Accounting: Assembling a Statement of Cash Flows

your cash needs So as we think about the dynamics

of generating cash which at the end of the day

is what you do for a living is a corporation

Let's go back to our bike manufacturer example In a

given month you add up your sales receipts Ten Bike

sold the Google for five grand twenty bikes to Facebook

for ten three hundred bikes to individuals who paid with

cash one hundred fifty big ones fifty bikes to individuals

who paid on credit in twenty five grand there right

So total sales One hundred ninety thousand bucks Well did

you actually put one hundred ninety thousand dollars in cash

in your bank account No Why Well because fifty bucks

were sold to individuals who simply signed a piece of

paper promising to pay you a total of twenty five

grand in sixty days But it's even more complicated than

that because you had twenty bucks that had been sold

to individuals on credit previously who chose this month to

pay off those bills So let's figure out what the

actual cash revenues in the door were for this month

You start with one hundred ninety thousand dollars total sales

figure and subtract twenty five grand in bike sold on

credit to give you one hundred sixty five grand in

direct sales or cash revenues for that period You then

add to this number the twenty bikes at five hundred

bucks each or ten thousand dollars in cash that just

came in from people previously paying off sold bikes So

now the cash total collected in the month is one

hundred seventy five thousand dollars So while that's great one

hundred seventy five grand might seem like a lot of

money but for better or worse you had a whole

bunch of bikes which had costs that had to be

paid for So let's imagine the ideal situation here where

you keep your inventory amount or volume or expense or

dollars in exactly flat That is each month you hold

exactly five hundred units of everything and as soon as

something has sold You put in an order with your

suppliers to immediately refill the inventory volumes of frames tyres

brakes those little basket things on the handlebars All right

So this month in total you sold three hundred eighty

bikes The manufacturing of those bikes had to be paid

for to the tune of two hundred fifty bucks a

bikes That's what Acosta doing Fancy math I am multiplying

hundred fifty dollars Times three hundred eighty units You come

out with a bicycle manufacturing costs of ninety five grand

Well you collected one hundred seventy five grand in cash

and you encourage bike equipment costs or costs of goods

sold of ninety five grand which you just subtract from

your total cash collected And that gives you a notional

profit before operating the company of eighty thousand dollars Right

That was your gross profit But there's a subtle of

maybe not so subtle difference here which throws all your

math off You had previously sold bikes on credit for

which you just collected ten thousand dollars And this month

you sold fifty bikes on credit so your accounts receivable

will have changed dramatically In fact it will have gone

up by the difference of thirty bikes or fifteen thousand

dollars So all of this math focus is on the

company as a cash on cash based perspective You It's

likely that the company has all kinds of other expenses

both cash and noncash right Like if employees have worked

there for a while Well obviously they get their salary

but the company is then probably accruing cash to pay

out projected bonuses at year end It's also probable that

there are other assets the company purchased a while ago

which need to be depreciated like that one year advance

The company had to pay the lease It's building which

then slowly declined in value each month And the cash

that you know went out to lease the building all

at once the beginning of the year And then it

slowly declined over time right That was a tough month

a lot of cash out the door that month Well

we don't need to get into the nitty and or

the gritty of what these factors dude owners equity Yet

the focus here is just about running a little business

Ideally one of your own One you start that has

divergent cash needs different cash profits and losses from accounting

or book based profits and losses Cash flows are different

from earnings Got it big idea there Well that's the

reason the cash flow statements has to exist and a

lot of attention to the balance sheet exists as well

It matters a lot Just don't give the balance sheet

too much attention You know you don't want to get 00:04:23.677 --> [endTime] spoiled