馃攳
Level I CFA: FRA Understanding Cash flow Statements-Lecture 2 - YouTube
Channel: IFT
[4]
Moving now to the Linkages and Preparation of the
[8]
Cash Flow Statement. This has three subsections;
[11]
the first two are important, the second one, in fact is
[16]
extremely important and highly testable, the
[19]
third subsection here is part of the learning objectives,
[24]
but I would say relatively less important. Linkages of cash
[29]
flow statements with income statement and balance
[31]
sheet. Here is a very simple link, the beginning
[35]
balance for cash is available on the balance sheet.
[39]
So, if we look at the balance sheet at the start of
[42]
the period say 1st, January 2010, the beginning balance is
[48]
100, and then from the cash flow statement
[52]
for the year, we can look at all the cash receipts,
[56]
let's say cash receipts equal 50. We can look at all
[60]
the cash payments, say that cash payments are 40, and
[63]
this is money out. The ending balance 110
[67]
would be 100 + 50 - 40 so, that shows the link between
[73]
the cash on the balance sheet, and the statement of
[79]
cash flows. Here is another example. Let's look at
[83]
accounts receivable, again, at the start of the year
[86]
accounts receivable is 200, this comes from the
[91]
balance sheet, then from the income statement we see that
[94]
revenue for the whole period was 5,000 and statement of cash
[101]
flows tells us that the cash collected from customers
[104]
was 4,800. This means that receivables must have
[110]
gone up by 200 because cash collected is less than
[115]
revenue shown, and this 200 then is reflected in the
[119]
fact that accounts receivable is 200 more at the
[123]
end relative to what it was at the start of the period. This
[128]
demonstrates the link between the balance sheet,
[131]
income statement, and cash flow statement. Coming
[136]
now to steps in Preparing the Cash Flow Statement.
[139]
As discussed before, the cash flow statement has
[142]
three segments; the operating activities, investing
[147]
activities, and financing activities. With operating
[151]
activities, we can either have the direct method,
[154]
or the indirect method. If we use the direct method,
[157]
then essentially, we have what's called a direct
[161]
cash flow statement that would simply be a statement
[165]
that is showing these three activities. If we say
[170]
that we have an indirect method cash flow statement,
[173]
then the operating activities would be shown using
[176]
the indirect method. For investing and financing
[180]
activities, there is only the direct method. We don't
[183]
have any indirect method for investing and financing
[186]
activities. We'll now look at each segment of the
[192]
cash flow statement in a little more detail. Operating
[197]
Activities: Direct Method. The top line here, is the cash
[201]
collected from customers. This can be computed
[205]
quite easily. The starting point is revenue which
[210]
we get from the income statement. Let's say that
[213]
the revenue from the income statement is equal to
[216]
100, and then we look at the balance sheet and we look
[222]
at how the accounts receivable has changed over
[225]
the period. Let's say that, accounts receivable increased
[229]
from 20 to 25. The accounts receivable went up, this means
[237]
that, the cash collected from customers must be less
[242]
than a 100, in fact, the cash collected from
[245]
customers is 95. How did we come up with this 95?
[251]
This 95 is 100 minus the change in accounts receivable. The
[258]
change in accounts receivable is the final value
[260]
minus the beginning value which is 5.Sso a simple formula
[266]
for cash collected from customers is revenue from
[270]
the income statement minus the change in accounts
[273]
receivable. Sometimes you might see this expressed
[276]
as increase in accounts receivable. Obviously,
[281]
if in another period, the accounts receivable goes down then
[285]
that would mean that the cash collected from customers
[288]
is greater than revenue. Next, we look at cash paid
[293]
to suppliers. The starting point here, would be the cost
[298]
of goods sold from the income statement, say the cost
[303]
of goods sold is a 100, and here we actually need
[307]
to look at two elements on the balance sheet. We need
[311]
to look at how inventory has changed, and we also need
[315]
to look at how accounts payable has changed. For simplicity,
[320]
let's say initially that accounts payable does
[323]
not change over the period, and let's say that inventory
[327]
at the start of the period was 0, and end of the period inventory
[332]
has gone up to 10. So, what was the cash paid to suppliers?
[339]
Notice, with the cost 100, we use the 100
[344]
as a starting point, so minus 100. If inventory
[348]
goes up by 10 that means that we must have paid 10 to our
[354]
suppliers, these are numbers let's say in dollars,
[357]
so, if inventory has gone from a value of 0 to a value
[361]
of 10, then 10 must have been paid to suppliers, so
[366]
that was 10 out--out means out from the company.
