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  Cash Flows from Operating Activities

Introduction to Cash Flows from Operating Activities

This is the net outflow or inflow from trading operations, after tax payments (or receipts) and cash paid to meet financing costs. It is equivalent to the sum of cash receipts from trade receivables and cash receipts from cash sales, in which relevant, less the sums paid to buy inventories, to pay wages, to pay rent, and so on. From this are also deducted payments for interest on the business's borrowings, corporation tax and dividends paid.

Note: it is the amounts of cash received and paid throughout the period that feature in the statement of cash flows, not the revenue and expenses for that period. Certainly, it is the income statement which deals with the revenue and expenses. Likewise the tax and dividend payments that come out in the statement of cash flows are those made in the period of the statement. Companies generally pay tax on their profits in 4 equal instalments. Two of these are throughout the year concerned and the other two are throughout the following year. The result, by the end of each accounting year, half of the tax will have been paid and the remainder will be a current liability at the end of the year, to be paid off throughout the following year. During any specific year, so, the tax payment would generally equal 50% of the previous tax charge of year and 50 % of that of the current year.

The net figure for this section is proposed to point out the net cash flows for the period that arose from normal everyday trading activities after taking account of the tax that has to be paid on them and the cost of servicing the finance (equity and borrowings) required to support them.

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