Else here.

And in this video, we'll be exploring the statement

of cash flows under ASPE.

The statement of cash flows is a last financial statement.

Although we still have the notes to the financial statements

to cover, they are not a statement,

but an important supplement to the statements.

Understanding the interconnection

between the statements is critical

when developing the statements.

In the balance sheet video, I demonstrated

the interconnection between the various statements using

slides.

Today, to show you a different view,

I'm going to use a matrix.

In the far left column, you see the statement name

and the amount that is carried to an other statement.

If you follow the row to your right,

you see which statement this amount is carried to.

Let's focus on just one row as an example.

Here you can see that the net income or net loss

amount from the income statement is added or deducted

from the opening retained earnings

on the statement of retained earnings.

In addition, it is used as the opening number for operating

activities in the statement of cash flows,

under the indirect method.

You can also see very quickly that the net income or net loss

is never used directly in the balance sheet.

By using a matrix, you can quickly

see the interconnection between different financial statements.

Let's go back to the full matrix and focus on the last row.

It shows that the cash balance from the current asset

section of the balance sheet is used as the closing cash

on the statement of cash flows.

If you look at the last column in the matrix,

you see that the two statements which

are interconnected with the statement of cash flows--

the net income or net loss from the income statement

and the closing cash balance from the balance sheet.

Consider using a matrix when you can,

as it's a very good visual representation

of the connection between the financial statements.

The statement of cash flows is divided into three activities--

operating, investing, and financing.

Descriptions of each of these activities

has already been covered in a previous video,

but let's just review them quickly.

Financing is activities that fund the company,

either through debt or equity.

Investing is activities that result from buying and selling

property, plant, and equipment, intangibles, or investments.

Operating is the activities that a company

does every day, selling or delivering goods or services.

To obtain an in-depth understanding

of these activities, please see my video

on business activities.

The statement of cash flows can be

prepared using the direct or indirect method.

There is no difference between the direct and indirect method

for both the investing and financing activities section

of the cash flow.

Under both methods, these two activities

are exactly the same.

That is not true, however, for operating activities.

The direct method lists the inflows and outflows

for each type of operating activity a company performs.

Cash flow categories shown include

cash collected from customers, cash paid to suppliers,

and cash paid to employees, just to list a few.

This method is considered more informative for stakeholders

and their decision making, because it clearly

shows the sources and uses of cash from operations.

The indirect method focuses on the differences

between net income under accrue accounting and cash

from operating activities under cash accounting.

It starts with net income and adjusts for non-cash items,

such as adding back depreciation expense

or deducting a decrease in accounts payable.

The indirect method is more difficult for users

to understand.

But that does not stop approximately 98%

of all US, European, and Canadian companies

from using the indirect method to calculate cash flows

from operating activities.

Why?

Because it is easier and less costly to prepare.

Are there any benefits for stakeholders

who use the statement of cash flows to assess a business?

Yes.

One benefit for stakeholders is that the indirect method may

highlight earnings management.

How?

By highlighting the difference between net income and cash

flows from operations.

We will further explore this concept

when we cover the development of cash flow

statements in a later video.

Considering the popularity of the indirect method

for the development of the statement of cash flows,

we'll be using the statement of cash

flows indirect method for purposes of these videos.

I will, however, also quickly show

you the direct method for comparison purposes.

Let's do a quick check of your understanding so far.

The payment of interest on a long-term loan is considered--

the answer is definitely not D. All cash outflows are included

on the statement of cash flows.

The answer is not B, investing activities.

Debt is never part of investments.

The answer is not C either.

Even though debt is part of financing activities,

interest paid on debt is on the income statement,

as an expense.

An income statement is the accrual accounting view

of the operating activities.

ASPE requires that it remain as part of operating activities.

The answer is therefore A, an operating activity.

An in-depth explanation of this will

be provided in a future video.

Now that we understand the activities that

make up the statement of cash flows,

we can look at an example.

Note that this statement is so large

that I've divided it into two slides,

so that you can see each activity better.

But the statement is actually one statement,

with the three activities listed immediately after each other.

