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.