Definition: Operating activities consist of principle activities that a company performs to earn income. In other words, these are the primary business operations that a company performs to earn revenue. This is what the company is in business to do.
What Does Operating Activities Mean?
These cash inflows and outflows from operating activities are reported on two different financial statements. First, they show up on the income statement and are used to compute net income. Second, they are reported on the statement of cash flows. This statement shows how cash from three main sources (operating activities, investing activities, and financing activities) increased or decreased during the period. Let’s look at an example.
Take Best Buy for instance. Best Buy purchases electronics and appliances from manufacturers and sells them to customers. So any activity that is involved in Best Buy purchasing inventory or selling inventory to customers is considered an operating activity. This can even include administrative expenses. As long as the activity is related to selling goods to customers, it is considered an operating activity.
Best Buy also has activities that are not directly related to selling products to customers like selling fixed assets, getting loans from banks, or paying dividends to shareholders. None of these activities are considered operating activities because they can’t be related back to Best Buy’s principle business activity: selling products to customers. These activities would either be considered investing or financing activities. Sometimes these three categories can get confusing.
Just remember that principle activities include any cash inflows or outflows that relate to the primary business activity or the activity that business performs to earn a profit. Every other activity is not considered an operating activity.