Alright, hello everybody!
I'm glad you're here today.
As I introduced myself in the previous lecture, my name is Dave Krug, and I teach-I'm a professor
at Johnson County Community College, and I tech accounting, and what we are going to
do in this class is: We are going to learn how to do the cash flow statement, okay?
This is one of my favorite things to teach.
I love the cash flow statement, and so in this series of lectures, I'm going to provide
you what you need, and then tell you what to do, and you're going to learn how to do
the cash flow statement.
Now learning how to do the cash flow statement is a very good thing, and it's required, or
needed for a lot of different classes in business.
I know here at the college I teach at it's in accounting two.
It's also in managerial classes.
There's even an intermediate class were you revisit the cash flow statement, and there's
other classes as well.
So if you have a firm grasp of the cash flow statement, that's a good thing, okay?
Now, remember way back when you took your first accounting course, and they talked to
you about the purpose of accounting is to prepare financial statements for external
users so they can make better decisions, right?
And does anyone remember the first financial statement you prepare?
The income statement, and then the statement of equity, and then the balance sheet, right?
Now, a lot of classes say the fourth financial statement that you release to the public is
called the cash flow statement.
Most places don't teach the cash flow statement in accounting one, because it's kind of...it'
s too difficult when you're at that early stage of your education, okay?
So some of you have never has that, but that's what we're going to do now, the cash flow
statement is one of those four financial statements that we prepare for the public, again, income
statements, statement of equity, the balance sheet, and the cash flow statement.
If you get an annual report for a company, I guarantee you those four statements will
be in there.
Now they might have additional; things as well, in their notes, but those four statements
are required, alright?
Now, some other background, we prepare the income statement, the statement of equity,
and the balance sheet.
We don't use the cash basis of accounting, do we?
What is the basis of accounting we use in accounting?
The accrual basis, right?
Remember the accrual basis?
We recognize revenues when they are earned, not necessarily when you receive the cash.
You recognize revenues when they are earned, and when are they earned?
When you provide a product or service.
So cash is not the emphasis to recognize revenue in the accrual basis.
Is that correct?
You also had what's called the matching principle.
Expenses are not necessarily recognized when the cash goes out, right?
Expenses are recognized when they are incurred, and we attempt to match the expenses to the
periods they help create revenue, right?
This is why we do adjusting journal entries.
Remember that way back?
So that you can conform to the accrual basis of accounting.
The cash basis of accounting is not-does not generally accepted accounting principles,
okay?
And you might-sometimes it strikes people as odd, but I want you to think of this: You
could really distort financial statements if you use the cash basis of accounting, because
couldn't you tell your accounts payable people "Hey, don't write any checks during December,
if you had a December 31 year end.
Write the checks in January so those expenses won't show up on this year."
Or you could even ask customers "Can you pay me early?
I mean we'll give you the services eventually, or the products eventually, but pay us early,
so we can show that as revenue."
You could really mess up an income statement, couldn't you?
Okay?
So, for the most part, companies are not allowed to use the cash basis of accounting.
They have to use the accrual basis of accounting, okay?
However, that does bring a certain set of challenges to people, or to companies, and
eventually to external readers of those.
As you guys get further along in your business careers, you're going to find out that there's...there's
ways that you can misrepresent the health of your organization if somebody id just looking
at the income statement, the balance sheet, and the statement of equity, okay?
There's ways that you can misrepresent them.
Now some people misrepresent unintentionally, but there are others that intentionally misrepresent.
So there is one reason that we have the cash flow statement.
Do you guys remember when you had high school government class?
In the United States you have the three branches.
Does anybody remember the three branches of the government in the United States?
Executive, legislative, and the judicial.
Did you ever hear about how those are kind of to provide checks and balances on each
other, okay?
Well I want you to think of the cash slow statement kind of like that.
The cash flow statement, in a way, is a check and balance on the income statement, the balance,
and the statement of equity.
If people are intentionally trying to falsify their results or make their organization look
healthier than it is, a lot of times you can spot it on the cash flow statement, okay?
It goes the other way too.
If people try to make the cash flow statement look overly healthy, it'll show up on the
income statement.
You see what I'm saying?
So these foot statements work together as checks and balances, and as business managers,
they help you run the business, and if your are ever analyzing a company as far as its
health, or maybe you're thinking about extending credit to them, or investing in them.
These are really, really good things to know, okay?
So that is why we have the cash flow statement.
It's kind of a way of saying "Okay time out!
I don't understand your accrual system.
I don't want to know about matching.
I want to know about the cash that comes in, and the cash that goes out.
You with me?
I know I'm giving you a lot of intro here, but I want to lay a good foundation.
Let me ask you this: have you ever know somebody?
Have you ever heard a story on the news, like an athlete who went bankrupt, and they were
like- you know they made millions and millions of dollars, okay.
You hear that all the time right?
Well there are a lot of people that, if you look at what they earn in a year, it's really
pretty good.
If you look at the assets that they have, their house, their cars, their vacation homes,
their investments.
Everything looks pretty good, but guess what those people do not have.
They don't have any cash.
There are people in Johnson County, which is where we are now, Johnson County is a very
wealthy county isn't it?
And you can drive through these neighborhoods, and see these huge houses with four car garages,
and the kids are running around in Baby Gap clothes, there are Sea-Doo's in the driveway
and everything, and I'm going to tell you: some of those people couldn't get 1000 dollars
cash together by the end of the week if they had to, they really couldn't.
