12. Introducing the Cash Flow Statement I

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Accounting: Principles of Financial Accounting

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IESE Business School

Accounting: Principles of Financial Accounting

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Курс 1 из 5 — Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

Из урока

Week 3: The Cash Flow Statement

Now that you have a good grasp of the balance sheet and income statement, I'll help you master how to recognize the transactions we went over in week two. I'll also introduce a third financial report - the cash flow statement - and discuss liquidity. Course objectives: To understand the difference between liquidity and profitability, become familiar with T-accounts and gain insight into the purpose of the cash flow report.

1. Introduction to Week 32:10

2. Recap of Week 23:15

3. T-Accounts and Journal Entries5:45

4. Setting up T-Accounts for the Campus Bookstore3:06

5. Sales, Cost of Goods Sold, Collections from Customers and Payment to Suppliers7:05

6. Other Operating Costs4:10

7. Transactions with Non-Current Assets8:09

8. Bank Loans and Interest4:03

9. Taxes, Closing Entries and Payments of Dividends5:44

10. Preparing the Balance Sheet3:54

11. Preparing the Income Statement4:30

12. Introducing the Cash Flow Statement I7:29

13. Introducing the Cash Flow Statement II4:03

14. Recap of Week 3 and Conclusions3:12

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Marc Badia
Assistant Professor
Accounting and Control

[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]

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