 to our part two review of unit one of financial management. If you haven't watched the previous video in this course, you can check it out. I'm gonna all put it all in links in the description below as we're going along here. And if you have any questions, feel free to leave them in the chat as you're watching live or if you're watching later, you can leave them out as a comment and we'll get to them later. And but without further ado, I'm just gonna hand it over to Dr. Pearsall to get us going so that we can get going. Great, thanks, Michael. And welcome, everyone. As Michael mentioned, this is going to be our second presentation on MBA 601 Financial Management. We're covering unit one. Last week we did the first part. We're gonna wrap that up with this week's presentation. If you're following along in the study guide, this would be the third section, one C for this unit. We covered last week, before we get into the financial material, just some brief comments about the course, the structure and the like. And I wanna do a couple of quick reminders on that. We had listed all of the learning objectives for the entire course. As we wrap up unit one, we're basically looking at these two course learning objectives. One is the ability for you to demonstrate a degree of accounting and financial literacy. And all that means is that I want you to feel comfortable in being able to talk about the role that accounting and finance play in the operation of a business. What's the purpose? What are their main responsibilities? What are some of the outcomes that come out of these management functions? And the second one, which is really gonna be the focus of today's discussion is to explain the firm's financial package. We're gonna go through each of the key statements in the financial package. We're gonna talk about what the information they provide, what they represent, and what they tell the management team of a business about how well the business is performing. Learning objectives, as I said last week, are important. They do tie back to the course materials as courses are being developed. We are following the pattern of what we've determined are the learning objectives and the assessments are tied to these learning objectives. So there is a logical and objective purpose to these. And so it's worth... Just give us one second, folks. We seem to have lost Dr. Pearsle here in the video. So let me just kick us back over to another screen. Luke, can you hear me? I can. We lost you for about, I'd say, at least three-fourths of that slide. You were a bit frozen there. Is that it? The last slide we were on, yes, this slide right here. Sorry about that. No problem. We love technology, especially when it works. So as I mentioned, the learning objectives are important. The courses are designed, the material in the courses fall in line and follow the objectives that we've established. And the same applies to the assessments that you're gonna see, including the end of unit assessments and the final exam. Mention that this course has seven units to it and we are going to wrap up unit one today. So between the last week and this week. And this is on the concept of managerial accounting. The learning objectives for the unit. We covered last week the discussion on accounting and financial literacy. And specifically this week is really to explain the financial package. So we're gonna go in some detail in that and talk about each one of the statements that we'll find in that package. Now, before we go too much further and I open this up for questions, there was a question we received last week. I think it was like towards the end and I had cut out before the question was asked. And the question was, why is the income statement known as the profit and loss statement? Or what is the profit and loss statement? And basically it is the income statement. We're gonna look at that today, but the income statement is a record of whether or not the firm is generating a profit or they have a loss. And so it is referred to often as the profit and loss statement. And I'll wait to see if there are any other questions. I'm not seeing any questions right now, but we'll give everyone a minute here just and I'll check the backend and make sure that we don't freeze up anymore. So we'll be back in just a second, guys. Well, we're not seeing any questions right now. Hopefully people are getting caught up, everyone's seeing everything. Let us know if you have any trouble. Of course, you can let us know in the chat or if you're watching the review later, feel free to leave a comment below and we'll get the comments that we missed just like we did just then. So I'll hand it back over to Dr. Piersol and we'll get going. To generate an appropriate return for their investment made by owners or by shareholders. So businesses do drive to show some positive financial results. Now, mentioned in the course, they have one of the goals that I think is important. Lou, I'm sorry, I think we didn't have your audio when you came back on this slide. I apologize to you and other people. Not sure what's going on, folks. I'll keep checking it out, but I think we got it sorted. Okay, did you want me to go back, Michael, or? No, just if you just start from this slide, I think we'll be okay. Okay, so we're talking about firms being successful and one of the keys to a successful business, of course, is how well they perform financially. Companies are formed to generate a certain amount of cash flow. You need cash to handle day-to-day