Understanding FINANCIAL STATEMENTS (Part 3) | Uday Gehani | Skillshare

Understanding FINANCIAL STATEMENTS (Part 3)

Uday Gehani, Dedicated to make complex topics easy!

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18 Lessons (1h 43m)
    • 1. Financial Statements and why they are Necessary

      1:39
    • 2. Types of Financial Statements

      1:09
    • 3. The Income Statement - Exploring the Earnings

      6:55
    • 4. An Independent Review of the Income Statement

      8:18
    • 5. Private Vs. Public Companies

      4:51
    • 6. The Balance Sheet - Assets - The more the Better!

      8:18
    • 7. And now we meet the other half - Liabilities and Owner's Equity.

      5:41
    • 8. The Balance Sheet- In Practice

      4:18
    • 9. Cash Vs Accrual Accounting

      8:30
    • 10. Cash Flow from Operations- Indirect Method

      10:01
    • 11. Cash Flow from Operations - Direct Method

      9:22
    • 12. The Cash Flow from Operations- In Practice

      7:26
    • 13. Cash Flow from Investing

      3:38
    • 14. The Cash Flow from Investing- In Practice

      3:31
    • 15. Cash Flow from Financing

      7:59
    • 16. The Cash Flow from Financing- In Practice

      8:25
    • 17. It's all in the Notes

      2:26
    • 18. Goodbye and Thank You!

      0:49

About This Class

If you've ever wondered what the numbers in Financial Statements mean, you've landed at the right class. 

Continuing our Accounting Journey from our first two parts, we learn all about the 3 Main Financial Statements which are The Balance Sheet, The Income Statement and The Cash Flow Statement. 

 

