1 00:00:29,420 --> 00:00:37,200 This session is about cash flow statement now, cash is really important for any business. 2 00:00:37,700 --> 00:00:43,670 Cash is needed for maybe a replacement of an asset. 3 00:00:44,150 --> 00:00:47,810 So maybe one of your equipment needs a replacement. 4 00:00:48,080 --> 00:00:54,380 Maybe you need a new production line, a new vehicle and so on and so forth. 5 00:00:54,980 --> 00:01:02,150 Also, cash is important for capturing some market opportunities. 6 00:01:02,810 --> 00:01:07,040 Let's say one of your competitors is up for sale. 7 00:01:07,280 --> 00:01:12,190 If you have the cash, you could take advantage, capture of that opportunity. 8 00:01:12,410 --> 00:01:19,070 Maybe you need cash to expand your operation, open a new factory or open a new plant. 9 00:01:19,370 --> 00:01:24,540 So all these are just some of the reasons why cash is important. 10 00:01:24,920 --> 00:01:34,640 So given the importance of cash, there is a designated statement just to track the movement in cash. 11 00:01:34,650 --> 00:01:39,670 And when we say movement in cash, we say, how did the cash move? 12 00:01:39,680 --> 00:01:41,590 What was the cash inflow? 13 00:01:41,600 --> 00:01:45,330 What was the cash outflow in a given period? 14 00:01:45,530 --> 00:01:52,310 So when we say cash inflow, that means that cash coming into the business, the cash we receive maybe 15 00:01:52,310 --> 00:02:02,930 from a customer, maybe from the bank, or maybe from someone that we provide services to. 16 00:02:03,260 --> 00:02:09,490 So any cash that we collect, that is a cash in cash inflow. 17 00:02:09,890 --> 00:02:13,730 Now, the cash outflow, that's the cash leaving the company. 18 00:02:13,740 --> 00:02:21,050 So any cash that leaves the company, maybe we purchased an asset, we paid cash, maybe we purchased 19 00:02:21,050 --> 00:02:25,430 some inventory, maybe we paid money for our suppliers. 20 00:02:25,430 --> 00:02:27,620 Maybe we paid salaries, expenses. 21 00:02:27,890 --> 00:02:33,260 All these cash outflows are just cash leaving the company. 22 00:02:33,290 --> 00:02:39,080 So this is a cash out now, if you think of the business as the water. 23 00:02:39,080 --> 00:02:39,530 Thanks. 24 00:02:39,690 --> 00:02:46,940 So you have some cash coming into the tank on some cash leaving the tank, and you always have some 25 00:02:46,940 --> 00:02:50,400 cash balance within the business. 26 00:02:50,690 --> 00:02:59,690 Now, I need you to think of the cash flow statement as three separate mini sections or mini statements. 27 00:02:59,960 --> 00:03:08,080 So one for operating activities, one for investing activities, one for financing activities. 28 00:03:08,660 --> 00:03:18,260 So in a way, we are categorizing our business into three areas, one area for operation, one area 29 00:03:18,260 --> 00:03:20,900 for investing, one area for financing. 30 00:03:21,140 --> 00:03:29,600 And under each area, we would like to see what was the cash inflow, the cash outflow and the net movement 31 00:03:29,600 --> 00:03:33,650 in cash under each of these three sections. 32 00:03:33,890 --> 00:03:43,040 Now, if we think of operating activities, then we think of any cash inflow or cash outflow that is 33 00:03:43,040 --> 00:03:47,280 related to the business operation, the core of the business. 34 00:03:47,540 --> 00:03:55,370 So if you are a furniture manufacturer, anything to do with making or selling the furniture itself. 35 00:03:55,550 --> 00:04:06,530 So here we talk about any cash inflow or cash outflow related to managing or funding the core of your 36 00:04:06,830 --> 00:04:07,590 operation. 37 00:04:07,850 --> 00:04:15,170 So if we think of cash inflow from operating activities, that could be cash from cash sales, revenue 38 00:04:15,170 --> 00:04:18,920 could be cash from cash collection from customers. 39 00:04:19,100 --> 00:04:25,190 Now, cash outflow, it could be purchase of stock, raw material inventory. 40 00:04:25,190 --> 00:04:31,330 It could be payment to suppliers or payment of expenses such as salaries. 41 00:04:31,490 --> 00:04:37,210 So all these are examples of cash inflow and outflow from operating activities. 42 00:04:37,550 --> 00:04:46,670 Now, investing activities is mainly related to the purchase or selling of a non-current assets. 43 00:04:46,910 --> 00:04:53,870 So anything to do with non-current assets without buying a noncurrent asset or selling a noncurrent 44 00:04:53,870 --> 00:04:54,320 asset. 45 00:04:54,560 --> 00:05:00,940 Any cash inflow of outflow related to that will be listed under the investing activities. 46 00:05:01,160 --> 00:05:09,770 Also here we will invest any purchases or any investment in these securities may be shares or stocks 47 00:05:09,980 --> 00:05:11,480 in any other company. 