Welcome everyone to the Felix live session on cash flows. I'm Chris Cordone. I'm your host for the next few weeks.

I've also got my teaching assistant, Yolanda Wadowski here as well. Hi everyone.

We are both been with Financial Edge for a while now, really happy to be able to bring this sort of new format to everyone. Don't know how many of you have been able to attend the previous ones, but we are going to focus today on cash flows.

We spent the first session on income statement analysis second session on working capital, and we are right in line and ready to go for cash flows. So cash flows, interesting subject. Let me just click over really quickly.

Let me show you my screen.

For those of you that don't know, we had a note posted in the chat about where to get the, where to get the file for today. It's gonna be in this workout empty file here. I'll, I'll get to it shortly and we'll start working.

But let me just tee it up a little bit first if we can, if you have questions, please feel free to pop them into the Q&A.

Some of you do have the ability to use chat and some of you you know, don't, I think we're trying to steer as many questions as we can into the q and a for that reason. So if you can pop out that q and a window and use that, that would probably be most helpful to all.

Yolanda will handle a lot of those and then occasionally bring, bring things to my attention if she sees a trend.

So, let's talk for a second about cash flows.

You've often heard the expression, you know, cash is king.

It's sort of an old Wall Street trope. Cash is king.

Interestingly enough the cash flow statement is relatively new.

There we have, you know, three main financial statements.

Balance sheet gets everything started, you know, funds up the company puts the resources into play to, you know to effectively operate the company, right? Income statement then tracks the earnings as we go period to period and figure out what are the earnings.

The net earnings is usually is where we end up with on the income statement. And then that of course feeds into the equity section because that's the owner's stake in the company, right? The owner's income stake of the company is the net income.

And that's kind of all we had for a while. And then you know, all of a sudden at certain point in financial history, the investors and the you know, accounting regulators were like, I think we need to kind of get back to cash here. Get back to cash.

And part of it has to do with, I mean, if you think about it for a moment, right? If you think about, if we think about why that is, think about how investing works, right? When, when we raise capital, either it's debt or equity, we need cash to pay it back if it's debt, we need cash to pay interest.

When we take money from investors, from equity investors, we need cash to pay dividends.

We need cash to return the capital back to the investors so that they can measure their overall return on the deal.

So ultimately, no matter how complicated companies get, and how elaborate, the accounting becomes and how, and how varied the accounts are, if we don't have ultimately an accounting of cash, then we're, you know, kind of in trouble. Now, the accountants are doing this, right? I mean, if we go, obviously we go and take a look at I pulled up, Apple's balance sheet. This is from last fiscal year. I mean, obviously, you know, we've got an accounting of cash here. So nobody, nobody has taken their eye off of cash. I mean what this is basically telling us is that Apple started the last fiscal year, which we're coming up on their you know their fiscal year has actually technically closed, right? We won't, have their next 10 k next annual report for a couple months at this point.

But that's sort of irrelevant. We're looking at last year's.

Because that's what I have. We can see that their cash from 2021 to 2022 actually went, went down, and it went down for perhaps a variety of reasons.

And that's kind of what we're gonna get into today with the cashflow statement.

The cashflow statement is ultimately a measure of how cash changed.

Now you might be saying, I don't know, Chris, do we really need a Felix live for this? I mean, you just, you just showed me the balance sheet.

I can see the cash went down by 13 billion 11 billion or 11.3 billion or so.

You know, what do I need you for? Or what do we need cash flows for? And you know, the reality that, you know, this does tell us in effect what's in the bank account from last year to this year, but it doesn't really sort of tell us, you know, how or why, and that's what the cashflow statement is going to do.

Ultimately what the cashflow statement is a reconciliation of the cash account.

Another way of saying a measure of how it changed, it's a reconciliation of that cash account. And in essence, what we're gonna rely on here is the architecture of a balance sheet, which says, of course, that, you know, assets equal liabilities and equity, right? We're gonna rely on that kind of, on that architecture.

And in effect, you know, what we're going to do is we're going to pull the cash out of this equation, and by pulling the cash out of the equation, we're going to effectively solve for cash. Now, what we're talking about here is the change from one period to, to another. So if I were to, you know, kind of draw this out, it's just a little easier for me to draw it, to try to type it with symbols.

Assets equals liabilities and equity would be what we call, you know, kind of a point in time, right? Because that's balance sheets are point in time. But if I wanted to look at sort of the change, you know, from one year to, to next to another basically what would be happening here is I'd be saying that the change in the assets is equal to the change in the liabilities and equity.

And if we think about it for a second, just think about what that means.

Change, right? So if I have a little balance sheet down here, here are my assets, here are my liabilities and my equity. Now, this is, let's say year one, and I want to go look at year two. Now what happened in year two? Now I'm just saying like, what happened, like actually in the company, right? Well, again, I'm separating kind of cash out at this point, right? I wanna like, 'cause I'm solving for cash. So what I want to know here is like, well, what happened? Well, let's just say for example, that in year two, the company had a big increase in the amount of assets they went out and they, maybe they bought another company.

Maybe they pumped a lot of money into their property plant and equipment.

If they bought a lot of assets, what would that imply that they need to kind of make that balance work? It would imply that they would also need to increase the funding side, right? They'd have to kind of figure out where does that money come from? Where does that cash come from to buy the assets? So here we have assets going up, that implies that there is going to be some sort of change in obviously the other side as well. We need to raise debt or raise equity to fund that increase in assets. And that's what we do, right? When we wanna buy assets, when we want to buy other companies, we have to, we have to finance it, we have to go out, we have to raise cash to do it. So, you know, by the same token, we could look at it the other way and we could say, okay, well what happens if, you know, on, in, in this from year one to year two? We'll kind of come over here and look at another example. What happens if, um, what happens if, you know their liabilities kind of shrunk, right? Their, maybe they paid off debt, right? What happens if their liabilities shrunk? Well, what, what that would imply as well is that somehow that happened, right? How did that happen? How did their liability shrink? Well, they had to pay them off.

So that would imply a shrinkage on the left side of the balance sheet as well. There's only one way, as we know that you can accomplish this, and that is to, in effect use cash.

So these are the kinds of things we're gonna be looking at is what are these changes in the balance sheet? And we're going to look at them specifically through the prism of cash.

So what I'm gonna do now is I'm just gonna actually I'm going to erase this because this is just scribble.

and I'm gonna go back to my sort of original thought here, which was, I've got this equation, which is time tested, right? I've got this equation, which is time tested, which is that assets equals liabilities and equity. And now I'm gonna put it in terms of change.

