[MUSIC] And now it's time to introduce the third financial statement, the Cash Flow Statement. The first thing that we need to realize is that profit is not the same as the change in cash. Remember that the many transactions we have been saying the profitability's changing, but liquidity is not changing, or the other way around. Now, in our case, you see that profit is €7,140, whereas the changing cash for the campus books are in the year x2 has been €1,000. So clearly it's not the same number. Now, why is that the case? Well, on the one hand, Profit = Revenues- Expenses. On the other hand, the changing cash is the cash inflows- cash outflows. That is, cash receipts- cash payments. And it turns out that revenues is not the same as cash inflows, and expenses is not the same as cash outflows. Actually, could you give me a few examples to show that that is the case? For example, let's think about the case where revenues is not the same as cash inflow. Well, a clear example is credit sales so we recognize the sale because we have delivered the product, the books. But we have not collected any cash. So we recognize a revenue bu we do not recognize a cash inflow yet. Now, let's think about an example where an expense is not the same as the cash payment. Probably one of the examples that come to mind is depreciation. So we recognize the depreciation expense but we don't recognize any payment, actually the payment was recognize, the vacant we paid for the purchase of the assets in the past. So precisely because profit is not the same as changing cash, we need a special financial statement. Another financial statement that explains the change in cash. What we are going to do here is to take the cash to your account and classify all the cash inputs and outputs in three different groups that probably sound familiar to you. Remember the business cycle? Well, the business cycle we had first the financing stage, second the investing stage, and finally the operations stage. And remember we had this full cycle, and so for the cash flow statement, what we're going to do is classify all the cash inflows and outflows who have received some payments in these different parts. Cash flow from operations, cash flow from investing, and cash flow from financing. Let's prepare the cash flow statement. First, we take the cash accounts with all the different inflows and outflows. And then, we have here the three kinds of cash flows, we have cash flow from operations, investing, and financing. And now let's classify all these payments and receipts in the different groups. The first case that we have here, the collection from customers. So these are the money that we collect from our sales. Sometimes it's going to be the cash sales. Other times it's going to be the sales that we collect later. What kind of cash flow is this? Clearly, it's an operating cash flow. It has to do with our operations. We are selling this products and we are getting some cash for them. So we put them under the first group, cash flow from operations. Let's go to the next cash inflow that we have here. The 1,800 that have to do with the sale of furniture. So what kind of cash flow is this? As I said before, this is not power of our regular operations. Our business is not selling furniture. So this has to do with an investment. We have met and now we are selling this investment. So this a casual from investing activities. And therefore we need to recognize an increase in cash flow from investing activities. The last cashing for that we have here, is the money you have received from the bank loan. Now, it's our business to get money from the bank? Not really. This is clearly a cash loan from financing activities. So we have decided to take a bank loan and therefore we have a cash inflow from financing activities. Now, let's go to the cash outflows. Let's classify all the cash payments that we have here in the cash tier account. The first one we have here is the payments we have made to the suppliers of books, to the publishing companies. As you will guess, this is a cash flow from operations, clearly, because you with the operations of the business. We are in the business of buying and selling books. Next, we have the operating expenses relating to the salary of Christina and the utilities. Because it's also related to the operations of the business. We need to discuss in order to have the business running. What else? The next cash outflow that we have here is the payment of the rent. Again, the payment of the rent cost with our operations. So we are going to recognize this under the cash flow from operations. We have also paid €6,000 for the purchase of new furniture. Now, this is a long-term investment, a non-current asset. And so, the investments in non-current assets, the payment of these investments, are going to be part of the cash flow from investing activity. The next cash payment that we have here, the investment in the Apple stock. This is a cash outflow we have invested this money in purchasing the stuff from Apple. And so, these kind of financial assets are also borrowed from our cash flow from investing. We have decided to invest part of our money, in this case in financial assets. The next cash payment can be a little bit more challenging. So the payment of interest to the bank. Where would you classify this payment? I guess that many of you are thinking, well, this is a cash flow from financing because it has to do with a loan. Well, actually the convention was what most of the companies do is to classify them under cash flow from operations. So the interest payments are classified under cash flow from operations. Actually the rule of thumb that most of the time works is that all the payments and receipts of cash related to the income statement somehow, they are classified in the cash flow statement under cash from from operations. So as you see in the income statement we have the interest expense. So the corresponding interest payment, which is not the same as the expense but is the payment, is going to be under cash flow from operations in the cash flow statement. In any case, these are conventions that with time and practice you will remember, so let's not get obsessed about them. We have two remaining payments. First, the payment of taxes. Another good thing as well, payment of taxes. What kind of cash flow is this? Well, payment of taxes is always a cash flow from operations. So we're going to place these under cash flow from operations. And finally, we have the payment of dividends and the payment of dividends is always the cash flow from financing activities. So we're going to place these under cash flow from financing activities. And now with all, we have the total cash flow from operations, total cash flow from investing and total cash flow from financing. If you want the three kinds of cash flows, you're going to get the change in the cash account. That is the difference between the beginning balance of the cash account and the ending balance at the end of your. And so, if you take the beginning balance, and you watch this change in cash what you're going to get is the ending balance of the cash to your account. And as you see here, the cash flow statement explains the change in cash during the year. How did the company generate cash? How did the company consume cash? As you may imagine, banks are specially entrusted in this financial statement because it tells them about the capacity of the company to generate cash and repay it's debt. [MUSIC]