operating expenses. You want to have capital available to make investments for being able to grow and expand the business. And certainly there should be an opportunity for the business to generate some sort of a reasonable return on investments for the owners and the shareholders who invested in the company. Now, we mentioned in the course that one of the goals for business should be, excuse me, to achieve better than average results. So although we can look at it and say, well, we're doing as well as everyone else in the market, I would encourage folks to look to try and establish their businesses, make decisions, and perform so that they are better than average. Why? One, it ensures that you're generating an appropriate amount of cash. Two, it provides a hedge against the unknown. What can happen if there are economic considerations or challenges, market changes, consumer demands are very dynamic. And so looking to at least be average, but looking to achieve more than average is a reasonable goal for businesses today. Now, in order to achieve this, the management team, managers and executives, they have to have data. They need information to be able to make decisions. They need to be able to on a regular and consistent basis evaluate how the firm is performing financially. They want to know not only how we're doing today, what today's results are, but how is our performance against the forecasts and budgets that we established at the beginning of the year? We wanna know how well the firm is performing against other companies, competitors that are in that marketplace. And we're gonna talk more about the importance of understanding these numbers so that we can see exactly what we're doing and more importantly, identify areas or issues that are gonna need some sort of specific attention. And after all, that's one of the key responsibilities of management, one of the key roles is the ability to control. And control has to do with knowing what's going on, knowing if something is not performing to expectation and taking corrective action to address those issues. Now, we typically start by wanting to understand where we've been. And so a lot of strategic planning and even forecasting and budgeting starts with a review of our history. What have we accomplished in sales over the past two or three years? What has been the trend of our products and services? Production, marketing initiatives, inventory levels, purchasing opportunities. A review of the past is a history lesson. And so let me preface this right now by saying that history is important as a means of understanding business trends but history is not necessarily a predictor of the future. So for example, if sales have increased by 10% every year for the last three years, it does not mean that sales will increase 10% this year. We start with where we've been and we start with that trend analysis but then management needs to step back and really look at what's going on in the industry. What's the current knowledge that we have about markets, competitors, products, customers, the economy. And we're gonna take that and apply that as well as we look to go forward and prepare our budgets and forecasts. So history is important, but it's a starting point, not the end point. When we have this data, especially when we're looking at comparing where we are now against the budgets and forecasts that were prepared at the beginning of the year, we're going to be looking at a variance analysis. Now, sounds complicated. It's fairly simple. It just means is there a difference between what you're doing versus what you said we do. So for example, we've put together forecasts and plans for what our sales would be by month, by quarter or the year. We budgeted our operating expenses. We've estimated cash flow and the use of debt. I'm sure we have a profitability goal. So the first question that's gonna face management is, we had these goals. Now I have what we're actually doing. Are we on track? And so the variance report does just that. It compares the actual results with the budgeted or forecasted predictions. And it says, is there a, if there is, what are we gonna do about it? Now, in my experience on a monthly basis, as a former CEO, I would get together with the executive team in my company. And on a monthly basis, we would do a variance analysis of our financials. And simply put, we would look at all variances that were negative. So sales were forecasted to do $10 million this quarter. We're at 8 million. That's a negative variance. And so obviously, you know where this has to start. It starts with the question, why? What happened? What's going on? And so as we identify these areas of negative variance, they go back to the appropriate departments, parts of the operation, like sales or marketing, who would take the task to go in and make sure we could understand why we weren't performing the plan. Now the key is one, to know what happened. And then two more importantly, what are you gonna do about it? So we have to take some actions. You have to make a decision. And the decision says two things. One, I need to make sure we get back on plan. And two, is there an opportunity to make up the loss here? So it's not necessarily good enough to be back on plan next month. What about the shortfall this month? Is there an opportunity to make that up? And before we go too much farther, if the variance is positive, it doesn't mean we ignore it and walk away. For example, in that if we talked about budgeting $10 million for sales, if we had