Although I have set up the statement in columns

for easy viewing, the accounts can all

be listed in one column and the amounts in another.

As always, the statement starts with a heading,

which must include the company name,

the title of the financial statement,

and the period of time covered.

Note, similar to the income statement and the statement

of retained earnings, this statement

is for a period of time, most commonly one year.

The statement opens with the heading for operating

activities and then starts with net income

from the income statement.

All the other amounts are reconciling

items between net income from the income statement, which,

remember, uses accrual accounting,

and the cash flow from operations,

which uses cash accounting.

These items are known as non-cash items.

This includes things such as depreciation and the change

in current assets and liability accounts

from the balance sheet.

Again, an in-depth explanation of these adjustments

will be made in a future video.

For now, what's important is to simply understand

the structure of the statement and why

it is required under ASPE.

At the bottom of this section, we

see that operating activities resulted in a net cash

inflow of $21,400.

Investing activities are next.

You'll note there's a net cash outflow

of $7,500 due to the purchase of both equipment and investments.

A cash outflow from investing activities

is not unusual, because it means that the business is investing

in the future ability to generate revenue.

And that's a positive thing for investors and creditors.

Finally, let's look at the financing activities.

Here, we see that the owners of the business

contributed more cash to the business

and that the business paid down some of their debt.

We can also see that the business paid out dividends

to the owners.

This ties into the $2,500 we saw in the statement

of retained earnings as a dividend paid during the year.

A subtotal of the financing activities is then seen.

The bottom of the cash flow statement

shows the net change in cash.

How is this calculated?

This is a summation of all three activities.

For this cash flow, that would be the operating inflow

of 21,400, investing and financing outflows of 7,500

and 1,700, respectively.

This results in a change in cash during the year

of $12,200, an inflow.

This amount is noted on the cash flow statement.

We then add this to the beginning balance of 72,300,

which we obtain from the prior year's balance sheet.

Remember that the closing cash from one period

becomes the opening balance for the next period.

Adding the change in cash to the cash

from the start of the year, we get an ending cash balance

of 84,500.

What does this tie into from the other financial statements?

This is the cash balance on the balance sheet,

under current assets for the current year.

We can clearly see the interconnection

between the balance sheet and the statement of cash flows.

Let's take a quick look at the statement of cash flows again.

Remember, we start with the appropriate headings

and net income from the income statement.

We move on to the operating activities,

than the investing activities, with the financing activities

listed last.

The net change in cash is then added, net increase,

as demonstrated here, or deducted

if it is a net decrease, from the opening cash balance.

This will obtain the closing cash

balance, which is on the balance sheet under current assets.

Now, let's quickly see the structure

of the statement of cash flows when we

use the direct method instead.

Noticed that the operating activities do not

include net income or any reconciling items.

Instead, the information provided

us focuses on where cash was received or paid.

This provides better information for stakeholders to analyze

and, for that reason, is preferred

by ASPE, although not required.

Remember that 98% of all companies

use the indirect method.

The investing activities and the financing activities

under the direct method are exactly

the same as what you saw under the indirect method.

Let's check your understanding for a second.

Remember to pause the video to determine your own answer

before continuing.

Net income is $17,100, but the cash flow from operating

activities is 21,400.

Why is there a difference?

The answer is not E. One of the above answers is correct.

The answer is not D. The question specifically

says there is a difference between net income

and operating activities only.

So this answer does not apply.

The answer is not C. The statement of cash flows,

as its name implies, uses the cash basis of accounting,

not the accrual basis.

The answer is not A. The income statement

uses the accrual basis of accounting, not the cash basis.

The answer is B, because the income statement uses

the accrual basis of accounting, and the cash flow

from operation uses the cash basis of accounting.

There will always be a difference

between net income and cash flow from operating activities.

So what questions does the statement of cash answer?

For investors, it helps to determine, in conjunction

with the income statement, if there

will be enough cash in the future to pay dividends.

For lenders and other creditors, it

helps determine if there is cash available

to pay the debts of the company as they come due.