What is the Cash Flow?
The discussion of cash flow will be restricted to the cash flows of companies. Most of the corporate accounting is done on an accrual basis, rather than a cash basis. However, by regulation, each company reporting to the Security & Exchange Commission (SEC) must include in their reports a Cash Flow Statement. This statement shows the amounts of cash generated and used by the company for various purposes.
The Statement of Cash Flows
The Cash Flow Statement has three sections, although sometimes there is a “Supplemental Information” section at the bottom. The three sections show details about cash generated and used within three categories of activities. These are (1) Operating Activities; (2) Investing Activities; and (3) Financing Activities.
The section on Operating Activities first reports the Net Income, and then converts it from the accrual basis to the cash basis. The section on Investing Activities reports any changes to long-term asset accounts, such as expenditures on buildings and equipment. The section on Financing Activities reports changes to long-term liability accounts, such as long-term debt, and changes to stockholder’s equity accounts, such as retained earnings.
At the end of the Statement of Cash Flows, these three sections are summed up to give either an increase or decrease in cash for that time period.
Dividend Growth Investing is usually interested in the total cash flow reported in the first section of these statements of cash flows, i.e., the total cash flow from operating activities. It is of interest, becasue of all the uses of cash that a company may make, paying dividends is one use of cash that is of interest.
Cash flows as a basis for selecting superior dividend growers is discussed in a tutorial on cash flow payouts, available elsewhere on the site.
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