Three core financial statements
Basic Cash Flow Statement Using a cash flow statement to reconcile net income with change in cash
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- In the last video, using the accrual basis for accounting
- we had $200 of income in month 2,
- but over that same month, we saw that we went
- from having $100 in cash, to having negative $100
- in cash, so we actually lost $200 in cash.
- So how can we reconcile the fact that
- it looks like we made $200 in income,
- but we lost $200 in cash?
- And that reconciliation is going to be done
- with the cash flow statement.
- So most cash flow statements, they'll start
- so I'm going to do a cash flow statement right over here
- So they'll start with your net income
- or actually they'll start with the cash that you started out with
- so they take you from
- this cash balance to that cash balance.
- So they'll say something like
- Starting cash, we know is $100
- And then they'll say well in the most naive
- interpretation of things, you net income
- in theory should be the cash you're getting
- or at least it's some type of profit
- you're getting assets in the door
- or at least you're counting as if you're
- getting some assets in the door.
- So then you're having, you have your
- net income, your net income during the period.
- And here we'll literally just take whatever is
- reported from the income statement.
- So over there we get $200 net income,
- and now we have to do the reconciliation part
- because if this was all that you were getting,
- then you should have $300 cash at the end of the period
- which we clearly don't have,
- so we have to reconcile by looking at the changes
- in different things on the balance sheet.
- So over here we have a net change
- in accounts receivable. So we have an increase
- in accounts receivable.
- So I'll call it AR increase
- AR is short for accounts receivable, just to save some space
- So let's just think about it,
- when you have an increase in account receivable,
- you're kind of letting people owe you money
- you're letting people owe you $400
- if you didn't let them owe you,
- that would have been cash,
- so you're kind of pushing back the time
- that you're getting cash.
- This is $400 that you didn't get
- that you could have gotten
- if you didn't allow, I guess, this person to delay
- when they paid you.
- So an increase in accounts receivables is
- actually less cash than you would have otherwise gotten
- so this is negative $400 for your cash flow.
- And we had no other changes, we haven't even addressed
- accounts payable, that's essentially pushing back,
- owing people, paying other people, paying your vendors money,
- but I don't even address that in the previous example.
- No other changes in our liabilities, so this is
- the only adjustment we make. And so if we do this,
- and sometimes this will be called a use of cash,
- or a subtraction from, there's different ways
- it can be phrased in different contexts,
- but over here you'll have your net cash
- from operations. Cash from operations, I'll say ops,
- and over here you can see, when you add it all
- just the cash from operations
- $200 minus $400, so I'm just adding this part right over here,
- you have negative $200
- and so your starting cash is $100,
- you have negative $200 cash from operations,
- and this is what you would have also gotten
- if you had done cash accounting,
- you would have negative $200 cash from operations,
- and then, if you start with $100, you use $200
- in cash, your ending cash will be negative $100.
- So this little thing that I just created here,
- this little reconciliation between the positive $200 in income
- and the negative $200 of cash,
- it's showing how we got
- from this starting point in cash to this ending point.
- This is a cash flow statement, so you now know the 3 major financial statements.
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