the cash flow statement segment is gonna be our last part within our introductory
to financial accounting series
and it's very epic in nature because I'm probably gonna have to create four or five
videos to articulate the idea well enough
and convey the concept so that you can fully develop and create cash flow
statements on your
test or exam and it's easily the most problematic for students, so I wanted to take
the time to really go over it well enough
so to begin let's look at
an income statement. So we know the very general parts
of an income statement are revenues, expenses and net income
and the reason why I wanted to go over this is because I wanted
to talk about accruals
first, so the the income statement is prepared on an accrual
basis which means that the revenues
are reported when they are earned
and not when cash is received, and expenses
are reported when they are incurred and not
when cash is spent. One example of each...
revenues are for instance if we have a receivable
receivable would be
reported as revenue even though we have yet to receive a cash. So that's one
example of an accrual entry
and an expense entry... well if we were to
report our salaries expense
this would be our entry. We would debit salaries expense and credit salaries payable
and as you can see there is no cash
being involved in this journal entry, yet we're still going to record the expense
so the accrual basis of accounting is not at all
equal to the cash basis of accounting, and I just wanted to emphasize that,
so we 100 percent know what we're talking about when we are talking about
accrual accounting. So lets move on
and actually look at an income statement from a company.
So right here I have an income statement
from the company Barrick gold which is actually
a miner company and they mine gold, so
what I want to go over and I know there's a lot here but the only thing I want to go
over is
the net loss figure which is
well since it's stated in millions of dollars this is going to be $10.6 billion dollars
of a net loss and let's go
over to our cash flow statement. So just remember that number
from the cash flow statement. The cash flow statement
seen here you can see that we have the net loss at the top
and even though we have a net loss you're gonna see that the
cash at the beginning of the year was $2 billion
and then it went to $2.4 billion so there
actually was an increase of $327 million
in cash. So the one thing one thing that I wanted
you to get from that is to realize
is that net income does not mean
that our cash balance is increasing
so if we have net income it does not mean that cash is going up
cash can easily go down, or the reverse can happen as we can see
in that example I provided. If net income went down...
it went down by $10.6 billion dollars and then
cash went up so
net income the reason why it can be completely different is because the net
income is a number or an element that is
created on an accrual basis. So what we're gonna do
is to prepare our cash flow statement
we're actually going to... we're gonna start
with our income statement, so this is going to be the indirect method
and then we're going to you
take the net income because
I'm not sure you picked up on it but the
cast flow statement in which I have here actually starts
off with the net income or the net loss, so that's the indirect approach. We'll always
start off with the net income or net loss figure
and then we're going to want to adjust
for all of the accrual entries.
And that way once we get rid of all of the accrual parts we'll just be left
with the cash basis part
of net income, and that way we'll be able to realize how much cash
has increased/decreased throughout the year.
And that's actually going to be entirely
the operating section
of our cash flow statement and I'll go back to the
statement so that you can see the cash flow statement...
so the operating activities part is right here
and as you can see that is the complete segment and there are actually 3 segments
operating
investing and the financing activities, because all
all activities within a company can be separated into these three types of
activities...
I think I went over this in my second or third tutorial
and the investing and financing parts..
so we have the three parts: operating, we have investing
and we have financing.
So these these two parts at the bottom are gonna be the same
regardless of whether we use the
indirect approach
or the direct approach. The only thing that is going to be different is the operating cash
flow part of the cash flow statement
depending on whether we use the indirect or direct method.
Just be prepared that we're going to be
essentially converting this net income figure
into a cash basis figure, and we're gonna learn all about that over the next
few value videos, so I'll see you guys in the next one.
Make sure to subscribe and thanks for watching.