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 now.
We're going to talk about these three different sections.
Now I'm actually going to skip over operating.
I'm going to come back to it okay.
Now I'm going to tell you, one of the biggest hurdles in teaching students how to do a cash
flow statement is getting them to understand this classification of cash flows okay.
Because really there are just a ton of different types of cash flows.
And there's some really kind of weird ones too.
So what I'm going to do in this session and as we go through this is I want to concentrate
on the main types of cash flows.
We're not going to worry about all these weird things okay.
And this is not much different than when you took account one right?
Didn't they teach you the main accounts but they didn't bring up these weird investments
and these weird intangible assets.
Now let's walk before we run right.
So I want you to concentrate on learning these main ones and then as we learn those then
we'll kind of build on it just like you did in your initial accounting classes okay.
I want to talk to you about the three main type of investing activities okay.
These are the three most common investing cash flows and when I say classifying cash
flows and classifying cash flow activates it's the same thing.
Okay buying or selling long term investments.
That is an investing cash flow.
So if I buy stock in another company that's an investing cash flow.
Or if I have stock in another company and I sell it that is an investing cash flow.
Are you with me?
Okay.
Buying or selling fixed assets such as land, building, automobiles; equipment.
If I buy a piece of machinery that is an investing cash flow.
If I see a piece of land that is an investing cash flow okay.
Loan cash on or collecting principle, specified principle on a long term note receivable;
that is an investing cash flow.
Are you with me?
Okay now I want you to notice something on these investing cash flows okay.
I'll go over to the docket cam.
We know our accounting equation is assets equal's liabilities plus equity.
Is that correct?
I want you to notice that at least in your understanding were you are now, these investing
cash flows have to do with long term assets okay.
At least were you are now I want you to see that, that list that we're going to go back
to in a second all have to do with long term assets okay.
Let's take a look at it again.
Buying or selling long term investments.
Isn't that a long term asset on your balance sheet?
Buying or selling fixed assets, land building, automobiles, equipment; those are long term
assets right?
A long term note receivable, that's a long term asset.
Does that make sense, okay.
So that can kind of guide you in this early stage.
Are you with me?
Questions on this?
Okay.
Alright let's not look at the three most common financing cash flows okay.
Well issuing long term debt including bonds and when we say like we issue bonds then we're
are going into debt correct?
We're talking about that in one of my classes now.
Issuing long term debt including bonds or paying principle on that debt.
That is a financing cash flow.
You with me?
Obviously it's a financing, it's a cash inflow if you're getting a long term loan and as
you pay off the principle that's a cash outflow but they're both financing cash flows.
You with me?
Issuing stock in your own company is a financing cash flow or if you buy back your own stock.
Remember treasury stock?
Treasury stock is when a company buys back its own stock okay.
That is a financing cash flow.
The other one, the three most common is paying dividends is a financing cash flow.
You with me?
Now if you go back to the docket cam I want you to see that at least in your understanding
of where you are now that these financing largely have to do with items on the right
side of the accounting equation right?
Long term notes payable, long term bonds payable, paying dividends on the stock, issuing stock,
if we buy back our own stock it's a contra equity but all those things have to do with
things on this side, is that correct?
So let this be your guide.
Long term assets, investing, long term items on this side, financing.
You with me?
Any questions?
Okay.
Okay now let's go back and let's talk about operating okay.
Now I want you to; operating are a little bit more difficult to put in a real concise
box of what they're going to be okay.
But operating are the cash flows that occur in our daily operations of our running our
business.
Such as receiving cash from customers okay.
I'm hopping around on this list.
Paying salaries and wages, paying our suppliers okay.
Do you see where these are things that are going to happen all the time in our operations?
I want you to understand when you look back at that investing and financing section, those
are things that occur in our business but they're not really daily operations right.
Do you like buy a big parcel of land all the time for your business?
No.
You might every now and then.
Do you issue stock all the time?
Usually not, usually you have an initial public offering and you may go decades without issuing
more stock.
Do you buy back treasury stock every day?
No. those are somewhat rare.
Even paying dividends is usually only done quarterly.
But going back to this operating do you see where these things have a tendency to be recurring
transactions that occur in the daily operations of the business.