actually recorded 13 million or 14 million, again, the first question is why? What happened where we generated more revenue than we had forecasted or budgeted? This isn't a bad news story, but it does raise the question. Was our original forecast too low? And should we look to go forward and increase the sales forecast going forward? Or is this a one period issue that we don't expect to occur? So you see, this is a dynamic plan. It's not static. We don't necessarily establish a budget at the beginning of the year and then just live with it during the year. It can be modified and changed as actions take place in the marketplace. And that's another reason why managers are looking at this financial data. Now, in addition to that internal view, we also wanna look outside the firm. We need to be able to evaluate our performance against what's going on with other companies, competitors, other industries in the marketplace. Again, for example, our sales have increased from $10 million last year to $15 million this year. Good job. We're going in the right direction. We've increased sales. But what if generally in the marketplace, most companies have increased their sales by 25%? Are we still feeling good about the number? So a key here is to recognize that we have a number. It's been reported. This is what we did. We had a number that we forecasted. This is what we wanted. And one of the real questions we're gonna ask now is, what should that number be given the current circumstances? And that's probably the hardest number of all to identify. But that's what management does. We sit there, we review, we analyze, we identify areas where we should have further discussions and perhaps create an action plan to address an issue, initiate that plan, and then more importantly, come back and review how we did. All right, so this is all part of modeling and the basis for all of this discussion is gonna start with the financial package of the firm. Now, it doesn't matter what the particular business structure or form of the company is. We know basically that we typically have a sole proprietorship, a single owner, could be operated and set up as a partnership, might be a legal corporation. These companies can be private or publicly owned. They can be for profit or not for profit, but they all require information on their financial performance. And let me leave you with this note as we think about understanding this information. The numbers are the numbers. The actual results are what were recorded. The budget is what we planned at the beginning of the year. But the numbers are not all encompassing in themselves. The real key for management here is to understand what's the story behind the numbers. What do they mean? What's going on that's producing the results we're seeing in our financial reports. Now, we're gonna look at the basic financial package that most businesses use and are familiar with. That financial package consists of four very specific statements. One is the income statement, also known as profit and loss. There is a statement of retained earnings, a balance sheet and a statement of cash flows. Now, when we ended the presentation last week for part one of unit one, I posed a question. And the question was, when you look at the financial package, which one of these statements is the most important? The answer is all of them. No one statement in the package will give you all the information you need to have to evaluate the overall financial performance of a business. And that's what we're gonna look at next. Each of these statements has certain information that's important for us to know, but we need all of these statements in order to have a very clear picture of exactly what the firm is doing. We're gonna start with the income statement, which again, also known as a profit and loss because that's what it reflects. The income statement records all of the revenue streams that we have for the firm. Now, when we look at an income statement and I'll show you an example in a minute, we have the top line, which is revenue. That top line could be made up of several lines. We may track revenue by product category. We may have products and services. The role of accounting here is to track and capture all of those financial transactions. We need to record every activity that represents cash coming into the firm. And we report that as the income or revenue on the income statement. Following that, we're gonna record all the expenses, all the things that we spend money on to operate that business, from production to salaries to rent, all expenses, right down to finally paying any taxes that the company is liable for. And that brings us to the bottom line of the income statement. And that bottom line will represent either a profit or a loss. Simply put, if the expenses are less than the revenue, we generated a profit. Otherwise, the company's operating at a loss. Now, let's take a look at an income statement. Basic fundamental income statements, they can be more complicated, they can have a lot more categories depending on the size of the firm and exactly what it is management's interesting in reporting on and tracking. But this is basic categories for an income statement. We're looking at a statement that reflects three years of activity. 