Cash flow

Definition

Cash flow is the net amount of cash being transferred into and out of a business. It is crucial for assessing the liquidity, flexibility, and overall financial health of a company.

5 Must Know Facts For Your Next Test

1. Cash flow from operating activities reflects the cash generated from the core business operations.
2. Investing activities in cash flow include purchases and sales of long-term assets like property and equipment.
3. Financing activities in cash flow involve transactions related to debt, equity, and dividends.
4. Positive cash flow indicates that a company's liquid assets are increasing, enhancing its ability to settle debts.
5. In capital budgeting, analyzing cash flows helps in determining the viability and profitability of long-term investments.

Review Questions

• What does positive cash flow indicate about a company's financial health?
• Which section of the cash flow statement includes transactions related to debt and equity?
• Why is analyzing cash flows critical in capital budgeting decisions?

Related terms

Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period.

Internal Rate of Return (IRR): The discount rate at which the net present value of an investment is zero.

Payback Period: The time it takes for an investment to generate enough cash flow to recover its initial cost.