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Cash flow measurement can be used to determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable. Cash measurement can be used to generate project rate of returns. The time of cash flows into and out of projects are used as inputs to financial models such as internal rate of return, and net present value.


Operational cash flows: Cash received or expended as a result of the company's core business activities.

Investment cash flows: Cash received or expended through capital expenditure, investments or acquisitions.

Financing cash flows: Cash received or expended as a result of financial activities, such as receiving or paying loans, issuing or repurchasing stock, and paying dividends.

Example of a positive $40 cash flow

TransactionIn (Debit)Out (Credit)Incoming Loan+$50.00Sales (which were paid for in cash)+$30.00Materials-$10.00Labor-$10.00Purchased Capital-$10.00Loan Repayment-$5.00Taxes-$5.00Total.................................................+$40.00.......

Financial Ratios

Financial ratios are formed from two or more numbers taken from the financial statements of businesses. The numbers may be taken from the Balance sheet or the Income statement and combined in any number of combinations. Rarely are numbers taken from the Statement of Retained Earnings or Cash flow statement.

They are used by

debt issuers for analysing credit risk. They may be stipulated in the debt covenants for determining cause for default.

business insiders for evaluating performance of people (employee stock options) or projects, and by




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