Cash Flow

Written by Patricia Tunstall
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Simply put, cash flow is the inflow and outflow of cash in a company. Accountants, who are responsible for tracking and recording cash flow, must classify different types of cash flow in order to explicate the workings of the company. One of the most important is operating activities: cash inflows from sales, and cash outflows for expenses.

Another category is investment activities: cash outflows for making investments in new assets, and cash inflows from selling old assets. A third category is financing activities: cash inflows from borrowing money and from owners' contributions, and cash outflows for paying debts, and making profit distributions to owners. Whenever a company issues a financial statement or report, the report must contain both an income statement and a cash flow statement.

A Recent Requirement

Internal financial reporting is one thing, but the annually-required financial report that is given to the public and the Securities and Exchange Commission is another. For this financial analysis, a cash flow statement has been required only since 1987. The Commission and its attendant agencies from the private sector have increased reporting requirements in recent years.

These requirements are attempts to increase governmental scrutiny of financial reporting to the public. With the recent incidents among some corporations and their auditors, the Commission has taken note of the failure of the self-regulatory system of the accounting profession. Congress passed the Sarbanes-Oxley Act of 2002, also aimed at increasing oversight of the accounting profession and the corporate world.


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