Business Finance Online

Financial Cash Flow

In Finance decisions are based upon cash flows. The value of any asset, including the firm's stock, is based upon the cash flows that it is expected to generate. Moreover, a firm needs cash to acquire inventories, to acquire fixed assets, to pay wages, to pay dividends, to pay interest, etc.

Accounting income is not cash flow. This results from the conventions of Accrual Accounting. For example, noncash items such as depreciation are subtracted out in the calculation of net income. However, Accounting data is readily available and it is an important source of information for analysts, both inside and outside the firm.

Therefore, it is useful to extract cash flow information from Financial Statements. In this section, we shall illustrate how to identify the activities of the firm which are generating cash and which are consuming cash.

In this section, we shall see how to identify the cash flows generated by the firm's assets and how those cash flows are distributed to the firm's investors.


Tools and Problems


© 2002 - 2010 by Mark A. Lane, Ph.D.