Transcripts

1. Financial Statements and why they are Necessary: Hi, guys. Congratulations. You made it so far into the ports. And I'm so happy and grateful that you did. We just started a new section here, and I have a pretty interesting topic lined up for you in this section. They're gonna dive deeper and to finance this treatment, we're gonna learn more about the different types of financial statements, the purpose of each financial statement and the important elements off each financial statement. But why? Why should you care? Why should you want to know more about financial statements? Well, have you heard of the saying? Knowledge is power. Nowhere is that more true than in the business world. The greater your knowledge about the business, the greater your chances off making better decisions related to a business. Financial statements are simply a set off records that tell us a story about a business. It's all the information off a business compile and put together. So if a stock investor wants to see how companies doing it for C or a manager for department wants to plan ahead, if a bank is deciding if it wants to lend money to a company, they all read the story off a business through the finance the street. This story gives them access to the inner workings of a business and the knowledge about the business's performance, which in turn enables them to make decisions about the business and predict its future. Well, you got 100% predict the future, but you can try to predict the future. So let's take control off our future by building on this knowledge. I'll see you in the next lecture. 2. Types of Financial Statements: you know, im gonna make an assumption. I'm gonna assume that you've seen a car before now. Cars of a few things in common, right? For example, they have a body. They have a steering wheel. They have car seats, engines and dyers. Like all cars of these parts in common, a full set of financial statements always has thesis parts. They are a balance sheet and income statement, a cash flow statement. And they also have notes to these finances. Treatments. Notes to this financial statements are simply additional information about the business would give more clarity about various portions of the financial statement. It doesn't matter what type of entity you're analyzing. It could be a small business run by a sole proprietor, a medium size partnership or a large corporation. The three financial statements in the notes to the financial statements, other documents you're going to see in every complete set of financial statements. So let's go through these parts and more detail in lectures that follow 3. The Income Statement - Exploring the Earnings : we got introduced income statements and section one summer is what we learned. We spoke about your personal finances and, like you make a salary from your job of business, owns revenue for itself by providing goods and services and, like you have your own expenses of business, has its own expenses. If you minus the revenue and expenses, your left a war with the profit or loss, now it's time for us to get into a bit more detail with the intricacies of foreign income. Statement. To do that, I'd like to bring back my friend Joey. Hi, Joey. Joey's got a few new development in his life. He's gotten fed up with the long working. Ours is an employee, and he's started his own thing. Joey decided to start a computer shop in a mall with a bit of money that he had left over, and he's named the shop Martian computers. Now, like any business model, Joey's business model has three parts. There's Joey, the owner. There's joys business called Martian computers. And there's the customers. These three pieces are always there. In any business. I may be talking about Martians, computer shop, General Electric, apple or Google businesses always have this business model with the business owners, the business itself and the customers. Now that we've established the three parts of for business, let's go ahead and analyze the income statement from Martians Computer Shop. We're gonna assume the joy has been in business for a couple of years, so we started the top. The top of the income statement usually starts with the name off the company and the time period covered by the income statement. For example, you could be analyzing and incomes treatment for any time petered. But a month, 1/4 or a year at the most popular ones. You're analyzing this statement for financial year 2015. The first line item and income statement is the revenue. Also known assails Revenue was a pretty straightforward they represent the money that the company has made by performing goods or services will see that the total revenue made for the year is he turned $63,180 made by the company selling computers and computer accessories. The next line item is the cost of goods sold. This is the cost support chasing in wintry, getting it shipped in any other costs related to getting it to the company's doorstep. It's also denoted by the acronym Cogs. In many cases, the total costs from Martians computers to buy and get the computers to their doorstep amounted to $517,000.885. The next line item in income statement is the gross profit, which is simply the revenue minus the cost of goods soared. So enjoy his business. The revenue off $863,180 minus the cost of goods sold off $517,885 equals a gross profit off $345,295. Wow, that's quite a mouthful. The gross profit is a very important number to watch out for, because it's basically the profits for business before any other overheads come into the picture. The gross profit helps us calculator a show called the Gross Margin, which is a person days that speaks a lot about the health and direction off a business. I'll speak and explain much more about how to calculate the gross margin in the lectures that follow all other expenses in a business which are not related to acquiring in my country are usually listed after the gross profit line. For example, business rain, employeessalaries marketing and advertising costs all come after the gross profit line Combine. These expenses are called operating expenses because they're used to run the business operations. Let's take a look at the operations of Martians computers. The rate paid on the shop has bean $90,975. During the year, salaries for employees amounted to $72,199. The UK pretty bills were $18,254 and the marketing costs such as flyer distribution, online advertisements, ex cetera or $1457 finance costs over $1000 have been paid during the euro's well. You can further investigate the source of finance costs in the balance sheet, and the north sections of the financial statement finance cost arise due date that the company may have undertaken, such as bank facilities or any other sort alone. You see if Martian computers has any date when we look at its balance sheet, if you total up all the operating costs of the business. The total $183,885 The gross profit minus operating expenses give US income generated from operations. I want you to remember that the words income profits and earnings are often used interchangeably. Finally, one of the last lines reported on income statement is usually the tax expense. This really is based on the state, city or country that a business operates in. Martian computers paid the tax man $58,914 for the year. So Martians World netted out a profit of $102,496. Not bad. Looks like Joe. He's done pretty well for himself. This about wraps up the income statement portion. Remember, fundamentally the income statement of summarised as follows. Revenue minus expenses equals income. The words income, profit and earnings are often used interchangeably, so don't get confused with them. The purpose of the income statement is to show how the company has performed over a Certain beaded profits are good, losses are bad. Losses are red flag and may mean that the company needs to get its act together. So this is pretty simple, right? Let's move on to our next financial statement. The balance sheet 4. An Independent Review of the Income Statement : hello and welcome back in the last lecture, Revenge through and got familiar with the difference between prior and public companies. Now, in this lecture, we have two gold. Our first goal is for you to see how to access the financial statements off a public company, and our second goal is to briefly review the income statement off a public company. So let's begin. In order for you to find the financial statements off any public company, the process is pretty simple. More used Walmart to illustrate the process. But you can do the same with any public company. Financial statements such as General Electric, PNG, Apple and so on. Just log on to Google and type the name of the company are looking for, followed by the words financial statements or annual report. For example, I'm gonna type WalMart finances treatments. Now you'll see the finances. Treatments of different years appear on the screen. There's 2014 in 2016 and so on. We'll pick the most recent one, the annual report off 2016. In this case, we click on the Link and a PdF downloads with States Wal Mart 2016 annual report on the first pitch, so we know our download the success. Sometimes the finances treatments download directly, and sometimes you'll see that the link gets you redirected to the company website, where you may have to download the finances statements from there. So let's go through the financial statements off Walmart a bit The Reporters 68 page report , which is pretty difficult for most public companies. So think twice before printing out the whole thing, both from an environment perspective as well as a saving ink perspective, Corners can be pretty expensive. As we scroll down, you'll see a few things in common in the financial statements off many public companies. The initial pages have some product shots. They usually also have a letter from the CEO addressing the shareholders in the customers like this one does from the Sea or Doug McMillon. They may also be some talk about current performance and future strategy. The bigger companies usually have nice pictures with people all the smiling and super happy . See, there you go. Everybody is happy about the employees as well as the customers. That's pretty difficult. And most financial reports as unit of the show, people cranky inside. That won't be too appealing. So I guess they stick with the happy pictures. Okay, moving along. Whenever I look at the annual reports, my first goal is to usually find the table of contents somewhere in there. Since most public companies have annual reports, which are very long on a personal. Nor when I look at the financial statements nowadays, I'm usually looking at them as an investor where I'm planning to buy stock in the company. I use my understanding of financial statements to assess the health off a company before I purchase stocks in the company. Now you may be doing this accounting course for your very own reasons, but I want you to remember one point for the future. If you currently buy stocks or decide to purchase stocks in a company in the future, it's a good investment of your time. If you check and analyze the financial statements off the company before you make your purchase, you may sport things with support your decision, or you may see something especially don't like and you want to investigate for the okay. Now that I've given my two cents on this topic, let's talk about the people off contents you can see in the table of condense that we have a statement of income, the balance sheet, the cash flow statement and the notes. The part that they're most interested in for now is the income statement, since we have only covered back so far in the course. So we're gonna mosey along to the income statement on page 35. You'll be covering the remaining financial statements in the remainder of the course, but let's stick to the income statement for now. Now, on the top of the income statement, you'll see the words consolidated statements off income. Actually, you'll see the word consolidated throughout the report. As in, you'll see consolidated