Cash Flow: A Comprehensive Guide to Its Legal Definition and Impact
Definition & Meaning
Cash flow is the total amount of cash generated by a business during a specific period. It is calculated by adding net income to non-cash expenses such as depreciation and amortization. This figure represents the cash available for various purposes, including paying dividends or investing in new assets. Understanding cash flow is essential for assessing a company's financial health and operational efficiency.
Legal Use & context
Cash flow is a critical concept in various legal and financial contexts, particularly in corporate law, tax law, and bankruptcy proceedings. It is often used to evaluate a company's ability to meet its financial obligations and can influence decisions related to mergers, acquisitions, and financing. Users can manage related forms and documents through tools like US Legal Forms, which provide templates drafted by experienced attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company reports a net income of $100,000 for the year. It also has $20,000 in depreciation and $5,000 in amortization. The cash flow for the year would be $100,000 + $20,000 + $5,000 = $125,000.
Example 2: A startup may have negative net income due to high initial costs but still show positive cash flow if it raises funds through investments or loans (hypothetical example).