So now what I'm essentially gonna do is I'm gonna say, I wanna look at the change in my assets, but I wanna separate out that cash, right? I want to sort of back out that cash to do so.

And then I'm also gonna look at the liabilities, change in liabilities and a change in the li and equity. And so effectively, if I take any balance sheet on earth, and I'm solving for cash, which means I wanna isolate this cash on this side, then effectively what I have on the other side are the change in the liabilities, the equity and the assets.

And I have that here because one is, once we jump over to the other side of the balance sheet, obviously I wanna make this, this is showing here, if we go back to kind of basic algebra here, this is showing here as a negative, right? I wanna solve this. I wanna solve for this change in cash here. The assets, when we think about the other side of the balance sheet, they work the other way, right? So, so my change in liabilities, my change in equity, and my change in assets, the change in all of those accounts are going to give me the change in cash. Now, how does that work? We can see kind of formulaically how it works. How does this work? Well, it works because there are these four rules of cash.

And you, we can see now how when we move assets to the other side of the equation, it kind of gets inverted here. There are four rules of cash.

And I'm going to show these here as numbers.

My four rules of cash are effectively that as assets increase, cash decreases.

So again, if I want to

increase that left side of the balance sheet as I showed in that little graphic, I've gotta, I've got to pay for it somehow.

I've gotta pay for that. So ultimately I can raise debtor equity.

That's gonna make my balance sheet balance.

But what happens when I raise debtor equity, I take that cash and I use it to buy assets.

So ultimately that cash has to go away.

And we can think about that in terms of CapEx, right? CapEx is going to we're gonna buy another company. We're gonna buy property plant equipment.

How do I do that? Well, I take cash and I pay for it, or I raise debt or equity create cash, and I take that cash and that cash goes out the door.

So no matter how you cut it, cash has to be moved.

Same thing with inventory. How do I acquire inventory? Cash has to be moved to do this. Now, we look at it the other way. Assets decrease.

Cash must increase.

So let's think about that for a minute. We have inventory that we sell.

We have marketable securities that we sell, right? We have divisions of our business plant assets that we sell.

This is all bringing cash into the business.

So assets increase, cash decreases assets decrease cash increases.

Now moving over to the other side, I've got liabilities and equity increasing.

What's happening? I'm funding, I'm increasing funding debt, debt is raised, cash comes in, equity is raised, cash comes in.

If I get trade credit from a supplier, which we talked about last week, right? If I effectively get a loan from one of my inventory suppliers, I have effectively raised funding, right? So when liabilities and equity increase, cash increases, and when liabilities and equity decrease, cash decreases. So we think about paying off a loan, we think about paying a dividend.

What happens when we pay a dividend? Well, the equity stake in a company drops because we are returning capital to an investor, right? So when we, when we generate earnings, we move that capital over to the balance sheet, to the retained earnings.

When we pay it out to them, we lower it. Well, how do we pay dividends? We pay them in cash, right? We can repurchase stock, we can repurchase our own equity as a company from the market.

Now, that's a little bit kind of beyond some of the things that we'll talk about here.

It's something that a lot of companies do, a strategy that a lot of companies have.

If they feel that their stock is undervalued or, or if they want to effectively return capital to shareholders. Because what's happening here is you're buying back your own stock from the market. You're buying back your capital, your equity is going down. But how do, how do we repurchase stock? How do we buy stock on, on any market? Well, we need to extend cash to do that. So we have these four rules of cash.

So again, if I break it down into a balance sheet, my change in cash is going to be the sum of all of these changes.

The sum of all of these changes.

So it's gonna be the change in liabilities and equity, plus the change in assets, less cash, right? We're gonna strip the cash outta here so we can solve for it.

And the way that they work, kind of, you know, opposite from each other is something that we are going to have to pay specific attention to as we work through the problems.

Make sure that we understand what's happening on a balance sheet.

So I'll just pause there. I didn't see any questions come in.

And Yolanda looks like we're, looks like we're pretty safe in this sense. So I'm gonna move forward.

Now, I said to you that if I took any balance sheet on Earth, I could tell you what the change in cash is by taking those changes in the other accounts. Now probably, you know, just by looking at apple's balance sheet, you know, you might say, well, I guess mathematically if these, if these two numbers balance right, total assets and then total liabilities and equity, and they did in the previous year, I guess mathematically that would make sense.

I don't wanna do this for Apple 'cause Apple's got a lot of accounts. But if I were to go over to our workout and go over to the workout page, I'm gonna come down to a problem.

That's a very simple problem here. It's workout number three.

And I'm gonna pretend that I'm just doing this problem kind of again to, to prove a point. There's some information here down the bottom.

I'm gonna ignore this for right now. We'll come back to it momentarily.

But for right now, I'm just gonna ignore that, gray it out.

And I just want to, I wanna basically prove that these four rules of cash can get me to this change in the cash account from one year zero to year one or one to two or whatever it is.

So this is kind of what I'm solving for here this change.

Now, I know that it went up by 25, I know that, but I want to examine how.

So the first thing I'm gonna do is I'm gonna go down through my assets.

I'm gonna apply my asset cash rules. And remember, I'll just kind of copy them in here. Assets increase cash, decrease cash decreases, assets increase, assets decrease, cash increases, and then liabilities and equity increase, cash increases, and then liabilities and equity decrease cash decreases.

So those are my four rules. We'll just kind of put them over there.

And I'm gonna go through this.

So my accounts receivable from last year to this year went up. They went up.

So if I were to put that in formulaically, and we're gonna do modeling together in a couple of weeks, but for right now, I'm gonna just do this the way I do it, which is I want to show that cash went up, right? I wanna show that, I'm sorry, I wanna show that assets went up, therefore cash went down, right? So I wanna put this in formulaically as last year, minus this year.

That's gonna gimme a negative 10. Now, same thing here for inventory. Now I'll, I'm gonna come to, now accounts receivable is something that we haven't exactly mentioned yet, but why, why does that mean it went down by 10? I don't understand accounts receivable went up. How does that mean? Well, effectively what I've done here is I've made a loan to a customer. Now, I never gave them cash, however, I did record a sale that, that the way the accountants have are kind of showing it is that, that that sale is flowing through my income statement as a sale, as potential profit, as potential net income.

So what I'm saying here is that, no, no, no, wait a minute.

Sales went up because of this loan that we made to our customer, not because of cash. So I'm effectively in a way accounting for that. Now, by showing you that anytime this asset goes up, it means somehow it costs us some cash.