2019 being the current year. We have our revenue line at the top. Now, note that revenue has increased each year from 3.9 million to 6.8 million in year three or last year. Now, we're also reporting on cost of goods. Now, cost of goods is made up of two basic categories. It's the cost that we spend for parts of materials to make the products that we're gonna sell. And it's labor. Two major categories, those are the cost of goods. We're gonna take cost of goods out from revenue which leads us with the gross margin. Sometimes referred to as the operating margin. Note that cost of goods sold also increased each year. We would expect that. We sold more and so you probably needed more materials and spent more labor to produce products. Then we're gonna focus on SG&A or selling general and administrative expenses. This is all the other expenses in the business that includes salaries, rent on buildings, insurance, marketing programs, selling initiatives, advertising and the like. So SG&A. Now, note that SG&A also went up each of the three years. Once we've determined the difference between the total gross margin and SG&A, we've calculated EBITDA or earnings before interest, taxes, depreciation and amortization. And so get a sense for here what we're doing here is we're step-by-step taking out certain expenses and bringing that line down. Next we're gonna account for depreciation. So any of the plant and equipment that has been depreciated in the prior year is gonna be recorded as an expense on the income statement. Then we're gonna take out any interest expenses we paid. Again, we're focusing on interest because that's money we pay to support debt. So we wanna keep track of that. Now you might note that there's been a substantial increase in interest expense in the year 2019. So we utilize more debt in 2019 than we did in the prior two years. And again, going back to my statement on what's the story behind the numbers, why? What did we do? Did we buy equipment, expand the facility? And then we're gonna allow a provision for any taxes that are due, state, local, federal, any appropriate taxes for the firm which brings us to the bottom line which is net earnings or profit. And so here's an interesting thing to note. Although sales increased over the last three years our net earnings decreased. And 2017 net earnings were over a million dollars. And last year it was down to 984,000. Now as a manager, as an executive in this firm I'm sitting there saying why? What is it that accounts for this reduction in net earnings? Obviously we'd like net earnings to increase year over year. That doesn't happen for lots of reasons and there could be good reasons for it. But in just looking at these numbers it may be not so easy to zero in and try to figure out where. So we do one more thing with this income statement. And that is we common size the statement. Now common sizing is a simple process that just wants to show a ratio between an item on the income statement and revenue. What is each item as a percent of revenue? So we've gone through and taken each item on the income statement for each of the three years that we're looking at. And we've common size that are shown each item as a percent of sales. So now we can start to really think about an analysis of where we're going to go with this report. So if we look at that cost of goods number note that in 2017 cost of goods was 51% of revenue. Now what that means is that for every dollar of revenue that came in we spent 51 cents on parts and labor. In 2019 that increased to 61 cents. Question is why? Now it could be that we've actually provided for this. We could have been informed of increases coming in from our key suppliers. We built in those price increases. Then the question might be if we're doing those increases should we have perhaps considered increasing prices to account for the difference. Whatever the reason, this is one of those items where we're gonna stop, look at it, peel back the numbers and understand what went into those numbers. And we're gonna do that with each of the items on the income statement. Notice that our net earnings as a percent of revenue was almost 28% in 2017. And that dropped to 14% in 2019. Now again, it could be that that's a planned part of our program. We might have decided in 2019 for example to make a major investment in new plant and equipment to support future sales. And we're planning on recouping those costs and increasing our profitability dramatically in the next couple of years. But looking at these numbers all I know is that there's been a change and I need to understand why. What has that change been? Now, let me stop here because we've covered a lot of material and just take a moment and see if anybody has any questions so far. Well, I'm taking a look. I'm always down here in the chat. If anyone has any questions you can ask them anytime obviously. And if you're watching the replay later feel free to leave a comment below and we'll get to it later much like we did earlier in this video but I'm not seeing. Oh, I just, I spoke too soon but I did talk long enough for people to ask questions so I did part of my job. We have a question in here about how much increasing net earnings is termed as good? How do we lay, sorry. How do we lay these estimates? Sorry, I butchered that. Let me read that again. I followed it. How much increase in net earnings is termed as good? How do we lay out these estimates? That's a great question. Let me give you the graduate school answer. It depends without trying to wave the question off. I mean, it's a reasonable question but it depends. It depends on the market. It depends on how well financially positioned the firm is. It depends on what's happening in competition. It's a dynamic market out