Welcome, welcome to a fun and exciting area called statement of cash flows.
Cash flows, very heavily tested.
Very important area, we are going to probably spend an hour, hour and a half on this right
now.
In different sections or different little video clips, but it's going to be a really
important area.
You need to understand this, heavily tested on the exam.
Very important for real world, right?
You are out there doing a job.
This is stuff we're going to cover both for GAAP and then at the very end of the section
under IFRS and the comparisons and differences.
Alright, statement of cash flows.
So we've got our statements.
Whose statements are these?
Management's, right?
Management is responsible for the preparation for the content, and so on.
A complete set of financial statements is a balance sheet, income statements, and statement
of changes in stock holder's equity, statement of cash flows, other comprehensive income,
and things like that.
So a statement of cash flows is just this.
It talks about how much cash did I have at the beginning of the year burning a hole in
my pocket, how much cash do I have at the end of the year?
We are looking at the difference between the beginning and the end and we are trying to
see, what are the ch-ch-ch-changes in cash?
So what it tells me is, how much cash do I have at the beginning, how much cash do I
have at the end?
The difference is the increase or decrease in cash.
So let's say for example at the beginning of the year I had $100, at the end of the
year I have $250.
That means I've got $150 more cash burning a hole in my pocket.
My job is to figure out, where did this cash come from?
As we look at this we are going to see the cash could come from either operating activities
or investing activities or financing activities.
You are going to see this plus or minus this plus or minus this equals the net change.
So what we are trying to do is say, �Hey, I've got $150 more money in my pocket, where
did it come from?"
Where did that money come from?
That's the purpose of the statement of cash flows.
So what we're going to have to do is understand, first of all, what is the definition of cash,
because we are talking about the change of cash.
The other thing is, we need to define what these activities are.
The FASB very carefully defined investing and financing.
If it's not investing or financing, what is?
Boom, operating.
Operating is like the catch-all.
If you don't know where to put it, put it in operating.
So that's what we're looking at as far as where the amounts are coming from.
We've got operating, investing and financing.
FASB carefully defines investing and financing.
Everything else is what?
Operating.
So again, the key is the change.
?Ch-ch-ch-changes, and face the strain ? who sang that song, many years ago?
D-d-d-d-David Bowie.
Ch-changes, there you go!
Alright, looking at notes it says, "Statement of cash flows is required whenever a company
presents their results of operations".
So you provide an income statement you've got to have a statement of cash flows.
The purpose is to provide in-flows and out-flows, sources and uses.
What is the source of money coming in, what is the use of money going out?
Where did the money come from, where is the money going to?
That's our sources and uses.
Now, we talk about cash, right, what is cash?
We know what cash is, that's the green stuff you carry around, makes you popular, gets
you friends, and gets you dates, right, you could buy a date.
What is the cash equivalent?
Because it's cash and cash equivalents.
That's the first balance on the balance sheet.
Cash equivalent is a highly liquid investment with an original, key word is original, maturity
of three months or less.
Highly liquid, original maturity of three months or less.
If you look in your notes it says, "Easily convertible into known amounts of cash."
So it's highly liquid.
"And original maturity of three months or less from the date of purchase".
What that means for example, is, original maturity to you the purchaser.
For example, I have a one year CD.
A one year bank certificate of deposit.
I've had it for, it's a one year CD, and I've had it for nine months, eight months.
What is the original to me?
One year, it's still an investment.
Example two: You have a one year CD that matures in a week.
I buy it from you, what is the original maturity to me?
A week, so it's like debit cash, credit cash.
On the balance sheet it's kind of a wash, right?
It's like, debit cash equivalent, credit cash, but where does it show up on the balance sheet?
Cash and cash equivalents, it's the same line item.
Again, if the original maturity to me is three months or less, cash, cash.
If it's longer than three months, investment cash.
So it goes into the investing which would be and investing activity.
So that's the first thing you need to understand as far as what shows up there on the statement
of cash flows.
As I said earlier, there are three different categories, what are they?
Operating, investing and financing.
The reason I like to cover this later in the course is because of the fact that all of
this deals with journal entries that we had to learn.
Now we've finally gone through journal entries like making a sale.
Journal entries like equity method, cost method.
We've talked about all these different areas, deferred taxes.
That before we hadn't talked about.
Now that we've covered them, now we can go through and actually look at a statement of
cash flows and have it make some sense because there are so many entries on there.
We've got to figure out how each of these journal entries affects cash and cash equivalents.