Question

What are the different 'Cash inflows' and 'Cash outflows' of operating activity?

Answer 1

The following are the operating activities that are classified on the basis of cash inflows and outflows.

1) Cash inflows of operating activity

• Receipts from the sale of goods or services: Sale of goods and services is the main or principal revenue generating activity of the business. When goods are sold cash is coming in the business, thus, receipt from the sale of goods and services is regarded as a cash inflow from the operating activity.
• Receipts from the sale of debt or equity instruments in a trading portfolio: For a financing enterprise sale of debt or equity instruments is regarded as the main activity. Thus, the amount received from the sale of debt or equity instruments in a trading portfolio is cash inflow from operating activity of the business.
• Interest received on loans: Interest received on loans is cash inflow from operating activity for financing companies. It is the main or principal revenue generating activity for these enterprises.

2. Cash outflows of operating activity

• Payments to suppliers for goods and services: In the case of non-financing companies payment made for the goods and services is a cash outflow from operating activity.
• Payments to employees or on behalf of employees: Payment made to employees is an expense for the business which is deducted while calculating profit or loss of the business. Thus, it is an indirect expense which is related to the operating activity of the business. Hence, payment made to employees is regarded as cash outflow of operating activity.
• Interest payments: Interest payments made by a financing company is regarded as cash outflow of operating activity.