there. We have competitors coming in at all times. International competition has increased dramatically. If you're selling to consumers then you know that consumer demand is a very changing thing. And so what should the actual number be? There's no preferred number here other than to say as a former CEO I want more rather than less. Now how much more that should be is going to be determined as you do your strategic plan at the beginning of the year. So as I sat there as we put together our plan for the forthcoming year we might address the issue of we're gonna make an investment in launching a new product line. And working with marketing and sales we have an estimation that they can increase market share by another 3%. That's gonna result in an increase in profitability. So it's very much an iterative project. It's very much dependent on exactly where the firm sits and what else is going on in the marketplace which by the way is why in my experience we typically started that strategic planning process about three months before the end of the year. There's a considerable amount of time in research that goes into trying to answer just that question. And I hope I answered that if I didn't just let us know. And we can talk more about it. That's awesome. That sounded really good to me. I will keep an eye down on the chat and let you know if there's any other questions. And if that answered the question if not we'll of course come back to it. But for now I'll just hand the reins back over to you so that we can keep moving. Great, thanks Michael. Oh, we just got an answer. Yes, they said that that was helpful. Perfect, I'm glad. So we talked about common sizing the income statement and the fact that this allows us these ratios allow us to really zero in on areas that might require some specific management attention which could be as simple as understanding the reason why and or recognizing that there's an issue here that has to be addressed. Let me give you one more example perhaps in the cost of good soul as expenses and those costs are increasing. It would have been a very common for me to on a regular basis sit down with say purchasing materials and operations groups and talk about establishing some goals to achieve. If we had forecasted that we were gonna spend X number of dollars on cost of good soul in this case $4 million last year maybe we would look to establish a target that says can we bring that number in at 10% less than what's budgeted. Now think about what that means that means that going back into each department purchasing is going to get together with their buyers and they're gonna say let's identify certain key suppliers and let's go back out and see about renegotiating some prices can we generate some cost reductions because of volume purchases or maybe working with engineering to redesign a part for a material. So there's real reasons and there's real things that happen as a result of this kind of review of the financials. Now let's look at the statement of retained earnings which is the second statement in the financial package. And by the way, there's a reason that the statements appear in this order and that said each subsequent statement takes something from the statements before. Now statement of retained earnings is an indicator and a report to investors and shareholders retained earnings. Let me let's take a moment and think about what retained earnings are. Remember that at the bottom of the income statement we had earned a certain amount of profit. Now management now makes a decision about that profit. If this is owned by shareholders or if it's a publicly traded company that money belongs to the owners it belongs to the shareholders. So one thing we could do is take all the profit and redistribute it to the shareholders. However, from a practical standpoint assuming we want to still be in business next year we might have some cash available on day one to continue operations. So this is a decision that management makes. They decide how much of those earnings they're going to retain in the company so that they have that cash going forward. Now bear in mind that that is money that belongs to shareholders. So we record it. In this case in the year prior we had $415,000 in retained earnings. We kept that. In the previous year we generated some net income but we decided that we would in fact pay some dividends to shareholders. So we take those dividends out. It's been returned to shareholders and then we report on the balance of retained earnings at the end of the year or start of this new year. And so now we have retained earnings of $565,000. From a shareholder standpoint because this is their money and we're keeping it in the business they see it as an investment, which is what it is. We're reinvesting part of their money so that we can have continuing operations, okay? So if you're a shareholder you're interested in retained earnings and what's happening with retained earnings. And let me make one more point here on dividends. If you're a publicly traded corporation you should have shareholders. There's very well an expectation that dividends will be paid on the stock that we own. How much dividends and how often they're paid is another management decision. Typically a firm will sit down and they will determine their dividend policy going forward. We'll actually budget to spend so much money to return to shareholders at the end of this year. And that becomes part of our plan. And remember, because dividends are coming out of net earnings to the