 Hello and welcome to the session. This is Professor Farhad in which we would look at the cash flow cycle and what would the cash flow tells us about the life cycle of the company. In other words, in which life cycle is the company in? Is it in the introductory cycle? Is it the starting company? Is it a growth company? Is it a maturity company or is it in decline? To illustrate this concept, I'm going to be using two companies. Peloton Interactive, what they have is interactive fitness product and Apple, Apple computers, which is we all know what Apple is known for, the iPhone, the tablet, so on and so forth. But before we start, I just would like to remind you what are the three sections of the cash flow statement, which we looked in the prior session operating section. It tells us how well the company doing on an operating basis, operating the business from a cash flow perspective, the investing section, at what stage the company is in? Are they investing? Or is this cash outflow? Or are they reducing their investments, cash inflow? And the financing section, how the company is financing itself. Is it financing itself through issuing stocks and bonds? Or is it now paying dividend, buying back stocks and buying back bonds? So what we're trying to see is, what does the cash flow tells us about the life cycle of the company? So this is on the x-axis, I have the life stage of the company, introductory growth, maturity and decline. And on the y-axis, I have the cash flow. This is zero cash flow. This is negative here. And I'm going to put the positive cash flow in green, positive cash flow. So here's what happened, or here's how it works. When the company is starting, when the company in the introductory phase, when the company is the introductory phase, when the company is starting, guess what? Most of the money, it's going to come from investments. I'm sorry, it's going to come from financing. They're going to rely on issuing stocks and issuing bonds, which is that. So at this stage, if we look at the financing section of the company, let's compare the financing section of Peloton versus Apple. So notice, Peloton is basically, it's not a startup company, but it's still in the introductory phase. Well, notice, their financing cash flow is positive. What does that mean? It means at this stage in the introductory stage, the company will need money to grow, even in the growth stage, they will need less money. Now they're starting to grow, they would need less money. Once the company reach maturity, once the company reach maturity, they no longer need the money from the investors and the creditors. On the contrary, once the company reach maturities and go into decline, they will start to go back and pay back the investors, pay back the creditors, because they reach maturity. They have plenty of cash. Let's compare this to Apple. Under Apple, notice their financing cash flow is negative, negative, negative, negative. So Apple is in the maturity phase. Why? Because they have plenty of cash. They don't need cash from the investors and the creditors to grow. They already, they already, they have plenty of growth. And at this point, they might have reached maturity and now they are confident to pay back the investors. So this is for the financing section. So first, Peloton would start bringing money from financing and at some point once Peloton reaches maturity, if they reach that stage, they have plenty of product, they will do the opposite, they will start to buy, they will start to pay back the investors, like what Apple is doing here. This is for the financing. For the operating, let's put the operating in orange, for the operating section, so notice the operating section. When the company starts to operate, they will have either a negative or a small profit. So it will start maybe negative, negative, and it will start to grow in the introductory phase. It will be negative until they maybe reach the growth. Once they start to reach the growth, they will start to make profit from operating the business. And notice Peloton here, small positive, negative, positive, negative. So they're in between introductory and growth phase. Once they reach the growth phase and they reach maturity, they will keep making money. Now we don't know how long, how many years the cycle is, and at some point the company will decline. Now we don't know when that happens. Notice on the other side, Apple. Apple is a mature company. So Apple, since Apple is a mature company, once you are a mature company, notice Apple is in the maturity stage, or we don't know whether it's in the growth stage or maturity stage, but definitely Apple is not an introductory because it's generating positive cash. So when the company is generating constantly positive operating cycle, they're either in a positive growth, really growing in their positive generating cash or in the maturity stage. Once they reach the decline, which we don't know when, they will go back and they will start to lose money. They will start to lose money. So this is how it works. Notice it's kind of the opposite. Now when it comes to the third section, the third section is investing. What is investing? Investing is when the company is investing in itself. Now obviously in the introductory stage, in the introductory stage, this cash flow will be negative. Why will be negative? Because you need money to invest. So notice Peloton, a good example. Older investing cash flow is negative. Older investing cash flow is negative, 2018, 2019, 2020 and 2021. So they, well, we really don't know when does it switch, but as long as the introductory phase and the growth phase, usually you are negative because you are investing in yourself. And to buy, to buy property, plant and equipment, to expand, to buy buildings, well you need money. And to need money, it means you have to spend money. So once you reach maturity, once you reach maturity, and you no longer have a need to invest, and we don't know when that stage is, what do you start to do? Well, you no longer buy a lot of stuff. You might start to sell, to maybe sell assets that you're not really using because you reach maturity. You can no longer have growth. And at some point, once you start to decline, you sell your assets. So notice for Apple. Apple in 2018, they were investing, they were investing. In 2020, they, the investing is negative. Also the investing could be buying stocks and other companies. So it's not really investing in a sense that investing in the company may be investing in other companies. And that's why it could be negative. It means they sold the stocks. That could be also the case. But notice, it's healthy to be negative cash flow for investing. Negative cash flow means you are investing in something. You are investing either in your company, buying property, plant and equipment, or investing in other companies, which hopefully will pay dividend down the road. It means they are good investments. Simply put, what we need to know is this, understanding how to prepare the cash flow statement is important. But also what I'm trying to show you is trying to interpret those three sections, operating, investing, and financing, and show you how would they look like on the life cycle of the company, whether the company's introductory phase, growth phase, maturity phase, or decline. And obviously, you can look up any company you would like on finance Yahoo or Google finance, look at their safe enough cash flow, and determine whether they are making money from operating, investing, or financing. Notice Apple, Apple is so healthy, they're making so much money from operating that they can invest in the company and pay back the investors and the creditors. On the contrary, Peloton is losing money from operating the business, losing money from financing because I'm sorry, from investing. And how are they bringing money? If they're losing money from operating the business, if they keep investing in the company, where is the money coming from? The money is coming, notice from financing. So whatever they bring from financing is showing stocks and bonds. It's to operate the business and to invest. Now, how long can you stay like this? A company like Amazon almost stayed a decade doing this, bringing money from investors and creditors and finance in the company, although they were operating at a loss. Tesla is another example. But many other examples, the company don't survive after two, three years of investors bringing money without making profit from operating the business. So I hope this is a good review session just to show you how it works. What should you do now? If you're not a subscriber to Farhat Lectures, whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, subscribe if you're an accounting student or a CPA candidate, study hard and stay safe.