So same thing with inventory. Inventory is a little bit easier, I think, to kind of understand. Because in order to grow your inventory, you, you know, you've gotta ultimately use some cash. Now you might say, wait a minute, what if I bought this inventory with a loan from, you know, from a supplier? And I would say very good, good point.

And a very good question. But ultimately, now we're talking again about two different transactions, right? Because you got a loan from a supplier, but then you took that cash and you went out and you bought inventory with it, right? So it's still ultimately coming back to that action, okay? Now, we had some investments. These might be operating investments, investments in the property, plant equipment. They might be stocks and bonds, I don't know. Doesn't matter. It's an asset.

Asset it down.

It looks like we therefore sold some investments.

Okay? Now my total assets here, I don't wanna do this because these are replicating all these accounts here, right? So if I, if I were to do the change in the total assets, I would be double counting what I'm trying to do here in this column E.

So let's flip on down to the liability side and let's look at what happens here. Now, here, my account's payable went up. So again, come back to that account's payable.

What happened here in this particular account, I got a loan from my supplier.

So that's going to be a positive cash flow, positive cash.

So I'm gonna do this year minus the previous year.

I'm kind of reversing my excel here just because for me, that's, that, that's how I keep it straight. Now, accrued expenses, what's, what are accrued expenses? We talked about them a little bit probably last week, but these are just like, you know, other bills that we have to pay, our wages, our utilities, whatnot. And effectively we haven't paid them yet.

So that is like taking a loan from, you know, con Edison in New York or, or you know, the whatever utility provider is, or even in effect, kind of taking a loan, an IOU, so to speak, from an employee, you haven't paid them yet.

So if those wages go down, if those utilities bills go away if the wage, if the wages owed go down, if the utilities owed go away, that means we're paying them off.

And so here we are showing that cash is going out the door.

And long-term debt is a little bit easier to think about. Here. We have a loan that's gone up, loan went up, we borrowed more from the bank.

That means obviously cash came in, long-term debt on the other hand worked the other way.

We paid some of that down. So cash is going away. And equity on the other hand is going up. So that implies one of two things, right? Why would equity go up? Well, we could have raised more equity absolutely possible.

Most companies, once they're kind of past, you know, when they're public, they're past IPO, they're probably not gonna do a lot of equity raising.

And we'll talk about that a little bit more as we get into more advanced topics.

But equity capital is, is considered to be expensive capital because the return required for that risk is higher, and debt capital is therefore a lot less expensive.

So if equity is going up, we would ask ourselves, why, why is equity going up? Well, it's, it's possible, it's probable that equity is going up because the company is generating profits and therefore profits coming into the company are being kept in the company not paid out.

And those profits, so to speak, are representing an increase in cash cashflow.

So increase in equity, increase in cashflow. And now if I were to go ahead and take the sum of these, I, I should hopefully get the increase in cash, which is 25.

So I'm gonna take the sum of the top three, and then the sum of all of those liabilities in equity.

And lo and behold, that gives me the change of 25.

So that's effectively what is happening mathematically with a cash cashflow statement.

Now, the problem with this is though, is that, yeah, if we go through kinda line by line it does, it does give us a better sense of like where exactly the money went or the cash went. But it's not terribly analytically intuitive, right? It doesn't really kind of tell us a ton. Now, it also is not the reason why the accountants created the cashflow statement.

The real reason why the accountants created the cashflow statement is because over time what had happened was, if we just go, kind of go back to Apple really quickly, and if I were to kind of scroll down here to their or scroll up, I should say, to their income statement, what happened is over time the income statement became less and less, maybe relevant isn't the right word. Accurate, I mean, accurate. It was technically correct.

But because of accrual accounting and the matching principle, right? When we recognize revenue and when we recognize expenses because of those things, the cashflow statement became more and more fantasy like, in a sense one of my colleagues calls it a dream. It's sort of the world, the world in which that we wish it would be.

So for a company like Apple, I mean, apple doesn't have a lot to worry about in the world. I mean, of course they wouldn't admit that, but I mean, you know they are where they are. But if you think about you know, a smaller company or a less established company your accountants have told you that all of these sales that you made are just, you know, totally, you know, valid to put on your income statement. You made tons of sales this year, you delivered the product. I always, like, again, I mentioned my wife's bakery as it was growing, getting big accounts, Nordstrom, you know, the, the cafe at Nordstrom's and big you know, coffee chains and whatnot. And, and they were all like, yeah, we'll take all this and we'll take it. We'll take it and we'll take it.

And so the income statement looked nice and fat like me after I tested all the different donut types that she would make, but income statement was looking fantastic, right? But at the same time, those, those customers were not paying, maybe paying the bills as quickly.

So we had all these sales that looked fantastic, but not a lot of cash flow.

And so ultimately, if you think about all of these, we talked about this, you know, kind of on you know, on day, on session one and a little bit on session two, the income statement is full of this stuff.

It's full of accrual, non-cash accounting.

So if, you know, if we kind of come over to here we look at our income statement, you've got sales, those are impacted by accounts receivable, and then you've got gross profit, you know, gross profit or cogs. However you want to, you know, look at it. Gross profit or COGS COGS, of course being what you calculate to get to gross profit that's being impacted by your inventory. How much, first of all, how much of your inventory was actually paid for in cash? Did you know, did the bakery pay its eggs and flour and sugar supplier, right? So here we have accounts payable as well, right? That's being impacted there. Now also, what if, what if a company overbuilt their inventory but didn't sell it, right? So they pumped all this cash into their inventory and then realized that the demand for the product wasn't there.

Is that showing up here? No, it's not. Because the accountants won't let us expense that inventory build until we sell it.

So from an income statement perspective, phew oh, good, you know, all those, ripped jeans that like the, that were big. Like, you know, at one point in the last I don't know when, I'm probably dating myself already, there're probably like two styles passed, but like true religion was like the big, you know, and they just went through a couple of bankruptcies and I've, I've taught that case a couple times. You know, like all those styles of jeans that they're, they're hot for a moment and then they're not, right? And we can go through that sneaker types, whatever it is.

So if you overbuild your inventory and sink all that cash into your inventory and don't sell it, your income statement does not reflect that that stuff just sits on the balance sheet, right? So immediately we see these links between the balance sheet and the income statement. And what is the story here? Like, what is the story being told? Is it accurate? There are other things too.

Obviously in the other operating expenses, you might see some of those other accrual accounts, right? Other accrual accounts such as wages, utilities, wages payable, utilities payable, et cetera.

Again, did we actually, you know, pay these bills or not? Did we actually, or they just accounting tools.

