 Hello and welcome to this session. This is Professor Farhad in which we will discuss the purpose and overview of the statement of cash flows. Now it's very important to understand what is the statement of cash flows? What is the purpose of it? And look at the overview, look at the various components before you dig in and start to build a statement of cash flows because once you understand the purpose, it might be easier to build it. Cash is the most important asset. I'm sure you heard the saying cash is king. Why? Because you can do anything with cash, pay your employees, pay your suppliers, hire consultant, hire additional help, pay your electricity, pay your utilities so you can use cash for anything. So the purpose of the cash flow statement is to provide information about the company's cash receipts and cash payments during a particular period. Now why would you want to know this? Well it's going to help you predict future cash flows. Well if you see for the past three years our utilities per year is $3,000. Well you can predict next year it will be around $3,000 give or take given inflation but the purpose is you can predict it will help you predict how much you're going to pay for utilities. Not only utilities, you can project your revenues and expenses obviously given taken into consideration new information. Now if oil prices is going up by let's assume 10% and your utilities is dependent on oil prices then you can say it's going to be around $3,300 because the prices of the oil went up so it can help you predict this. It also help you predict your ability to pay dividend because investors are interested in dividend that's why they will invest in you that's why they give you money and it will help you predict if you're going to be able to meet your obligation your obligation that your debt obligation your creditors because if someone wants to invest in you buy stocks or lend you money first they want to make sure can you reward them can you pay them dividend can you pay back can you pay back your principle can you pay the interest and the statement of cash flows will tell the investors and the creditors a lot about your ability to do so. It also explained the difference between a cruel net income and cash flow from operation. You have to understand that when we prepare the income statement when we prepare the income statement it's based on a cruel that's fine a cruel is good but what we care about is how are we doing on a cash flow basis from a cash perspective are we generating positive cash from operating the business or negative cash and will work will will not will work an actual example showing you the difference between the two of course that's a one major section but also we want to know the importance of it because sometime a company could be generating positive a cruel and negative cash and for a long period this could be a risky risky business also it tells you about your cash and non-cash financing and transaction the statement of cash flows it's going to tell you whether you have transaction that are non-cash basically buying buying property plant and equipment buying land vehicles using sources other than cash it tells us this much about the business as well simply put it tells us how is the company doing on a cash basis cash basis is important from a cash perspective how are we doing and specifically it's going to break down this basis under three categories operating investing and financing and it's very important to look into each section separately and understand what goes into each section because those are the three section of the statement of cash flows before you prepare them you want to know you have you want to have an overview what is what is each section about because once you understand each section you can prepare one also on the CPA exam they might ask you questions under which category does this activity goes is it operating investing or financing so it's very important to differentiate between those three and understand what goes into each section now before we dig deeper into those three sections I would like to remind you whether you are a student or a CPA candidate and most likely that's who you are that's why you are watching and I'm glad you are because you're looking for some help and you have arrived go a step further farhatlectures.com where I provide you additional resources multiple choice true false additional lectures exercises that's going to help you understand this statement of cash flows I don't replace your CPA review course if you're studying for your exam use me as an addition use me as an addition to your accounting course I'm going to help you substantially do better understand the material better if you have not connected with me on LinkedIn please do so take a look at my LinkedIn recommendation like this recording if you're watching it means you're liking it please like click on the like button share it with other connect with me on Instagram Facebook Twitter and Reddit so those are the three parts of the statement of cash flows and we're gonna go through each section separately explain what is it about and what does it contain starting with the operating activities when you hear the word operating activities the first thing you want to think about is think of the income statement what you are doing is you're taking your income statement and converting your income statement to cash basis simply put you have net income well that's great that's a cruel give me net income on a cash basis are we generating cash from operation simply put when we operate the business buying selling operating the business on a day-to-day basis are we generating cash or are we losing cash think about if we're losing cash if we're constantly losing cash well we're better off closing the business that's not necessarily true all the time because at the beginning of the life of the company the company might be losing money from operating the business you might be saying if they're losing money how do they survive we're gonna find out how but the point is if you are operating the business constantly losing cash for a long long period and you have no projection of having a positive cash close the business why would you operate the business and lose cash every day that you open so basically the operating activities is converting convert the income statement to cash flow from operation that's basically what it goes down to now what do we need to what what information do we need to to perform this step items involved are obviously the income statement current assets and we're gonna examine the change in current asset and the change in current liabilities and don't worry we're gonna work a detailed example explaining how do we prepare one using this method all what i want you to do now is when you think of operating activities you understand what operating activities are of the statement of cash flows now we're gonna move from operating to the second section investing when you think about investing think about investing in the company itself so how can the company invest in itself so you're investing in yourself well how can you do so how can the company invest in itself well you would look at the change in their assets specifically long term because the short term asset the current assets are used for operating so when you buy new building when you buy equipment when you build a warehouse when you expand when you spend money on your what's called capital asset long-term assets you are investing in your business think of long-term investments also when you buy investments in other companies when you invest for example when microsoft buys linked in that's an investment when apple buys another company that's an investment they are investing in in themselves in the company itself