Definition of cash flow
cash flow
An obvious but at the same time elusive term that refers to cash
inflows and outflows during a period. But the specific sources and uses
of cash flows are not clear in this general term. The statement of cash
flows, which is one of the three primary financial statements of a business,
classifies cash flows into three types: those from operating activities
(sales and expenses, or profit-making operations), those from
investing activities, and those from financing activities. Sometimes the
term cash flow is used as shorthand for cash flow from profit (i.e., cash
flow from operating activities).
Cash flow
cash received and paid over time.
Cash flow
In investments, it represents earnings before depreciation , amortization and non-cash charges.
Sometimes called cash earnings. cash flow from operations (called funds from operations ) by real estate and
other investment trusts is important because it indicates the ability to pay dividends.
Cash Flow
In investments, NET INCOME plus DEPRECIATION and other noncash charges. In this sense, it is synonymous with cash EARNINGS. Investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends.
cash flow
the receipt or disbursement of cash; when related
to capital budgeting, cash flows arise from the purchase,
operation, and disposition of a capital asset
Related Terms:
cash flow provided by operating
activities adjusted to provide a more recurring, sustainable measure. Adjustments to reported cash
provided by operating activities are made to remove such nonrecurring cash items as: the operating
component of discontinued operations, income taxes on items classified as investing or financing activities, income tax benefits from nonqualified employee stock options, the cash effects of purchases and sales of trading securities for nonfinancial firms, capitalized expenditures, and other nonrecurring cash inflows and outflows.
Net income plus depreciation.
The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.
The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.
An estimate of the timing and amount of a company's inflows and outflows of money measured over a specific period of time typically monthly for one to two years then annually for an additional one to three years.
This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.
A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.
Also called dedicating a portfolio, this is an alternative to multiperiod immunization in
which the manager matches the maturity of each element in the liability stream, working backward from the
last liability to assure all required cash flows.
cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.
With some exceptions, the cash effects of transactions
that enter into the determination of net income, such as cash receipts from sales of goods
and services and cash payments to suppliers and employees for acquisitions of inventory and
expenses.
cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.
cash receipts and payments involving
long-term assets, including making and collecting loans and acquiring and disposing of
investments and productive long-lived assets.
A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.
A financial report that shows the movement in cash for a business during an accounting period.
Line depicting the operating activities and cash flows for a firm over a particular period.
Cash Flow–to–Income Ratio (CFI)
Adjusted cash flow provided by continuing operations
divided by adjusted income from continuing operations.
CASH FLOWS FROM FINANCING ACTIVITIES
A section on the cash-flow statement that shows how much cash a company raised by selling stocks or bonds this year and how much was paid out for cash dividends and other finance-related obligations.
CASH FLOWS FROM INVESTING ACTIVITIES
A section on the cashflow statement that shows how much cash came in and went out because of various investing activities like purchasing machinery.
CASH FLOWS FROM OPERATIONS
A section on the cash-flow Stockholders’ equity statement that shows how much cash came into a company and how much went out during the normal course of business.
Discounted cash flow
A technique that determines the present value of future cash
flows by applying a rate to each periodic cash flow that is derived from the cost of
capital. Multiplying this discount by each future cash flow results in an amount that
is the present value of all the future cash flows.
Discounted Cash Flow
Techniques for establishing the relative worth of a future investment by discounting (at a required rate of return) the expected net cash flows from the project.
Discounted cash flow (DCF)
Future cash flows multiplied by discount factors to obtain present values.
Discounted cash flow (DCF)
A method of investment appraisal that discounts future cash flows to present value using a discount rate, which is the risk-adjusted cost of capital.
discounted cash flow (DCF)
Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (NPV). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the business’s cost-of-capital rate.
Discretionary cash flow
cash flow that is available after the funding of all positive NPV capital investment
projects; it is available for paying cash dividends, repurchasing common stock, retiring debt, and so on.
Equivalent annual cash flow
Annuity with the same net present value as the company's proposed investment.
Expected future cash flows
Projected future cash flows associated with an asset of decision.
free cash flow
Generally speaking, this term refers to cash flow from
profit (cash flow from operating activities, to use the more formal term).
The underlying idea is that a business is free to do what it wants with its
cash flow from profit. However, a business usually has many ongoing
commitments and demands on this cash flow, so it may not actually be
free to decide what do with this source of cash. Warning: This term is
not officially defined anywhere and different persons use the term to
mean different things. Pay particular attention to how an author or
speaker is using the term.