Well, what about also depreciation and amortization? Depreciation and amortization is a legitimate income statement expense that the accountants say you, you can recognize it, but it has no bearing on reality. And the reality is, is that this is non-cash, and it also in effect, hides what we actually spent on our property plant and equipment in that year. This is the Warren Buffet problem, right? It, it, it hides it because the accountants have told us that if you buy a factory, if you build a factory that costs tens of millions of dollars, you only need to expense in this, this line a tiny, tiny bit.

So again, the income statement is hiding a lot of reality here, hides CapEx and you know, there are other things as well. There are other things as well.

So we'll uncover some of them, but honestly, for the most part, we're kind of getting at sort of the bigger ones. Obviously, you know, taxes work this way too.

Did we actually pay taxes or did we just kind of accrue them, you know, for income statement purposes? So there are things like, that which we'll uncover in the problem set.

So I'm gonna put this down as income statement kind of from accrual to cash.

So what the accountants wanted to do with the cashflow statement is to kind of take another look at the income statement and see if they could do a better job of describing the operations of the company, but in cash terms.

In actual cash terms.

And investors wanted this because you had like really big companies. I mean, you look at Apple, I mean Apple's not this is not done as much anymore, but like when I went through training, it was a big deal. Companies that were big at the time, like IBM and General Electric, right? These companies have changed immensely since I was in training, but at the time they were known and they were definitely known in the decades before, like seventies, eighties, up to the nineties, right? For being companies that could manipulate the income statement to always show an increase in profit, to always show an increase in EPS. And I'm sure Yolanda remembers some of this as well as you were in consumer retail, Yolanda, if I recall.

And those are those big companies that could do the same thing. Like, you know, Gillette could do it. Obviously, you know, Kellogg's can do it. General Mills, I know Kellogg's is now KVA or Kvo or something like that. They changed their name, but Cal Lenovo. Cal Lenovo.

But these companies can totally, they can manipulate this. They, they're big enough, their distribution networks are big enough that they could actually figure out how to stuff sales into their distribution channels and record that as though it actually happened as a sale, right? And th then the income statement looks great. Investors say, wow, EPS went up for the 19th straight quarter, take my money, please take my money. And, you know, then you go and you look at the end, it's like, well, what, what are they doing with all this cash? They've been sitting on this cash forever, right? What are they doing with it? So this cash flow statement was an effort to kind of unwind all this.

And what the accountants basically said was, we're gonna look at this kind of three different ways we're gonna look at this. The first thing we're gonna do is we're gonna focus on the operations and the operations of the company. So we're gonna have cashflow from operations and that cashflow from operations.

What that is going to do in effect is it's actually going to convert the income statement to cash.

That is the main core task of the cash flow from operations section one of the cash flow statement.

Take that income statement and blow it up and show it in cash terms, unwind all that stuff that I showed you here.

So let's take a, a quick look at this first workout here so I can show you kind of, you know, how this in effect why this matters, right? And I described it a little bit, but I want to show you, it's like always better to show rather than tell, particularly in, in a virtual setting, and particularly where, you know, we're all kind of, you know, we're not really entirely getting to interact in this format, right? So this is saying here, use the information below to calculate the cache generated by the book by this company and compare that to the business profit.

So if I were to kind of look at the, the cash generated, well, you know, it would be kind of simple.

We just have to go through this list and pick out all of the transactions where there was a cash impact, an immediate cash impact.

So the cash impact here would be, let's kind of go through what, what is the cash impact? Well, cash sales, absolutely, right? Cost of goods sold. We don't know what that is.

We don't know because we don't, we weren't told how the goods got into the inventory in the first place, but below they tell us that the inventory was purchased in in cash, right? So that is gonna be a cash impact.

The inventory that was purchased for, um, credit of course, you know, was not, is not a cash impact.

What about CapEx? Well CapEx is the business operations spending, spending cash on its physical assets.

So that's obviously a cash impact. Depreciation of course, is an accrual issue. Operating expenses, if they're paid in cash, obviously a cash issue.

And then obviously taxes, if they're paid in cash are a cash impact issue as well.

So we've got these four items that reflect the actual cash impact of the business. And if I take them and add them up, I've gotta make sure I remember which ones are coming in and which ones are going out, right? So I'm gonna take the cash sales and I'm gonna add that, but then I'm gonna subtract the inventory purchased in cash, and then I'm gonna subtract the expenditure on property plant equipment.

And then I'm gonna subtract the operating expenses and I'm gonna subtract my cash paid my taxes paid in cash, right? My taxes paid in cash. So what that's telling me is that in, in this year or period, my operations actually used up cash.

So if I'm running this business, I know this because I know my bank account where I pay these bills from has dropped, but it comes time for me to prepare my financials to the investors. And it's gonna be a very different picture, isn't it? We're gonna have essentially an income statement that reflects accrual accounting. So we're gonna have sales that were that were made both for cash and on account.

Because it doesn't really matter as long as we provided the product.

It counts, right? So both of these kinds of sales count. Now the next thing I have to do is calculate my cost of good sold. Now they, here, I'm lucky, they kind of told us what the cost of goods sold is.

So the cost of goods sold here is the hundred.

So that reflects of that 150 of product that I sold, it cost me 100 to make that product. And again, this is irrelevant or regardless of whether I actually paid for that product, it's just the cost associated with what I sold.

Alright? So there's my cost of goods sold, that gives me my GP of 50. Now what else happened? Well, I've got depreciation on my assets. Now, technically this might be included in gross profit as well, but I'm gonna just separate it out so we can kind of keep things nice and neat.

Accountants say, Hey, don't forget, you can write off some of those asset purchases this year and we'll just take a percentage of them. You know what whatever we were allowed, we'll basically take, and that's gonna be 25.

Now, I never wrote a check for this. It's just an accounting allowance.

It's gonna lower my taxes. So I'm all on board with that. Now, the next thing I need to do is tabulate what are my operating expenses outside of kind of the product that I sold.

What are the operating expenses for the business itself? And that's going to be, in this case, the, the SGA expense, is going to be a combination again, of the operating expenses that I both paid in cash and I accrued because the accountant said, look, you know, it's not just about what you paid in cash to your workers, it's about what you owe them till the end of the year. And you, you're gonna owe more on your power bill too. The, they haven't sent it yet, but you're gonna owe more.

So I've gotta go ahead and take my 10 for the what was paid in cash and add to it the five that I accrued.

And then I'm gonna put all of this in parentheses as well.

And that's gonna get me to my sg and a. And if I take the net of this, I get an operating profit of 10. Did I go all the way up? Yeah.

