Welcome. In this video, we're going to continue our building an understanding of cash flow statements. In fact, we're actually going to build a cash flow statement. To do that I'm going to go back to that comprehensive example that we used a while ago. Our wholesale bookstore, Libra of Wisdom. And we're going to look at the transactions there and build our cash flow statement off of those. In order to do that, I need to remind you of what happened with cash in that example. Here's our cash t account, probably a quick glance of that reminds you of everything that happened, right? Well, maybe not. But remember I told you before if we put numbers by each transaction, it will be easy for us to go back and remember those in the future. Well we did do that. So we're all set. We can just pull each of these transactions and we've got our summary of what occurred. And now we can remember what happened with cash in this company and we can move forward in making our direct cash flow statement. Now you may recall from one of the other videos the first step in the cash flow statement is to take each transaction and put it into one of the three categories: operating, investing, or financing. So that's what we're going to do here. Let's start with the very first transaction. We received $100,000 of cash and it was contributed by our owners. Is that part of our core operations? Is it part of our underlying investing? Or is this financing activity to provide capital to the firm. Well, if you said financing, you were right. Let's look at the next transaction. We had $24,000 worth of our cash and we used it to prepay rent. Again we want to think about this the same way. What did we pay that rent for? We got a warehouse. So does that mean it's part of operating part of investing or part of financing? Well in this case it's part of our operating. It's something we're doing. We're going to get benefit for it over the next five months in order to run our operations for this year. So it's an operating transaction. Let's move on to the third transaction. We gave up $14,000 of cash to get some equipment and we promised to pay another $22,000 at some point in the future. So what is this? Operating, investing or financing? Remember this equipment supposed to last us for three years. So it's an item that's going to create value for us over an extended period of time, more than one year. Generally then we would think of that as, if you said investing, you got it right. It's an item that we've made an investment in, that we hope to get value on over several periods. Now for bonus points, here's another question. What amount is actually going to show up in the investing section? Is it the $14,000 cash we gave up or the $22,000 note payable? Well, it's the $14,000. Remember the cash flow statement only captures what went on in cash. Where does the $22,000 show up? Did that actually impact our cash account? No, it didn't. So it's not going to show up anywhere on the cash flow statement. From a cash flow standpoint, it's as if that part never happened. OK. Let's move on to our next transaction now. Transaction 6a we collected $120,000 of cash from customers that we've made sales to in the past. Is this operating, investing, or financing? Well, our sales are our main operations. So this is part of operations. Similarly, we have a $130,000 of cash that we paid to our suppliers. If you got 6a then you probably also know that 6b is operations. Let's look at our last transaction, number 8. We paid $12,000 in cash dividends. Is that something we did to enhance our operations? Is it some sort of an investment that's going to pay off over the future? Or is it some sort of a financing transaction where we're interacting with our capital providers. Well, if you said financing then you've got this one right. I think most of you probably look at this and said actually putting these into categories isn't all that tough. Well if you could put them into categories all you have to do to make a direct cash flow statement is lumped those categories together, sum a few things and we're all set. Let's take a closer look at this cash flow statement. Notice the cash from operations sums up to $34,000. It's a $34,000 negative. So it's saying during this period, our operations actually used up $34,000 worth of cash. We're brand new companies so that's probably OK. Over the longer term though if you keep using up cash from your operations, that's not a healthy sign. If your basic business can't generate positive cash flows. How are you going to have money to make investments or to return to your investors? And of course, nobody is going to want to put more money into a company that consistently uses up more money than it creates in its operations. Now we can move on to our cash from investing activities. Remember that was just that equipment we purchased. So that's a $14,000 use up of cash as well. It's actually OK that that's a negative balance. In fact, if we're going to be making investments in general we'd like to see a negative balance there. The more negative the balance there, the more investments we're making for the future and that's probably a good signal about what's going to happen for our company in the future, assuming that we're able to make those investments actually pay off. And finally, we have our cash from financing activities. This is from our interaction with our shareholders. Remember in this situation they gave us $100,000 at the beginning of the period. We've already given them a dividend of $12,000. So net, we received $88,000 from our shareholders. If you look across these three categories for our company here, what you'll notice is our positive cash all came from financing. That means outsiders provided the cash for us and we had to use that cash up to fund our operations as well as to make some more investments for the future. Of course, we're brand new company so that might be OK but it makes it really clear to us that in this first month of operations really our cash was driven primarily from what was provided to us by our owners. So what is the net impact of all this? Well, our cash went up by $40,000. We're going to add that to our beginning balance because we are a brand new company at 0. But usually there would be some sort of cash balance here to begin with which then would give us our ending cash balance per our financial statements. Those numbers would come off of our balance sheet and they kind of help us to tie our cash flow statement back together with our balance sheet. Well, that's it that's all that's involved in a direct cash flow statement. It's really pretty simple. Unfortunately, this isn't the sort of cash flow statement you're usually going to see from public firms. You might see this from a private firm but when you take a look at public firms they usually do something called indirect cash flow statement. I'm going to do another video on that so that you can better understand it. I wanted you to see the direct cash flow statement, so you'd understand the idea of having the different categories and the basic idea of how a cash flow statement works. It's also because my experience is generally, this is what people think they're going to see when they say they'd like to see a cash flow statement. So I wanted you to know you could do a cash flow statement like this if you're working within your firm and you think this would be useful to you. It's just not what you're going to see from external financial statements usually. OK, let's get onto those other video so that you can understand the indirect cash flow statement.
