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Basic cash flow statement

Using a cash flow statement to reconcile net income with change in cash. Created by Sal Khan.

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  • blobby green style avatar for user Alexander Kleinhans
    Sorry but what were the three main statements? I know of Cash Flow Statements, Income Statements, and what?
    (7 votes)
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  • blobby green style avatar for user Sam Dangremond
    Isn't the sign on the "AR increase" wrong? If this value is defined as an "increase" then the value should be positive - or, alternatively, this value should be defined as "AR decrease"?
    (11 votes)
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    • blobby green style avatar for user Marshall Stanton
      It's a negative in terms of cash flow, because it's cash that hasn't yet come in. It would be positive if they actually gave you cash instead of an I.O.U. So you could also think of it as money that you lent them for a time, or credit you've extended to them, in the form of your service. It's a positive in terms of assets and equity, however, because it imposes an obligation on someone to pay you money in the same way that a bond or a loan would.
      (18 votes)
  • blobby green style avatar for user Marshall Stanton
    Wouldn't it be more proper to say that the cash at the end of the month is $0 and you have a corresponding $100 liability to the bank (with whom we are overdraft) instead of saying that we have -$100 cash? Numerically, it works out the same way, but the way I described I think would make more intuitive sense, no?
    (4 votes)
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    • blobby green style avatar for user brianjpeter
      Simple answer,

      It is a logical way to think about it, but the problem is that you are creating a liability that is not backed by a source document. ( Bank Statment, Invoice, Bill, ect...)

      Because the bank account is designed to let you have a over draft, and the cash or bank account usually is linked directly to that account, we like to keep that account as accurate to the bank statement you will receive as we can.

      An account is allowed to go negative, its just not a normal situation when it does.

      More complicated and accurate answer,

      I haven't gone through all the video's yet but another reason why this is inadvisable is because at some point, usually on a monthly basis, we will need to record a Bank reconcilliation.

      To be brief, You are recording what you have done to your bank account and the bank sends you a statement showing what they have done. You do not look at any other account other than your Bank account during this process. The rest of your chart of accounts is Dead to you.

      In an ideal world the bank statement and your bank ledger should match perfectly, but everynow and then, they mismatch because the bank statement may be printed before a transaction has been processed, or you are not aware of the charges that the bank has charged you on there end. You would make journal entries to adjust for this where necessary.

      This bank reconciliation only works when the assumption that you and the bank are working on the same principles of depositing and withrawing from you account. If you record the overdraft outside the bank account, suddenly your statement becomes slightly more troublesome as it shows up no where in you bank account on your reccords, but the bank clearly shows it.
      (7 votes)
  • blobby green style avatar for user Baba Woods
    How do you read and interrupt a cash flow statement
    (1 vote)
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    • spunky sam blue style avatar for user Mike Moyle
      With a lot of cross-checking. The Balance Sheet and Income Statement are what someone who is interested in the financial health of your business is really interested in. The Cash Flow Statement just proves that everything balances out. So when you read the Cash Flow Statment you cross-check the numbers on it against the other two statements, and make sure they match. Also, you would be looking for numbers that were too high or low, like liabilities far in excess of the revenue, as compared with other business of the same type. If you saw something like that, you would ask the business for an explanation.
      (6 votes)
  • leaf red style avatar for user Safia Osmany Muna
    Is there any serial in video's or chapters to study accounting from beginning to ending? How should one watch the video's ?Start from where?There should be chapter 1,2,3. like this.Please give some advice.
    (2 votes)
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    • aqualine ultimate style avatar for user Andrew Blemings
      Not listed. They're in the order they should ideally be watched in under the "Accounting and Financial Statements" menu. That seems to be the order in which they were made, at least. That being said, there aren't any videos that start from the "very beginning" with the accounting formula, or with an explanation of what assets and liabilities and equity actually are. If you feel you're not quite following along, Google "accounting videos" and you'll find a lot of other free resources that can explain it all to you. :)
      (5 votes)
  • blobby green style avatar for user Jacob Mathew
    How the net profit/loss on a cash based income statement differs from the closing balance of cash on the statement of cash flow?
    (3 votes)
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    • mr pants teal style avatar for user Tejas
      Net income on income statement is the change in the value of equity on the balance sheet. Net income is used as an input to calculating cash flow from operations. Cash flow from operations, cash flow from investing, and cash flow from financing are summed to calculate the net change in cash. Net change in cash represents the change in cash on the balance sheet from the start of the period to the end of the period.
      (2 votes)
  • blobby green style avatar for user Kathy Larsen
    What is the difference between the accrual basis acct'g and cash basis acct'g?
    (1 vote)
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    • leaf green style avatar for user Ryan
      For cash basis, the only time a transaction is recorded is when cash is exchanged. You sell someone a product, they pay you in cash, therefore you recognize revenue.