prior question that was asked we wanna make sure net earnings is sufficient to continue operations and also to address any dividends we wanna pay. The balance sheet is the third statement in the package and it contains some information again that's of interest to shareholders and also to people like lenders and suppliers. The balance sheet basically is broken down into three categories. Those categories are assets, liabilities and owner's equity. Now assets are anything that the firm owns. All right, so when we think about it generally speaking assets are positive, right? That's a value that we have. Assets are broken down into two categories. Current assets and non-current assets. What's the difference? Current assets are anything that can be converted to cash within a 12 month period. So what is, and they're listed in order of liquidity and liquidity is simply a way of looking at turning an item into cash. So what's the most liquid asset you have? Cash, because it's already cash. And then we have investments that can be liquidated and turned into cash. Accounts receivable. That's money that we're expecting to come in. It's owed to us from customers and accounts. And inventory, you've built product, you put it in a warehouse, we own that. It has value because it can be sold. So current assets are all those things that can be liquidated in 12 months. The non-current assets typically property, plant and equipment are obviously those things which would take longer than 12 months to liquidate. And so main categories in this area are land buildings, machinery and equipment. These are capital appropriations. They come out of the capital budget. They typically represented a substantial investment and they're going to have an impact on the business for a number of years going into the future. We invested in a new building because we're expanding our operation and we need to be able to store more inventory. We made an investment in new equipment for manufacturing because it'll be more effective, more efficient. It'll improve quality on the products we have or to reduce some of our expenses. So those are assets. Now, before I go on to liabilities, I'm going to make one more point about assets. I said that they are value, they're things that we own. Let's focus on inventory for just a second. Inventory has value. We've got $1.2 million of inventory that we expect to sell and turn into revenue. But suppose that inventory is five years old and it's obsolete. It's not really worth the value that we've established. Think about a video game company that still has inventory on video game number one and they're up to version nine. Chances are they're not going to be selling that old inventory. So at some point we may have to go in, revalue the inventory and either write down or write off that inventory. And so that's why these statements are dynamic. And again, we need to look behind the number. If I'm a lender and you're looking to me for a loan and you tell me, but here's the assets I've got. I've got 1.9 million in assets. One of the things that would be a common question from a lender is, well, let's take a look at the inventory number. How current is that? What is it valued at? What's the likelihood that you'll in fact be able to sell that inventory? Okay. Now, if we go down to liabilities, liabilities is the opposite of assets. It's everything that we owe. And again, we're going to break liabilities down into current and non-current. The current liabilities are things that are expected to be paid in the next 12 months or this year. Non-current liability is going to be longer than a year. Think about long-term debt. Now, think about somebody who has a mortgage or who takes out a 10-year loan for a new building for their plant. And they're making payments on a regular basis. The payments that are going to be paid this year is actually a current liability. The balance of that loan or that mortgage is going to be a non-current liability because it's going to be paid next year and going out X number of years. And the final category that we're going to look at is going to be, I'm sorry, before we do that, we also can common-size the balance sheet. So again, the same principle as the income statement, being able to evaluate these categories as a ratio, all right, to see it helps us immediately identify certain trends or certain categories that we want to zero in on. Note that although sales increased in 2019, the inventory has actually decreased. Three years ago, it was at 53%, now it's at 44%. So sales increased, inventory went down. Now, that could be a good new story. One of the things about inventory is that it has a inventory carrying cost. You build a product, you bought the parts, the materials, you expended labor, you put it into a warehouse where you're paying rent, you have to handle the products, you pay insurance on the products that are stored there. They haven't been sold yet. So one way to think about inventory is it's like stacks of cash with rubber bands sitting on a shelf in the back room. You can't use it yet, you can't take it, you can't spend it. So one thing we do in terms of controlling costs would be to rationalize inventory. Make sure we have a program to go through and on a regular basis eliminate absolute inventory. Or what are some of the things we can do that can reduce the inventory, but still not impact our ability to serve customers? That's the whole idea of just-in-time inventory. That was really... Right, sorry about that, everyone. Dr. Pierce, I'll