So that's 50 less to 25, which is 25 less to 15, which gives me 10. And that's my OP. And lastly, I've got a accrue, accrue the taxes that I owe, not just what I paid in cash, but the actual taxes that I owe, the accrual amount. And that's going to be the tax expense here of three. Now, why wouldn't I also add the five here? Well, when we, the way taxes work is when we pay taxes, we pay them for the previous period.

So unlike paying employees where we pay them, say every couple of weeks, and then we accrue and then we pay them and we pay the utilities every month, right? Taxes, they accrue, we record them, and then we pay the previous period.

So that's why I'm only showing the three here as the tax expense.

And that's gonna leave me with an operating, sorry, a net profit of seven.

So I can go right up to my investors and say, Hey, this seven is all for you. And an investor might say, well, great, can I have some of that as a dividend or a distribution as they're known in for smaller companies? And they're gonna say, well, there's a slight problem here, which is that we actually generated seven in net income. I don't wanna forget about that.

Keep reminding you of that. That is correct. This is, was signed off by the accounting firm of Dewey Cheatham and how and everything here is looking good, right? But the cash that we have in the business right now actually took a big hit.

We're down 95 in actual cash.

And you know, the investors are gonna say why? And now we need to kind of show them why we're gonna go through the, the steps of unwinding. I'm not gonna do it in this problem, but this is what has to be done from an accounting perspective to get this net income number to an actual cash number, right? And seven goes to, goes effectively to 95 negative, right? Okay.

So that's kind of how that works. Now, Yolanda, I've either thoroughly put them to sleep or I'm doing such a good job that everyone is right with me. Here we go. Thank you. Max, can you highlight the difference between the cash impact impact and the net profit in this situation? Yeah. Well, effectively we, we can Max and thank you Elijah for that vote of confidence.

What what's gonna happen here is we're gonna take this net income and we're going to begin our cashflow statement with that.

So the first step in the cashflow from operations is take, we begin with net income as it's reported and adjust for cash.

So if I were to go to the Apple cash flow statement, which is the third statement here after the balance sheet, here is statement of cash flows.

You'll see the first thing Apple actually does for us is they tell us kind of the, the beginning cash balances. It's just sort of a, a nice, kind of a nice to have thing here.

But they're gonna basically tell us, Hey, here is my beginning balance.

Let me show you how I get to the ending balance. Now, the first thing you'll see that they have on here is the 99,803.

And just to point this out, for those of you that work with Felix or have been working with Felix in addition to watching videos and taking the webinar, if you're ever doing work, you know, through our links to documents, right? In other words, I went over here to Felix I clicked on the 10K, it brought up the, the document here within the Felix window.

And if I were to highlight a figure, I can make a note or an annotation on that figure and it'll save it for me so that whenever I go back to this, I can understand where I got numbers from. Now, a number like this is not a huge find, so to speak. I mean, everyone knows where this number is, but if you wanted to highlight, for example, stock-based compensation, you could go into that. This one is a good kind of find.

We could actually save this by clicking on save.

And then what's gonna happen here is under my annotations link that 11,104 has sort of been saved.

And I can actually change the name to label it a little bit.

So I would call it SBC for stock-based compensation.

I'm a tiny bit off the rails here. Please bear with me because I want to, I know all of you are benefiting from Felix and I want you to know the things you can do with it on the job, right? So I now have that SBC, link in here, stock-based comp, that's a little shortcut acronym that we have for it.

And if someone said to you, Hey, max, where'd you get the SBC from? You could say, oh, right here and click on that link, email it to them. They don't even need to know what Felix is, who Felix is, where Felix came from.

All just send them that link. They will be brought into a 10K, which they do know, they, they will. And then that's where you got the, so that's a really nice feature, you know, to have here, right? So I, I brought that up because it popped up when I highlighted the, the net income. So Max, getting back to your question.

So what I showed you in that problem, the positive what was it, 15 or 10? Now I forget what it was. For net income, Yolanda, what was it, what was the net income in that problem? Seven.

Positive seven.

So we would be starting here if this were our company with that seven right here.

And then I would be going through that list of, you know, kind of transactions to get from seven, kind of back to the negative 95, so to speak.

And that's again, now what happened? So here, how, how, how did we get from seven to negative 95? Well, you know, this one 50 of sales is not all cash. It's only 100 of cash, right? This cost of goods sold here is not reflective of what I actually A, paid my suppliers and B, invested in my inventory. So I need to adjust for those two things.

Depreciation, I didn't pay to anybody. So I gotta get that out of there.

But at the same time, I also want to consider my my CapEx too, right? So the these are the things max that are, that we're, and we're gonna do them in, you know, and again, in a better problem, I don't wanna do it too much here because in reality you're not gonna have this list. All you're gonna have is an income statement and a balance sheet.

So to go through this list would be like, almost like you had a conversation with the treasurer of the company and they told you line by line what's cash and what isn't. You're not gonna have that.

So we're gonna do it kind of in a more realistic way. Now, uh, let me just kind of go in here again.

I've got net income and I'm gonna adjust that for cash. That's the cash flow from operations. Now, essentially then the cashflow from operations goes in and deals only with the income statement stuff.

The next section is called the cashflow from investing.

And the cashflow from investing is actually going to look at the long-term assets and determine what changes were there to the long-term assets, what cash changes were there to the long-term assets.

So these are things like CapEx, sales of, of other investments like stocks and bonds, investments in other companies, et cetera, et cetera. By the way, I talked about these obviously, but here we're looking at things like operating, working capital, depreciation, amortization, obviously if they have any, et cetera.

Those are the non-cash impact items to the operational section.

So cashflow from investing is again, just focusing now on the long-term assets. Now, a lot of people think of CapEx as being an operating activity, and I've kind of talked about it as such.

I've talked about CapEx as an operating activity.

And honestly in almost all conversations about finance that you will have, you will consider CapEx capital expenditure to be an operating activity of the company. Now, the accountants, they're kind of their own little bunch, right? They're, they're, you know, they're, they think a little bit differently.

They want it to separate this into its own kind of category.

As we move on into more advanced modules, we will kind of start to see CapEx migrate into more of the operational cash flows. And I'm just gonna point that out now, because we are not trying to be accountants, we are not trying to replicate what accountants do.

We are trying to use the framework, the consistency of accounting rules and regulations and preparation and, and be financial analysts with it be be investment bankers or equity research analysts or what have you, right? So we need to take from them and, and then manipulate for ourself, right? Right now I wanna just show you how the cashflow statement works. So I'm, I'm kind of, you know, nudging up against the accountants and pretending I'm one of them, but I'm not.