[371]
So, we subtract 10 that means a total of 110 must have
[377]
been paid to the suppliers. Now, let's look at accounts
[383]
payable. Earlier, I said accounts payable doesn't
[386]
change, but now let's say that accounts payable
[389]
goes from 20 to 25. What does this mean? Accounts payable
[397]
is going up, this means that we are actually holding
[402]
cash back from our suppliers. An increase in accounts
[406]
payable is, to some extent, like borrowing from your
[410]
suppliers. So, this will have a positive impact on
[414]
cash. We are talking about the expense, so we already
[418]
have - 110 over here. Since accounts payable is
[422]
going up, this is going to have a positive impact,
[426]
so + 5. The net effect is that cash paid to suppliers
[430]
equals -100 - 10, which is -110, + 5 which is -105.
[441]
I hope you are beginning to see a pattern over here.
[444]
When an asset account, such as accounts receivable,
[448]
goes up that has a negative effect, so notice the negative
[454]
number associated with a change in accounts receivable.
[458]
Similarly, inventory which is an asset, where this
[463]
goes up that has a negative impact on the cash flow.
[469]
So we were already up -100 from the income statement.
[472]
Inventory, which is an asset, goes up we have a negative
[477]
impact. When we are talking about the cash flow statement,
[480]
very simplistically, we can think of two kinds of
[483]
assets; cash and non-cash. When a non-cash asset,
[488]
such as accounts receivable or inventory goes up that
[492]
means there will be a negative impact on the cash situation.
[495]
On the other hand, when a liability goes up, then that
[500]
has a positive impact. Now, before I come to these other
[506]
elements, I just want to summarize what I have been
[509]
saying and help you memorize a shortcut, then we will
[512]
come back to this items. So, when you are working on problems,
[517]
such as this, the first thing you do is determine whether
[520]
the cash flow is income or an expense. So if we are
[525]
talking about cash received from customers, we are starting
[529]
with revenue, which is an income element. If we are
[533]
talking about cost of goods sold, then we are dealing
[536]
with an expense so that would be a negative. You can
[540]
think of income as a source or inflow, and expense
[544]
as an outflow. When there is an increase in an asset,
[550]
this is going to have a negative impact on cash flow.
[553]
So if asset goes up, this might be inventory or this might
[557]
be accounts receivable or it might be any asset, if
[560]
this is going up that means that the impact on cash
[565]
is negative. This is called a use of cash, but decrease in
[572]
asset will have the opposite impact, or decrease
[575]
in accounts receivable, for example, will have a positive
[578]
impact on cash flow. Similarly, a decrease in inventory
[584]
will have a positive impact on cash flow. On the liability
[588]
side, an increase in liability will have a positive
[592]
impact on cash flow. So, if accounts payable is going
[596]
up then that will have a positive impact on cash flow.
[600]
If accounts payable is coming down, then that will
[603]
have a negative impact. This can be generalized
[607]
to other operating liabilities. So, if we come back
[613]
to this situation now; cash paid for operating expenses.
[617]
If you see any liability account, such as operating
[622]
expenses payable, then you can look at whether that
[626]
liability is going up or down and then figure out
[630]
the cash paid. Let's say cash paid for interest,
[633]
say you have interest expense is equal to 50 from the
[637]
income statement, this is a negative, it's an expense.
[641]
Interest payable on the balance sheet, let's say,
[645]
goes from 7 to 9. Interest payable is a liability,
[651]
liability going up has a positive impact on cash.
[656]
So you would actually add 2, and therefore, the cash
[661]
paid for interest would be negative 48. Hopefully, this
[667]
makes sense because what I have just been talking
[670]
about is extremely testable and highly likely to show
[674]
up on your exam. Once you have computed all this cash
[680]
elements and you've computed the cash collected
[683]
from customers. You can then come up with your operating
[686]
cash flow. Now, pause this video and do this question
[691]
before you look at the answer. What you should do
[695]
is the following; first of all recognize that we
[699]
are being asked for the cash received from customers.
[703]
We start with revenue, which is 10 million, expenses
[709]
are 7.5 million. This information is not needed. Profit
[714]
of 2.5 million is also not needed, but we are told that
[718]
accounts receivable increased by 4 million. So,
[722]
the asset account went up, that will have a negative
[726]
impact on cash, so we start with +10. There is
[732]
a negative impact of 4, so the cash collected
[735]
from customers must be 10 - 4 which is 6. Let us take
[741]
a look at this example now. An analyst collects the
[745]
following information and you are supposed to
[748]
calculate how much cash is paid to suppliers. Try
[753]
to come up with an answer before looking at the solution.
[758]
Here is what you need to do. Recognize, first of all,
[762]
that the cost of goods sold is 150,000 this is an expense so put
[769]
a negative, then you see an increase in inventory.
[774]
Inventory is an asset, asset is going up by 8,000 that
[779]
means that there is a negative impact on cash so
[783]
you put - 8000. There is an increase in accounts payable.
[789]
Liability which is going up, liability going up
[793]
has a positive impact on cash. So, you add 12,000 and
[800]
what you should end up with is - 146,000. So, the cash
[809]
paid to suppliers is 146,000.
Most Recent Videos:
You can go back to the homepage right here: Homepage