Cash Flows

This chapter evaluates the statement of cash flows, which gives a detailed breakdown of cash inflows and outflows during the year, split between the three main activities of the business: operating, investing, and financing. The totals of these are added together to get a net cash flow figure for the year, which is finally added to the opening cash balance to obtain the closing cash balance. The statement of cash flows reports flows of cash and cash equivalents, which include investments that are easily convertible into cash and not subject to risks of changes in value. Cash flow, not profit, is the ultimate measure of business value, because cash is real, whereas profit is a notional construct of the accounting equation. Quality of earnings indicates the extent to which a business is converting profits into cash, its exposure to short-term sustainability risks, and the likely authenticity of the accrual-based figures.