I promise, I promise you I'm not. Okay.

Now the next and last section will be cash flow from financing activities.

Now, this is its own category as well, and the reason why is its own category is because in this section we are only going to deal with what changed the capital accounts, what changed the capital accounts, what are the capital accounts? They are the invested capital accounts, the debt, the equity, particularly, specifically the common stock, preferred stock equity accounts, the capital account.

So I say that because retained earnings is an equity account, but retained earnings is the, is deals with the net income.

So that's not part of this section. Net income and retained earnings is a part of the upper section, but dividends is gonna be a thorn in our side because dividends technically get paid out of retained earnings, but they're not on the income statement.

They're not on the income statement. So we can't include them in the operations. They have nothing to do with making donuts, iPods, iPhones, you know, jeans, nothing to do with any of that stuff. It's how we service the capital account. So it's gonna be in this section. So that's gonna be thing. Things like increases, decreases in debt, capital raises dividends and share buybacks, buying back shares of the company on the open market cashflow from financing. Now you might say at this point, what about interest? Interest is a financing activity.

What about interest? Well, here's where I think the, the accountants got a little bit sort of, you know, twisted in their own ideology.

They really wanted this operations section to be more about converting the income statement to cash.

That's what they really wanted. Now, did I freeze again, Yolanda? No, you're good. Okay. I see myself kind of doing a, you know, kind of a dance, but yeah, I don't, okay, so they wanted the operation section to be more about converting the income statement to cash.

So on the income statement is obviously interest expense.

So interest expense is in, in this operational section. It's, it's not in the financing section. So that's, that can be a little bit of a sticky, sticky point. And I think, you know, it's one that we just kind of have to, you know, accept and and then move on, right? Because there's no I mean, I've see, I see people pulling it out sometimes. Um, but, But we're not gonna do that, not today. Okay? So anybody, anybody, anybody can take an income statement in two periods of balance sheet.

And of course the income statement has to correspond to those two periods, right? So last year, this year of the balance sheet and the income statement from this year. So those all correspond, right? Anybody can take those pieces of information and build a cashflow statement.

Anybody, anybody. In order to do that, you need to basically be able to do kind of two different things.

This is the patented Chris Cordone methodology for building a cashflow statement correctly.

And I have a patent number if you, if you want to actually challenge me on that, I have my application all ready to go steps to building a cashflow, okay? The first thing we need to do is categorize each balance sheet account to determine which of the three sections.

So again, we are basically going to be doing that math of last year to this year, last year to this year, this year to last year. We're gonna, we're going to be doing that like I did in that problem, but we're gonna be doing it in a more analytical way. We're gonna be doing it with a different process, right? We have to do it according to kind of the accounting method.

So the first thing is, is we're gonna go through each of the balance sheet accounts and we're gonna determine which of the three sections will fall. Is it operating? Is it investing or is it financing? O/I/F Then we have to measure the change according to the four rules of cash.

So if you do these two things, you, you'll without fail, get the correct reconciliation of cash from one year to the next.

So the, what the first step guarantees us is that we do not overlook any change because according to that delta cash equals delta assets, liabilities, and equity, according to that, we, we have to include all the accounts.

If we don't include all the accounts outta balance or, or in this case, incorrect cash flow.

Gotta get those done. Next, we've got to make sure that when we go ahead and calculate those deltas that we know did cash go up or cash go down.

So apply the four rules.

So the first thing we're gonna do is we'll practice on this problem, which I think is the workout two, we'll kind of practice where these accounts would go, operating, investing and financing.

And I, I'm also gonna kind of give you a bit of secret I guess, which is that at the end of the day, if you get a classification wrong between the three sections, it, it doesn't really matter as long as you didn't miss anything, you didn't double count anything, and you got the four, you know, rules, right? What section you're in. They'll, they'll all still add up. The math will still work.

It just will be a little weird to whoever's reading it because they'll say, you know, why is dividends in the operating section, right? And, and that's technically not right.

So the idea here is to give valid information to investors and to, or to lenders, or lenders or investors to and the way we do that is to try and get these classifications right so that they understand when you say operating cash flow, they understand exactly what that means. Okay? So work out too identify whether the following balance sheet accounts represent operating investing or financing cash flows.

So normally I go around the room and everybody chips in here, but that's not the kind of the setup that we have.

So I'm gonna go through these very quickly.

Please raise your hand or pop a q into the q and a.

If you don't understand the distinction that I've made, O/I/F okay? And we're gonna be doing this a lot because every problem that we have, we're gonna do this on. So cash and equivalence, is it o is it i, is it f. Well, we're starting with a trick question because we are solving for cash.

Cash is the answer.

So it's neither or none, right? So I'm gonna put solve here because that's, you know, that's what that is.

Now what if we have some assets that are securities that we're, that we trade, they're marketable securities. Well there's a, we could have a conversation about this.

Some people include these with cash, in which case we would lump cash and marketable securities together and we would solve for that amount.

Depends on the nature of these investments. So I'm going to, here just to be, you know probably consistent with the rest of our material at fe. I'm gonna put solve, as well, and I'm gonna say generally marketable securities.

So these would be the current version, not held for sale, which would be the long-term version. But current tradable, marketable securities are included in cash. Okay? Now, accounts receivable, operating vesting financing, well, operating accounts receivable linked to sales. Sales go on the income statement, income statement's, operational. So that's gonna be an O. Inventory cost of goods sold it's closest le closest link is to cost of good sold because the inventory that we sell goes through cost of good sold, but also the inventory that we don't expense is sort of missing from the income statement. So we want that there as well.

Prepaid expenses, this is just prepaying insurance subscriptions, gym subscriptions, newspaper subscriptions, operating, why are they operating? Well, these are part of those accruals for the, um, SSG and a account or potentially even the COGS account.

Now, deferred taxes, we have not talked about deferred taxes.

And guess what, we're not gonna talk much about them in this entire sequence.

It's an advanced topic. We have some good videos on Felix, if you find yourself swimming in the muck of deferred taxes, but we're not gonna cover that. So, I gotta give you some rules here.

And rules are gonna help you because even if you are a year or two into the job, you're gonna come across accounts that you're like I've never seen that before. Let me think back to, to these rules that Chris told me about. Well, deferred taxes, generally anything tax related is gonna hit operations because generally the operations of the business are what create both the taxes that are paid and the taxes that are deferred.

There are very few things that I can think of that are not operational that create taxes and deferred taxes.

So I'm gonna go ahead and put that always in the operational account.

