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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.