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The Cash Flow Statement: Why Profitable Companies Can Still Run Out of Cash

Beginner Investing • 6 min

What this lesson is about

Net income is an opinion, cash is a fact. This is the statement that tracks the fact.

2 parts · a quick check after each · then the quiz

Part 1 of 2

Net income can be an accounting opinion; cash is a fact. The cash flow statement shows real cash moving in and out. It has three sections. Operating (the core business), investing (buying or selling long-term assets), and financing (debt and equity activities like loans, dividends, and buybacks).

This is how a company can appear profitable on the income statement while actually running low on cash. Revenue can be recorded before the cash comes in.

How long the cash lastsMoney in, money out, and the month the account is empty.

Quick check

What does the cash flow statement track?

Part 2 of 2

Insider Angle: This is why 'cash flow positive' and 'profitable' are not the same thing. Seasoned analysts always check the cash flow statement before believing a headline profit number. This is especially true for fast-growing companies that extend a lot of credit to customers.
Try This: Find a company's cash flow statement. Identify one specific line item in each of the three sections. What does each one tell you about the company's cash activity during that period?

Quick check

What are the three main sections of a cash flow statement?

Quiz

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