Other current assets, who knows what this is, who knows? We might be able to find it in the notes.

We might not.

So another rule that I'm gonna give you here is that other current assets, as long as they're current, put 'em in the operating section.

These are probably related to working capital, but we, we would have to kind of dig in there and find out. I generally, it might be tax related as well, but we already have taxes, so I don't know what to say about this. But the general rule of thumb, if it is, if it's current, it's gonna be operational now, property, plant and equipment. Where is the change in property, plant and equipment going? Now, this is also a bit of a trick question.

Where is the change in property plant equipment going? Now, if we rush in here and we think aha CapEx makes this go up, CapEx I know is an investing activity ism gonna put investing down, you would only be partially correct because we have to think about in its entirety, how is this account changing? How is property, plant and equipment changing? Well, property, plant and equipment increases because of CapEx and then it decreases because of depreciation.

So what happens here is you have for example, a thousand of property plant equipment to start with.

You go out and you buy 250 of new CapEx.

So now your assets are higher, but by the end of this year, I'm assuming you bought 'em on day one. By the end of this year, the accountants have told you that these are five year assets, so you're gonna depreciate 50 of them. So on the income statement, you're going to have 50 of depreciation as an expense, non-cash.

So what is the change in the property plant equipment account? I'll put this here as a negative. Well, the account, the property plant equipment account net change was 200.

But we need to show the investors what actually happened here.

Two 50 of that change came from investing.

So that's the I 50 is a non-cash expense impacting negatively our income statement or impacting our income statement in a non-cash way.

So that's gonna be operational.

So it's got two there. A little bit tricky and we'll get to see it in action.

So you can see again, you know, if I just, again, if I looked at the change in the balance sheet, as long as I captured that 200 net, I'd be fine, but it's better if I can show the two different changes.

I need to get to a net change of 200, cash went down by two 50, but then I'm adjusting my net income by positive 50 to get to cash net income. The net of that is the 200. Okay, any questions on that? That's probably the sticky one. Okay.

Long-term investments, investing, long-term financial assets, investing, intangibles, intangibles, work the same exact way as property plan equipment, same exact way.

You've got intangibles, assets, copyrights, patents, trademark software. You've got purchases of intangibles. They don't, they don't have a fancy word.

There's no intangibles or anything like that. They just didn't, they, you know, they got short, they got the short end of the stick here.

Coming soon to a theater near you is a, is a word for this.

Because we're now in a tech world where developing software is a big deal, obviously. So Yolanda, I'm gonna put you on that one. Okay? Can you come up with a good word for, and tanex is actually pretty good now that I think about it.

But it also sounds like, you know, like a treatment for something too. Purchases of intangibles.

And then we also now have the equivalent of depreciation for intangible assets. And those are called, um, those are called, uh, amortization, so D n A, the D and the A, right? So same, same exact thing. I won't go through another problem. Same exact thing.

So we have an investing component, which is the purchases.

That's what's making the assets go up. And then we have an operating component, which is the add back to net income to correct the non-cash expense hitting our income statement.

Okay? Deferred taxes, Cordone rule of tax says it's gonna be operating even though it's non-current.

Chris, even though it's non-current, Chris, that's gonna be o okay, now we're moving on to the liability side.

We've got accounts payable that's going to be operating, it's impacting our COGS, accrued expenses, operating, that's impacting our SSG and a short-term borrowings.

Now we're clearly in the debt world. Finance, current portion of long-term debt finance, capital leases.

Finance leases are another kind of debt financing.

We'll talk about them a little bit more, only a tiny bit more, but a little bit, a little bit more later.

Current income taxes payable, again, operating other current liabilities.

Well now I'm a little bit of a, a loss here as well because other current liabilities. Now, other current assets, I said we should stick 'em in the operating section.

So I'm gonna do that again here.

What's in there could be a number of things, but more importantly, we're just gonna put them in there, right? Not worth spending a ton of time on that. Long-term debt financing, uh, capital leases that are not due within any a year.

The longer term part financing, deferred tax liability. Don't even need to, as soon as I hit, you had me at tax, right? As soon as the, as soon as you see tax there, boom. Operating.

And now the last one, which I think is probably the last liability, which I think is maybe the trickiest, other non-current liabilities. Who, I mean, these could be a number of things. It could be pension, they could be post-retirement, they could be taxes, we don't know.

But the reality is, is that liabilities are cannot go in the financing section unless it's actually interest bearing.

And for it to be interest bearing, it has to have a debt moniker.

It has to be long-term debt, short-term debt bonds, revolver notes payable, commercial paper term loan, A term loan B bank.

It has to have a debt moniker.

Other liabilities is a blah blah, blah thing. It's like, say generic title cannot go in the financing section unless it's specifically debt cannot go in the investing section. Either.

You cannot invest in a liability, never can never have a liability in the investing section. Liability is a funding source, right? It's a way to increase funding.

So what, what is that? Well, if it's not financing and it's not investing, it's gotta be operating. So I'm gonna put an O there.

And that's my scientific explanation for why that goes in the operating section.

Common stock financing, additional paid in capital financing, retained earnings. Now this one's a little bit tricky again, because net income is driving retained earnings. That's operating, but dividends can come out of retained earnings. That's financing.

So treasury stock, lastly is also a financing activity. Okay? So that's the exercise. And now we've got, you know, a, a good chunk of time to just kind of very slowly, you know, work through a few problems and I'll have some, probably even some time for, you know, for answers at the end.

If I were to go back now and kind of take a look at this problem that I did here for me to do any more with workout three, I did it kind of the mathematical way.

If I wanted more information about what was really changing these accounts, I need the income statement. I did. I wasn't given the income statement, I was just given a little, you know, some data here, which at this point we're kind of beyond this. I'm gonna kinda leave this one alone.

You know, once we get through the end of these workouts, you won't even really need to go back, um, you know, to this as well.

So I also think there's a mistake in this problem too, if I remember correctly, because yeah, I think there is, but in any event, let's just leave that one alone.

Let's move down into workout, five, because I want, I kind of want is it five? Let's go down into workout six.

I kind of wanna move it ahead because we don't have a ton of time together and I, and I, and I wanna make this as realistic as possible for you as, like I said, when you're doing these cashflow statements, you're doing them probably within a modeling concept, uh, in a modeling context.

Now, why am I saying that? Well, the last thing on earth you are ever gonna do is build a historical cashflow statement.

The reason why you're not gonna build a historical cashflow statement in terms of calculate a historical cashflow statement is the same reason why you're not going to calculate historical income statement or historical balance sheet.

