Free Cash Flow, the Cash Flow Identity, And the Accounting Statement of Cash Flows

This study highlights the relationship between the two major tools of cash flow analysis, namely, free cash flow within the cash flow identity and the accounting statement of cash flows. After reviewing current textbook pedagogy for introducing the concept of a firm's cash flow, we derive the accounting statement of cash flows from the cash flow identity (in which a firm's free cash flow equals its cash flow to investors). Using a numeric example, we also compare the information generated by the two analytical tools, noting both the difference in focus between the tools as well as the differences in construction. Finally, we encourage textbook authors to give greater attention to the linkage between free cash flow within the cash flow identity and the accounting statement of cash flows, as well as the