CFO
NetCashProvidedByUsedInOperatingActivitiesNetCashProvidedByUsedInOperatingActivitiesContinuingOperationsCash from operating activities, better known as operating cash flow, is the net cash a company generated from, or used in, its core business during a period, after paying for things like inventory, wages, rent, interest, and taxes, and before any spending on long-term investments or any financing transactions. It is the first of the three sections of the cash flow statement.
A positive figure means the day-to-day business brought in more cash than it consumed. It is often called operating cash flow, or CFO.
ASC 230 defines operating activities as everything that is not an investing or a financing activity, which in practice means the cash effects of the transactions that determine net income. Companies usually present the section with the indirect method: net income, plus noncash items such as depreciation and stock-based compensation, plus or minus changes in working capital. In XBRL the total is tagged NetCashProvidedByUsedInOperatingActivities, which includes any discontinued operations; companies that break those out also report NetCashProvidedByUsedInOperatingActivitiesContinuingOperations. Regulation S-X Rule 3-02 requires audited cash flow statements in annual reports for each of the three most recent fiscal years (smaller reporting companies, under Article 8, provide two).
Some classification choices under US GAAP differ from what intuition suggests. Interest paid, interest received, and dividends received are all operating cash flows, while dividends paid are financing. Income taxes are operating, even when they relate to a gain on an asset sale. Under IFRS, companies have more choice about where interest and dividends go, which affects comparisons with non-US filers.
Operating cash flow is widely viewed as harder to manipulate than earnings, but it is not immune. Stretching payables, selling receivables, and cutting inventory can lift it for a period, and reclassifying outflows into investing activities, for example by capitalizing costs, raises it permanently. Analysts compare it with net income over several years and subtract capital expenditures to get free cash flow.
A: Net income is an accrual measure that records revenue and expenses when earned or incurred. Operating cash flow counts only cash actually received and paid, so it adds back noncash charges and adjusts for working capital changes.
A: Yes. A fast-growing company can tie up so much cash in receivables and inventory that operating cash flow turns negative even while it reports a profit.
A: Under US GAAP, yes. Interest paid is an operating outflow, even though the debt that created it is a financing activity.
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