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馃敶 Cash Flow Statement Tutorial in 3 Easy Steps: Understanding Cash Flow Statement Analysis - YouTube
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Alright!
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Here we are once again at mbabullshit.com.
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So our topic for this video is free cash flow,
ok, and sometimes also known as operating
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cash flow, or OCF, or free cash flow, FCF,
alright.
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So, remember you can always go back to mbabullshit.com.
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Alright, so let鈥檚 get down to it.
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So, the focus of this video is to know, ok,
is to know how financial managers prefer to
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use a cash flow statement, ok, instead of
a net income statement which is preferred
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by accountant, alright.
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Now, these two statements are very similar,
but they are not exactly the same, alright.
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So, you will see now in a while why they are
not exactly the same, so, yeah, also, you
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will also see why in order to make a cash
flow statement you must first make a net income
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statement, alright, so now, let鈥檚 get down
to it.
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So, as you remember from your accounting subject,
if you did take accounting, ok, in the net
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income statement you have to include the cash
sales, meaning the sales for which you already
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received cash plus you have to include the
accrued sales.
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Accrued sales means the sales which you made,
but for which you still did not yet receive
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the cash, so for example, if you earn a burger
shop, or a car shop might be a better example
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for this case, alright, if you sell a car
today and you customer drives the car out
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of your showroom, that is already considered
a sale, ok, so even if your customer did not
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yet pay you in cash, alright, even if he did
not yet pay you in cash, ok, as soon as the
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sale is made, or the sale is agreed upon,
then it is already considered a sale, and
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in accounting you already write that down
here, ok, as part of your sales, and you include
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that as part of your revenue in net income
statement, and then also in the net income
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statement, ok, we have to include the cost
of sales, ok, and the expenses, right.
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So, if you bought the car and you had to pay
for, or you had to buy tires for the car,
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you had to include that as part of your cost
of sales.
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Now, in accounting you will include both the
case expenses and the accrued expenses, ok,
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what are cash expenses?
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Cash expenses means if you buy the tires,
and you pay cash to your supplier, you include
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that in the net income statement.
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However, if you buy tires and you don鈥檛
pay the supplier yet, ok, alright, then those
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are what you call accrued expenses, but you
already write that down in the net income
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statement already here, alright.
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Now, another main thing which we include in
the net income statement is our depreciation
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expense, ok, so maybe in a car show room,
you had to pay for, I don鈥檛 know, tables
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and chairs, and you spent $1,000 on tables
and chairs, and you expect the tables and
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chairs to be useful for five years, ok, then
you can say that there is a depreciation expense
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of $200 a year for example, ok.
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So, that is just an example.
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It could be any amount.
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The point is you have to include depreciation
expense.
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If you don鈥檛 fully understand depreciation,
then I recommend that you go back to your
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accounting subject, alright, and then after
that we compute the net income before tax,
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alright, so let鈥檚 try it right now.
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Let鈥檚 say that you had state cash sales
and accrued sales combined of $200.
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Let鈥檚 say you had cost of sales, and cash
expenses, and accrued expenses, and also accrued
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cost of sales of $70, and you also had depreciation
expense of $10.
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We now can compute the net income before tax
of $120, ok, so this is how much you earn
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before tax, and this is considered your net
income, so take note that this $120 some of
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it is in cash maybe over here, and some of
it might be accrued, meaning you did not get
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the cash yet, alright.
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Now, using your net income before tax, you
now have to compute your tax, ok, so if we
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assume, or pretend as an example, the tax
is 35%, now remember, it might be a different
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percentage in your exam, ok, it depends on
your professor, but if taxes are 35%, well
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then how much is 35% of $120?
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It is $42, ok, so $42.
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We subtract $42 that is why it is negative.
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We subtract $42 from $120 and now we have
our net income after tax and that is $78,
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so here we have the net income after tax,
and as far as accountants are concerned, this
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is the most important part of the net income
statement, right.
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The reason why you make a net income statement
is because you want to find out your net income
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after tax, ok.
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Now, very important, now, even though accountants
think that this is the most important part
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of the net income statement, ok, financial
managers have a different view.
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Financial managers usually, or quite often,
do not care about this net income after tax,
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ok.
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Financial managers also like to make an income
statement, but the reason they make an income
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statement is so that they will know this amount,
the tax amount.
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Financial managers don鈥檛 care so much about
this, about the net income after tax.
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They care more about this part of the net
income statement, and you will see why in
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a short while as we go through the cash flow
statement, alright, so let鈥檚 do that now.
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