## Operating Activities (AS 3)

Definition: Cash flows arising from the principal revenue-generating activities of the enterprise — i.e., activities that enter into the determination of net profit or loss.

### Cash Inflows from Operating Activities

Cash receipts from the sale of goods and rendering of services
Cash receipts from royalties, fees, commissions and other operating revenue
Cash receipts from income tax refunds relating to operating income

### Cash Outflows from Operating Activities

Cash payments to suppliers for goods and services
Cash payments to and on behalf of employees (salaries, wages)
Cash payments for income taxes relating to operating income (default: treat as Operating unless clearly identifiable with investing/financing)
Operating overhead: printing costs, admin expenses, etc.

### Examples by Entity Type

Entity	Operating Inflows	Operating Outflows
School/College	Fees received	Employee salary, printing cost, admin
Publisher	Book sale revenue	Author royalties, printing
Manufacturer	Product sales	Raw material payments, wages

### Income Tax — Default Rule

> If a question mentions income tax without specifying which activity it relates to, classify the entire tax payment as Operating cash flow.

Worked example

### Example 1

School: Cash fees collected ₹50L (Inflow – Operating). Salaries paid to teachers ₹20L (Outflow – Operating). Printing of study material ₹2L (Outflow – Operating). Advance income tax paid ₹5L — no specific identification given → Outflow – Operating.

### Example 2

Manufacturer: Received ₹80L from customers for goods sold (Inflow – Operating). Paid ₹30L to raw material suppliers (Outflow – Operating). Paid ₹10L workers' wages (Outflow – Operating). Net Operating CF = ₹80L – ₹30L – ₹10L = +₹40L.

⚠️ Common exam mistakes

Classifying advance income tax or TDS as Investing or Financing by default — unless the question explicitly links tax to a specific non-operating income, treat it as Operating.
Omitting indirect operating items like cash from commission or royalty receipts — these are Operating, not Investing.
Confusing 'receipts from debtors' (Operating) with 'loan repayments received' (Investing).

Bare-Act text Para 6 – Definitions · AS 3 – Cash Flow Statements · click to expand

Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

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AS 3 – Operating Activities: Definition and Examples

Worked example

⚠️ Common exam mistakes