Definition
The cash flow statement reconciles net income to actual cash generated, categorized into three sections: operating (core business cash), investing (asset purchases/sales), and financing (debt and equity transactions). It is considered more reliable than the income statement because cash is harder to manipulate than accrual-based earnings. Divergence between earnings and cash flow warrants investigation.
lightbulb Example
Net income is $20M. Operating CF: add back $8M D&A, minus $5M working capital increase = $23M. Investing CF: -$15M CapEx. Financing CF: -$6M debt repayment, -$3M dividends = -$9M. Net cash change: -$1M.
verified_user Key Points
- Three sections: operating, investing, financing
- Cash harder to manipulate than accrual earnings
- Operating CF should exceed net income (ideally)
- Free cash flow = Operating CF minus CapEx