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Accounting Allah shmoop cash flow statements Here's our little introduction

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to the third child in our little family of financial

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statements and it's called the cash flow statements And well

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it's very much like the income statement with one key

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difference It on ly focuses or tracks cash cash earnings

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as opposed to gap earnings Well why would cash profits

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be any different from accounting profits Ay there's the rub

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and you've gotten your first glimpse as to why accounting

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is a profession and not a hobby So let's explain

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the notion by walking through an example that we're going

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away over simplify for the sake of clearly explaining the

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difference between cash flow and accounting earnings Very important difference

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here So here we go We have a little drone

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company established in two thousand seventeen We deduct our expenses

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to calculate operating profit Right We have revenues hundred million

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box expenses eighty million bucks and we get pretax operating

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profit of twenty mill How do we determine the taxes

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on the operating profit if taxes or thirty percent Easy

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we get twenty million times that thirty percent and that

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gives us yes six million dollars in taxes for that

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period Subtract taxes from operating profit to calculate net profit

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or earnings And yeah there we go Fourteen million bucks

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Simple but not really It's the stuff that makes up

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the eighty million dollars in expenses where we have issues

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here Why while the eighty million and expenses wasn't all

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cash expense huh What does that mean In order to

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assemble the drones efficiently we spent forty million dollars on

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a robot driven factory We spent that cash on the

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factory at the very big ginning of this period were

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just simplifying here And we estimate that the factory will

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last in ten years and then be worth ten million

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box when we sell it for parts So the value

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of that robot factory will decline a total of thirty

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million dollars over ten years Right Started forty then thirty

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Then we sell it for ten again for simplicity in

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this example will just use straight line depreciation me the

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same amount of depreciation will attribute to the factory each

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year year after year and appreciate the value of that

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factory by the same amount for ten years That isthe

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will decrease its value by three million dollars a year

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Each year for ten years until we expect to sell

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it and collect ten million dollars from the sale of

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its parts on eBay or wherever of the eighty million

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dollars in expenses we had this year Then we would

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just a duck three million dollars in that robot factories

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depreciation in value over its ten year period until we

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have it valued as ten million bucks by twenty twenty

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eight at which point we plan to sell it for

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scrap If the robot factory is the only thing we're

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depreciating well then we have a bit more cash flow

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Then we have earnings In this year we have eighty

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million dollars in total operating expense But because we had

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three million dollars in depreciation it wasn't Akash expense this

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year Well we only have seventy seven million of those

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expenses as being paid in cash this year The three

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million of those expenses were non cash That is there

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in accounting charge we take to represent the decline in

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value of that factory over time Why the three million

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clowns are best guesses to roughly what that factory should

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decline at over a decade And yes it's a very

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rough gas We're just guesstimating So yeah there's a ton

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of wiggle room to fake or create weird numbers that

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help Worf heard us in accounting for all this along

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the way Well anyway on seventy seven million of cash

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expenses and six million of taxes Well after one hundred

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million dollars in revenue we have one hundred minus the

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seventy seven million there minus the six million in cash

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profits Yeah or seventeen million total of cash profits or

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catch flow even though we had fourteen million dollars of

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accounting earnings So our cash earnings or cash profits or

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three million dollars higher than our stated gap earnings Interesting

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And remember that we spent the robot factory build dough

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of forty million dollars on the last day of the

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last period so that period or quarter showed huge outflow

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of cash right That forty million dollars all went out

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the door the day the factory was paid off and

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in real life obviously there be progress payments and someone

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But in this laboratory example we assume the factory was

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completely done perfect and it actually worked In that moment

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we gave them a check for forty million bucks in

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cash So also note that on that last day our

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balance sheet would have adjusted as well it would have

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been prior to the robot factory purchase Well something like

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this We've got seventy million dollars have cashed it in

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there and not a whole lot of other assets But

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then after the purchase well it would show only thirty

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million in cash and attributed forty million dollars to that

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robot factory that works are cash declined forty million dollars

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in value and our robot factory materialized as if by

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magic as plus forty million in value came out of

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nowhere Forty million dollars transferred from cash to value we

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attribute to the robot factory having and our shareholders equity

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remained unchanged Nothing happened No action there Well we neither

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created value nor destroyed value In this example we just

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shifted assets around so that hopefully in the future we

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can create value by being able to produce drones cheaper

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faster and better with our brand bank and new robot

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factory thing Following the cash flowing around the company throws

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all kinds of curveballs that those either managing its books

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or inspecting them for a potential investment in the company

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Right Well what else might have moved Cash flows to

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be different from gap stated earnings Well revenues for one

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thing that is not all revenues might have been paid

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in cash cash this year Like we could have sold

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a whole lot of drones three years ago for eighteen

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million dollars paid up front deliver a ble to the

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buyer But then we'd recognize those revenues as per contract

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or am or ties them only when they were delivered

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in one third installments over three years Well in that

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case we'd be recognizing noncash revenues And from the cash

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flow statement in operations we'd have to subtract six million

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bucks worth of cash revenues from our cash flow totals

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Well tons of other curveballs happen We won't get into

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all of them yet First we have to divvy up

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the three disciplines of cash flow itself because we'll cash

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flows in a company we within three discrete separate categories

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What are they Well they comprise the sections of cash

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flow statements which you'll see on a wall of paperwork

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They're accusing case All right The first one cash flow

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from operations Yeah The first section covers the thought process

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and basic arithmetic we just did above It states the

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cash generated or loss from the basic operations of the

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company and that given a period of time and is

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usually cleverly labeled in public company filings as cash flow

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from operations But cash flow statement also covers another area

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Next one's called cash from financing activities So how do

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you account for the change in the companies cash position

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when they've raised cash money by offering shares of ownership

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or equity to the public or own really to anyone

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Well in that period of time the company would have

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given over some of its equity in return for cash

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So cash from financing activities is tracked differently from cash

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from operating activities because it's just a completely different animal

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It's on ly remotely related to the operational health of

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the company itself not directly If company pays a cash

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dividend well then that dividend comes out of this portion

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of the casual statement as well And the clever label

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cash flow from financing activities Yeah that's what it goes

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there That was the father in the son The Holy

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Spirit revolves around cash as it is deployed in the

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company's own investing activity So yeah that's number three cash

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from investing activities It covers the event where say our

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little drone company sells a patent it no longer needs

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for ten million dollars not part of its operations unless

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it was a professional patent maker or something But it

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ain't this's a drone maker So selling a patent isn't

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part of its operations as a business And selling that

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patent isn't about raising money for the company by selling

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dead or equity to Wall Street It wasn't financing the

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builder upgrade of anything with that patent sail It just

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simply didn't need the patent laying around getting old and

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stale and useless because the company had canceled plans for

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its line of AH a singing telegram drones Well that

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patent as an asset just goes away And the company

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shows an increase of ten million dollars in cash or

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cash assets on its balance sheets likely with the value

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of its patent portfolio If it's aggregate Book value was

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held at anything close to market values while declining from

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say ninety million in patent values to now being on

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Lee eighty million rights were taken Ten million of the

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patent value and taken it out of our ninety million

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of assets there And all right well the big message

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here Cash flow statements deliver three key numbers They show

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cash from operations Cash from financing events like selling shares

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is part of an AI po or other fundraising activity

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and cash from infesting activities like selling patents are buying

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a robot factory If all of this was beginning to

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grow hazy see in your brain Oh don't sweat it

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for even a nanosecond will cover all this stuff in

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detail later in the course We just want to tease

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your mind with the concept that we'll be throwing your

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way In the meantime you do your best to dodge 00:08:57.368 --> [endTime] the curve balls there

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