The statement of cash flows seems similar to the income statement, which shows how much revenue came in and how many expenses went out. The difference lies in a concept called accrual accounting. As discussed in Lesson 301, accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. The principle is known as matching--expenses must match the revenues those expenses created whenever possible. While that explanation seems simple enough, it gets messy in practice, and the statement of cash flows helps investors sort it out.
The statement of cash flows strips out all the abstract, noncash revenues and expenses that are included in the income statement. Many companies have shown profits on the income statement but have stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead.
Cash Flows from Operating Activities >>