48 00:05:11,630 --> 00:05:19,350 So cash inflow from investing activity could be something like sales of noncurrent asset. 49 00:05:19,400 --> 00:05:25,460 If we have that equipment and we did sell it for, let's say, five hundred pound, then we will have 50 00:05:25,460 --> 00:05:27,370 a cash inflow of funds. 51 00:05:27,590 --> 00:05:28,910 The cash outflow will. 52 00:05:29,330 --> 00:05:38,660 Something like purchase or acquisition of a non-current assets, and there are some examples there as 53 00:05:38,660 --> 00:05:38,900 well. 54 00:05:39,260 --> 00:05:46,730 Now, financing activities, this is the cash inflow and cash outflow related to external sources of 55 00:05:46,730 --> 00:05:47,580 financing. 56 00:05:47,990 --> 00:05:53,790 Now, external sources of financing, we have the owners and we have the creditors, the bank. 57 00:05:54,230 --> 00:06:01,660 So any cash inflow, cash outflow related to that will be listed under the financing activities. 58 00:06:01,820 --> 00:06:09,890 So some examples on the cash inflow from financing activity is when a company issues stock so they sell 59 00:06:09,890 --> 00:06:16,780 the stock in the market, they collect some cash for themselves and that will be a cash inflow. 60 00:06:17,030 --> 00:06:26,120 Cash outflow could be something like payment of dividends or repayment of that annuity payment to the 61 00:06:26,120 --> 00:06:26,660 owners. 62 00:06:26,670 --> 00:06:33,140 All the creditors will be classified on the financing activity, cash outflow. 63 00:06:33,560 --> 00:06:37,390 Now, this is just a summary of what we said. 64 00:06:37,640 --> 00:06:41,720 Let's talk about how we prepare the cash flow statement. 65 00:06:41,750 --> 00:06:47,740 Now, when you think about preparing the cash flow statement, think about each section as a mission 66 00:06:47,750 --> 00:06:49,110 statement by itself. 67 00:06:49,550 --> 00:06:57,290 Now, if we take first the operating activities section, then we have two ways to do to prepare that 68 00:06:57,290 --> 00:07:00,440 section, which is the direct method in the method. 69 00:07:00,860 --> 00:07:09,440 Now, 99 percent of companies use the index method and this is what we would use in this example as 70 00:07:09,440 --> 00:07:09,660 well. 71 00:07:09,920 --> 00:07:15,710 So basically what you do, you start with the net income from the income statement. 72 00:07:16,220 --> 00:07:21,450 And step one, you add the non-cash item that you have removed. 73 00:07:21,650 --> 00:07:29,120 So, for example, if you took out some depreciation, you need to add it back to the net income value. 74 00:07:29,330 --> 00:07:36,560 Step number two, you need to take any changes in current assets or current liabilities and reflect 75 00:07:36,560 --> 00:07:42,680 that in the number you have under the adjusted net income number. 76 00:07:43,430 --> 00:07:45,050 Now, this is the rule you have. 77 00:07:45,350 --> 00:07:54,530 If you have an increase in the current asset, then you must reduce the cash by that value of increase. 78 00:07:54,800 --> 00:08:03,080 The logic here is to say if I increase my current asset, that means I must have used some cash to achieve 79 00:08:03,080 --> 00:08:03,330 that. 80 00:08:03,470 --> 00:08:06,710 So just keep that thinking in your mind. 81 00:08:07,340 --> 00:08:15,740 If your current asset has decreased, that means probably you converted that asset to cash, so that 82 00:08:15,740 --> 00:08:17,120 will increase the cash. 83 00:08:17,390 --> 00:08:23,770 Just remember, these two and liability will be the opposite to assets. 84 00:08:23,780 --> 00:08:30,220 So this is the two steps how to prepare the operating activity section. 85 00:08:30,230 --> 00:08:32,190 So we start from the net income. 86 00:08:32,420 --> 00:08:39,000 We know this is a figure that includes some cash and non-cash items. 87 00:08:39,230 --> 00:08:43,370 Step number one, we add back the depreciation step. 88 00:08:43,370 --> 00:08:49,970 Number two, we make the adjustments based on the changes in the balance sheet and that will give us 89 00:08:49,970 --> 00:09:00,260 the cash flow from operating activities now for investing activities and financing activities on what 90 00:09:00,260 --> 00:09:09,330 we do is just to add whatever cash inflow we have and deduct whatever cash outflow we have. 91 00:09:09,350 --> 00:09:18,080 So the direct and indirect method only applies to the operating activity section when we prepare the 92 00:09:18,260 --> 00:09:20,830 operating activities section. 93 00:09:21,530 --> 00:09:25,570 So to prepare, let's look at these numbers on this example. 94 00:09:26,270 --> 00:09:32,200 Number one, when you prepare a cash flow statement, you need the following. 