Understanding Operating Activities: Core Business Functions and Financial Impact

What Are Operating Activities?

Operating activities refer to the day-to-day functions of a business that are directly involved in producing and selling its products or services, generating revenues, and conducting general administrative and mntenance tasks. These core operations largely determine whether a company is profitable. Common operating activities include cash inflows from goods sold, payments made to employees, taxes, and purchases from suppliers. These activities can be found within financial statements on the income statement and in the cash flow statement.

Operating activities are distinct from investing or financing activities which focus on functions not directly tied to providing goods and services. Instead, these activities help ensure a company's long-term stability and operations. For example, issuing stocks or bonds is not categorized under operating activities.

Some key examples of operating activities include:

1. Manufacturing: This encompasses processes such as production, quality control, and inventory management.

2. Sales and Marketing: Activities like advertising, salesforce management, and customer service are part of this category.

3. Resources: Paying salaries, managing benefits, and conducting performance evaluations fall under operating activities.

4. Finance: This involves cash flow management, budgeting, accounting, financial reporting, and financial planning.

Let’s take the example of Apple Inc., a leading technology company:

2017 Fiscal Year Financial Overview:

• Net Income: $48.35 billion

• Depreciation, depletion, and amortization expenses: $10.16 billion

• Deferred taxes and investment tax credit: $5.97 billion

• Other funds: $4.67 billion

Applying the formula:

Funds from Operations = Net Income + Depreciation, Depletion Amortization - Deferred Taxes Investment Tax Credit + Other Funds

Totaling these figures:

$48.35Bn + $10.16Bn - $5.97Bn + $4.67Bn = $69.15Bn

Then adjusting for net change in working capital $-5.55Bn:

Cash Flow from Operating Activities = Funds from Operations + Net Change in Working Capital

= $69.15 - $5.55Bn

= $63.6 billion

This showcases how operating activities contribute to a company’s financial health through consistent income generation.

Compete Risk Free with $100,000 in Virtual Cash

Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today

ARTICLE SOURCES

1. Net income of $48.35 billionDepreciation, depletion, and amortization of $10.16 billionDeferred taxes and investment tax credit of $5.97 billionOther funds of $4.67 billion** - Apple Inc. Financial Report for the fiscal year ed September 2017.

Partner Links

About Us

Terms of Service

Dictionary

Editorial Policy

Advertise

News

Privacy Policy

Contact Us

Careers
This article is reproduced from: https://www.investopedia.com/terms/o/operating-activities.asp

Please indicate when reprinting from: https://www.ci56.com/Financing_investment/Operating_Activities_Overview-2.html