Course 108: A Tour through the Cash-Flow Statement
Cash Flows from Operating Activities
In this course
1 Introduction
2 Cash Flows from Operating Activities
3 Cash Flows from Investing Activities
4 Cash Flows from Financing Activities

The "Cash Flows from Operation Activities" section tells you how much cash the company generated from its business, as opposed to more peripheral things such as investments.

Net Income. This figure is simply taken from the income statement. All the items below are added to or subtracted from net income to get net cash provided by operating activities.

Depreciation and Amortization. When a company buys an asset intended to last a long time, it amortizes (spreads out) the cost of that asset on its income statement. (See Stocks 106 for a more detailed discussion of the income statement.) This number is sometimes included on the income statement, and it is always included in the cash-flow statement. Since it's a noncash charge, it's added back to net income as one step in figuring operating cash flow.

Deferred Taxes. Deferred taxes arise because companies are allowed to calculate depreciation differently when figuring their taxes than they do when reporting their financial results to the Securities and Exchange Commission. The details can get rather complicated, but the important thing for our purposes is that deferred taxes is another noncash charge that is added back to net income in figuring cash flow.

Changes in Assets and Liabilities (Receivables, Inventories, Payables). When inventories or accounts receivable go up, the company's cash flow decreases, because these things represent money that's tied up in the business and not available for spending. Conversely, when inventories or receivables go down, cash flow increases.

Foreign-Currency Adjustments. U.S. companies that do a significant amount of business overseas will generally be paid in a variety of foreign currencies, all of which have to be translated into U.S. dollars. The foreign-currency adjustment is necessary to account for changes in exchange rates between the time the payment is made and the time of the financial statement.

One-Time Charges. Sometimes a company will take a one-time cash charge, such as a write-off related to an acquisition. Any such charges have to be added back into net income when figuring cash flow.

Net Cash Provided by Operating Activities. Also known as operating cash flow, this is the result of adding or subtracting the above items from net income. It doesn't replace net income, but can be used as a supplement to it. It is important to look at operating cash flow when examining companies with a lot of amortization and special charges each year, which make it hard to compare the company's performance from year to year.

Next: Cash Flows from Investing Activities >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.