Free Cash Flow
The funds available for distribution to the capital providers of the
company after investments inside the company have been made
Free cash flows
cash not required for operations or for reinvestment. Often defined as earnings before
interest (often obtained from operating income line on the income statement) less capital expenditures less the
change in working capital.
Incremental cash flows
Difference between the firm's cash flows with and without a project.
negative cash flow
The cash flow from the operating activities of a business
can be negative, which means that its cash balance decreased from
its sales and expense activities during the period. When a business is
operating at a loss instead of making a profit, its cash outflows for
expenses very likely may be more than its cash inflow from sales. Even
when a business makes a profit for the period, its cash inflow from sales
could be considerably less than the sales revenue recorded for the
period, thus causing a negative cash flow for the period. Caution: This
term also is used for certain types of investments in which the net cash
flow from all sources and uses is negative. For example, investors in
rental real estate properties often use the term to mean that the cash
inflow from rental income is less than all cash outflows during the
period, including payments on the mortgage loan on the property.
Nominal cash flow
A cash flow expressed in nominal terms if the actual dollars to be received or paid out are given.
NPV (net present value of cash flows)
Same as PV, but usually includes a subtraction for an initial cash outlay.
Operating cash flow
Earnings before depreciation minus taxes. It measures the cash generated from
operations, not counting capital spending or working capital requirements.
operating cash flow
See cash flow from operating activities.
Operating Cash Flow
Income available after the payment of taxes, plus the value of the
non-cash expenses
PV (present value of cash flows)
the value in today’s dollars of cash flows that occur in different time periods.
present value factor equal to the formula 1/(1 - r)n, where n is the number of years from the valuation date to the cash flow and r is the discount rate.
For business valuation, n should usually be midyear, i.e., n = 0.5, 1.5, . . .
Real cash flow
A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash
flow is given.
Scheduled cash flows
The mortgage principal and interest payments due to be paid under the terms of the
mortgage not including possible prepayments.
Statement of cash flows
A financial statement showing a firm's cash receipts and cash payments during a
specified period.
Statement of Cash Flows
One of the basic financial statements; it lists the cash inflows and cash outflows of the company, grouped into the categories of operating activities, financing activities, and investing activities. The Statement of cash flows is prepared for a specified period of time.
statement of cash flows
One of the three primary financial statements
that a business includes in the periodic financial reports to its outside
shareowners and lenders. This financial statement summarizes the business’s
cash inflows and outflows for the period according to a threefold
classification: (1) cash flow from operating activities (cash flow from
profit), (2) cash flow from investing activities, and (3) cash flow from
financing activities. Frankly, the typical statement of cash flows is difficult
to read and decipher; it includes too many lines of information and
is fairly technical compared with the typical balance sheet and income
statement.
Statement of cash flows
Part of the financial statements; it summarizes an entity’s cash
inflows and outflows in relation to financing, operating, and investing activities.
statement of cash flows
Financial statement that shows the firm’s cash receipts and cash payments over a period of time.
Statement-of-cash-flows method
A method of cash budgeting that is organized along the lines of the statement of cash flows.
accounting rate of return (ARR)
the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow
Accrual accounting
The recording of revenue when earned and expenses when
incurred, irrespective of the dates on which the associated cash flows occur.
ADF (annuity discount factor)
the present value of a finite stream of cash flows for every beginning $1 of cash flow.
Adjusted present value (APV)
The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.
allocation
the systematic assignment of an amount to a recipient
set of categories annuity a series of equal cash flows (either positive or negative) per period
Annual report
A report issued to a company’s shareholders, creditors, and regulatory
organizations at the end of its fiscal year. It typically contains at least an income
statement, balance sheet, statement of cash flows, and accompanying footnotes. It
may also contain management comments, an audit report, and other supporting
schedules that may be required by regulatory organizations.
annuity
Equally spaced level stream of cash flows.
annuity due
a series of equal cash flows being received or paid at the beginning of a period
annuity due
Level stream of cash flows starting immediately.
Asset-based financing
Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.
Asset swap
An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to
provide a better match with its iabilities.