balance sheets consolidates treatments of cash flows, etcetera. But what does this word consolidated mean? Now? The word consolidator and financial statement simply means group. That is the data off. Two more more companies is being combined and reported in this case, the finances treatments are reporting the combined data off Walmarts, US operations, WalMart International Operations and Sam's Club. You can usually find the names of the companies in the group in the north section. We're also going to be covering notes later in this course. The next thing you see is the fiscal years ender January 1st 14 4015 in 2016. The reason that three years listed is for investors to be able to easily compare the company's current your performance with the past two years. For example, if you see a total revenue off $482 million in the latest year 2016 you can see that the company revenue has declined in 2016 compared to 2015. And that should automatically raise a red flag for you. When you see something like this, a few questions of rights, Why did the revenue decline is related to the economy? Is this maybe an industry related thing? Or was this declined related to WalMart alone? When you look at financial statements, think of yourself as a private investigator looking for clues or Sherlock Holmes of sorts. Read between the lines. Investigate that keeps thing is really interesting. But I'm digressing from the main point of this letter, which is to show you that if you understood the building, block off the income statement in Martians computer shop, which was the revenue minus expenses equals profits or loss, as the case may be, you will see that the same building block applies for the income statement of WalMart one off the largest companies in the world. So I don't want you to worry so much about the specifics of the numbers at the stage. But more importantly, I want you to see in these financials that there's revenue is the top line, followed by host off expenses such as the cost of sales operating, selling in general expenses, interest expenses and taxes leading up to our net income or profits. Let me add that these type of expenses may change. There may be more revenue categories or more expense categories, but the building block that's the revenue minus expenses equals profits or loss remains the same. This building block is the foundation for any income statement that you're gonna be seeing in the future. Now, if you're a business owner, allowed you to take out the income statement of your business and see this building block in action in your own business. And if you're not a business owner and doing the scores for any other reason, I want you to think about any public corporation you're interested in and download their annual report, spend some time and lazing the income statement and enjoy the new knowledge you've gained. The more you go or income statements of different companies, the more comfortable you will get with them in time. There's a lot more to come about the remaining financial statements. In the meantime, I thank you so much for joining me in this lecture. I will see you in the next one. 5. Private Vs. Public Companies : And so what happened is I told him, Turn right. And the car was right there. I couldn't believe it. Oh, hi. That I'm sorry I didn't see you. I was just having a conversation with joy. He's aren't much of a talker, but he's an excellent listener. E I was just having a conversation. Enjoy. One of the things that we spoke about earlier today was that in spite, a few going through the financial statements of Martians Computer stop. I think it would be a great idea for you to actually take a look at the financial statements off a public company. So now that we're done with the income statement of Martians Computer Shop, we're gonna look at the income statement off real public company. But before we do that, I think it would be off great value to you for you to clearly understand the distinction between a private company and a public company. So you go ahead and do that number. Continue my conversation with Joey. I'll see you soon. While I am so grateful Joy for sharing the financials treatment of his company, Martians Computer shop with us. I think it would be interesting and valuable to see the financial statements of the rial company. In the meantime, thank you so much for Help Joey. Before we begin. It's really important for us to understand that in the real world there two types of companies and to note the difference between these two types, it may take a few minutes, but this will help you understand and give you the big picture view off accounting and finance in the longer so the two types of companies are private companies and public companies. Private companies are owned by individuals who shares are not publicly traded. Let me explain businesses set up in any part of the world the government or regulatory body in that part of the world gives the owners of the business shares also cord stock. These shares represent ownership in the business. For example, when Joey owns Martians Computer Shop, he is 100% shareholder in the business. If our friends Joey and David set up a business together and agreed on a 50 50% partnership and they issued 100 shares, your information Joy would keep 50 shares. David would keep 50 shares, and this would represent a 50% ownership each. If, on the other hand, Julie, 75% owner and David is 25% owner, then Joy would get Certify shares and David 25 shares. I think by now you get the picture on how the owners of process books well, it's Joey's on Martians computer shop, David's ice cream stand or any other company. Outsiders like you or me cannot buy any shares of the business without the business owner's consent. And because the shares are privately held by these owners. That's why these companies are called private companies. On the other hand, we have public companies of the company sell ownership of the business and financial markets like stock exchanges you, me or any member of the public, and buy stocks of the business off a public company if we wanted. Examples of famous publicly traded companies are Apple, Google or WalMart in the United States, if you're in India, it could be reliance or batter motors. It is because of the nature of public companies, the fact that you can buy ownership into them, that they are required by law to disclose their financial statements. So you as an individual can analyze these financial statements and decide for yourself if you want to buy a piece of the business. So now you know why I was so thankful. Joy. In the beginning of this lecture, most private owners of businesses in the real world do not disclose their finances. Treatment, stroke sailors. He usually only do so if they have a specific purpose in mind, for example, when they're trying to get a loan from a bank, in which case they have to disclose their financial statements to the bank or maybe the turn seller business. And they have to disclose the financial statements toe the potential buyer. On the other hand, financial statements of public companies are easy to access and available on the Internet. This distinction of disclosing finances treatments may be small, but it is important, and it's important for you to be clear about this. That's all for this lecture. Thank you so much for joining me. I'll see you in the next one 6. The Balance Sheet - Assets - The more the Better!: today, we're gonna be talking about another financial statement called the Balance Sheet. Now remember that a balance sheet has foundation in the accounting equation assets, equal toe liabilities, plus Owner's equity. Let's start off with the left side of the situation. The assets Hello and welcome to the next lecture review will continue our analysis off the financials treatment off Martians Computer Shop. As with the income statement you see at the top of the screen, the name of the company appears on the balance sheet as well. The date appears right below that. The one difference between income statement and a balance sheet is that a balance sheet is a snapshot of the financial position off a company as off the date. An income statement gives you the workings of the business for a particular period, for example, like 1/4 or year. This is so important I'm gonna repeat it. The difference between an income statement and balance sheet is that the balance sheet is a snapshot off the financial position off a company. As off that date, an income statement gives you the workings of the business for a particular period, so let's move on to the assets assets of the business. I usually split up into categories in a balance sheet, the current assets and the long term assets. Current assets represent assets that can be reasonably expected to be converted into cash within one year from the balance sheet date. Assets that cannot be done in the cash in the space of a year are called long term assets. One thing that I would like you to keep in mind is that every business is what's called an operating cycle and operating cycle is the average peter of time required for a business to make an initial outlay of cash, produce goods, sell the goods and receive cash from their customers who bought the goods. In some cases, there are companies which have a very long operating cycle, for example, a company that manufactures satellites. In such a case, the current asset balances may actually be longer than a year due to the nature of the business. Knowing the nature of the business you're looking at gives you a better idea about the current assets in the balance sheet. So let's start with our first current asset Martians Computer Shop. The cash balance shows $148,299. Cash balances in a balance sheet represent the total cash held in ready cash at the place of business, as well as any cash balances that may be held at the bank. For most businesses, cash is the best I said they can have off Earl Gashes Cash most flexible and useful asset that is against. That's why we often say cash is king. The next line in our balance sheet is in accounts receivable. Figure off 95,991 accounts receivable of funds that are all too a business for products delivered or services performed. Remember, as an individual, we all like to be old money. Of course, that's Andrea or too much money. The same principle applies to businesses. Accounts receivable are driven by the type of business being run. For example, an ice cream shop will be run mostly on cash and have few accounts foreseeable, unless they start taking i O. U's for double chocolate brownie sundaes. The accounts receivable in Martians Computer Shop represents buck sales that Martians Warren has made to other shops and is waiting to receive money from The next line of 217,608 represents the inventory that is held by Martians. Computer shop in reentry simply means the products that are headed for sale in Martians, computers it represents. The laptops and computer accessories are being held for sale. One thing which we should watch out for in in men tree is the trend of the industry and how long inventory is being kept for, for example, the rapid pace of change in technology. So we better be selling his computers fast or they're gonna get obsolete. Knowing the nature of enough she you're looking at is important to get a feel for this number. You can also calculate the inventory turnover ratio to know more about this. But for now, that's out of the scope of this lecture, and we're gonna keep our focus on the balance sheet items. The next line represents prepaid expenses or not prepaid expenses, you might ask. Prepaid expenses are expenses that have been paid in at once due to the nature of certain goods and services. We prepare for them and record them in the balance sheet as an asset. For example, insurance is a prepaid expense because the purpose of poor chasing insurance is to buy protection in case something unfortunate happens. So insurance expenses are always prepaid. Other common people expenses are, for example, the rink that accompany maybe most companies parent in at once. An example of expensing prepaid