Saturday, August 30, 2008

Can This Be Right? Cash-Flow Statement

Lama at the customarily bang-on Calculated Risk has an odd post up lamenting that people don't pay attention to the cash-flow statement (i.e., vis a vis the balance sheet, or the income statement).

Really? --he asks without intended irony or sarcasm. I pay attention to the cash-flow statement. And although I am not an accountant, I teach a bit of basic accounting to law students, and cash flow is the heart of the course: "accounting" numbers, v. "cash" numbers, the agonizing history of the cash flow statement, the whole (as I thought) magilla--including a hat tip to the guy who sort of invented it, the estimable Thornton O'Glove (link).

With all respect to Lama, my guess is that s/he (?) is listening to the wrong people. Accountants may not like the cash-flow statement--it was kind of forced on them, after all. But investors, in my experience, love it. Who else invented EBIT--earnings before interest and taxes, where you start off with "accounting" earnings and mentally recalculate for cash?

Old acccountant joke: oh yeah, I know the finance types--they think "depreciation" is an asset. Finance response: well, duh. Let's hear it for cash flow, the sincerest thing in the world, the one that will never lie to you, will never let you down.

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