      Accrual basis does not require cash to change hands in order to record a transaction. There are different rules. For example, you would recognize revenue when you have delivered a good or service and you are expected to receive payment in the future. Cash hasn't changed hands, but a transaction still has happened.
      (5 votes)
  • piceratops sapling style avatar for user Tosca Lesley Kotze
    If I take a loan (in my personal capacity as an owner of a company) , on an asset which does not belong to the company - but belongs to me, personally - and I bring this CASH into the business.....how would I account for this in the Cashflow statement ...and in the Balance sheet (if my company is running at a loss)
    (1 vote)
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    • piceratops seed style avatar for user Karie Sheils
      The loan would show up on the Balance sheet as 'Cash' on the Asset side and as Owner's Equity (since it is your personal asset you are giving to the company) on the Liabilities side. You would note the cash asset on the cashflow statement as owner's investment.
      (2 votes)
  • starky ultimate style avatar for user Dunja Dizdarević
    Would you add or subtract the change in accounts payable from the net profit figure?
    (1 vote)
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  • duskpin sapling style avatar for user Ngoc Phan
    How can Deferred Revenue- DR be represented in Cash flow statement? Does it have negative number?
    (1 vote)
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    • starky sapling style avatar for user Christina
      Short answer: Deferred Revenue is added (positive) into Net Income in the Operating Section of the Cash Flow Statement.

      Explanation: Deferred Revenue (or Unearned Revenue) occurs when you receive cash for something that you should not yet record as revenue (it is instead recorded as a liability, called 'unearned revenue'). Therefore, deferred revenues are not included in the calculation of Net Income until they are earned.

      Now let's apply this to the Cash Flow Statement: In the Cash Flow Statement, we start with Net Income, and we make additions/subtractions to reconcile Net Income to the operational cash flow. To determine whether a transaction should be added to or subtracted from Net Income, we need to look at what actually happened to Cash. So, if you receive cash (Cash increases) for something that you did not yet earn or record revenue for (so Net Income has not yet been increased), you need to ADD this Deferred Revenue into Net Income. Deferred Revenue will be a positive number in the Operating section of the Cash Flow Statement.

      We can also look at an example: Say a customer prepays you $100 for a service you will fulfill next year. You record this with a debit to Cash, and a credit to Unearned Revenue (a liability). This transaction has not increased your revenues, so it has had no effect on your Net Income. Now let's skip ahead to your Cash Flow Statement...you begin with Net Income, and you will now make additions and subtractions to reconcile Net Income to operational cash flow. Your existing Net Income figure does not include the $100 Deferred Revenue that you received, but that transaction did in fact increase your Cash, therefore we will add $100 to Net Income to arrive at the net increase/decrease in Cash due to operating activities.
      (2 votes)

Video transcript

In the last video, using the accrual basis for accounting, we had $200 of income in month two. 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-- 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. Starting cash we know is at $100. And then they'll say, well, in the most naive interpretation of things, your net income in theory should be cash you're getting or at least it's some type of profit. You're getting some assets in the door. Or at least you're counting as if you're getting some assets in the door. So then you have your net income during the period. And here we'll literally just take whatever's 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 cash that you were getting, then you should have $300 in 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 sheets. 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 short for accounts receivable just to save some space. So let's just think about it. When you have an increase in accounts receivable, you're 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 maybe you could have gotten if you didn't allow 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. I don't even address accounts payable here. 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 or 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 just 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 had 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, and 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 three major financial statements.