expenses would be, for company has a one year insurance policy, which cost $1200. As each month elapses, $100 of prepared insurance will be expense to the income statement, and the violence remaining is reflected in the balance sheet. In the case of Martians computers, the amount of $17,440 is amount of insurance and rain. There has already been paid the next lines really simple all the current assets a total up and reflected in the slain named total current assets. After the current assets, we usually have the category of long dome assets. Long term assets are typically things like land, buildings, machinery and items that have a usable life off over a year. In Martians computers, we see a balance of 197,000 and 1 $80 which will pay this fit out costs. What that means is Julie spent $197,000 on setting up his place of business at the mall, for example, you may have paid for heating, air conditioning, getting a reception desk. Buying for nature are creating a display and so much more. Any items such as this will always have more descriptions for our investigation in the notes to the financial statement. With regard to long term assets, I would also like for you to think about what is called appreciation Every year. The balance of these fit out costs is going to depreciate due to normal wear in there till the value reaches zero. We usually call this normal there in their depreciation. Accountants have different methods to calculate this, as the year sparse depreciation amounts can be seen on the balance sheet. Last but not least on the asset side, we have Google. Google is regarded as an intangible or soft asset. Intangible assets can be patents, copyrights, Brian names, trademarks and, like, in this case, Google good. We can represent a strong brand name on acquisition of a company with strong brand name being the first alien to own a business in our world Jewish shop has a brand name and a goodwill off $58,000. Valuing goodwill is subject to much debate and best left talk about once we have a big, more experience with balance sheets. But I wondered a showing intangible in our balance sheet, since you will see them, especially in more larger and well established companies. The last line of assets gives us the total assets, which is a total of the current assets of 479,338 and non current assets off 255,996 which told those upto $735,334 Easy sneezy right that wraps up our lecture on assets liabilities coming up, stay tuned for more. 7. And now we meet the other half - Liabilities and Owner's Equity.: hi there. So know that the asset section is all wrapped up. Let's continue with our next section. The liabilities The preceding lecture identified Business resources, which produced income called Assets Liabilities, are the opposite. While assets generate money for the company, liabilities usually take money away from a company just like assets. Liabilities come in two basic flavors. Current and longer. Current liabilities are the liabilities for its payment is due normally in less than a year , and long term liabilities have payments doing more than here and, like the acid section, is divided into current on long tongue assets. The liability section is the writer into current and long term liabilities. Let's start by taking a look at the current liabilities. The first line off Martians Computer Shop shows an accounts payable balance off. 78,928 reporters. Accounts payable mean if you think about it, almost everyone an individual or a corporation has something Taubate with someone. The money that is or buy a business. Someone else is reflected in the accounts payable in this case, and accounts payable off. Approximately 79,000 could reflect in my country, which has been taking on credit from manufacturer or supplier and is to be payable at a later dick. As per the agreement that Martians computer shop has with supplier off the in men tree, the next line off short term borrowings of $327 may reflect in order off the bank to explain the current portion off long term borrowings. Let me give you a personal analogy. Let's see you have a home loan, which is a 30 year mortgage, which you pay every month. The total of the 1st 12 months of payment from the balance sheet date would be reflected in the current library section under current portion off long term borrowings, and the remaining balance will be reflected in the long term liability section. In our case, Martians Computer Shop has $300 in current portions off long dumb Barings. Let's move on to the next line item. Now there's only tooting certain life right debt and taxes, and we can't escape the tax man cutting tax payable of $1000 reflect the amount that Martians computer owes in taxes within the next 12 months. We're done with the current library portion and see that the total current liabilities are $80,555 Martians. Computers has only $1904 in the way off long term borrowings. As the name implies, long term borrowings represent any borrowings from a company that are more than one year. Companies may borrow funds to finance in new entry, to purchase new machinery or to capitalize on market opportunities in the world of business . You may have heard of the word leverage when a company borrows too much sexually, highly leveraged. We've come to the end of our liability section with the current liabilities of $80,555 long term liabilities of $1904 which sums upto a total off $82,459. The liabilities all wrapped up. It's time to meet the owners now. Do you remember in a previous lecture, I mentioned that like you have a person that worth the owner's equity is reflective off a business's network. It's the total assets minus the total liabilities. The equity section usually shows paid in capital and retained earnings. Let me explain the do a business has to ways of raising money, either through boring score liabilities or by owner sporting in their own money, which gets reflected as capital in the owner's equity section. The paid in capital of $126,513 represents the funds Joey has used to start the business. Next, we move on to retain earnings beauty. No earnings are money. There is actually retain in the business. That is the profits that the company keeps in the business. Technically speaking, profits belong to company owners, and a company makes a profit. The company needs to decide if it wants to remove the money from the business, which is called dividends, or keep the money in the business, which gets reflected in the retained earnings. He don't love the paid in capital in the retained earnings, and I left with a figure off $652,875. That's the company's network network is also referred to as Equity Off Book, while you Why does the business will have so many different ways to say the same thing? Well, that's a mystery to me is vote. I guess people just like to feel smart by confusing everyone else. Hopefully now, though, you're beginning to see the light. No, I don't mean the light bulb that showed up on your screen, but I mean that you're getting accounts. Finally, we see that the total equity plus total liabilities equal $735,334 exactly as our total assets on the balance sheet supporting our accounting equation, which states assets equals liabilities plus owner's equity. Everything must balance. Right? So we're all done with the balance sheet. Give yourself apart in the back for coming this far. I'll see you in the next lecture. 8. The Balance Sheet- In Practice : you know, we can't just exercise once and say, That's it. I'm done with Exercising for all my life can be in the same way. We can't just look over one balance sheet and think That's it. We're done with balance sheets for lives in the interest of us getting more comfortable with balance sheets. Let's go and look at another one in this lecture. Hi there. And thanks for tuning in. Now. In front of you, you'll see the balance sheet of Martians Computer Shop. I want you to observe three things. Number one. The balance sheet comprises off the assets section, the liability section and the equity section number two. The assets and liabilities are divided into current and long term and number three. The balance sheet satisfies the accounting creation. Total assets equals total liabilities, plus total equity Easy, right? You've already gone over this in the previous lectures, so you're pretty familiar with it. Now let's see how that transitions into a company with the revenue in the billions by looking at the balance sheet off Walmart. So guess what? In the balance sheet of Walmart, we have number one. The three components assets, liabilities and Equity number two. The assets and liabilities are divided into current and long term. Now, let me tell you that the assets or liabilities may not always state the words current and long term specifically, but that's a sequence always follow current first, followed by long term next, and then we have number three the balance sheet, which satisfies the equation. Total assets equals total liabilities, plus total equity. Now the financial years may very, and the numbers may change. But if you're comfortable with the format off the balance sheet and the concept followers, which is the equation, total assets equals total liabilities. Blust Order Equity. I can see you becoming a pro, it understanding and analysing financial statements in no time. All it needs is some interest in some practice. Before I leave you, I want to end this lecture with a personal note. As a financial analyst, I sometimes notice that there were business owners who avoided looking at their financial statements because of fear. This feel was very, really very genuine, as dear to them as a person who may have a fear of heights or spiders. And the consequence of this fear was that these business owners ignored their financials, which hurt their business in the long run and cost them sleepless nights in the best of cases and bankruptcy filings in the worst ones. So what we learned from this? Well, what we should learn is that it's important for us to keep pushing forward till we get this . It's just too important. And I'm here for you until you do. If you need any additional help, are not sure about something. Feel free to poster discussion in the discussion section off the scores. Or if you're not comfortable with a public forum, just feel free to send me a private message, and I'll do my best to help. Having said that, I leave you with a few words to live by. Thank you so much for joining me, folks. I will see you in the next lecture. 