What Are Operating Activities and its Some Examples?

What Are The Operating Activities?

Operating activities are the functions of a business directly associated with offering its goods and/or services to the market. These are the company’s core business activities, such as manufacturing, distributing, marketing, and selling the product or service. Operating activities typically provide the majority of a company’s cash flow and largely determine whether it is profitable. Cash receipts from goods sold, payments to employees, taxes, and payments to suppliers are also some operating activities and these activities can be found in a company’s financial statements, especially the income statement and cash flow statement.

Operational activities are distinguished from investing or financing activities, which are activities of a company that are not directly related to the provision of goods and services. Instead, financing and investing activities help a company operate better in the long run. This means that the company’s issuance of shares or bonds is not considered an operating activity.

Fundamentals of Operating Activities

Operating activities are the day-to-day activities of a company that involve manufacturing and selling its products, generating revenue, as well as general administrative activities and maintenance activities. The operating income shown in the company’s financial statements is the remaining operating profit after deducting operating expenses from operating income. A company’s statement of cash flows usually contains an operating activities section that shows cash inflows and outflows as a result of the company’s main operating activities.

In the event of ambiguity, operating activities can be easily identified by classification in the financial statements. Many companies report operating income, or income from operations, as a separate line item on the income statement. Operating income is calculated by subtracting cost of sales (COGS), research and development (R&D) expenses, selling and marketing expenses, general and administrative expenses, and depreciation and amortization expenses.

Operating income does not include interest income or expenses. For example, the activities of operating a clothing store might include the following:

Purchasing materials from suppliers and paying labor for the production of garments
Payment for transporting goods to the factory and clothing from factories to warehouses
Arranging transportation from warehouses to retail stores and mail order customers
Employee salaries for work in warehouses and retail stores
Pay managers to oversee operations
pay taxes
Payment of rent for warehouses and retail facilities

Other less common operating activities include fines or cash settlements from litigation, refunds, and collections from insurance claims.

KEY TAKEAWAYS

Operating activities are the day-to-day activities of a company that involve manufacturing and selling its products, generating revenue, as well as general administrative activities and maintenance activities.
The principal operating activities of the Company include manufacturing, sales, advertising and marketing activities.
Cash flow from operations is an important metric used by financial analysts and investors.
Operating activities may conflict with the Company’s investing and financing activities.

Operating Income

The main operating activities that generate revenue for a company are the production and sale of its products or services. Sales activities may involve selling the company’s own products or products supplied by other businesses, as in the case of retailers.

For example, a spa business, in addition to providing services such as massages, can generate additional income by selling health and beauty products.

Although interest income and dividends are part of the total operating cash flow, it is not considered a major operating activity because it is not part of the company’s core business activities.

Operating Expenses

Costs arising from principal operating activities include manufacturing costs as well as advertising and marketing costs for the company’s products or services. Manufacturing costs include all direct production costs that are included in the cost of goods sold (COGS).

Operating expenses related to advertising and marketing include expenses for advertising the company and its products or services using various media, whether traditional or through online platforms. Additionally, marketing expenses include things like appearing at trade shows and attending public events like charity fundraisers.

Operating Activities And Cash Flow Statement

Cash flows from operating activities are among the major subsections of the cash flow statement. It is separate from the Investment and Financial Activities Division. Investing activities refer to income or expenditure on long-term assets, such as equipment and utilities, while financing activities refer to the issuance of bonds, retirement bonds, sale of stocks, or there are cash inflows from activities such as dividends. .

To get an accurate picture of a company’s cash flows from operating activities, accountants add depreciation expense, reductions in losses on current assets and increases in current liabilities to net income, then add profits and increases in current assets and subtract decreases in current liabilities. Investors examine a company’s cash flow from operating activities separately from the other two components of cash flow to see where the company is actually getting its money.

Investors want to see positive cash flow because of positive income from operating activities, which are recurring, not because the company sells all of its assets, resulting in a one-time profit. A company’s balance sheet and income statement help paint a picture of its financial health.

Example of Cash Flow From Operating Activities

Let’s take the leading technology company Apple Inc. (AAPL) Cash flow breakdown The iPhone maker reported the following for the fiscal year ending September 2017:

Net income is $48.35 billion
Depreciation, reductions and amortization amounted to $10.16 billion
Deferred taxes and investment tax credits of $5.97 billion
Other funds $4.67 billion

Following the first formula, adding these numbers makes the value of the funds from operations $69.15 billion. The net change in working capital for the same period was (-5.55 billion). Adding this to the money from operations gives the cash flow from operating activities for Apple as ($69.15 – $5.55) = $63.6 billion.