Accrual basis accounting recognizes costs and revenues when the transactions are completed and when the sums in question are collectible. For example, if a business made a sale on credit to a creditworthy customer, it would record that sale on the accounts the instant it is made. As a result of this, the revenues and expenses on the business's income statements do not reflect the amount of cash and cash equivalents it has on hand. Cash flow is the term used to describe the change in the amount of cash and cash equivalents that a business has on hand; positive cash flow means that it is acquiring more, while negative cash flow means the amount is decreasing.
Cash and Cash Equivalents
Cash can incorporate both currencies and certain economic resources called cash equivalents. Cash equivalents are stable assets that are convertible into currencies in a short amount of time without significant loss in value. Examples of cash equivalents include commercial paper, money market accounts, and short-term securities with maturation dates of three months or less.
Cash flow is the movement of cash and cash equivalents both into and out of a business's ownership. Cash flow is not the same as revenues and expenses on the income statement because accrual basis accounting recognizes transactions at the time of their occurrence. Since sales can be made on credit or be collected in multiple payments, revenues and expenses are not the same as cash inflows and outflows.
Positive and Negative Cash Flow
Positive cash flow is an influx of cash and cash equivalents into the business, whereas negative cash flow is an outward flow of cash and cash equivalents away from the business. For example, the business collecting cash from a sale it made one month ago would be a positive cash flow in the present period, while if it made a purchase using cash, that would be a negative cash flow.
Cash Flow Statement
Cash flows in a single accounting period are recorded on a financial statement called the cash flow statement. It divides cash flows into three segments -- operating, investing and financial. Operating refers to cash flows originating from the business's main operations, investing refers to cash flows originating from the business's investments into its operations, and financial refers to cash flows originating in the business's dealings with its investors in the form of cash influxes and dividends being paid out. Each cash flow statement ends with net cash flow, which is either a positive or a negative figure depending on whether the business received more cash and cash equivalents than it paid out in that period.