let me know if you can hear me. I think you froze there for just a second. I can hear you. Yeah, I think your screen froze and you were quiet for just 15 seconds. So just go, if you could just go back like, you were talking about the inventory and I'm not exactly sure where we got lost, just like 10 seconds back. Okay, so in talking about managing inventory and the cost of inventory, I mentioned that one of the programs that came out of these initiatives was just-in-time. And that was businesses working with close suppliers, critical suppliers to determine ways where they could get the materials they need for production without having to maintain a large inventory. So for example, in my experience, way back when, when I started, and we don't need to know how long ago that was, we would go in and we would buy months worth of inventory to support our production facilities. That of course meant tons of warehouse space. At one time we had over 3 million square feet of warehousing space. One of the programs that I actually worked on with one of our main suppliers, which was General Electric, we used thousands of small fractional horsepower electric motors and our products. We were able to work together, give them access to our production schedules and they committed to actually supplying motors just in time for our production requirements. So a truck would come in and be offloaded right into the production facility. We saved huge amounts of space and cost by initiating their program. And our supplier also benefited because they had a firm commitment to know exactly what they needed to produce to meet our requirements for the year. All right, so that's an example of how we use these statements. Now, the third category of the balance sheet, which is of critical interest if you're an owner or a shareholder is, what's my share? Or what is shareholders equity? And simply put, shareholders equity is simply the assets of the firm minus the liabilities. And if there's anything left, it belongs to shareholders. In practice, what this means is, let's suppose that we were actually going to liquidate the firm at the end of this year. If I liquidated all my assets, I would take that money and pay off all my liabilities. If there's money left, that belongs to the shareholders. And that's shareholders equity. It's their stake in the firm, it's what they own. And you could take that by the number of shares that are outstanding, and you could determine what is the equity per share. And that's how we use these numbers. So this is of keen interest to investors and shareholders. If you've ever owned stock in a business, or you bought stock, or you're going to buy stock, you're going to be looking at shareholders equity. And you might be interested in looking at the historical performance of the business. I mean, how have we done for our shareholders? Has shareholders equity gone up? Has it been consistent? Or has it been going down? Certainly can have an impact on your decision to invest or not to invest. The last statement we're going to look at is a statement of cash flows. And as the name implies, this is going to talk about cash. So this is not paper receipts or the like, this is monies that you have. Cash flow is money that comes in and money that goes out. And we need to be able to track our cash because it has a direct implication for our ability to meet the obligations of the business. When we look at statement of cash flows, we break it down into three basic activities that just about every business participates in. Those activities include operating activities, investing activities, and financing activities. And we look at each of those three activities and we determine what is going on with cash as it goes in and it comes out. So if you look at this report, we would see under operating activities, we have net income, what did we earn? Adjustments to that depreciation, changes in accounts receivable, changes in inventories, bottom line, what was the net cash provided by operations? Now net cash can be positive or negative, but this is associated directly with the reason we're in business. What are the specific operating activities we're doing? Second category is investing activities. We invest money. We prepare a capital budget. We invest in fixed assets. It could be plant or equipment or property. We may have short-term investments. We have excess capital. We don't let money sit in the bank. We invest it maybe in a short-term investment to earn interest. So we're going to take a look at what's happened with short-term investments and we're going to sum this up as the net cash provided to the business through whatever investing activities the company does. And the last one is financing activities. We do financing in terms of notes payable, that short-term debt that we owe. We could have long-term debt for maybe a major plant expansion, payment of cash dividends. So we'll look at those specific activities and review what the net cash provided by financing was. Bottom line is, we'll have a statement of cash flows that looks something like this. Cash provided by operations, by investing, by financing and the net change in cash. What was it at the beginning of the period? When we started the beginning of the year, we had a certain amount of cash. Then we did all of these activities. How did we end at the end of the year? What's our cash position? Now, couple of points on this. One, we don't want to sit on large volumes of cash because investors have an expectation that they