Average life
Also referred to as the weighted-average life (WAL). The average number of years that each
dollar of unpaid principal due on the mortgage remains outstanding. Average life is computed as the weighted average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal
paydowns.
balance sheet
A term often used instead of the more formal and correct
term—statement of financial condition. This financial statement summarizes
the assets, liabilities, and owners’ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a business’s most
recent balance sheet.
Basket options
Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.
build mission
a mission of increasing market share, even at
the expense of short-term profits and cash flow; typically
pursued by a business unit that has a small market share
in a high-growth industry; appropriate for products that
are in the early stages of the product life cycle
Business risk
The risk that the cash flow of an issuer will be impaired because of adverse economic
conditions, making it difficult for the issuer to meet its operating expenses.
Call risk
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
Capital budgeting
The series of steps one follows when justifying the decision to purchase
an asset, usually including an analysis of costs and related benefits, which
should include a discounted cash flow analysis of the stream of all future cash flows
resulting from the purchase of the asset.
Capitalization ratios
Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.
Capitalize
In Finance: to find the present value of a stream of cash flows.
In Accounting: to reflect costs of the balance sheet rather than charge them off through the income statement, as to capitalize major repairs to a fixed asset.
cash burn rate
A relatively recent term that refers to how fast a business
is using up its available cash, especially when its cash flow from operating
activities is negative instead of positive. This term most often refers
to a business struggling through its start-up or early phases that has not
yet generated enough cash inflow from sales to cover its cash outflow for
expenses (and perhaps never will).
Cash cow
A company that pays out all earnings per share to stockholders as dividends. Or, a company or
division of a company that generates a steady and significant amount of free cash flow.
CFAT
cash flow after taxes.
Changes in Financial Position
Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.
Common stock ratios
Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.
Continuous Discounting
The process of calculating the present value of a stream of future
cash flows by discounting over a continuous period of time
Conventional project
A project with a negative initial cash flow (cash outflow), which is expected to be
followed by one or more future positive cash flows (cash inflows).
Coverage ratios
Ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.
Dates convention
Treating cash flows as being received on exact dates - date 0, date 1, and so forth - as
opposed to the end-of-year convention.
DCF
See: Discounted cash flows.
Debt Capacity
An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.
Dedicating a portfolio
Related: cash flow matching.
Dedication strategy
Refers to multi-period cash flow matching.
Deferred taxes
A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.
Depreciation
A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring Long term assets over the useful life of the assets.
depreciation
Refers to the generally accepted accounting principle of allocating
the cost of a long-term operating asset over the estimated useful
life of the asset. Each year of use is allocated a part of the original cost of
the asset. Generally speaking, either the accelerated method or the
straight-line method of depreciation is used. (There are other methods,
but they are relatively rare.) Useful life estimates are heavily influenced
by the schedules allowed in the federal income tax law. Depreciation is
not a cash outlay in the period in which the expense is recorded—just
the opposite. The cash inflow from sales revenue during the period
includes an amount to reimburse the business for the use of its fixed
assets. In this respect, depreciation is a source of cash. So depreciation is
added back to net income in the statement of cash flows to arrive at cash
flow from operating activities.
Direct method
A method of preparing the operating section of the Statement of cash flows that uses the company’s actual cash inflows and cash outflows.
Discount Rate
The rate of interest used to calculate the present value of a stream
of future cash flows
discount rate
Interest rate used to compute present values of future cash flows.
Discounted payback period rule
An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.
Discounting
The process of calculating the present value of a stream of future
cash flows
discounting
the process of reducing future cash flows to present value amounts
Discounting
The process of finding the present value of a series of future cash flows. Discounting is the reverse of compounding.
Distributions
Payments from fund or corporate cash flow. May include dividends from earnings, capital
gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by
investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least
once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).
Dividend discount model (DDM)
A model for valuing the common stock of a company, based on the
present value of the expected cash flows.
Dollar-weighted rate of return
Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.
Duration
The weighted average of the time until maturity of each of the
expected cash flows of a debt security
Earning Power
A company's ability to generate a sustainable, and likely growing, stream of
earnings that provides cash flow.
Earning Power
A company's ability to generate a sustainable, and likely growing, stream of
earnings that provide cash flow.
Earnings Management The active manipulation of earnings toward a predetermined target.
That target may be one set by management, a forecast made by analysts, or an amount that is consistent with a smoother, more sustainable earnings stream. Often, although not always, earnings management entails taking steps to reduce and “store” profits during good years for use during slower years. This more limited form of earnings management is known as income smoothing.
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