>> Well, this is how a teenager would do accounting.
You get an allowance from your parents.
You borrow some money from your parents.
You spend a bunch a money.
If you end the month with money in the bank, it was a pretty good month.
But this doesn't work so well for companies.
All a company would have to do to post better performance into this system would
be to borrow more money or sell more stock.
A better way to look at cash flows would be to separate them into whether they come
from operating the business or investing for the future or financing for
the long term.
Let's try organizing the cash flows by the source or use of the cash.
So let's start with cash flows from operating the business.
This would be cash that was paid for the rent.
The cash that was paid for the wages.
We didn't actually collect anything from customers.
So the net cash flow from operating the business was a cash outflow of $22,000.
Then we could look at cash required to invest in the business for the long term.
So the company spent $100,000 cash to buy a truck,
which resulted in a total cash outflow from investing activities of 100,000.
And then finally we can look at cash used to finance the business.
So that company received 50,000 in cash from issuing common stock.
They borrowed $80,000 from a bank,
which was a net cash inflow from financing activities of 130,000.
We still get the same bottom line of $8,000.
But now we've organized the cash flows based on whether we're operating
the business, investing in the business, or financing the business.
And this is exactly what the statement of cash flows will look like.
It's going to report the cash transactions for the company over a period of time,
like the month of December, split up into operating activities,
which are transactions related to providing goods or services or
other normal business activities.
Investing activities, which are transactions related to the acquisition or
disposal of long-lived assets.
And financing activities, which are transactions related to owners or
creditors.