gave you money so that you get them a return. So we want to do something with that cash. We want to invest in the business. And if we don't have an immediate investment opportunity, specifically for the company, we may want to invest in something that at least generates some interest so that we're earning money on the cash that's sitting there in the business. Now, those are the four basic statements in the financial package. That's a lot of material I know. And we're going to, in the next presentation, we're actually gonna get in and see what kinds of calculations we can do when we do financial ratio analysis. So for the next lecture, I suggest you have your calculators ready in a notepad because we're going to do a lot of calculations. But before I wrap up this presentation, let me just stop here again and see if there are any current questions. All right, well, yep. Everyone, if you have any questions, feel free to leave them in the chat. And of course, if you're watching later, feel free to put them in the comment section below. But I think if I'm not wrong, Dr. Pressman, we do have a summary after this. So maybe if anyone has any questions, get your questions in now while we do the summary and look forward as I think is coming up now. Great idea. And just so you know, we're going to wrap this up relatively quickly now. So I'm not going to put you through much more of this, but a couple of closing thoughts on this. The financial package is an essential starting point for managers, executives, owners, and even shareholders to take a look and review the firm's performance in their financial condition. Think of these financial reports as a report card on management. I mean, as a former president and CEO of a business, those financial reports were a reflection of what happened based on the decisions I made. Hopefully good decisions, hopefully positive results, but they are a way of looking at what we've done. Remember also that there are two users of this financial information. The internal users, the management team, directors, supervisors, operations in your business, look to these numbers because they use them to budget what they're doing, control expenses, and see what the goals and objectives are for the business. You also have external users, which are typically the owners, the shareholders, lenders that you may be looking for to finance some capital projects, and even your suppliers, who are trying to make a determination on whether or not to give you open credit on the things that you're buying. And one last thing is depending on the size of the company and whether or not you're public, there is a value to providing audited statements. Auditing can take place inside the firm internal auditing, which in my experience is something that takes place on a regular basis throughout the year. And then an independent or outside auditor at the end to provide that objective outside evaluation of the value and the validity of the data being presented. Now, in the end of this unit in the study guide, there is the vocabulary section. I picked out just a few here that I wanna briefly touch on. We talked about a lot of things that management does. The roles of management are three basic ones, planning, which is preparing the budgets in a forecast and the capital plans in advance, evaluating, making decisions on the allocation of resources, capital and human resources to implement those strategies, and control, which basically means making sure that we're doing what we said we do and keeping the train on the track. We've talked about external and internal users. Function of managerial accounting is to take the numbers and use them to make business decisions. And that's why the numbers should be available on a regular basis. In managerial accounting, we produce more financial reports than just a financial statement because internal to the company, we need to get down into very detailed explanations of key accounts. Financial accounting, on the other hand, is responsible for the external presentation, the annual financial statements and like for the external users. We talked about the variance report using the financials to actually determine how well we're doing. And we remember that we have an obligation, a fiduciary responsibility to stakeholders to make decisions that are in the best interest of those who own or have invested in the firm. Next week, we're going to get into the nitty gritty of financial statement analysis, which is where we'll take the statements and we'll actually go through and talk about different calculations that we use that help give us insight into specific formulae, what is our return on investment or the return on equity. So we'll get into those when we'll talk about those in some detail. So having said that, that's our presentation for this week and we'll hold it open for any questions. Okay, yeah, well, we haven't gotten any questions yet, but I will do my classic slow roll to the end here and start by thanking you on behalf of everyone. Dr. Piersol for taking us through yet another one of these, reminding everyone to join us next week as we just went over for unit two. Mind everyone to leave a comment if they're watching later and they have some question, we'll get to it after that. And of course, more importantly, thank you everyone for joining us. I'm not seeing any questions in the chat, so we're just gonna line this down here. Again, a big thank you to everyone and we will see you again next week. Take care everybody, thanks Michael. Bye.