This session is about cash flow statement now, cash is really important for any business.
Cash is needed for maybe a replacement of an asset.
So maybe one of your equipment needs a replacement.
Maybe you need a new production line, a new vehicle and so on and so forth.
Also, cash is important for capturing some market opportunities.
Let's say one of your competitors is up for sale.
If you have the cash, you could take advantage, capture of that opportunity.
Maybe you need cash to expand your operation, open a new factory or open a new plant.
So all these are just some of the reasons why cash is important.
So given the importance of cash, there is a designated statement just to track the movement in cash.
And when we say movement in cash, we say, how did the cash move?
What was the cash inflow?
What was the cash outflow in a given period?
So when we say cash inflow, that means that cash coming into the business, the cash we receive maybe
from a customer, maybe from the bank, or maybe from someone that we provide services to.
So any cash that we collect, that is a cash in cash inflow.
Now, the cash outflow, that's the cash leaving the company.
So any cash that leaves the company, maybe we purchased an asset, we paid cash, maybe we purchased
some inventory, maybe we paid money for our suppliers.
Maybe we paid salaries, expenses.
All these cash outflows are just cash leaving the company.
So this is a cash out now, if you think of the business as the water.
Thanks.
So you have some cash coming into the tank on some cash leaving the tank, and you always have some
cash balance within the business.
Now, I need you to think of the cash flow statement as three separate mini sections or mini statements.
So one for operating activities, one for investing activities, one for financing activities.
So in a way, we are categorizing our business into three areas, one area for operation, one area
for investing, one area for financing.
And under each area, we would like to see what was the cash inflow, the cash outflow and the net movement
in cash under each of these three sections.
Now, if we think of operating activities, then we think of any cash inflow or cash outflow that is
related to the business operation, the core of the business.
So if you are a furniture manufacturer, anything to do with making or selling the furniture itself.
So here we talk about any cash inflow or cash outflow related to managing or funding the core of your
operation.
So if we think of cash inflow from operating activities, that could be cash from cash sales, revenue
could be cash from cash collection from customers.
Now, cash outflow, it could be purchase of stock, raw material inventory.
It could be payment to suppliers or payment of expenses such as salaries.
So all these are examples of cash inflow and outflow from operating activities.
Now, investing activities is mainly related to the purchase or selling of a non-current assets.
So anything to do with non-current assets without buying a noncurrent asset or selling a noncurrent
asset.
Any cash inflow of outflow related to that will be listed under the investing activities.
Also here we will invest any purchases or any investment in these securities may be shares or stocks
in any other company.
So cash inflow from investing activity could be something like sales of noncurrent asset.
If we have that equipment and we did sell it for, let's say, five hundred pound, then we will have
a cash inflow of funds.
The cash outflow will.
Something like purchase or acquisition of a non-current assets, and there are some examples there as
well.
Now, financing activities, this is the cash inflow and cash outflow related to external sources of
financing.
Now, external sources of financing, we have the owners and we have the creditors, the bank.
So any cash inflow, cash outflow related to that will be listed under the financing activities.
So some examples on the cash inflow from financing activity is when a company issues stock so they sell
the stock in the market, they collect some cash for themselves and that will be a cash inflow.
Cash outflow could be something like payment of dividends or repayment of that annuity payment to the
owners.
All the creditors will be classified on the financing activity, cash outflow.
Now, this is just a summary of what we said.
Let's talk about how we prepare the cash flow statement.
Now, when you think about preparing the cash flow statement, think about each section as a mission
statement by itself.
Now, if we take first the operating activities section, then we have two ways to do to prepare that
section, which is the direct method in the method.
Now, 99 percent of companies use the index method and this is what we would use in this example as
well.
So basically what you do, you start with the net income from the income statement.
And step one, you add the non-cash item that you have removed.
So, for example, if you took out some depreciation, you need to add it back to the net income value.
Step number two, you need to take any changes in current assets or current liabilities and reflect
that in the number you have under the adjusted net income number.
Now, this is the rule you have.
If you have an increase in the current asset, then you must reduce the cash by that value of increase.
The logic here is to say if I increase my current asset, that means I must have used some cash to achieve
that.
So just keep that thinking in your mind.
If your current asset has decreased, that means probably you converted that asset to cash, so that
will increase the cash.
Just remember, these two and liability will be the opposite to assets.
So this is the two steps how to prepare the operating activity section.
So we start from the net income.
We know this is a figure that includes some cash and non-cash items.
Step number one, we add back the depreciation step.
Number two, we make the adjustments based on the changes in the balance sheet and that will give us
the cash flow from operating activities now for investing activities and financing activities on what
we do is just to add whatever cash inflow we have and deduct whatever cash outflow we have.
So the direct and indirect method only applies to the operating activity section when we prepare the
operating activities section.
So to prepare, let's look at these numbers on this example.
Number one, when you prepare a cash flow statement, you need the following.
Number one, you need a comparative balance sheet.
So if you are preparing the cash flow statement for 2020, that means you need a balance sheet for 2019
on the balance sheet for 2020, and you will need an income statement for the same year.
So you will need an income statement for 2020.
So let's look at this example fairly all 2007, 2008.
So once you have the balance sheet for the two years, you need to create a third column where you calculate
the differences.
So you take the value in 2008 minus the value in 2007 in this year, and you do that for all the items
in the balance sheet.
So that's your step one.
Then you have your income.
Statements for the same year.
Now you start preparing the cash flow statement, remember, think of it as a three separate many statements.
So the first statement you need to prepare is for operating activities.
And we said, step number one, we start with the net income from the income statement.
So the 74000, we add back the non-cash items, which is depreciation.
In this case, it's forty three thousand, as you can see, in the depreciation expense.
And then we move to step number two.
Step number two, we will make adjustments based on the changes in the balance sheet.
So any increase to the current liability will increase cash and increase to the current assets will
decrease cash.
So we record all these transactions of all these changes and we make the adjustment to the numbers.
And finally, the net cash impact from operating will be positive, seventy four thousand four hundred
and fifty.
Now, that means Company A. was able to generate seventy four thousand four hundred fifty pound in cash
in 2008.
So the difference between the cash outflow and the cash inflow was seventy for four hundred and fifty
for the cash inflow site.
Now if we look at the cash flow from investing, then we look at loans extended to other companies.
So we increase the loan to other companies by nineteen thousand.
We did make purchase of equipment for forty five thousand.
All these are cash outflow, hence the negative sign cash flow from investing.
That is sixty four thousand negative.
So that means the cash outflow in 2008 from investing activity.
The cash outflow was higher than the cash inflow by sixty four thousand.
If we look at cash flow from financing again, we only adding to the cash inflow.
We deducted the cash outflow.
So we have some cash inflow, cash outflow and the net and that is fifteen thousand positive.
So cash inflow was higher than cash outflow by fifteen thousand from financing activities.
Now, net change in cash.
We need to look at the change from financing, change from investing, change from operating activities
and look at the net of that.
And when we look at this figure on see twenty five thousand four hundred and fifty, that means a company
was able to generate cash worth of twenty five, four hundred and fifty.
So the cash inflow for this company was higher than the cash outflow by twenty five thousand four hundred
and sixty.
So this is the cash flow statement for you.
I hope you did enjoy this lecture.
Thank you very much.