9. Cash Vs Accrual Accounting: once a border day in a long time ago. Okay, maybe not that long ago. I mean, in 1987 to be precise. The only thing you needed to report financial statements was an income statement and a balance sheet. But since then, a few things changed from 1987. The Financial Accounting Standards Board made it mandatory for all public companies. Toe also provide cash flow statements. By 1992 the International Accounting Standards Board followed soup and cash flow. Statements became a global phenomenon. I mean, global phenomenon, the context off accounting circles, at least. So you might be wondering, Why do we need Castro statements? What's the big deal anyways? Ah, balance sheet gives us the resource is of business and also lets us know the businesses network. An income statement gives us the businesses profitability. So then why bother with Castro statements at all? Isn't all of this enough? Well, to explain, Let me tell you accountings, dirty little secret. But let's keep this between ourselves. Some companies that sure profit are actually lying. That's right, actually lying. There are cases in which companies may be showing profitability, but be on the part to bankruptcy. You don't believe me? Let me explain. Let's bring back our friend David to help. Now let's see. David Ice Cream Stand made a revenue off $100,000 this year. The expenses of running the Stein were $60,000 therefore the profit he made was $40,000. Difficult income statement stuff Pretty easy, right? Okay, we're cures where things get interesting. Let's take a look at the impact that traded has on his income statement. But first, let me define what credit means in this context. In the world of business, businesses buying sell stuff to one from each other all the time as part of their normal business operations, and most businesses usually set up and agreed water school terms of credit. For example, David's ice cream stand may supply ice cream to the local Baskin Robbins and have an agreement where Baskin Robbins pace David cash 90 days after the initial delivery, businesses that deal a lot together often set up such tomes off credit within themselves. These terms of credit very based on two things. One is the industry that the business operates in, for example, great terms in the ice cream industry may be a bit different from an airplane business Terms of Crazy also very based on negotiating power of the business themselves. For example, a local small Sigh supermarket has a lot less negotiating power than a Walmart when negotiating with the supplier. Also, it's important that you don't confuse the debit and credit lingo that we've been using with the terms of credit, which is being used now and is used so much in business circles. No, it is standard practice in the accounting world to record the transaction during the period it occurs, regardless off when actual cash exchange takes place. So if David makes a delivery of ice cream off $100,000 this year, though he may receive a payment for some off that next year. We still record the full revenue for this year. This concept of recording a transaction during the PD and it occurs it's called accrual accounting. I do want to add that there are few small businesses across the world who to stick or transaction when the actual cash exchange takes place. But these kind of businesses are very few, and this method of recording the exchange of cash it's called cash accounting. So now that we understand the concept of accrual accounting, let me show you the impact that this can happen in business. In our case, let's assume that when David made a revenue of $400,000 he supplied $50,000 of ice cream to the neighborhood Baskin Robbins on credit, based on his credit domes. You'll get paid 50,000 this year and 50,000 next year, even though David Income statement shows a revenue of 100,000 and expenses of 60,000 with a profit of 40,000. But in reality, if you take a look at the movement of cash, you'll see that the cash revenue was only 50,000 his expenses or 60,000 which equals a cash loss off 10,000. So you see, even though David Report of profit on his income statement of 40,000 looking at profits alone, can be deceiving in such a case. If you supplemented that and looked at the accounts receivable section off the balance sheet, that would show your balance of 50,000 and that would give you a better picture off what is happening in the company and it may be is a red flag for you. Investigate for them. Luckily, since 1987 cash flow statements are also mandatory. So that provides even a better bitter off the movement of cash. We're gonna be covering more on the Castro statement in the lectures that follow. Now I want to add to our example before they explain the impact of credit on a business. Let's give the first part of scene. David makes the revenue of 100,000 but the actual cash coming in 50,000 But those expenses or of 60,000? Let's say you only paid $50,000 out this year as he received credit from his suppliers, who agreed that he can pay them next year. So now, even though we have 60,000 actual expenses, we have 50,000 in cash being paid out. So if you look at the income statement, we have really cash movements which looked like this cash revenue of 50,000 less cash expenses of 50,000 equals zero another. So David broke even not to buy better than loss off 10,000. I hope these examples helped. So now you know accountings dirty little secret that not all profits are created equal and a company showing profits could also be headed towards bankruptcy. You need to do your due diligence and find out more about any company that you're looking at now that you have all of this information. Firstly, you should know that when you look at financial statements, it's important that you look at the income statement, the balance sheet and the cash flow statement as a whole. In order to look at the health off a business, don't just assume that if a business is making profits that it's doing well to know more about this, you can always look into what's called a ratio analysis. Racial analysis is a big, out of scope off a basics accounting course, but at least by knowing the term racial analysis, you know, if you want to dig deeper into learning financial statements, that's where you need to head. I also especially wanna emphasize to the business owners that this shows you how important it is when you negotiate credit terms and not to ignore the movement of cash in your business. I've seen several businesses failed because the business owners didn't know the impact that cash movements have to a business now to recap, you know, work cash accounting is and what a cruel accounting is. You are also clear about the impact that trended has on a business and why it makes looking at the movement of cash so important more about the Castro statement and the woman of cash in the lectures that follow State Yoon. Thank you so much for joining me. I'll see you in the next lecture. 10. Cash Flow from Operations- Indirect Method : hi guys. Ever since Joey started his business, he's been thinking on Lord about money. That's because he knows that each decision he makes impacts the cash position off Martians , computer shop in a certain manner, and that's a Lord of responsibility. For example, any time the company to seize money, he needs to decide what he wants to do with it. Should he pay the bills first? Or should he put some funds aside for any day? Should he buy more, invent tree or pay off some off the company dead? Should he increase the salary of his employees and keep them happy? Or should he pay himself for Dividend? After all, he's been wanting to buy a new car, and he looks pretty hard. Decisions, decisions, If you think about. From an accounting standpoint, each of Joey's decisions impact either the income statement or the balance sheet off Martians computer shop. But with so many decisions that he's making, how would we keep track off their impact, especially on the cash balances of water? Time petered Well, that's where the convenience of the gas flow statement comes in. The cash flow statement allows us to get a clear position off the cash movements in a company which are the effect off the decisions made by management. This makes it a great tool to assess business performance. Good management. Like anarchists, Joey can take the information from the cash flow statement, see how the company is doing and learn from it, and that helps him make more effective decisions in the future. So let's go with the Castro statement of Martians. Computer shop together so we can learn from it, too. Similar to the income statement. The top of the Castro statement starts with the name of the company in the time period there discovered by the cash flow statement in our case, the Castro statement states, for the year ended December 31st 2015 meaning we are analyzing the gas flow movements off Martians Computer shop for the year 2015. Now, as we discussed before the cash flow statement categorizes the cash received and the cash used in tow. Three separate categories. They are cash flow from operations, the Castro from investing and the cash flow from financing. And typically that's the order in which they are written now. So let's start with taking a look at the cash flow from operations. Three. Cash flow from operations measures the gas influence our floor for company from its normal business operations. There are two methods to calculate the Castro from operations. They are the direct method and the indirect method, and accountants pick one of these two based on their preference. At the end of the day, the method that in accounting chooses may be different, but the result remains the same. Let me explain. Think of yourself picking a blue car or a black car to get to your destination, leaving everything else exactly the same. What? The car should be able to get you to your destination in the same Lee, but the direct mattered, and the indirect method will eventually get you to the same destination that is, they'll give you exactly the same information about the cash flow from operations. It's just about which one you prefer better, But don't just take my word for it. Let's go through each matter together to give you a better idea. Let's start with the indirect mentor Now. We know from our previous lectures that net income or profits may not really reflect the overall truth about the profitability off the company, since it's hugely impacted by the effect of credit. And so the cash flow from operations using the indirect method attempts to systematically remove such effects and shores. If the company made cash for lost cash from its operations in the gas through from operations, we typically start with net income. So how we know from the income statement that Martians computer shop has made a net income off $102,496 Then we do a comparison of the current assets and current liabilities in the balance sheet between the year 2015 and the year 2040. Now, whenever any of these balances change, we know that the balances have changed beautiful decisions made by management or the owners of the company. The first line I don't states cash, and in our case you've already accounted for cash at the bottom of the Castro statement. The next line item is accounts receivables. You will see that the constancy of all has gone down from $114,621 to $95,991. That's a reduction by $18,630. So that's a good thing for concerts. Evil goes down. For a company that means the company has gotten paid, and therefore the effect on cash is to increase cash by $18,630. The next line item is in my country, and we can see an increase in in re entry from $199,495 to $217,608. That's an increase off approximately $18,113. I want you to think about this in the context of cash when in wintry, sportiest cash goes off. So we know that cash rent out and therefore reduced cash balance by $18,113. The next and final item in the current assets is the prepaid expenses, prepaid expenses in a balance sheet, items which BP for first and consume leader. Good examples would be items such as rained and insurance. We see prepaid expenses of the company have decreased from $20,139 toe $17,440 for difference off $2699. Now this is good for a company's cash violence, because that means you're not giving out money and at once, that's where decreasing prepare expense would mean more cash inside the company. And we add the cash amount off $2699 toe net income. That's it all wrapped up with the current assets section. Long term assets are not part of the normal business operations and therefore do not effect cash balances in the cash flow from operations. They impact the cash flow from investing, but we're gonna be going over that a bit later. For now, let's move on to the current liabilities. We started the accounts Babel, which is a balance off $78,928. This balance has gone down from $85,773 which is a reduction and accounts payable by $6845 . That means that Martians computer shop has paid out money to suppliers or renders, so we deduct $6845. The next two line items are borrowings and affect the cash flow from financing and we'll be discussing that soon enough. The last item is our taxes payable, which has gone up from 800 to $1000 which means that the whole more in taxes at the end of this year than the last by $200 since he more money. That means that cash, which we order the tax man, is increased by the $200 and it's still with us. And so we record. This is an increase in cash by $200 for now. Now we add in, sir, practice inflows and outflows of cash from net income, and we get a positive balance off $99,067. Now, I want you to note that there are items such as depreciation, expense or gains and losses on sale of capital