Which statement best defines cash flow from operations (CFO)?

• A. The cash generated by financing activities
• B. The cash retained from investing activities
• C. The cash generated by operating activities
• D. The amount of cash retained by the company as a result of its operating activities

Answer: (D)

Cash flow from operations shows the cash produced by a company’s day-to-day business activities. It captures cash inflows from customers and cash outflows for the costs of running the business—suppliers, operating expenses, taxes, wages, and other operating payments. CFO can be obtained directly by summing operating cash receipts and payments, or indirectly by adjusting net income for non-cash items and changes in working capital. This figure reflects how well the core business generates cash, independent of financing or investing activities.

Among the options, the phrase that defines CFO is the cash generated by operating activities. The idea of cash generated by financing activities describes a different part of the statement, not CFO. The notion of cash retained from investing activities doesn’t fit CFO, since investing activities involve buying and selling long-term assets. Finally, describing CFO as the amount of cash retained from operating activities suggests a leftover amount, rather than the cash generated from operations itself.