Cash flow is easy to understand. If you had $5,000 in your bank account on January 1, and only $1,000 on December 31, your cash flow for the year was a negative $4,000, regardless of how much income you reported to the IRS. Corporate accounting follows the same rules; only the numbers are bigger.
Interestingly, companies have been required to include cash flow statements with their financial reports only since 1987.
Accountants construct the cash flow statement by starting with reported earnings and then adding back noncash items that were subtracted from earnings to figure income, but did not actually result in cash moving out of the firm’s bank accounts.
Expenses such as depreciation and amortization, for example, represent ...