The net cash flow or net increase (decrease) in cash for a company is the sum of operating, investing, and financing activities plus any foreign exchange effects. It indicates whether the company generated or used cash during the reporting period. Normally, the net change in cash is added to the beginning level of cash and cash equivalents to calculate the cash at the end of the period. This cash line will match the cash and cash equivalents reported on the period-ending balance sheet.
Investors look closely at the operating cash flow because it relates most closely to the income statement and earnings. Both statements should be considered together because each has its own limitations. The cash-oriented accounting of the operating cash flow ignores sales from which money can reasonably be expected in the near term as well as expenses that are owed and must be paid in the future. The accrual-based income statement includes non-cash elements and is affected by management's estimates and discretion of account treatments. The income statement does not show the timing of cash flows and the effect of operations on liquidity and solvency.
For established companies, both cash flows from operations and net income should follow similar trends. The comparison of the operating cash flow segment to the net income statement is less applicable to younger, rapidly growing companies that must use significant levels of cash to fund their growth through increases in items such as accounts receivable and inventory.
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