95 00:09:32,330 --> 00:09:37,060 Number one, you need a comparative balance sheet. 96 00:09:37,400 --> 00:09:46,610 So if you are preparing the cash flow statement for 2020, that means you need a balance sheet for 2019 97 00:09:46,610 --> 00:09:53,720 on the balance sheet for 2020, and you will need an income statement for the same year. 98 00:09:53,720 --> 00:09:57,700 So you will need an income statement for 2020. 99 00:09:58,430 --> 00:10:04,080 So let's look at this example fairly all 2007, 2008. 100 00:10:04,130 --> 00:10:12,350 So once you have the balance sheet for the two years, you need to create a third column where you calculate 101 00:10:12,350 --> 00:10:13,370 the differences. 102 00:10:13,850 --> 00:10:23,660 So you take the value in 2008 minus the value in 2007 in this year, and you do that for all the items 103 00:10:23,660 --> 00:10:24,910 in the balance sheet. 104 00:10:24,920 --> 00:10:26,810 So that's your step one. 105 00:10:27,440 --> 00:10:28,850 Then you have your income. 106 00:10:28,930 --> 00:10:30,590 Statements for the same year. 107 00:10:30,850 --> 00:10:40,090 Now you start preparing the cash flow statement, remember, think of it as a three separate many statements. 108 00:10:40,300 --> 00:10:44,800 So the first statement you need to prepare is for operating activities. 109 00:10:45,100 --> 00:10:51,310 And we said, step number one, we start with the net income from the income statement. 110 00:10:51,520 --> 00:10:58,240 So the 74000, we add back the non-cash items, which is depreciation. 111 00:10:58,240 --> 00:11:03,980 In this case, it's forty three thousand, as you can see, in the depreciation expense. 112 00:11:04,120 --> 00:11:07,210 And then we move to step number two. 113 00:11:07,390 --> 00:11:13,040 Step number two, we will make adjustments based on the changes in the balance sheet. 114 00:11:13,360 --> 00:11:20,980 So any increase to the current liability will increase cash and increase to the current assets will 115 00:11:20,980 --> 00:11:22,150 decrease cash. 116 00:11:22,160 --> 00:11:30,700 So we record all these transactions of all these changes and we make the adjustment to the numbers. 117 00:11:30,940 --> 00:11:40,110 And finally, the net cash impact from operating will be positive, seventy four thousand four hundred 118 00:11:40,120 --> 00:11:40,640 and fifty. 119 00:11:41,050 --> 00:11:53,350 Now, that means Company A. was able to generate seventy four thousand four hundred fifty pound in cash 120 00:11:53,680 --> 00:11:55,410 in 2008. 121 00:11:55,600 --> 00:12:03,430 So the difference between the cash outflow and the cash inflow was seventy for four hundred and fifty 122 00:12:03,610 --> 00:12:06,690 for the cash inflow site. 123 00:12:07,240 --> 00:12:14,410 Now if we look at the cash flow from investing, then we look at loans extended to other companies. 124 00:12:14,710 --> 00:12:18,670 So we increase the loan to other companies by nineteen thousand. 125 00:12:19,060 --> 00:12:22,990 We did make purchase of equipment for forty five thousand. 126 00:12:23,230 --> 00:12:29,800 All these are cash outflow, hence the negative sign cash flow from investing. 127 00:12:29,800 --> 00:12:32,920 That is sixty four thousand negative. 128 00:12:33,160 --> 00:12:39,520 So that means the cash outflow in 2008 from investing activity. 129 00:12:39,940 --> 00:12:46,800 The cash outflow was higher than the cash inflow by sixty four thousand. 130 00:12:47,530 --> 00:12:53,080 If we look at cash flow from financing again, we only adding to the cash inflow. 131 00:12:53,320 --> 00:12:55,390 We deducted the cash outflow. 132 00:12:55,570 --> 00:13:03,280 So we have some cash inflow, cash outflow and the net and that is fifteen thousand positive. 133 00:13:03,640 --> 00:13:11,500 So cash inflow was higher than cash outflow by fifteen thousand from financing activities. 134 00:13:11,770 --> 00:13:14,500 Now, net change in cash. 135 00:13:14,860 --> 00:13:23,920 We need to look at the change from financing, change from investing, change from operating activities 136 00:13:24,100 --> 00:13:26,200 and look at the net of that. 137 00:13:26,500 --> 00:13:34,420 And when we look at this figure on see twenty five thousand four hundred and fifty, that means a company 138 00:13:34,780 --> 00:13:42,430 was able to generate cash worth of twenty five, four hundred and fifty. 139 00:13:42,610 --> 00:13:51,940 So the cash inflow for this company was higher than the cash outflow by twenty five thousand four hundred 140 00:13:51,970 --> 00:13:52,540 and sixty. 141 00:13:52,630 --> 00:13:56,050 So this is the cash flow statement for you. 142 00:13:56,050 --> 00:13:58,660 I hope you did enjoy this lecture. 143 00:13:58,750 --> 00:13:59,770 Thank you very much.