Getting Started: The Statement of Cash Flows

Cash is the lifeblood of most companies, and many a company has crumbled from a lack of it. Why is it then that the statement of cash flows is probably the least understood of the big three financial statements ("Getting Started: Fundamental Analysis")? It's time to get in the know about cash flow.

What Is Cash Flow?

Simply put, cash flow is the movement of cash into and out of a company. This is significant, because cash coming into a company during, for example, a given year isn't necessarily the same thing as revenue . The statement of cash flows eliminates this difference, taking us back to the actual movement of cash.

This difference is caused by accrual-basis accounting (in comparison, see cash-basis accounting ). Under accrual accounting, revenue and expenses are recognized when the work has been performed -- not when the cash is paid or received (for more on revenues and expenses, see "Getting Started: The Income Statement"). Because of this, it's not uncommon for companies to book revenue long before the bank ever sees a single cent.

Classifying Cash Flows

The statement of cash flows divides these cash transactions into three different sections that tell investors what the transaction (known as an activity) was related to: operating, investing and financing.

Each of these sections can tell you a story about how the company is doing, both from a cash standpoint and in terms of its overall health.