Statement of Cash Flows - Lesson 1

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..