A company's ability to consistently generate positive cash flows from its daily business operations is highly valued by investors. Operating cash flow can uncover a company's true profitability. It’s one of the purest measures of cash sources and uses, and is the gateway between other reported financial statements.
The cash flow statement
Operating cash flow (or cash flow from operations - CFO) can be found in the cash flow statement, which reports the changes in cash versus its static counterparts: the income statement, balance sheet and shareholders’ equity statement. Specifically, the cash flow statement reports where cash is used and generated over specific time periods and ties the static statements together. By taking net income on the income statement and making adjustments to reflect changes in the working capital accounts on the balance sheet (receivables, payables, inventories), the operating cash flow section shows how cash was generated during the period. It is this translation process from accrual accounting to cash accounting that makes the operating cash flow statement so important.
The sources and uses of cash are broken down into categories of operating, investing, financing and, in some cases, supplemental activities.
1. Operating activities: records a company's operating cash movement, the net of which is where operating cash flow (OCF) is derived.
2. Investing activities: records changes in cash from the purchase or sale of property, plants, equipment or generally long-term investments.
3. Financing activities: reports cash level changes from the purchase of a company’s own stock orissue of bonds, and payments of interest and dividends to shareholders.
4. Supplemental information: basically everything that does not relate to the major categories.
Read more from Globe and Mail