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Current time:0:00Total duration:3:44

Video transcript

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 this they'll say something like starting cash starting cash we know is at is $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 your counting is 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 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 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 a our increase a are 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 kind of letting people owe you money you're letting people owe you $400 if you if you didn't let them oh 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 I guess this person to 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 404 your cash flow and we had no other changes we I don't even address accounts payable here that's that's essentially pushing back owing people uh 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 subtraction from or there's different ways that it's different 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 opps and over here you can see when you add it all when you when you will just the cash from operations 200-400 so I'm just adding this part right over here you have negative 200 and so you're 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 your ending cash will be negative 100 so this little thing that I just created here this little reconciliation between the positive 200 and income and the negative 200 of cash and showing where 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