Certified Financial Management Specialist Practice Exam

Which of the following best defines cash flow from operations?

1. Total revenues

2. Net income adjusted for non-cash expenses

3. Cash generated from core business activities

4. Cash from investment activities

The correct answer is: Cash generated from core business activities

Cash flow from operations refers specifically to the cash generated by a company’s core business activities that are essential for running the business. This metric focuses on the operational performance of the business, demonstrating how much cash is generated through its principal operations, excluding cash flows from investing and financing activities. Understanding cash flow from operations is essential for assessing a company's financial viability and its ability to generate cash to meet its ongoing obligations, reinvest in the business, and provide returns to shareholders. It gives insight into the actual cash that a company generates, which is essential for evaluating its profitability and operational efficiency, separate from accounting earnings which can include non-cash items. In contrast, total revenues only reflect the amount earned before any expenses are deducted, so they do not provide insight into cash generation. Net income adjusted for non-cash expenses does consider profitability but encompasses a broader scope that includes impacts from investments, taxes, and financing decisions. Cash from investment activities relates to cash derived from buying and selling assets, which is not part of operational performance. Thus, cash generated from core business activities is the most accurate description of cash flow from operations.