Accounting: Cash Flow Statement Intro
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Cash Flow Statements are very much like Income Statements but with one big difference. Wanna know more? Watch this Accounting video to find out!
Courses | Accounting |
Language | English Language |
Transcript
as opposed to gap earnings Well why would cash profits
be any different from accounting profits Ay there's the rub
and you've gotten your first glimpse as to why accounting
is a profession and not a hobby So let's explain
the notion by walking through an example that we're going
away over simplify for the sake of clearly explaining the
difference between cash flow and accounting earnings Very important difference
here So here we go We have a little drone
company established in two thousand seventeen We deduct our expenses
to calculate operating profit Right We have revenues hundred million
box expenses eighty million bucks and we get pretax operating
profit of twenty mill How do we determine the taxes
on the operating profit if taxes or thirty percent Easy
we get twenty million times that thirty percent and that
gives us yes six million dollars in taxes for that
period Subtract taxes from operating profit to calculate net profit
or earnings And yeah there we go Fourteen million bucks
Simple but not really It's the stuff that makes up
the eighty million dollars in expenses where we have issues
here Why while the eighty million and expenses wasn't all
cash expense huh What does that mean In order to
assemble the drones efficiently we spent forty million dollars on
a robot driven factory We spent that cash on the
factory at the very big ginning of this period were
just simplifying here And we estimate that the factory will
last in ten years and then be worth ten million
box when we sell it for parts So the value
of that robot factory will decline a total of thirty
million dollars over ten years Right Started forty then thirty
Then we sell it for ten again for simplicity in
this example will just use straight line depreciation me the
same amount of depreciation will attribute to the factory each
year year after year and appreciate the value of that
factory by the same amount for ten years That isthe
will decrease its value by three million dollars a year
Each year for ten years until we expect to sell
it and collect ten million dollars from the sale of
its parts on eBay or wherever of the eighty million
dollars in expenses we had this year Then we would
just a duck three million dollars in that robot factories
depreciation in value over its ten year period until we
have it valued as ten million bucks by twenty twenty
eight at which point we plan to sell it for
scrap If the robot factory is the only thing we're
depreciating well then we have a bit more cash flow
Then we have earnings In this year we have eighty
million dollars in total operating expense But because we had
three million dollars in depreciation it wasn't Akash expense this
year Well we only have seventy seven million of those
expenses as being paid in cash this year The three
million of those expenses were non cash That is there
in accounting charge we take to represent the decline in
value of that factory over time Why the three million
clowns are best guesses to roughly what that factory should
decline at over a decade And yes it's a very
rough gas We're just guesstimating So yeah there's a ton
of wiggle room to fake or create weird numbers that
help Worf heard us in accounting for all this along
the way Well anyway on seventy seven million of cash
expenses and six million of taxes Well after one hundred
million dollars in revenue we have one hundred minus the
seventy seven million there minus the six million in cash
profits Yeah or seventeen million total of cash profits or
catch flow even though we had fourteen million dollars of
accounting earnings So our cash earnings or cash profits or
three million dollars higher than our stated gap earnings Interesting
And remember that we spent the robot factory build dough
of forty million dollars on the last day of the
last period so that period or quarter showed huge outflow
of cash right That forty million dollars all went out
the door the day the factory was paid off and
in real life obviously there be progress payments and someone
But in this laboratory example we assume the factory was
completely done perfect and it actually worked In that moment
we gave them a check for forty million bucks in
cash So also note that on that last day our
balance sheet would have adjusted as well it would have
been prior to the robot factory purchase Well something like
this We've got seventy million dollars have cashed it in
there and not a whole lot of other assets But
then after the purchase well it would show only thirty
million in cash and attributed forty million dollars to that
robot factory that works are cash declined forty million dollars
in value and our robot factory materialized as if by
magic as plus forty million in value came out of
nowhere Forty million dollars transferred from cash to value we
attribute to the robot factory having and our shareholders equity
remained unchanged Nothing happened No action there Well we neither
created value nor destroyed value In this example we just
shifted assets around so that hopefully in the future we
can create value by being able to produce drones cheaper
faster and better with our brand bank and new robot
factory thing Following the cash flowing around the company throws
all kinds of curveballs that those either managing its books
or inspecting them for a potential investment in the company
Right Well what else might have moved Cash flows to
be different from gap stated earnings Well revenues for one
thing that is not all revenues might have been paid
in cash cash this year Like we could have sold
a whole lot of drones three years ago for eighteen
million dollars paid up front deliver a ble to the
buyer But then we'd recognize those revenues as per contract
or am or ties them only when they were delivered
in one third installments over three years Well in that
case we'd be recognizing noncash revenues And from the cash
flow statement in operations we'd have to subtract six million
bucks worth of cash revenues from our cash flow totals
Well tons of other curveballs happen We won't get into
all of them yet First we have to divvy up
the three disciplines of cash flow itself because we'll cash
flows in a company we within three discrete separate categories
What are they Well they comprise the sections of cash
flow statements which you'll see on a wall of paperwork
They're accusing case All right The first one cash flow
from operations Yeah The first section covers the thought process
and basic arithmetic we just did above It states the
cash generated or loss from the basic operations of the
company and that given a period of time and is
usually cleverly labeled in public company filings as cash flow
from operations But cash flow statement also covers another area
Next one's called cash from financing activities So how do
you account for the change in the companies cash position
when they've raised cash money by offering shares of ownership
or equity to the public or own really to anyone
Well in that period of time the company would have
given over some of its equity in return for cash
So cash from financing activities is tracked differently from cash
from operating activities because it's just a completely different animal
It's on ly remotely related to the operational health of
the company itself not directly If company pays a cash
dividend well then that dividend comes out of this portion
of the casual statement as well And the clever label
cash flow from financing activities Yeah that's what it goes
there That was the father in the son The Holy
Spirit revolves around cash as it is deployed in the
company's own investing activity So yeah that's number three cash
from investing activities It covers the event where say our
little drone company sells a patent it no longer needs
for ten million dollars not part of its operations unless
it was a professional patent maker or something But it
ain't this's a drone maker So selling a patent isn't
part of its operations as a business And selling that
patent isn't about raising money for the company by selling
dead or equity to Wall Street It wasn't financing the
builder upgrade of anything with that patent sail It just
simply didn't need the patent laying around getting old and
stale and useless because the company had canceled plans for
its line of AH a singing telegram drones Well that
patent as an asset just goes away And the company
shows an increase of ten million dollars in cash or
cash assets on its balance sheets likely with the value
of its patent portfolio If it's aggregate Book value was
held at anything close to market values while declining from
say ninety million in patent values to now being on
Lee eighty million rights were taken Ten million of the
patent value and taken it out of our ninety million
of assets there And all right well the big message
here Cash flow statements deliver three key numbers They show
cash from operations Cash from financing events like selling shares
is part of an AI po or other fundraising activity
and cash from infesting activities like selling patents are buying
a robot factory If all of this was beginning to
grow hazy see in your brain Oh don't sweat it
for even a nanosecond will cover all this stuff in
detail later in the course We just want to tease
your mind with the concept that we'll be throwing your
way In the meantime you do your best to dodge 00:08:57.368 --> [endTime] the curve balls there