 In this module, we are going to discuss what is meant by a cash flow statement. How we prepare a cash flow statement, what are its major components or what are the major elements that are that help us in formulating or understanding the cash flow statement. And once we have the cash flow statement, how do we interpret it or analyze it? So basically, when we talk about the cash flow statement, it tells you about the various types of cash inflows and cash outflows which a certain company is making. So any company has received money in the form of cash and how much cash money has been spent on it. Just considering the value of cash, the financial statement that is made is called the cash flow statement. So it gives you overall different types of pictures as compared to the income statement or the balance sheet. In the income statement, you have made all the expenses and revenue sources, gains and losses accounted for, which you are expecting, that we have to make these kinds of different expenses and we are going to be getting these kinds of different revenue sources. Actually, how much money you have received and how much money has been spent on your account or any company's account, if you want to keep that particular thing in mind and accordingly you have to make decisions, then for that purpose, you need to look at the cash flow statement of a company or a firm. So overall, the terms of the financial picture of cash flow statement, there are two major aspects that are to be considered. First of all, you have to understand the position of any company's cash, for example, if you are talking about a company, they have manufactured something and supplied it to the market but they don't have any payments and they have to pay for their employees and they don't have cash in their ready form, then the company will be in trouble. So it is important to look at that aspect also. So for this particular aspect, we look at the cash flow statements. So sometimes there are companies or there are firms where cash is expected to be getting revenue but cash in hand is in trouble. There are bills or you have to pay or you have to pay for your money. So financial distress is a condition in which any company or individual can't generate so much revenue or can't generate so much income that they can meet their financial obligations or as I have just told you, you have to pay for it and you know that you have spent crores of money on manufacturing and selling it to the market but you don't have the full payments or your buyers. So you have to pay for it, you have to pay for the bills, they have a deadline so if you don't have cash, then that means that the company is in the financial distress situation. So this particular aspect is in the financial distress or financial distress, it is important to look at its cash flow statement. So this plays an important role in the cash flow statement and basically when we are looking at the cash flow statement, we follow the accrual system where we make the income statement. Here you can't account for the accrual system. You can't account for the technique of accounting. You simply strictly see how much cash we have and how much cash you are infusing and how much cash you are getting out. So to understand the cash flow statement, we need to understand that there is this accrual accounting method which is accounted for or which is used to construct the income statement. And what is in it? As you said that we have generated income or we have manufactured anything, its value is this. So we will write in the income statement that we have manufactured 5 crore products or you are going to sell them to the market. This will come in the income statement but how much money you have got, it cannot tell you the income statement because when we construct the income statement, then we use the accrual accounting method. Accrual accounting method means that you just account for those values which you have sought for or accounted for. But the actual amount of money you have in your hand does not consider the accrual accounting method. And for that, we need to look at this third type of financial statement which is called cash flow statement. So when we are going to calculate the net income, like when we discussed the income statement, the various components of it, we saw that when we are calculating the inventory or we are taking the value of depreciation, then we are taking all the judgments or assessments. Actually, when you go down, you do not assess the values. For example, if you are taking the linear method of depreciation, you said that whatever assets we have, it will deteriorate the value of 10% every year. But we do not know how much the actual market value is. So basically, it is possible that you will get the picture of the overall assets which is very valuable. But actually, when you actually go to sell it, you may get very little money. So there is this difference between the income statement values and the cash flow statement values. So therefore, it is important to understand both sides of the picture in order to have a clear or a better understanding of the overall financial performance of a firm. Similarly, when we are talking about the net income, there are judgments, judgmental values are given, hypothetical values are given, or some formula is given, then you apply values. So as soon as you have some intangible assets, you have to amortize them, then you use judgments there as well. So it is possible that the net income statement you have written is very different from the actual values. So it is important to look at the cash flow statement also when we consider the cash flow statement or when we try to learn or understand the construction or the structure of a cash flow statement. It is important to note that when we construct the cash flow statement, so when we look at the overall structure, it is important that when I just told you that we have operating activities, the cash flow statement is put first to make the cash flow statement. So when we say operating income, what does operating activities mean? So whatever your primary activities are, whatever different business operations, some manufacturers, all the things that you are getting cash inflow or to make the payments, those will be considered in order to consider the operating cash flow from the operating activities. So this forms the first section and it will include all the transactions that are done in order to do the operational business activities. Then we are going to consider when we move on to the next part, it takes into account the cash flows involving the investment activities. So the third component of a cash flow statement, that is the cash flow from the financing activities. So when you are accounting for the financing activities, it means that you have to account for cash flow for the financing operations as the third part of the cash flow statement. So in order to understand what is the overall structure of a cash flow statement, I am going to use an example. Again, we are going to talk about the hypothetical company XYZ. In order to understand the overall structure of a cash flow statement, I am going to demonstrate by taking into account a hypothetical company's values in order to illustrate how the cash flow statement is constructed. So as I have mentioned earlier, these are the three parts of the statement. First of all, we are going to account for the cash flow from the operating activities. So suppose you have generated net income from your major job cooperation. You have generated net income and realized that it turned out to be $23.4 million. Then we are going to subtract from the net income the value of increase in accounts receivable. Suppose we have taken an imaginary value. Suppose it was $10 million. You have to subtract it. After that, we subtracted the value of our inventory that you have increased. Now you must be thinking that the inventory has increased and we have minused it. So we have minused it because when you have bought these inventories, you have made a payment for it. And the payment was supposed to be $30 million. So this is the minus sign. Then you have added value which is increase in accounts receivable. So this is an increment and therefore we are going to add it. And suppose the value turned out to be $12 million. So the total cash flow that you have realized with operating activities, you have added all of these. So that turned out to be $254 million. Next, this is the first type of cash flow we are going to take into account from the operating activities. Then if you have performed any financing activities in that year, then you have to account for them. So suppose now we have said that we are going to take into account from the investment activities. So you have invested in plant and equipment. You have invested, bought a plant, bought equipment and for that you have paid $90 million. Then we are going to consider the third type of head and that is the cash flow from the financing activity. And for that we have paid dividends to the people. You have the cash flow from the company because this is the payment which you have made. Right? And suppose now we have forwarded an example. So we have paid $10 million and suppose you have taken the short term debt from somewhere, borrowed it for $94.6 million. So this is increase in short term debt. So this is an inflow. So that is why I have put a plus sign here. So you saw that now what we are doing is we are counting only those heads which are going to you in the form of cash or you are coming to you in the form of cash. And if you are going to you in the form of cash, then you represent it with minus sign to all those activities. So if we write here at the bottom right now, account for total change in cash and marketable securities. So this turns out to be $20 million. So this is what the cash flow statement looks like. And you can see that I mean just in the pellet discuss the camera nice me operating activities get among the cash flows called for that. I mean investment activity cash flow called for the financing activities sometimes people are unable to differentiate between the investment activities and the financing activities. Please note investment activity. Further revenue or economic activity. Since we have discussed that the three major heads of a cash flow statement include the cash flow from the operating activities cash flow from the investment activities cash flow from the financing activities. It is important to understand the difference between investment and financing because sometimes people think investment or financing to don't know a key. So please note key in don't know me park. So when we say investment activities, it means that investment activity. So that type of expenditure will be known as investment it can be for example, training in people invest for the further income generate a extra piece of land buy. So your investment activity is the cash flow can be considered. Financing come at the end here. So this is solely for in terms of the borrowing or the debt or the loans etc. So that would be financing and financing is not investing. So investment is different from financing up investment. So that is something which is different or your investment activity expenses will go in different heads financing activity that will be purely considered as financing activity.