2.2 Cash Flow Identity and the Statement of Cash Flows

Although financial statements present essential information about the performance of a company, they do not give us the information in a format that helps identify its cash flow. Armed with the accounting information they do provide, however, we can now examine cash flow. To gain insight into the operations and financing decisions of a company, we use the cash flow identity, which states that the cash flow from assets is equal to the cash flow to creditors and owners. In other words, it shows that the firm uses the cash that it generates from its operating decisions (money it takes in) to purchase additional assets or to pay creditors and the owners of the company (money it pays out):

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