cashflows

Cash flows represent the net amount of cash and cash equivalents moving into and out of an entity during a period. They measure liquidity and cash generation, focusing on actual cash movements rather than profits, which may include non-cash items such as depreciation.

A cash flow statement tracks three activities: operating, investing, and financing. Operating cash flow reflects cash from core activities; investing covers asset purchases and sales; financing includes changes in borrowings, equity, and dividends. The direct method shows actual cash receipts and payments, while the indirect method adjusts net income for non-cash items and working capital changes.

Key concepts include net cash flow and free cash flow, defined as operating cash flow minus capital expenditures. Free cash flow indicates cash available for debt repayment, dividends, or growth after maintaining asset bases.

Cash flow analysis supports liquidity management, budgeting, capital budgeting, and valuation, including discounted cash flow models. It complements income statements by revealing cash generation and timing, which can differ from reported profitability.

Limitations include sensitivity to timing and seasonality, distortions from one-off transactions, and the exclusion of non-cash items that affect long-run value. Currency effects and changes in working capital can also influence cash flows.