Cash Flow Statement Part 1

Quick reference

• 00:03 Hi, this is Ray Sheen.
• 00:04 I'd now like to talk about the cash flow statement,
• 00:06 one of the three fundamental financial reports.
• 00:09 This'll be one of three modules and it's an overview of the cash flow statement.
• 00:13 Let's get started.
• 00:15 Let me start by introducing you to the cash flow statement and
• 00:18 cover some of it's main concepts and key principles.
• 00:20 The statement looks like this.
• 00:22 It divides the cash flow activities into three categories.
• 00:26 Cash from operating activities, cash from investing activities, and
• 00:29 cash flow from financing activities.
• 00:32 Each of these categories are likely to have some accounts that are bringing cash
• 00:36 into the business and some that are taking cash out of the business.
• 00:40 The cash flow statement represents the churn in cash
• 00:43 through the business accounts.
• 00:45 On a personal level, I liken it to your checking account or wallet.
• 00:49 It is cash flow that determines whether I have money in my wallet tonight to go out
• 00:53 for a four course steak dinner, or
• 00:55 stop by a fast food restaurant for some takeout chicken.
• 00:59 Obviously, the cash flow statement is focused on cash.
• 01:02 It represents how well the business is able to convert its activities into cash.
• 01:06 I'm reminded of an associate of mine who's favorite phrase when discussing business
• 01:10 operations and new projects was, if the cash doesn't flow the answer is no.
• 01:17 Similar to earnings statement,
• 01:18 the cash flow statement is for a period of time, such as a month, quarter, or year.
• 01:23 Which of course means that the transaction date is very important.
• 01:26 It is in this statement that a company that uses the accrual method of accounting
• 01:31 is able to reconcile their books to the actual cash created or
• 01:34 lost by the business.
• 01:36 One of the insights from the cash flow statement is to easily determine
• 01:40 if the company is investing into the business.
• 01:42 If it is investing, you can see if the company is able to fund its own
• 01:45 investments from operating activities, or if it must borrow its way to prosperity.
• 01:51 Let's look at the statement in a little more detail.
• 01:54 Since the cash flow statement is measuring the churn of cash, it will show for
• 01:58 each account what cash came in and what went out.
• 02:01 That is the source and uses of cash.
• 02:03 This provides a sense of operating a managerial efficiency.
• 02:07 Many of the accounts can either be a source or use of cash.
• 02:10 So I will show them on both sides of our see-saw diagram.
• 02:14 I will highlight the major accounts, but companies will often break these down into
• 02:17 sub-accounts to provide greater clarity into their operation.
• 02:22 First let's discuss the sources of cash.
• 02:24 The operating activities start with a profit, or net income.
• 02:28 Next there's accounts receivable,
• 02:30 which is money owed to the company by it's customers.
• 02:33 This is a source of cash when a company speeds up collections.
• 02:36 That means a reduction in this account is a source of cash
• 02:40 since there's less money owed to the company.
• 02:42 Then there's accounts payable which is the money owed to suppliers.
• 02:46 This case is just the opposite.
• 02:48 An increase in accounts payable is a source of cash.
• 02:51 That is because goods or services have been received from the supplier so
• 02:55 the company has the benefit of these without paying for them.
• 02:58 Inventory is another operating activity that can be a source of cash.
• 03:02 A reduction in this account is a source since the company has sold more inventory
• 03:06 than it acquired during the time period.
• 03:09 The last to count in operating activities is depreciation.
• 03:13 It is almost always a source of cash.
• 03:15 I will discuss it more in another module.
• 03:17 But in a nutshell, depreciation is how the charges for a capital asset
• 03:21 are recorded on the earnings statement and therefore it lowers the net income.
• 03:26 However the purchase of the capital asset is entered
• 03:30 as a use of cash in the investing activities of the cash flow statement.
• 03:34 So depreciation is added back in at this point,
• 03:37 in order not to double count that expenditure.
• 03:40 The other source of cash accounts are pretty straightforward.
• 03:43 Borrowing money is a source of cash in the financing activity category,
• 03:47 as is issuing stock.
• 03:48 The only source of cash in the investing activity
• 03:51 is when a company sells a capital asset.
• 03:54 The other side of the seesaw is the uses of cash.
• 03:57 Again, there are the plus or minus aspects of the operating activities.
• 04:00 If instead of profit, the net income is a loss, that is a use of cash.
• 04:05 Keep in mind the net income has already accounted for the payment of interest and
• 04:08 taxes which use cash.
• 04:10 An increase in accounts receivable is a use of cash since money is essentially
• 04:15 being lent to customers, while a reduction in accounts payable is a use of cash
• 04:20 because the company is paying suppliers sooner.
• 04:23 And an increase in inventory is a use of cash
• 04:25 since money is now tied up in stuff sitting on the shelves.
• 04:29 One of the more common uses of cash is the acquisition of an asset,
• 04:33 which is an investing activity.
• 04:36 The repayment of debt and
• 04:37 paying money to shareholders are financing activities that use cash.
• 04:41 As business ebbs and flows, the cash balance will fluctuate.
• 04:47 The cash flow statement provides insight into how well the business is managing
• 04:52 it's cash.

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