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This session is about cash flow statement now, cash is really important for any business.

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Cash is needed for maybe a replacement of an asset.

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So maybe one of your equipment needs a replacement.

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Maybe you need a new production line, a new vehicle and so on and so forth.

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Also, cash is important for capturing some market opportunities.

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Let's say one of your competitors is up for sale.

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If you have the cash, you could take advantage, capture of that opportunity.

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Maybe you need cash to expand your operation, open a new factory or open a new plant.

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So all these are just some of the reasons why cash is important.

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So given the importance of cash, there is a designated statement just to track the movement in cash.

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And when we say movement in cash, we say, how did the cash move?

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What was the cash inflow?

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What was the cash outflow in a given period?

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So when we say cash inflow, that means that cash coming into the business, the cash we receive maybe

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from a customer, maybe from the bank, or maybe from someone that we provide services to.

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So any cash that we collect, that is a cash in cash inflow.

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Now, the cash outflow, that's the cash leaving the company.

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So any cash that leaves the company, maybe we purchased an asset, we paid cash, maybe we purchased

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some inventory, maybe we paid money for our suppliers.

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Maybe we paid salaries, expenses.

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All these cash outflows are just cash leaving the company.

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So this is a cash out now, if you think of the business as the water.

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Thanks.

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So you have some cash coming into the tank on some cash leaving the tank, and you always have some

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cash balance within the business.

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Now, I need you to think of the cash flow statement as three separate mini sections or mini statements.

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So one for operating activities, one for investing activities, one for financing activities.

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So in a way, we are categorizing our business into three areas, one area for operation, one area

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for investing, one area for financing.

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And under each area, we would like to see what was the cash inflow, the cash outflow and the net movement

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in cash under each of these three sections.

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Now, if we think of operating activities, then we think of any cash inflow or cash outflow that is

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related to the business operation, the core of the business.

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So if you are a furniture manufacturer, anything to do with making or selling the furniture itself.

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So here we talk about any cash inflow or cash outflow related to managing or funding the core of your

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operation.

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So if we think of cash inflow from operating activities, that could be cash from cash sales, revenue

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could be cash from cash collection from customers.

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Now, cash outflow, it could be purchase of stock, raw material inventory.

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It could be payment to suppliers or payment of expenses such as salaries.

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So all these are examples of cash inflow and outflow from operating activities.

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Now, investing activities is mainly related to the purchase or selling of a non-current assets.

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So anything to do with non-current assets without buying a noncurrent asset or selling a noncurrent

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asset.

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Any cash inflow of outflow related to that will be listed under the investing activities.

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Also here we will invest any purchases or any investment in these securities may be shares or stocks

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in any other company.

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So cash inflow from investing activity could be something like sales of noncurrent asset.

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If we have that equipment and we did sell it for, let's say, five hundred pound, then we will have

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a cash inflow of funds.

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The cash outflow will.

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Something like purchase or acquisition of a non-current assets, and there are some examples there as

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well.

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Now, financing activities, this is the cash inflow and cash outflow related to external sources of

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financing.

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Now, external sources of financing, we have the owners and we have the creditors, the bank.

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So any cash inflow, cash outflow related to that will be listed under the financing activities.

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So some examples on the cash inflow from financing activity is when a company issues stock so they sell

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the stock in the market, they collect some cash for themselves and that will be a cash inflow.

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Cash outflow could be something like payment of dividends or repayment of that annuity payment to the

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owners.

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All the creditors will be classified on the financing activity, cash outflow.

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Now, this is just a summary of what we said.

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Let's talk about how we prepare the cash flow statement.

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Now, when you think about preparing the cash flow statement, think about each section as a mission

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statement by itself.

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Now, if we take first the operating activities section, then we have two ways to do to prepare that

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section, which is the direct method in the method.

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Now, 99 percent of companies use the index method and this is what we would use in this example as

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well.

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So basically what you do, you start with the net income from the income statement.

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And step one, you add the non-cash item that you have removed.

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So, for example, if you took out some depreciation, you need to add it back to the net income value.

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Step number two, you need to take any changes in current assets or current liabilities and reflect

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that in the number you have under the adjusted net income number.

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Now, this is the rule you have.

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If you have an increase in the current asset, then you must reduce the cash by that value of increase.

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The logic here is to say if I increase my current asset, that means I must have used some cash to achieve

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that.

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So just keep that thinking in your mind.

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If your current asset has decreased, that means probably you converted that asset to cash, so that

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will increase the cash.

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Just remember, these two and liability will be the opposite to assets.

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So this is the two steps how to prepare the operating activity section.

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So we start from the net income.

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We know this is a figure that includes some cash and non-cash items.

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Step number one, we add back the depreciation step.

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Number two, we make the adjustments based on the changes in the balance sheet and that will give us

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the cash flow from operating activities now for investing activities and financing activities on what

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we do is just to add whatever cash inflow we have and deduct whatever cash outflow we have.

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So the direct and indirect method only applies to the operating activity section when we prepare the

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operating activities section.

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So to prepare, let's look at these numbers on this example.

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Number one, when you prepare a cash flow statement, you need the following.

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Number one, you need a comparative balance sheet.

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So if you are preparing the cash flow statement for 2020, that means you need a balance sheet for 2019

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on the balance sheet for 2020, and you will need an income statement for the same year.

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So you will need an income statement for 2020.

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So let's look at this example fairly all 2007, 2008.

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So once you have the balance sheet for the two years, you need to create a third column where you calculate

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the differences.

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So you take the value in 2008 minus the value in 2007 in this year, and you do that for all the items

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in the balance sheet.

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So that's your step one.

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Then you have your income.

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Statements for the same year.

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Now you start preparing the cash flow statement, remember, think of it as a three separate many statements.

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So the first statement you need to prepare is for operating activities.

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And we said, step number one, we start with the net income from the income statement.

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So the 74000, we add back the non-cash items, which is depreciation.

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In this case, it's forty three thousand, as you can see, in the depreciation expense.

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And then we move to step number two.

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Step number two, we will make adjustments based on the changes in the balance sheet.

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So any increase to the current liability will increase cash and increase to the current assets will

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decrease cash.

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So we record all these transactions of all these changes and we make the adjustment to the numbers.

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And finally, the net cash impact from operating will be positive, seventy four thousand four hundred

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and fifty.

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Now, that means Company A. was able to generate seventy four thousand four hundred fifty pound in cash

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in 2008.

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So the difference between the cash outflow and the cash inflow was seventy for four hundred and fifty

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for the cash inflow site.

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Now if we look at the cash flow from investing, then we look at loans extended to other companies.

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So we increase the loan to other companies by nineteen thousand.

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We did make purchase of equipment for forty five thousand.

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All these are cash outflow, hence the negative sign cash flow from investing.

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That is sixty four thousand negative.

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So that means the cash outflow in 2008 from investing activity.

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The cash outflow was higher than the cash inflow by sixty four thousand.

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If we look at cash flow from financing again, we only adding to the cash inflow.

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We deducted the cash outflow.

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So we have some cash inflow, cash outflow and the net and that is fifteen thousand positive.

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So cash inflow was higher than cash outflow by fifteen thousand from financing activities.

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Now, net change in cash.

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We need to look at the change from financing, change from investing, change from operating activities

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and look at the net of that.

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And when we look at this figure on see twenty five thousand four hundred and fifty, that means a company

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was able to generate cash worth of twenty five, four hundred and fifty.

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So the cash inflow for this company was higher than the cash outflow by twenty five thousand four hundred

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and sixty.

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So this is the cash flow statement for you.

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I hope you did enjoy this lecture.

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Thank you very much.