Cash Flow And Financial Statements A Closer Look

sources of cash

A firm's activities that generate cash.

uses of cash

A firm's activities in which cash is spent. Also called applications of cash.

At the most fundamental level, firms do two different things: they generate cash and they spend it. Cash is generated by selling a product, an asset, or a security. Selling a security involves either borrowing or selling an equity interest (i.e., shares of stock) in the firm. Cash is spent in paying for materials and labor to produce a product and in purchasing assets. Payments to creditors and owners also require the spending of cash.

In Chapter 2, we saw that the cash activities of a firm could be summarized by a simple identity:

Cash flow from assets = Cash flow to creditors + Cash flow to owners

This cash flow identity summarizes the total cash result of all transactions a firm engages in during the year. In this section, we return to the subject of cash flows by taking a closer look at the cash events during the year that lead to these total figures.

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