assets, which affect cash flow from operations as well, and we haven't included that in this particular example. That's because this stage I don't want you to get so concerned are overwhelmed with what forms Castro from operations. But instead I want you to be seen signs off a Helly Castro statement. So my main take away for you in this lecture is to look for off positive cash balance in the Castro from operations, which is an indicator off a healthy company. A strong positive cash flow from operations, especially over time, is a good sign. An indicator off a healthy company. When we look at Castro from operations, we should be looking for growing or at least consistent, positive level off cash flow from operating activities over time. Well, that's it for the indirect matter. We're going to talk about the direct method in the next lecture. Thank you so much for joining me and I will see you in the next one. 11. Cash Flow from Operations - Direct Method : hi guys. You are now familiar with the indirect method off the Castro from operations, and both Joey and me are so happy with the progress you're making now. Like I mentioned before, there's another way to get the same result in the Castro from operations. And it's called the Direct Method Accountants. Shoes between their direct and the indirect method, like the name indicates the deck. Mathare is pretty direct, but what I mean by that now, while in the indirect mattered, we take net income and make adjustments to arrive at the cash balance from the operating activities. In the case of the direct method, we take the data from the same places, which is the income statement and the current assets and current liabilities. In the balance sheet part, Our application is much more straightforward, where we simply take inflows and deduct the outflows of cash to arrive at the final figure . I'll explain this in more detail, but before we move ahead, I want to give you two tips. Tip number one. I want to mention that when you look at the balance sheet off a company, seeing the your on your comparison like this one is pretty normal. However, the changes in cash that you see on the right side of your screen have been added by me. I've done this not only to show you the change in cash, but also for the sake of convenience. In reality, if you have to create your own Castro statement for a test or an exam, writing down the change in cash on the right at the beginning before you start the preparation will make things much easier. Tip number two. In the beginning, it may take time for you to reduce the direction of cash from the movement, often asset or a liability. For example, If I say prepaid expenses have gone up for the year as cash increased or decreased, or if a loan has been paid off as cash increased or decreased, you may be able to get the answer, but it might take you a bit of time now, while I know you'll fully understand the concept in the long run, you can always remember the following dip for now in the shorter. So the dip is when assets increase, cash decreases and when assets decrease cash increases, so cash moves in the opposite direction off assets. In the case of liabilities and equity liabilities or equity increases, cash and greasers, libraries or equity decrease cash decreases. So liabilities and equity moving the same direction is cash. I encourage you to understand the concept, but in the Shark Dome, these steps and tricks don't hurt. Now let's move on to understanding the direct method. I want you to think about the biggest cash transactions in Martians computer shop or, for that matter, in any business. In a typical business, the biggest cash influence coming from its customers in the form off revenue. The biggest out floors are usually protesting in one tree and all the other operating expenses, such as paying rent, paying salaries, paying the utility bills. And we also have taxes. In a sense, I've just explained the direct method. In a nutshell. Let's take a look at financial statements of Martians Computer Shop to see how this works. First, we start off with our biggest inflow, which would be cash collector from customers. Find out the cash collector from customers. You look at the revenue number off $863,180 which is found on top of the income statement. This is basically the laptop sold by Martians Computer shop to its customers. Now the northern revenue may not be completely in cash and may have some credit mixed with it. So we take a look at the accounts receivable on the balance sheet. In our case, we see accounts receivable has decreased from $114,621 toe $95,991. That means $18,630 of cash has been collected. So we take the revenue that Martians computer shop made off $863,180 AG increase in cash from accounts receivable off $18,630 to come up with the final violence off $881,810 as cash collection from customers, which forms the first line item off our cash flow from operations. Next, let's take a look at the biggest outflows. Let's start with the poor, chase off in my entry and then move on to operating expenses and taxes. So let's start with the purchase of in Wintry the Mean Accounts and more with purchase of entry are the cost of good soul, the inventory and accounts payable, which is the credit terms offered by suppliers For them, entry let's go through each of these. One by one, we find the cost of goods sold in income statement right below the revenue number. Martians Computer Shop reports a cost of goods sold off $517,885 which means it paid out that amount to purchase laptops and to get them transported to their doorstep and restore them. Of course, cost of goods sold alone does not give you the complete picture of CASS transactions related to invent tree. So we also have to look at the in men, tree balances and accounts payable in the balance sheet. Now we see that in men tree has increased from $199,495 to $217,608 so in inventory increases, it implies an outflow of cash. Instance. Invent tree increased by $18,113. It means that cash has gone down by $18,113. Next we look at the accounts people In the current liability section and accounts, people have gone down from $85,773 to $78,928. That's a reduction of $6845. Now, in the context of cash and accounts payable reduce, That means Martians Computer Shop has speed their suppliers. Another difference between the two is $6845. Summing up the costs of goods sold with the invention and accounts payable, it shows a negative balance off $542,840. Which means that or all Martians computer shop has spent this cash in the process of poor chasing merchandise during the year. Simple enough. Next, another big chunk off the company's cash outflow happens when a company pays out its operating expenses, like range salaries, You little t bills, except to find out how much the company paid in operating expenses. We take a look at the income statement, which shows a total of the operating expenses as $183,885. Next, we look at the prepaid expenses on the balance sheet, which, after all, are simply operating expenses. Payden and once Now the people expensive reduced from $20,139 toe $17,440. In the context of cash, that's a good thing. And prepare expenses like rent and insurance have gone down. That means the cash outflow from the company has been lower in the cash and the company has increased by $2699 Now to calculate the cash outflow from operating expenses, we take our cash outflow off $183,855 and add $2699 to it. We come up with the total cash outflow off $181,186. Now this forms a big chunk off our outflows and inflows already, but off course, we can't forget to pay the tax man, so we hope over to our income statement again. Very C income taxes paid off $58,914 then we go over to the balance sheet current liability section where we see an increase in income tax payable from 800 to $1000. Which means that don't be having increasing our tax library. We still have $200 more in our pocket for enough something these up. We get the total cash paid for income taxes for the year as 58,007 and $14. We total up all the cash inflows and outflows, and we have a net cash from operating activities. Balance off $99,067 exactly as we saw in the indirect metal again. At a minimum, my most important take away for you when you look at a cash flow from operations is to scan and see if the company has a positive cash flow from operations. Since this is a pretty important number, well, that's it from my side. Thank you so much for joining me. And I will see you in the next lecture. 12. The Cash Flow from Operations- In Practice: Hi there, folks. In a perfect world, the cash flow statement should be the easiest to read and understand. After all, cash flow simply means cash in minus cash out right. However, the reality is not that simple. Many times, understanding the cash flow statement causes the most trouble for people. But that's why they're going to be spending a lot of time and getting a lot of practice with the Castro statement in the scores. In this lecture, we will continue our analysis of the cash flow statement by looking at the real life example of Wal Mark. The objective is not only to do a step by step analysis of the Castro statement, but also to give you insights about how business functions and how the different parts of a business are glued and fit together. So let's begin by looking at the cash flow from operations Aziz you can see on the screen you have the cash flow statement off Wal Mart 2016 in front of you, you can see the cash flow statement is divided into three parts. The cash flow from operations, the gas flow from investing and the gas flow from financing in this lecture, our focus is going to be on the cash flow from operations now. In previous lectures, we have discussed about the two methods to calculate the cash flow from operations, which are the direct method and the indirect method. Whatever method a company chooses, the end goal for the cash flow from operations is the same. To come up with the net operating cash inflow or outflow that has taken place in the company. In this case, the accountants at WalMart have chosen to use the indirect method. How do we know that? Well, you can see the standard pattern for indirect methods. For example, the top line of the cash flow from operations starts with net income to which adjustments are made, such as addition, off depreciation and amortization. You can also see that the effect off change in cash flow due to change in current assets and current liabilities is being reflected. The standard format is indicated off the indirect method. On a separate note, the rule setting body of accounts, which is the Financial Accounting Standards Board, or fast, be in the United States, prefers their accountants used their direct method, but you still see the indirect method being used much more in Castro statements from the United States because A it's easier to calculate for accountants and be it reviews less details about the company as a public company, especially don't want to give are too much information because they don't want to give this information or to their competitors going along. You'll see that the night cash from operations is positive, which is a good sign, though you'll notice there is a negative thing. You're going to see that the net Castro from operations is decreased from $28.6 billion in fiscal 2015 toe $27.4 billion in fiscal 2016. No are decreasing. Net. Castro from operations is not a good sign, and this should be investigated for the. But before we move on, let me highlight a few things here. The quality often analysis off financial statements is based on two things. Number one, the quality of questions you're willing to ask Now, the more you analyze finances treatments, the better your line of thought becomes, and the better your quality of questions will get. Eventually, Number two analysis takes a lot of time in patients. It takes the ability to keep investigating until you find the answer. It's like being a private investigator of sorts. It takes time because most companies are complex by nature. Also, remember, there may be times when you may not be able