Cash flow means the movement of money over a period. For a company, we distinguish cash from operations, purchases and sales of long-term assets, and financing such as loans or newly issued shares. The statement also covers cash equivalents: short-term, highly liquid investments readily convertible to known amounts of cash with very little risk of a change in value. A balance tells us how much the company holds on a particular date; a flow explains movement over a period. Accounting profit answers a different question, and a rise in an asset’s market value does not itself bring in a payment.
Imagine a company whose cash balance has grown. The balance alone cannot tell us whether the money came from selling products, selling assets or borrowing. That is why the international accounting standard IAS 7 separates operating, investing and financing cash flows. In our simplified example, all amounts are in US dollars (USD) and cover the same period: the company opens with 30 USD, operating cash flow is −5, investing cash flow is −40, financing cash flow is +60, and the foreign-currency translation effect is +1. This gives 30−5−40+60+1 = 46 at close. The exchange effect is a recalculation of the value of cash already held, not another payment received. The company therefore ends with a bigger balance even though its operations consumed cash. [1]
A sale and its payment often happen at different times. The company in our example records revenue of 100 USD, but customers still owe it 40. It has already paid operating costs of 70 and recorded depreciation of 10. Depreciation allocates the cost of an asset used by the business across accounting periods; it does not itself mean another payment in this period. With no other items, profit is 100−70−10 = 20, while actual operating cash flow is 60−70 = −10. We can reach the same result indirectly from profit: 20+10−40 = −10. We add back depreciation and subtract the unpaid part of revenue. Adding back depreciation creates no cash; it removes a noncash expense from the starting profit. All amounts are in USD for the same period; we leave out interest, taxes and other changes to keep the example simple. [2]
Keep the same example, but change when the supplier gets paid. Of the 70 USD in costs, the company pays only 50 for now and still owes the remaining 20. Operating cash flow rises from −10 to 60−50 = 10, while profit stays at 20. Paying those 20 later uses cash without recognizing a new expense for the same supply. The timing of payment changed, not the result of the sale. These differences involve working capital: cash flow depends on what the company holds in inventory, what customers still owe it and what it has yet to pay suppliers. Better cash flow in one period therefore does not necessarily mean higher profitability or a lasting ability to pay dividends, meaning distributions of profit or other permitted funds to shareholders. [2]
In another example, the company borrows 60 USD and buys a machine for 40. The statement shows financing +60 and investing −40; this did not create sales revenue of 60 from customers. Repayment of principal, the amount borrowed excluding interest, belongs to financing. It is not a second expense for the same machine. Moving 5 between the same reporting entity’s own cash accounts also does not itself change its total cash: only the account holding it changes. A reporting entity might be one company or a group presented together in the statements. All amounts in this example are in USD. When reading the statement, we therefore need to follow the source of the money as well as its overall increase. [2]
A creditor and a company may agree that, instead of repayment of a 30 USD debt, the creditor will receive shares. Debt is exchanged for an ownership stake, but the company does not receive a new cash payment of 30 USD. This is a noncash financing change, which IAS 7 requires to be disclosed separately from cash flows. Compare it with another situation: the company actually receives a loan of 30 USD and then pays 30 for a machine. Here, two cash movements occur. Their net total is also zero, but something different happened. The net figure alone cannot explain the transaction. [1]
Free cash flow is commonly calculated as operating cash flow minus capital expenditure, such as payment for a new machine. In Question 102.07, the US Securities and Exchange Commission (SEC) points out that the measure has no uniform definition: a company needs to explain its calculation and reconcile it to the financial statements. In our example, operating cash flow of 10 USD less capital spending of 3 gives 7. But if principal of 8 is due at the same time, there is a shortfall of 1 without other cash. All these amounts are in USD. Those 7 are therefore not automatically available for discretionary distribution. We still need to know about mandatory payments and any items the company excluded from its adjusted measure. [3]
The same payment may appear in a different part of the statement under different accounting frameworks. IFRS are international accounting standards, while US GAAP refers to US accounting rules. The new IFRS 18 standard applies to annual periods beginning on or after 1 January 2027, with earlier application permitted. Related amendments to IAS 7 set operating profit as the starting point for the indirect method and change the classification of interest and dividends. For a 2026 statement, check whether the company adopted the standard early and which accounting framework it used. Do not automatically transfer IFRS rules to US GAAP. Moving an item between categories does not itself change total cash, but it can change the operating cash flow being compared. [4] [1]
A company holds 100 BTC, meaning bitcoin. The price of each rises from 50000 to 60000 USD, increasing the market value of the whole holding by 1000000 USD. Without a sale, however, the price change alone brings no money into its cash account. How the value is recorded in the accounts depends on the framework used. In its June 2019 decision, the IFRS Interpretations Committee (IFRIC) did not classify the cryptocurrencies considered as accounting cash; that is an accounting classification, not a claim that bitcoin cannot be used for payments. Likewise, a company may raise 10000000 USD by issuing new shares and spend the same amount on BTC. Its bitcoin holdings grow, but the money did not come from customers buying products or services. The two payments have a net cash effect of zero. That alone does not show that the company finances its purchases with cash generated by its operations. [5]
For the clearest picture, read this entry together with Dividend, Capital structure, Corporate Bitcoin Treasury, Debt maturity. The reverse links also lead from Dividend, Reflexivity, Leverage, Debt maturity.