Cash flow is the backbone of a company and should be the center piece to decisions....
Cash flow is the backbone of a company and should be the center piece to decisions. What is the difference between cash flow and accounting flow? Why is cash flow more important than reported earnings? How do we get from reported earnings to cash flow?
Homework Answers
Cash flow of a company denotes the actual cash flows the company sources and uses for its operations, investment and financial purposes while an accounting flow is the earnings generated and expense incurred as per the accounting norms and conventions.
While reported earnings can be manipulated and mis-reported cash flow can never be subjected to manipulation as it is the actual cash generated and used by a firm. Hence it is more important than reported earnings for the users of financial statements. The cash flow is also used for valuation purposes.
Reported earnings can be adjusted by adding back the non cash expenses and subtracting the working capital changes. The non cash expenses are reported on the basis of either IT regulations or the SEC.
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