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.