They are cash poor.
Have you known people like this?
Okay?
Cash is important.
Liquidity is important.
Many a company has gone out of business, and if you looked at their income stamen, it looked
alright.
If you looked at their balance sheet, it looked alright.
Statement of equity looked okay, but their problems were they did not have any cash,
okay?
So the cash flow statement is an extremely important financial statement, make sense?
Do any of you- does anybody here do a budget for themselves?
Do you ever keep track of how you spend your money?
Anybody do that on like quicken or something?
You do?
Do you use Quicken or some formal method?
Excel.
Excel?
Yeah?
As far as were you spend your money Travis?
Okay.
Yeah just divvy it up, and just know where we stand at the beginning of each paycheck.
Okay now why do you do that?
So I don't overspend.
So you don't over spend.
What other reasons might you keep track of the cash you spend?
You know where your money's going.
You know where you're spending your money on right.
Okay good.
What other reasons might small families or young family keep track of their cash?
For savings.
Yah maybe you want to save up for something like a vacation coming up in the summer or
college.
Okay you got a little baby girl.
Someday she's going to be going to college.
I wonder what it will cost then right.
I got teen age boys in high school and it seems like yesterday they were babies and
I'm getting ready to pay for college and I'm like how am I going to do this.
But you might keep track of you cash as a way to save up for something right.
Well let's look at; taking a look at this computer, the PowerPoints and you folks watching
this on the computer you know where to find this information as well that you can print
out if you'd like to and everybody here has it.
But we're going to learn the cash flow statement.
There is my email address by the way.
But I want you to understand that the purpose of a cash flow statement for company is exactly
the same reasons; well not exactly but pretty doggone close to the reasons that Travis you
keep track of your cash.
How did we get our cash?
Where do we spend our money?
Okay.
Is our cash balance going up or is our cash balance going down?
Right?
Other reasons that a company might want to know about their cash flow.
How did we fund our operations?
Do we have enough cash to pay our debts as they mature right?
That's another reason you might keep track of your cash right.
Maybe you have a mortgage or loan payment or a school payment and you need to make sure
you have cash to pay that.
Or maybe you're going to have to ask yourself am I going to have to borrow more money.
Am I running out of cash here and am I going to have to take out another student loan.
Or maybe if you're business you're going to say do we have enough cash to pay dividends
right.
These are the reasons that a company might pay or might keep track of their cash flow
and a lot of the cash flow statement is important.
It's not too different from why you would as well right.
Okay.
Now I want to define something real quick and that is this term called cash equivalent.
When you look at a financial statement for a company and you see the line that says cash
it usually says cash and cash equivalents.
And I want to define what cash equivalents are.
And there; like I said they're usually on the same line of the financial statement.
Cash equivalents as this slide says are short term and they are highly liquid okay.
They are so close to maturity that you pretty much know what they are worth in cash okay.
They're not effected by you know changes in the market or interest rate.
Let me tell you some things that would not be cash equivalents.
Investment's in common stock of another company.
A long term note receivable; no.
Treasury bond, no.
These are things that are really close.
Usually if its debt it needs to be ninety days or closer to maturity.
So this might be like a certificate of deposit or a; you know something like that.
Like a save; not saving accounts; savings accounts are just cash.
But anything like a certificate of deposit or a short term treasury bill that's ninety
days or soon and so that's what a cash equivalent is.
But usually you'll just see that on the same line, cash and cash equivalents okay.
Well I at least I want you to be familiar with that term.
Alright any questions thus far?
Alright what I want to do now is talk about the fact that a cash flow statement has three
very important sections.
The operating, the investing and the financing activities section okay.
And what our goal in this class, this specific session is we want to start working on how
do you classify cash flows okay.
Let's go back to the balance sheet.
You're going to have trouble preparing a balance sheet if you look at an account and you don't
know whether it's an asset or a liability or part of equity correct?
You're not going to be able to prepare an income statement if you look at something
and you don't know whether it's an expense or revenue.
You have to be able to put it in the right spot.
Is that correct?
Well a cash flow statement has three important sections.
The operating, the investing and the financing and so if you don't; if you look at a cash
flow and you can't classify it correctly you're going to put it in the wrong spot on the cash
flow statement.
Does that make sense?
So we need to be able to classify these cash flow.
Let me just show you a quick example of a cash flow statement.
Okay.
This is a very simple example of just a made up company and let me get my pointer going
here.
And I want you to notice that we have these three sections.
Cash flows from operating activities, cash flows from investing activities and cash flows
from financing activities and then we add those three up and you get what your net change
in cash is.
In this case it's forty one thousand.
And you add that to the begging balance of cash and that brings you to your ending balance
of cash right.
But you have these three sections of the cash flow statement correct.
You need to be able to properly classify cash flows.
Cause like take a look at this.
Proceeds from sale of land.
What type of activity is that?
That's an investing activity.
Well if you don't know it's an investing activity and you mistakenly put it up in the operating
section or put it down in the financing section it's not going to really help your users.
It's got to be in the right section okay.
Same thing.
Payment of dividends.
If you put that up in the operating section mistakenly it's going to mess up your financial
statement.
It's not going to be very helpful okay.
So one of the first things that we need to be able to do is look at cash flows and understand
what type of cash flow it is.
You with me?
So we're going to talk about that here.
We're going to talk about operating cash flows, investing cash flows and financing cash flows
okay.
So that's what I want to do know.
We're going to talk about these three different sections.