to find all the answers you warned. Or you may not understand why company management has done something or acted in a certain way in such a case. Use your best guess, since that's all you have to live it. So let me get back on track with our analysis of cash flow from operations. An investigation into why the cash flow from operations declined your on your takes us to pay 25 of the annual report. But it stated that the decrease in net cash provided by operating activities for fiscal 2016 when compared toa previous fiscal years, was primarily due to the lower income from continuing operations partially offset by improve working capital management in simple language. This just means that Wal Mart's operating income fell. Operating income is simply the revenue that the company has made, minus the expenses required to operate the company before interest in taxes. And where do we find this information? Well, we find this information in the income statement, so let me skip over there. Now. You can see an evidence of this decline in Wal Marts operating income from 27.15 billion to 24.1 billion. But why did this happen? Looks like the operating income has fallen due to a decline in total revenue and a corresponding increase in operating, selling and general expenses. The obvious next question to ask would be wider total revenue fall. The investigation into the sales decline takes us to page 24 where we see the break up of sales. The sales of the U. S market increased by 3.6% from 2015 to 2016 which is good, but Orel decline in sales has happened. You were decline off sales in the international segment, which burned down from USD 136 billion to USD 123 billion. Our decrees off 9.4%. In fact, what you will notice? A second consistent your of decline in international sales management explains this in two parts there decrees in net sales was primarily due to the 17.1 billion off negative impact from fluctuations and currency exchange rates, and decline off sales in UK and China. By now, you get the fundamental idea that your analysis off financial statements of companies requires you to keep digging till you get the answer. I'm gonna end this lecture on that very important note, but there's a lot more on Castro statements still coming up. I hope you got some new insights from this lecture. I will see you in the next one. 13. Cash Flow from Investing: hi guys. Now that we've knocked out another accounting concept, Castro from operating activities, it's time to move on to the cash flow from investing. While the cash flow from operations is a good indicator off our company has done in a particular period. Keeping an eye on the Castro from investing is a good indicator off the company's future direction. Let me explain. Cash flow from investing includes cash outflows and inflows related toe long term assets. Typical cash outflows you see in the cash flow from investing section. Often accompany spends on long term assets, which build the infrastructure off the company. Ah company that sensibly and properly invested long term assets is doing so with the expectation that these resource is would result in increased cash flow and profits for the company in the future. Thes cash outflows, maybe investments in property, plant and equipment vehicles or poor chase of another company or any other capital expenditures. The cash inflows in the investing activities may highlight the cash received from the disposal off resource is already owned. If you have good management and they dispose long term assets, they do so because they realize that the long term asset is no longer viable or will not provide the same long term future benefits to the company. To summarize the Castro from investing is important because it gives us a good insights to management and its thinking and its direction for the future. Now let's take a look at the cash flow from investing for Martians. Computer shop Taking a look at the long term assets section off the balance sheet off Martians computer shop. It shows that the fit out costs have increased from $136,708.297,180 dollars now fit out costs in a company really toe any construction or developments, there are me to get a workspace fully functional or to enhancing. In this case, an increasing fit out costs means Joey spent some money this year enhancing his workspace. Perhaps he's got a new display earlier or improved the decor in some way. Either way, when he's gone out of the company and is therefore recorded as a negative balance off $60,472 in the cash flow statement, the next line on the long term assets section off the balance sheet states goodwill, which is an intangible asset and therefore doesn't affect the cash and is therefore not reflected in the cash flow statement at all. Examples of goodwill. If you remember our company's brand name customer relationships, Peyton's or it could be proprietary technology. So that's it. The company has no influence related to Castro from investing, giving us a negative balance of $60,472. Now the cash flow from investing activities is a negative number, and this is completely normal. This simply means that the company has spent money on long term assets to build up. Its resource is for the future. Do your due diligence whenever you're looking at a cash flow statement. But don't be alarmed if you see the Castro from investing is a negative number. Now that's all for Castro from investing. Thank you for joining me. I'll see you in the next lecture with a last category of cash flows. The Castro from financing 14. The Cash Flow from Investing- In Practice: hi there. I just want to take a few minutes and show you the cash flow from investing section at Walmart. You know by now that the cash flow from investing section shows the cash outflows or influence that the company has had with regards to long term assets. I mentioned earlier that we should not be alarmed of. This is a negative number, since this section is a typical drainer of cash and growing companies as they always spending money on poor chasing new assets such as buildings, stores, land equipment, making more George and acquisitions and so on. As you can see, the cash flow from investing section at Walmart shows a negative balance of $10.7 billion which means that Wal Mart has spent $10.7 billion on such activities. The biggest portion of cash has been spent towards the purchase off property and equipment . An explanation of this can be found on Page 21 of Walmart's report. Let me skip over that ensure you management states that they made investments off $11.5 billion Globally. These capital investments primarily consists off payments to add stores and clubs. The immortal existing stores and clubs, construct distribution centers and invest in technology experience digital retail capabilities, investing other technologies. In addition, the main an incremental operation. Investment off $296 million in e commerce in fiscal 2016 compared to 2050. Now let me highlight two important points here, so let's just go back to our Castro statement. The first point I want to highlight is, as you can see, the cash flow from operations is a healthy positive number off $27 billion. Competitively, the business has spent $10.7 billion in cash outflows for growth and expansion by comparing the net gas flow from operations but the net cash flow from investing, you can get an initial glance to see if a company's productive and healthy. Since it WalMart the positive cash flow from operations is more than double the negative cash flow from investing activities. The business is producing much more cash than it consumes, so they seem fine in this department. But let's be careful not to jump to a favourable conclusion too quickly, since we still have to go through the cash flow from financing before I leave you. I just want to say one thing with regards to the purpose I made this lecture. As you can see, the cash flow statement is telling you a story about Wal Mart, its operations, its management, that strategy and so on. We can get a worldview off where the company is, and we can guess where the company is headed. By looking at this. That's why we call accounting as the language of business. If you want, Mr. In accounting, you can truly begin toe understand? Business. Thank you so much for joining me in this lecture. I will see you in the next one. 15. Cash Flow from Financing: fantastic in true box of fashion. We've knocked out the Castro from operations and the Castro from investing. You would make Mohammed Ali proud or Iraqi Balbo. Whatever suits your fancy, it's now time to move on to our last category of cash flow, which is the cash flow from financing. To truly understand the cash flow from financing, you must understand how business gets Financing they're do is in which a business raises money. They are money from the owners, call equity or money from outsiders, called debt the Castro from financing the statement of cash flows when it does the Castro from thes two components. It's a simple is that some of the common categories of Castro's from financing activities are proceeds from moorings for short term and long term Castro see from owners, usually on the issuance of stock repayments of borrowings and repayments to owners. Which is the evidence. Let's take a look at Martians computer shopping and lays its cash flow from financing now, since Castro from financing monitors cash movements related to debt and equity, the place to find these moments is to check the debt and equity section off the balance sheet. If you look at the liability section, we can identify three items which have to do with debt. We have the short term borrowings, the current portion of long term borrowings and the longer moorings. If we analyze these, we notice that each one has gone down, meaning that the company has speed cash during the year to reduce its or all in debt levels . We see that the short term borrowings have reduced by $4799 are in portion off. Long term borrowings have reduced by $8200 long term borrowings have reduced by $8500. If he total these up, we get $21,499 which is the total cash outflows of the company during the year to reduce debt. This amount gets represented as a negative balance in the Castro from financing as the repayment off borrowings that doesn't for their debt portion. Now let's take a look at the equity section, but as a paid in capital remains the same, we see that the retained earnings has gone up by $102,496 I remember retain earnings is the representation off all the past earnings that the company has retained and still not paid out as dividends. In this case, washings Computer Shop reported a net income off $102,496 therefore retained earnings has gone up by $102,496. But this increase is not representative off a cash increase and therefore does not make it separately anywhere in the gas fuel state. Let me explain, Akash. Increase or decrease is the measure off cash that comes in and goes out. Think of your personal check book, for example. If you write a check to somebody, money flows out. If you receive a check, then money flows in the Kachin rated or lost to produce net income or loss has already been accounted for in the Castro from operations and now but retained earnings. There's no real cash movement happening when retained earnings goes up due to a profit of $102,496 for example, the profits and the net cash terminated from the profits have already been accounted for in the cash flow from operations At the end of the day, if you learn one thing about reading earnings, let me be this just because the company has movement in retained earnings or a particular period of time, you will not see it separately recorded in the Castro stated. In some cases, accountants prepare a separate statement called the statement of retained earnings could disclose the various elements off retain earnings for its readers. No, why should is computer shop speed nor dividends over the year? And so that section is recorded A zero, which leaves are met cash from financing at a negative balance of $21,499 like 50 Castro from investing. Seeing a negative number in the Castro