 This audio lecture is brought to you by the YouTube channel Farhat Accounting Lectures. On my YouTube channel you can find over 1500 free accounting, auditing and tax lectures to prepare for your CPA exam. Those audio lectures are designed for people on the go, for busy people, people who are commuting on the plane, on the train or if you are spending some time in the gym or walking in the park or even trying to go to sleep. So they are designed to review the material for the exam. If you really want to learn the material in depth, please visit my YouTube channel. And if you happen to visit my YouTube channel, please consider making a donation to support the channel. I'm here to help you. Let's get started. This audio file can be downloaded from my website, farhatlectures.com. In this audio we will discuss the statement of cash flows. What is the purpose of the statement of cash flows? The purpose is to help investors, creditors and others to assess the entity ability to generate future cash flow, the ability to pay dividend, the ability to meet its obligation, pay off our debt. It also explains the difference between accrual net income and cash net income. And this is one of the most important aspects of the statement of cash flow. It's going to help you convert from accrual accounting to cash accounting or sometime from cash accounting to accrual. Once you understand the statement of cash flow, you'll be able to convert from accrual to cash and from cash to accrual. And that's extremely important for the CPA exam. But simply put, what the cash flow statement boils down to is figuring out or explaining the difference. You can figure out the difference in cash from year to year by taking the beginning balance of cash minus the ending balance of cash. For example, you started with $100,000, you end up with $150,000. The difference is an increase of $50,000 in cash. Now you want to understand why that difference happened. The statement of cash flow will explain that difference. And the statement of cash flow will explain that difference by breaking down the changes in cash into three categories. In this audio lecture, I will go over the categories very briefly. I will name them, explain them very briefly, plan the seat for the next audio lecture. In the next audio lecture, I will take each category and explain more in depth how to prepare the steps to prepare that particular section. The three sections of the statement of cash flow are the operating activities, investing activities, and financing activities. I'm going to go over each section very briefly today. When you think of operating activities, think of the income statement. Basically what we are doing in the operating activities, and you will see that in the next session, is taking the income statement and the income statement is prepared based on a cruel accounting. And we're going to convert the income statement into basically a cash flow statement. Now we're going to learn about two methods doing so. We have the indirect method and we have the direct method. You will need to know both methods for the exam. But the first thing I want you to think about operating activities, it's income statement figures and anything on the balance sheet that affect the income statement. Well, we'll discuss this in the next session a little bit more in details. The second section of the cash flow statement is investing, the investing section. Well, when you think about the investing section, here's what I want you to do. I want you to close your eyes and think of long-term assets on the balance sheet. What are the long-term assets on the balance sheet? Those are property, plant, and equipment, and long-term equity investments. So this session, not this session, this section will explain the difference. What happened to your investments? So why do we call these investments? When you buy vehicles, when you buy land, when you buy warehouses, when you buy more equipment, you are investing in your company. And that's why property, plant, and equipment is part of investing activities. So we're going to need to analyze the changes in investing activities. And the other category that would go there under the investment activities is when you invest, when you invest in other companies, when you buy the stocks of other companies, and you plan to hold the stocks for a period of time. So sometimes you buy stocks, sometimes you sell stocks. You are making an investment. Also, you make an investment when you lend money. So another category could be there is when you have a long-term receivable. When you lend money, you are basically a creditor. You are an investor. And that's why lending money and collecting that money as well is part of your investing activities. That's the second category. And the third category is financing activities. And financing activities is how it deals with how the company finance itself. How do you finance itself? You finance itself through debt and equity. So here we are dealing with bonds, long-term notes, stocks. And when you have stocks, you pay dividend. Now, please note, make a note of this now. I will mention it again. If you pay interest, interest is paid on debt. However, interest expense is considered an operating activity versus dividend. Dividend is paid for common stocks. Dividend is considered a financing activity. So make sure you distinguish between those two. It's a rule you have to remember. Gap, that's what they want us to do. Therefore, you make sure you are aware of it in case you got that question on the exam or in case you are preparing a statement of cash flow. Also, if you sell stocks, which is selling equity that's financing, if you buy back your stock, that's treasury stock. Those are the activities that go under the financing activities. In the next session, I will have a recording for each section, a little bit more in detail explaining how to prepare that section. I hope this session was valuable to you. And stay tuned if you happen to visit my YouTube. Once again, please like my videos, share them. And if you can donate, it's greatly appreciated to support the channel. Good luck.