-: So our cash flows start
with our day-to-day business.
Our buy stuff, sell stuff.
Cash flows from operations.
So it's going to be receipts from customers
and payments to suppliers and employees.
That's the key components.
Then we have investing, and this is.
Investing sounds weird 'cause normally people,
individuals, invest in shares,
but this is investing in new infrastructure,
the assets of your business.
So it's non-current asset purchases.
Buying property, plants and equipment, or intangibles,
or selling them off.
An example, so selling off property, plants and equipment,
buying property, plants and equipment,
those are the key items there.
And then there's financing.
So, you have to borrow money or we might raise equity.
We might issue shares and gain cash,
or we might pay out some dividends.
So, once again, I've been referring to Techworks.
So you can see operations, investing, financing.
So we need to be able to build this,
and it ties in with the balance sheet.
So what we do is we get out cash at the beginning
in the balancing sheet,
and then we adjust for operations, investing and financing,
and that will give us our cash at the end.
So this is the Techworks,
sorry, the Lowfunds example that you get to work on,
and I'll show you what we do.
We build, the template I use,
it's the same as those formulas,
I just structure it down the page so it's quick and easy.
Now, when we do cash flow from operations,
we need to calculate receipts from customers
then payments to the suppliers and employees.
Then interest and income tax are separately disclosed
to make it easy for the viewer to interpret.
So, there's no magic to the template.
You can't just memorise it.
It's logic, it's based on reconciling T accounts.
So don't rush it.
Practise it, get good at it.
So, what we do is, step one.
We don't know what our cash receipts from customers are,
but we do know what our opening balance
of trade receivables is.
And a trade receivable is like our debtors.
So if we have our debtors,
I know that we are going to collect that during the period.
So cash receipts from customers is going to include
all my collections from last period
that I'm going to collect in this period.
So anything that was left uncollected,
I'm going to collect this period.
So we get our opening balance of trade debtors.
Also I'm going to collect most of my
sales revenue this period.
So, I'm going to collect any outstanding debts,
that's why we add it, plus my sales revenue.
But!
I'm not going to collect all that sales revenue
because there might be some bad debts.
And this is why we need to adjust for that.
So when a sale happens, debit receivables, credit sales,
but if you have a bad debt,
you have a doubtful debts expense
and an allowance for doubtful debts.
Then, when you write it off,
you're going to see a reduction in your accounts receivable.
Now, normally when accounts receivable goes down,
it's because you've collected the cash,
but in this case you haven't received the cash.
So we don't want to count that.
So we have to calculate our bad debts written off
and take that out from the amount of total cash.
So the way we do that as a formula,
we get our opening balance of doubtful debts,
we add our doubtful debts expense,
and we subtract our provision for doubtful debts, so that.
The logic of that is saying,
well, we didn't actually get that cash amount.
So from there,
we take away our closing balance of trade receivables.
Why?
Because our sales revenue.
Let's say we sold $100,000 in a year,
but at the end of the year we had $20,000 worth of debtors,
our closing balance.
Well, that means we didn't collect all of the sales revenue
so we can't count that in our cash receipts from customers.
We have to subtract that.
So sometimes people memorise this back to front,
and that doesn't make any sense.
The logic is, we add the opening balance
because I'm going to collect that,
and we subtract the closing balance
because I haven't got that cash yet.
And that is how you build cash receipts from customers.
That's the very first step.
Now, if you're quick at this,
you can solve this in about 40 seconds, 50 seconds.
So if you get a question in your exam,
within one minute you should have the answer right.
And now, in your CPA exam, you're going to get 42 MCQs,
and you have two hours to do them.
So you've got more than two minutes an MCQ
so you should be able to be very quick.
But you're going to be given all this information,
and if you don't know how to do it quickly,
you don't have much chance.
So, here is a practical example.
It's just got 9:30, but this is pretty much
my final example for tonight
so I'll spend another couple of minutes.
See if you can build,
and it says "pause the video" so this is for the people
who are watching and recording.
I'm just going to give you about 30 seconds.
I think I actually gave this to you.
If you downloaded the task, the preload task,
you should have already had a look at this.
But you should be able to
work out cash receipts from customers.
Why?
We know what our sales are
and we know what our receivables are, opening and closing.
So we've got sales, but we don't always collect those sales
because they might be bad debts.
Some of it hasn't been collected at the end of the period.
That's going to be in the closing receivables amount.
And then we have our opening receivables
that we're also going to collect.
So here's the logic.
The very first thing is, we have $210,000
from previous period sales that we are going to collect.
So 210, that's my starting point.
I'm also going to add 920
because I sold that during the period.
So 210 plus 920, but at the end of the period 245,000
of this 920 was not yet collected
because it's sitting in debtors so I have to take that away.
Let's see how that looks in a template.
Opening balance of trade receivables.
I am going to collect this.
It's from the sales from last period.
Add my sales revenue, 920.
Now, luckily, in this scenario,
it's quite a quick and easy one,
there are no doubtful debts or bad debts.
And then our closing balance was $245,000.
Our cash receipts, and a few people
have been typing that, 885,000.
Any questions on that?
What you can see is,
if you know how to use this formula approach,
you are going to get the answer right instantly,
and if you don't know it, you're going to be really stuck.
(laughs) Choose the answers that end
with zero, zero, zero, potentially.
So, why does this work?
Why does, sometimes you've got, oh,
you've got this magical template, but why?
Here's the logic.
So, when you make sales, you have a credit to revenue
and you have a debit to accounts receivable.
So, this is how much of that accounts receivable
is still sitting there at the start of the period,
210,000 on debtors who haven't paid you
that will pay you soon.
So, we can add this to the starting point.
Then, during the period,
we make another $920,000 worth of sales.
So we add these two amounts together,
and that gives us total cash to be collected, 1.13 million.
Our opening receivables plus our revenues.
We should collect 1.13 million,
but we don't because we didn't collect it all.
There's 245,000 still to collect.
So what is the difference between the 1.13 million
and the 245 still to collect?
That, well, there's no bad debts written off
so what's the difference?
What is that?
You know, solve for x.
It's like an algebra equation.
885,000.
So now you've seen how it looks in a ledger,
you've seen how it looks in a graph,
and you've also seen how it looks in a template.