Cash Flow

A company reports its net income after tax (net profit) on the income statement. That net income is reduced if the company is subtracting large amounts for depreciation/amortization. If a company bought a printing press for $1 million cash a while ago, they might be subtracting $100,000 a year until they've written down the cost to zero, in order to spread the cost over the useful life of the equipment. But those subtractions now are not cash--they are a reality check. Since depreciation/amortization is a non-cash subtraction on the income statement, analysts often add back that subtraction to the net income in order to estimate how much cash the company is generating.

In the 10K, the company shows its balance sheet and income statement, and also a statement of cash flows. There are three ways a company can use or generate cash each year: operations, investing, financing. A company can generate or use up cash operating its business, but also by investing in equipment (or selling it off) or issuing securities (or buying them back). So, if the company's cash position increases, analysts would note perhaps that it's simply due to a recent offer of stock or convertible debentures (financing). If the cash position drops this year, maybe it's only because the company wisely invested cash into better equipment (investing). For extra credit "google" a public company's 10K and read thru the consolidated financial statement and the notes to it. It could REALLY help you on a few test questions. NEED HELP with your exam?