from financing is also pretty normal. You may see positive numbers in this category when the owners have injected funds in the company or the company has taken on new debt. Most of the other times you see companies pay down debt or be livid in streets owners and therefore see a negative number here. Now, before we move on, I want to make a disclaimer. I have looked and classified the items on the Castro statement under the guidelines off US gap. However, there are items in the Castro statement which may be classified differently depending on which part off the world you are watching this in, for example, under the International Financial Reporting Standards or my father's for short, which is followed in many parts of the world. Interest payments and dividend payments are classified either s cash flow from operating activities or Castro from financing activities. However, on the US gap, interest payments can only be classified as cash flow from operating activities, and dividends can only be classified as cash for from financing activities. It's important for you to be aware of these discrepancies that may arise you to the different rules set by different governing bodies. If you are analyzing financial statements of company and would like to know what set of guidelines have been followed based on which part of the world urine that information is always available in the notes section off the financial statements you're looking at great now that we have that out of our way, let's move on to the final part of the Castro statement where the total up, the Castro from operating activities, the Castro from investing activities and the Castro from financing activities, which totals $17,096 indicating that the or all cash balance of the company has increased by $17,096. We add $17,096 increased the cash balance at the beginning of the year, which was 1 $31,203 come up with the final violence of 1 $48,299. This studies with the urine violence of cash on the balance sheet and 98 by now. You successfully understand the gastro statement industry categories gastro from operations , the gas for from investing and the gastro from financing. And you also understand that a positive or negative balance in each category represents the decisions taken by owners or the management and indicated off the direction the company is headed in. Well, that's it from my side for now. Thank you for watching, and I will see you in the next lecture. 16. The Cash Flow from Financing- In Practice: accounts does not operate in a vacuum. Think of any athlete who becomes good at a sport practicing the sport and doing the right exercises is just one aspect of their training. Another media aspect is the right nutrition and following the correct diet plan in the same way, any person who truly wants to understand and do well in business was not only under certain accounting, but also understand many of the concepts in world and finance. In this lecture, we'll be looking at a real world example of the cash flow from financing in the cash flow statement, which also requires us to touch on some off the concepts in the world of finance. As you get better in the subject, you'll see the two worlds off. Accounting and finance often overlap and intertwine in many places. I hope you enjoy the lecture in front of your screen. You're looking at the third segment of the cash flow statement of Wal Mart, which is the cash flow from financing. So far, you've learned that there two ways in which your business raises money either debt or equity, while we can get a lot off information on their debt, levels and equity of the company from the balance sheet and the notes. The cash flow from financing is also a great place for insights into the same like we've seen in the cash flow from investing. Seeing a negative number in the Castro from financing is pretty normal. It simply means that the company has given out more money during the year than it has raised. In the case of Wal Mart, you see that the company has raised approximately $1.2 billion in short term debt on the one hand, and on the other hand, it's paid down long term date off $4.4 billion during their the next major line item is dividend payouts to shareholders off $6.3 billion. If you look at all the numbers in the Castro from financing closely, you noticed there despite the wall ability you see in all of the other line items in the Castro from financing the dividend payouts of all martyr consistently in the range of six billion boyo. Now, let me explain why their dividend payouts so stable the evidence of the money that the company gives it. Shareholders in this case, WalMart has given our north of $6 billion consistently for three years. Company management in many publicly traded companies does not like to reduce the amount of dividends, since the reduction in dividends is often taken as a negative signal by many of the shareholders. And if shareholders don't like what they see, they often sell their stock in the company. And we invest their money in something else that they do like if enough stockholder still their stock, it may cause an aural reduction in stock price for the company now, obviously, the board and the company cares a lot about that because the board horse so many of the company shares and so many members of senior management also have their salary incentives tied directly to the stock price. So you see, that's why it's in the interest of the company to keep different unstable, share price increasing and all of the shareholders happy. Frankly, it's not that they're just thinking about the shareholders is a big vester interest in it for themselves, and that's just the way the cookie crumbles. Following this, the next big line item is a $4 billion repurchase of company stock. This is also called a stock buyback in the world of finance. Now you might be wondering, Why does the company pay money to buy back its own shares? This doesn't make any sense. Well, like so many things in the business world, you follow the money trail and everything begins to make sense. There are many reasons why publicly traded companies buy back their own shares. I'm gonna explain a few of them. One media reason is that if a company buys back its own shares, there are fewer shares that are publicly traded. The fewer shares that are traded, the more each individual shares sport. The more each individual shares worked, the richer the shareholders become. So now you get it. At the end of the day, it just about finding creative ways to make more money. A second reason management buys back its own shares is if they believe that the shares are truly being undervalued. Shares could become undervalued because of a number of reasons, such as poor short term performance or maybe some negative, sensationalist news about the company. In that case, management takes it one days and buys back its shares at a lower price and plans to resell them leader the higher price so that later in the cellar of the higher price, they have an additional inflow of cash into the company. The next two line items are cash outflows related to dividends paid to non controlling interest and poor chase off non controlling interest. But what is known controlling interest mean let me explain. Non controlling interest simply means owning less than 50% off another company. Owning a company less than 50% doesn't give the parent company total control of the second company, and hence the name non controlling interest. Another name for non controlling interest is also called minority interest. Often, big corporations decide to acquire smaller companies, in part if they believe that owning the smaller corporation is aligned with the long term strategic objectives off the bigger form. For example, in this case, nor 13 on Page 57 shows that one of the purchases that Wal Mart made was often e commerce company in China. For approximately $760 million the acquisition is in line with Wal Marts, push to sell products and capture more revenue from the online world. No to summarize a combination off. All the activities related took the gas flow from financing shows. Are total cash outflow from financing activities off $16 billion from the company? Normally, the next step would be to take the effect of the cash flow from operations, the cash flow from investing and the gas flow from financing, and see how it affected the overall cash balances off a company. But multinational corporations with cross border trading activities currency movements play a big role on their cash balances. So here we can see that a movement and exchange rates has caused Walmart to lose $1 billion . Ouch. So despite a positive cash flow from operations, the cumulative effect off all the cash outflows from investing and the cash outflows from financing have led to a decline in the cash balances of WalMart from $9.1 billion $8.7 billion. The ending balance is off cash in the cash flow statement match with the ending balance shown on the balance sheet as they should, and that also brings us to the end of this lecture. I hope you've gained some new insights into the number of layers that get added on an effect. Cash balances as companies get bigger insides. Thank you so much for joining me. I will see you in the next lecture. 17. It's all in the Notes : hi, guys. You must have noticed in some of the previous lectures that David numbers next to various accounts in the financial statements with the heading called Notes. Each of those numbers represent the corresponding note in the financial statement. So what's a note? Notes are additional information which the accountant or auditor wishes to provide in relationship with that account. While financial statements usually follow a format, the additional information and notes have their own flow while still providing a way for us to access additional information they allow is an easily accessible place for complex definitions or calculations to be explained. Sure, V. As readers desire any additional information. For example, an order might want to give some additional information on the type of depreciation method being used or may want to give a north relating to graduate e or pensions off employees. They could be a North on in mental evaluation amongst so many other things. Ironically, most times when you see a financial statement, you'll notice that the notes section actually takes up much more room and give so much more detailed in the financial statements themselves. These notes can give a lot of support and add a bit off life and color toe. Any research into a company well, die about wraps it up for notes Before I go, though I did use the world order a few times and would like to clarify what an order is for the people that are not completely sure. While a conference are usually employees off the company, auditors are often hired from outside form to verify the accuracy. Often, accountants work, while accountants are responsible to create financial statements for the company and ordered off. Look over the financial statements and determine the accuracy and make sure that the financial picture off the company is reasonably captured. They give their opinion on the accuracy off the finances. Statements usually monitors attached a page called Auditor's Opinion. If you ever see the words qualified or adverse mentioned orders opinion, no, that's a signal for you to watch out and investigate further 18. Goodbye and Thank You!: Yeah. Fantastic. You made it to the end of the course. I hereby crown you king or queen off accountable. And I'm so happy for you more than anything. I'm so happy that you've done the best thing you could do for yourself, which is take control of your own education. I thank you so much for allowing me to be a part of this journey. And even though I'm not make you personally yet, I really hope that this courses helped you expand and deepen your knowledge. I would love to get your feedback and to know how your experience has been. Thank you so much for joining me once again. I wish you a life full of abundance and happiness. A truly of issue. An extraordinary life. Goodbye for now.