Principles of Managerial Finance, 15th Edition

4.2 Measuring the Firm’s Cash Flow

1. LG2

2. LG3

“Cash is king” is an old saying in finance. Cash flow is the primary ingredient in any financial valuation model. If an analyst wants to put a value on an investment that a firm is considering, estimating cash flow is central to the valuation process. This chapter explains where the cash flow numbers used in valuations come from.

Though a company’s earnings deservedly receive much attention from outside investors, earnings and cash flows are not equal. When companies calculate their earnings, they do so using accrual-based generally accepted accounting principles (GAAP), and those principles are designed to achieve objectives other than simply reporting cash inflows and outflows. For example, if ...