Hey Friends,

I didn’t write my book, “Choose Stocks Wisely,” to advocate individual stock investing. Rather, I wrote it to communicate how imperative it is to analyze a company’s balance sheet before investing in any publicly traded stock. There is no substitute for the balance sheet in proper risk assessment. I appreciate each of you for reading my book and my blog posts, and for telling those in your circles who already invest in common stocks about my book.

In the book, my personal buying method is shared; but there are countless methods and strategies out there with regard to buying stocks. For me, the primary contribution of the book remains its explanation of how the balance sheet provides for a proper quality assessment as to the liquidity and solvency of the balance sheet. The balance sheet is “the” financial statement. The income statement and statement of cash flows are activity reports and useful in that regard. That is, they tell us what happened over the most recent quarterly period or annual period (if end of fiscal year). But they do not reveal the financial condition of the business. That is the domain of the balance sheet. Thus, it is “the” financial statement.

While the earnings report is the activity report that dominates the conversations in the realm of stock market discussion (and earnings do drive stock prices), the statement of cash flows is the report of second importance for me in financial analysis — second to the balance sheet. If one had to define all assets into one asset, it would be cash because all business is eventually transacted in cash.

Today, I’ll start a series on the statement of cash flows. More specifically, the writing will be with regard to the first section of this report, namely “cash flow from operations.” From quarter to quarter, cash will either increase or decrease from the income-producing activity of the business. The operating section of the cash flow report provides the detail of this activity. The income (earnings) report, with minor exception, shows the same income-producing activity as does the cash flow from operation section of the statement of cash flows. The difference is the income statement measures the inflows and outflows from operating as “accruals.” The cash flow statement measures inflows and outflows simply as cash in and cash out.

I’ll close with this introductory post and we’ll go forward next time. Again, I appreciate your support and for helping with the success of my book as your word-of-mouth has been a significant factor. Promotion is not my bailiwick. Yet, I do feel strongly about communicating the critical role of the balance sheet to investing and good stewardship. So, thanks for helping my book effort along over these years.

See you next time.

Paul