Cash Flow and Short-Term Planning

This time, we shift from accounting performance to financial reality. Up to this point,

we’ve relied heavily on income statements, ratios, and net income to evaluate a firm.

This knowledge chunk asks a more fundamental question: Does the firm actually have cash when it needs

it? The key idea is that profitability does not guarantee liquidity.

A firm can report strong net income and still fail if it cannot meet its short-term obligations.

This is why finance focuses on cash flow rather than accounting profit. We begin by distinguishing

accounting cash flow from actual cash flow. Accrual accounting records revenues

when earned and expenses when incurred, not when cash changes hands. As a result,