The cash flow statement tracks actual cash coming in and going out — the financial statement that cannot be manipulated as easily as the income statement. While revenue can be booked before cash is received (accrual accounting), the cash flow statement shows only real cash movements. It reveals the truth about a company financial health.
Three sections: Operating Activities (cash from core business) — the most important; should be consistently positive. Investing Activities (buying/selling long-term assets) — usually negative for growing companies. Financing Activities (debt, equity, dividends) — shows how the company funds itself and returns money to investors.
Red flags: a company with rising net income but declining operating cash flow may be using aggressive accounting. Enron reported profits while operating cash flow deteriorated — an early warning sign that was largely ignored. Warren Buffett focuses on owner earnings (net income + depreciation minus capex), which closely mirrors cash flow. Analysts increasingly prefer cash flow analysis over earnings analysis.