so you can buy investments investments of other companies so you can buy here stocks of other companies okay you could also buy bonds of other companies lend money you are making an investment and you're gonna earn interest also what we're really looking at when you're talking about investing investing in yourself investing in property plant and equipment ppne when you operate the business you need property plant and equipment so what do you do you invest in yourself and also you could invest in intangible assets buying intangible assets so those are usually the three big categories when it comes to the investing section property plant and equipment investments stocks and bonds of other companies those are investments and other companies obviously but you are investing because you are owning those investments and intangible assets the third category is financing activities think of how the company financing itself how can you finance itself well to find out how you finance itself you're going to examine the change in your liabilities and your equity so your assets how do you finance yourself comes from two sources your assets comes from liabilities that and from equity stocks so you want to find the change in liabilities and the change in the stocks that's what you are looking for how can the company finance itself well as i just told you they can issue that well they can issue that now here's what you need to know about the debt that itself when when the company borrows money not lend money here they're lending money under investing we said issuing buying bonds that's when you are lending money here you are lending money it's investing borrowing is financing when you borrow money you are financing itself you are financing the company borrowing now when you borrow money you have to pay interest now here's what you need to know interest cost is considered an operating activity so although the debt itself is a financing activity when you pay interest on the debt it's considered operating two you can issue stocks remember what i said about the accounting equation assets equal to liabilities debt and stocks common equity when you issue stocks well that's also financing activity now bear in mind when you issue stocks you're going to pay the investors dividend when you pay the dividend dividend is considered financing activity so that is considered operating dividend paid dividend paid is considered financing activities and we're going to see what dividend received later what what is what is that considered on the next slide so this is how you finance yourself this is how you finance yourself now let's dig a little bit further and see what goes under each category let's be a little bit more specific again when we think about operating activities we're going to have a positive cash flow and negative for investing we're going to have positive and negative for financing we're going to have positive and negatives so we're going to look and to see what goes under each category kind of now we're kind of zoom in a little bit in now we know the operating activities it's all about the income statement well we're going to have a section of cash inflows and that's going to include sales of goods and services and usually that's the largest largest section of the operating activities because what the what what do companies do company sells their goods and services various companies will have various goods and services but that's their main source of revenue now is this the only source of revenue of course not they might have investments and stocks they might lend money so they simply put they might receive some interest income dividend income so notice dividend received and interest income is considered operating because the assumption is you're going to take this money and use it to operate the business now also the company will have a cash outflow so this is the those are the cash inflow cash outflows what do companies spend money on to operate the business well many things but mainly pay their suppliers if they're buying inventory pay their employees pay your employees you have to pay your employees you have to pay your taxes you have to pay the interest on the loan and notice I highlight the interest on the loan to remind you that paying the interest is considered an operating activity and all other operating activities when you have to pay for those operating activities now this is operating activities and don't worry we're going to work examples with actual numbers but I want you to see what operating activities is all about investing activities you're going to have a cash inflow and a cash outflow although I'm going to start with the cash inflows I should start with the cash outflows because it's more natural to start with the cash outflows for investing cash inflows is when you sell your property plant and equipment so if the company sells any of its property plant and equipment well guess what they're generating positive cash flow and that's considered investing activities same thing when they sell their investment sale of investments when they have investment and other companies and they sell it that's a cash inflow they're bringing money also when they collect their loans so if they lend money and now they're collecting the money now it's a cash inflow and it's considered investing activities notice collection of their own loans they're lending the money they're not borrowing they're lending the money it's an investing activity why because when you lend the money you earn interest well you are investing that's that's why it's investing now we're going to also have cash outflows and you're going to notice that cash outflows are the exact opposite of cash inflows so rather than selling you're going to be buying property plant and equipment so notice cash outflows sorry negative cash outflows so those are the inflows and the cash outflows will is purchasing those property plant and equipment notice the opposite purchase of investments notice it's the opposite when you purchase the investment you have to spend money cash is leaving and when you lend money when you lend money cash would leave the company and the opposite is the collection of loans so this is the second section let's take a look at the third section which is financing activities financing activities also will have a cash inflows again how do how do how do company finance themselves through stocks and debt borrowing bonds so cash inflows will have issuing of stocks when you issue your own stock you are financing yourself you are bringing money to the business when you issue your own debt when you borrow money that's also cash inflows and it's part of your financing activities now you're going to have cash outflows as well and guess what cash outflows will be related to the cash inflows when you issue stocks you have to pay dividend remember dividend is considered a financing activity sometime you buy back your own stock you issue the stock then you have extra cash you buy it back remember we talk about treasury stock remember when you pay interest on the debt it's considered it's considered what it's considered operating okay and when you pay back your own loan so you issued the bond you issued the debt now you are payback you are paying back you you're paying off your loans that's an outflow of cash remember interest is not here interest on the loan is considered operating activity it's right here interest on the loan which is a little bit unusual what should you do now go to farhatlectures.com and work mcq's multiple choice through false invest in yourself invest in your career invest in your education it's going to pay you dividend down the road don't shortchange yourself good luck study hard in the next session we would look at actual examples