Cash Flow Introduction NARRATOR: This video is on the statement of cash flows. Let's talk about the statement of cash flows. First, it is the last financial statement that you will prepare. It uses information from all other financial statements. Remember, we start with the income statement first, then we go to the statement of retained earnings, then the balance sheet. The final one we do is our statement of cash flows. The purpose behind this is to explain the cash outflows and inflows in three different areas-- operating, investing, and financing. The reason we need a statement of cash flows is because when you look at a balance sheet, it's going to tell you if cash increased or decreased from the previous year. What information can you gain from learning if a company had an increase or decrease? Not a whole lot. That's why we need a statement of cash flows. We will look at each of these three areas in just a few moments. The statement of cash flows will always or should always reconcile the ending cash balance as presented on the financial statement. That is going to be our ending number that we come to in our statement of cash flows. It's great when you're preparing a statement of cash flows and you can have a built in check figure. So we'll start with the operating section. The operating section, you'll see some little there's some pictures around here to give you ideas of what is included in the operating section. We're going to use the income statement for net income and non-cash expenses, like depreciation and amortization. We will use current assets and current liabilities from the balance sheet. What makes it current? It is due within a year. Current assets include things like accounts receivable, office supplies, prepaid expenses, inventory. Current liabilities include accounts payable and any notes payable due within a year. The operating section tells investors how much cash the business can generate on its own from its day to day business operations. This is the most important section in the statement of cash flows because it gives the investors the idea of how well the organization can support itself. You will notice I did not mention cash in the operating section. Since our goal is to reconcile to the cash number, we don't use cash itself within the operating section. Then we have the investing section. The investing section, if you look at my little notes around there, you can see we have land, building, equipment, and machinery. This is all comes from the long term asset section of the balance sheet. So these are all long term assets. These are assets that we intend to use for more than a year. The investing section tells investors how a company is using or investing their money in the business. When we prepare this report, it will show if we have a positive or negative cash flow. A positive net cash flow for investing doesn't mean it's necessarily a good thing, and a negative cash flow doesn't mean that it's necessarily a bad thing. You just have to look at the details to figure out if that's a positive or negative or good or bad thing. The financing section, in the financing section, we're going to be looking at the statement of retained earnings for cash dividends. We're going to be looking at the long term liabilities and equity section of the balance sheet. This tells investors how much cash we get from sources outside of the business. So how are we getting money from people outside of the business? Either we're getting loans, we're issuing bonds, we're issuing stock, we're giving up ownership, we're paying dividends. What are we doing? All of these things will be documented in the financing section. So let's recap. The statement of cash flows is often the most misunderstood financial statement and primarily because people don't understand how to read it. The operating section is the most important if you want to know about the health of the company since it tells you how much cash that business can generate on its own. It's a very useful figure to figure out how well the company is going to do this year and possibly in future years. The statement will always reconcile to cash. That is the entire purpose for the statement of cash flows is to explain the inflows and outflows of cash and to come back to that cash balance. We will continue talking about the same individual sections and how to read them and how to prepare them. So look forward to more information.