Skip to Content

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.

     Cash Flow Statement 

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.

The Dividend Growth Investing website has a great interest in corporate cash flow statements, since we view the ability to pay increasing dividends as dependent on a company generating excess cash flows.  In order to pay us more and more money per share, the company needs to be generating it.

Subscribe Now!