Cash Flow Statement in 3 Easy Steps: Understanding Cash Flow Statement Tutorial


Uploaded by MBAbullshitDotCom on 26.04.2010

Transcript:
Alright! Here we are once again at mbabullshit.com. So our topic for this video is free cash flow,
ok, and sometimes also known as operating cash flow, or OCF, or free cash flow, FCF,
alright. So, remember you can always go back to mbabullshit.com. Alright, so let’s get
down to it. So, the focus of this video is to know, ok, is to know how financial managers
prefer to use a cash flow statement, ok, instead of a net income statement which is preferred
by accountant, alright. Now, these two statements are very similar, but they are not exactly
the same, alright. So, you will see now in a while why they are not exactly the same,
so, yeah, also, you will also see why in order to make a cash flow statement you must first
make a net income statement, alright, so now, let’s get down to it. So, as you remember
from your accounting subject, if you did take accounting, ok, in the net income statement
you have to include the cash sales, meaning the sales for which you already received cash
plus you have to include the accrued sales. Accrued sales means the sales which you made,
but for which you still did not yet receive the cash, so for example, if you earn a burger
shop, or a car shop might be a better example for this case, alright, if you sell a car
today and you customer drives the car out of your showroom, that is already considered
a sale, ok, so even if your customer did not yet pay you in cash, alright, even if he did
not yet pay you in cash, ok, as soon as the sale is made, or the sale is agreed upon,
then it is already considered a sale, and in accounting you already write that down
here, ok, as part of your sales, and you include that as part of your revenue in net income
statement, and then also in the net income statement, ok, we have to include the cost
of sales, ok, and the expenses, right. So, if you bought the car and you had to pay for,
or you had to buy tires for the car, you had to include that as part of your cost of sales.
Now, in accounting you will include both the case expenses and the accrued expenses, ok,
what are cash expenses? Cash expenses means if you buy the tires, and you pay cash to
your supplier, you include that in the net income statement. However, if you buy tires
and you don’t pay the supplier yet, ok, alright, then those are what you call accrued
expenses, but you already write that down in the net income statement already here,
alright. Now, another main thing which we include in the net income statement is our
depreciation expense, ok, so maybe in a car show room, you had to pay for, I don’t know,
tables and chairs, and you spent $1,000 on tables and chairs, and you expect the tables
and chairs to be useful for five years, ok, then you can say that there is a depreciation
expense of $200 a year for example, ok. So, that is just an example. It could be any amount.
The point is you have to include depreciation expense. If you don’t fully understand depreciation,
then I recommend that you go back to your accounting subject, alright, and then after
that we compute the net income before tax, alright, so let’s try it right now. Let’s
say that you had state cash sales and accrued sales combined of $200. Let’s say you had
cost of sales, and cash expenses, and accrued expenses, and also accrued cost of sales of
$70, and you also had depreciation expense of $10. We now can compute the net income
before tax of $120, ok, so this is how much you earn before tax, and this is considered
your net income, so take note that this $120 some of it is in cash maybe over here, and
some of it might be accrued, meaning you did not get the cash yet, alright. Now, using
your net income before tax, you now have to compute your tax, ok, so if we assume, or
pretend as an example, the tax is 35%, now remember, it might be a different percentage
in your exam, ok, it depends on your professor, but if taxes are 35%, well then how much is
35% of $120? It is $42, ok, so $42. We subtract $42 that is why it is negative. We subtract
$42 from $120 and now we have our net income after tax and that is $78, so here we have
the net income after tax, and as far as accountants are concerned, this is the most important
part of the net income statement, right. The reason why you make a net income statement
is because you want to find out your net income after tax, ok. Now, very important, now, even
though accountants think that this is the most important part of the net income statement,
ok, financial managers have a different view. Financial managers usually, or quite often,
do not care about this net income after tax, ok. Financial managers also like to make an
income statement, but the reason they make an income statement is so that they will know
this amount, the tax amount. Financial managers don’t care so much about this, about the
net income after tax. They care more about this part of the net income statement, and
you will see why in a short while as we go through the cash flow statement, alright,
so let’s do that now.