more than cash inflows then it is called cash lost in operating activities.
This cash flow is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividend, repay loans and make new investments without recourse to external sources of financing. Information about the specific component of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash inflows.
Examples of cash flows from operating activities are:
- Cash receipts from the sale of goods and rendering the services.
- Cash receipts from royalties, fees, commission and other revenue.
- Cash payment to suppliers of goods and services.
- Cash payment to and on behalf of employees.
- Cash receipts and cash payment of an insurance enterprise for premium and claims, annuities and other policy benefits.
- Cash payment and refund of income tax unless can be specifically identified with financing and investing activities.
- Cash receipts and payments relating to futures contract, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purpose.
Some transactions, such as the sale of an item of plant, may rise to a gain or loss that is included in the determination of the net profit or loss. However, the cash flow relating to such transactions are cash flows from investing activities.