These are the cash flows that occur in what the core business of what we do.
Does that make sense?
I want you to notice that if you; let me get my pointer out.
If you receive interest or pay interest that is an operating cash flow.
That was why I was real specific on those previous slides to say paying principle or
collecting principle right.
Cause if you ever receive interest or pay interest it is an operating cash flow.
Are you with me?
Okay.
If you receive dividends it is an operating cash flow.
If you pay dividends it's a finance okay.
Again receipts from customers, salaries and wages, taxes and fines, payments to suppliers,
those are all operating cash flows.
They occur in the daily operations okay.
Now I know that this takes a little effort to learn these but there's just no other way
around it.
You have to be able to classify your cash flows to be able to prepare a cash flow statement
okay.
Now I also want to talk about one other thing and that's kind of a weird deal.
But there are some transactions that are called non-cash investing and financing transactions
okay.
For example; you can come off that.
Let's say that my company owed your bank a hundred thousand dollars on a long term notes
payable okay.
Well what if we decided you would forgive that debt if I gave you twenty thousand shares
of stock in my company.
Do you see where that transaction, there's no cash that flows either way is there?
You're forgiving the debt.
I'm issuing stock.
There's no cash flow; but that's a pretty doggone significant transaction and we have
to disclose that separately on the cash flow statement.
There's usually a separate note to it that says non-cash, significant non-cash investing
and financing transactions.
And issuing stock to forgive debt would be one of those.
Here's another one.
What if I bought a million dollar building completely on credit?
Well what would that journal entry look like?
If I bought a million dollar building completely on credit wouldn't that look like this?
I would debit building for a million and then I would credit some toward a long term notes
payable right?
Isn't that the journal entry?
Is there any cash coming in or going out here?
No.
Well that is another example of a non-cash investing and financing.
You need to disclose that separately okay.
Some other ones are going to the computer, leasing of assets, converting preferred stock
to common stock, those are significant enough transactions.
What they're trying to do is they don't want people to try to foul the readers okay.
They don't want them to try to foul the readers and if you forgave a bunch of debt by issuing
stock that's something they need to know about.
You with me?
So how do we learn these transactions?
Well I'm going to show you here okay.
You folks who are watching this you have this as well.
You folks here you have this.
I went ahead and made what can be used as some kind of elementary flash cards okay.
What you can do is cut these our and then fold on the dotted line and you've got a little
set of flash cards.
Or if you want just use this information and copy it on index cards if you want okay.
But I kind of do this for you because it may not be obvious of how to make these flash
cards okay.
There should be four pages of this and you can see for example, purchasing inventory
that's something that's going to happen every day right?
That's an operating activity.
Let's look forward.
Purchasing land, well that's an investing activity isn't it?
Right we talked about that.
It's a long term asset.
Selling a piece of equipment is an investing activity.
Let's find a financing one.
Paying dividends is a financing one.
Issuing stock in our company for cash that's a financing activity okay.
Make sense?
So and then you can see I left you a few blank ones if we come up with some others alright.
So you have two things that I want you to do before we meet again.
I want you to make these flash cards and start learning them okay.
And then I'm going to give you this and I'll give you this after, I'll give you folks this
after the cameras stop rolling.
And for you folk at home I want you to do the cash flow hand out number one.
It's just a few questions and a few homework if you want to think of it that way that you
need to do that will get us ready for the next session.
Does that make sense?
Okay.
So this is pretty much it right now.
There's like five or six set to get where you are now to get where you can do a cash
flow statement okay.
The first thing I need you to do though is to start learning those cash flows.
Being able to classify those cash flows okay.
So take some time.
Make those flash cards.
Mix them up.
Learn them until you know them.
You'll start to see sort of a pattern of them.
Like I said investing have a tendency to be long term assets.
Financing have a tendency to be long term debt in equity okay.
Operating have a tendency to be things that happen all the time in our daily operations
okay.
And non-cash obviously are those transactions where if you visualize the journal entry cash
isn't being debited or credited.
Cool?
So that's what I want you to do.
We're done.
Start learning those cash flows and do cash flow hand out number one and I will see you
next time alright.
Bring your calculators next time okay.
Alright, goodbye thanks.