Concept Of Cash Flow From Operaring Activities And Its Determination And Specimen

Operating activities refer to day to day revenue generating activities of a firm. These activities are considered to be the major sources of internally generated cash. Cash inflows from operating activities include the cash from sale and collection from debtors. Cash outflows for operating activities include cash purchase, payment to suppliers, payment for other operating expenses, payment for interest and taxes. Cash flow from operating activities could be determined by using two methods.

1. Cash flow from operating activities under direct method
Under direct method, only those items from income statement are selected that result into actual flow of cash. So non cash expenses such as depreciation and amortized amount appeared in income statement are ignored. The changes in some components of current assets and current liabilities except cash balance are also incorporated that result into cash inflows and outflows. This method classifies cash flows from operating activities into five categories.
* Cash sales and collection from debtors
* Cash purchase and payment to suppliers
* Payment to employees and other operating expenses
* Payment for interest and taxes
* Cash from extra-ordinary activities

Alternatively, however, marketable securities and short-term investment may also be categorized as cash flows linked with investing activities instead of cash flows from operating activities .Unlike that bank overdraft and notes payable may be treated as cash flows from financing activities. Such options are available since those are non-regular activities of every firms.

The following specimen shows the calculation of cash flow from operating activities under direct method.
Cash Flows From Operating Activities
For The Year Ended ................

Particulars..........................................................................................Amount
A. Cash sales and collection from debtors.......................................XXXX
B. Cash purchase and payment to suppliers...................................XXXX
C. Payment to employees and other expenses...............................XXXX
D. Payment for interest and taxes....................................................XXXX
E. Cash flows from extra-ordinary activities...................................XXXX
Cash flows from operating activities(A+B+C+D+E)........................XXXX

2. Cash flows from operating activities under indirect method
Indirect method to determine cash flow from operating activities is used if net income is available instead of sales revenue in the income statement information.Under indirect method first the funds from operation is ascertained by adjusting the net income by non-cash expenses included in the income statement. The funds from operation so ascertained is again adjusted by the changes in current assets (except cash) and the changes in current liabilities to determine the cash flows from operating activities.
To apply this method, all the amount of non-operating and non-cash expenses are added to the net income and then the amount of non-operating incomes are deducted. The resulting figure known as funds from operation. The changes in current assets and changes in current liabilities are adjusted to funds from operations so that the resulting figure is known as cash from operating activities. The specimen showing the determination of cash flows from operating activities under indirect method is as follows.

Cash Flows From Operating activities
For The Year Ended ..............
Particulars.......................................................................................................Amount
Net Income......................................................................................................XXXX
Add: Non-operating and non-cash expenses..............................................XXXX
Less: Non-operating incomes.......................................................................(XXXX)
Add: Decrease in current assets....................................................................XXXX
Add: Increase in current liabilities.................................................................XXXX
Less: Increase in current assets.....................................................................(XXXX)
Less: Decrease in current liabilities...............................................................(XXXX)
Total= Cash flows from operating activities ................................................XXXX