Somebody already did it. It's done. Whoever Apple's accountants are, and I'm pretty sure it's not Dewey Cheatham and how they've, they've moved on into other accountants probably one of the big four most.

And we can tell just by looking, there's gonna be an auditor's note here. It doesn't matter. But it's usually an auditor's note here somewhere, but I, I don't care to really find it. So I'm gonna leave it alone.

You know, Ernst and Young, they did it for you.

So we're gonna leave, you know, that kind of work to them.

They did it. Why would you do historical cashflow statement? Why would you go through this work? If you're working with a public company, you know, you simply go to the cashflow statement and take a look at what's on here, right? So what's on here are all the things that we've talked about.

Every single balance sheet change is accounted for for Apple in their, in this 2022 year, which corresponds to the change between 2021 and 2022 on the balance sheet. It's done. So when, when are we doing this? If we're not ever gonna do it for historical purposes? Well, we're, we're going to do it when we model, and I'm gonna go over that more in a couple of weeks. But the, the, again, all of these rules and regulations are coming from the accountants. So we're, we're, what I'm doing is sort of, since I haven't taught you modeling, I'm showing you that the fundamentals are gonna work as long as we have two, two balance sheets and an income statement. And that's what this problem six has. We have two years of balance sheet, and I have one year of income statement, oh, sorry, I wanna go to, I wanna do seven and I've got two years of balance sheet and I've got one year of income statement. And I want to show, show you that with this information, we can, we can build our own from scratch cashflow statement. Okay? The ultimate change that we're looking for here is that how did, how did we get from 22,217.6 to 35,809.2? How did we get, how did we do that? As you get more experienced, you will be able to pick up a balance sheet and, and look at it.

And actually, you, you don't, you don't even really need a cashflow statement. You'll be able to do this without one, believe it or not.

But the cashflow statement makes it nice and easy and you certainly would never want to, you know, kind of invest without one, right? You'd wanna make sure you spread it out yourself.

So first thing we're gonna do here is we're going to, I'm gonna make my margin a little bit wider here, is I'm gonna go through my, my patented list.

I'm gonna do this pretty quickly because I just did it at kinda length above.

I don't want to kill too much time here. Short-term investments, well again, do we want to include them with cash or not? What do you think, Yolanda? Are we gonna include these here with cash? Let's do it. Let's do it.

So I'm gonna assume that this is cash and that this is cash, okay? So technically now speaking, we're not solving for the 35,809 we're solving for 37,105 is the change that we're looking for. Okay? So I'll just put that in a box there. We're gonna count these as as cash.

Okay? Accounts receivable, operating inventory, operating other current assets, operating. These are the working capital counts.

Total current assets, that's a total, we don't want to do that. Net property, plant and equipment. Again, CapEx is investing, depreciation is operating investments, investing intangibles, same as PP&E, same as PP&E totals. Skip them.

Now moving on to the liabilities. Notes payable will, notes payable is one of those debt monikers that immediately tells us is going in the financing section.

Notes payable is never trade related, never.

And accounts payable is never interest bearing.

I guess it can be. If you really get in arrears with a supplier, they'll certainly hit you with some fees. They're more likely to cut you off before they start, you know, charging you interest. I mean, the reality is if you don't pay your bills, you're probably not gonna pay your interest either. Okay, accounts payable. Now we're into the OWC. Again, taxes payable.

OWC, total current, skip that.

Long-term debt financing. Deferred taxes should ring a bell.

Operating total liabilities, skip it.

It's a total common stock financing. Retained earnings, again, operating for the net income part of it and investing, sorry, financing for the dividend part of it.

And it's, again, it's financing because we're making a payment to capital providers there. Okay? Treasury stock is, sorry, financing.

And the rest of these are total accounts. So we're, we're kind of like ready to rock and roll here with this cashflow statement.

Now, if I go up to my income statement, you know, one thing that might possibly be kind of jumping out at you if you're, if you've done this maybe or if you've taken some accounting or if you've, um, you've just been paying really close attention, is that I've talked about things like dividends and CapEx, but obviously dividends in CapEx are not on the income statement and they're kind of buried in my numbers in this multi kind of multi change, you know, number here, CapEx is buried here and intangibles are buried there, dividends are buried here. So for this problem, how can I kind of figure out what they are? Well, we have a way to do that.

Now in reality, when we start modeling, which is again where we're gonna put this really to use, you're gonna have assumptions for those things.

So we're not gonna be doing kind, kind of the forensic accounting that we have to do here.

But it's a nice exercise to go through because you get to learn really how these accounts work, right? If I go up to my example above here, if I started with a thousand of PP&E which is last year's balance sheet, and I ended with 1200 of PP&E which is this year's balance sheet, those two pieces of information I have, I also have on my income statement the 50 because that's listed as depreciation.

What I'm not given in this problem is my CapEx, so I can solve for it, right? I've got three variables. I just need the four, I've got three numbers. I need one variable.

I can very easily solve for that one variable.

And so we're gonna go through that exercise down below for these accounts that have multiple changes. And these are what is known or what is known or what as, or what are known, getting my English together late in the day as base analysis.

Base analysis. Why? Well, we have a beginning, we have an addition, we have a subtraction and we have an ending balance.

And these are super, super, super helpful when we model.

That's how we, that's how we dissect these accounts. Okay? So first thing I'm gonna do here is I'm going to go and I'm gonna start my income statement with the one item that is the beginning of every income.

That is the beginning of every cash flow statement all over earth.

And that's my net income, right? So cash flow from operations, I'll do this this way. Cash flow from operations and I start with my net income everywhere, everywhere, everywhere. We start with net income, my net income, I'm gonna go ahead and link, uh, to up at the top.

Um, oh, I'm in the wrong problem again, sorry, I keep going back to six. I want to go to seven, that's why I highlighted it.

Sorry about that.

So I'm going up to my net income for year one and that's the 31,663. So again, max, I've gotta get this 31,663, which is equivalent to the seven in our problem into that cash number.

And you're gonna see the, the steps and how we do that using the balance sheet.

Okay? So I've got that in here.

Now to follow my patented technique, what we have to do is we have to make sure that we A, capture every change and then B, don't double count.

And a good way to do that is to go over here and x out the letter when we, when we capture that particular change.

So I'm gonna go ahead and do that by Xing out my O.

So now I've got my net income.

And now what I'm going to do according to you know, what Apple says is that I'm going to take my adjustments to reconcile net income to cash.

And the general steps for doing this is that we start first with any of the non-cash expenses.

Non-cash expenses.

So in here those would be going up to our income statement, our depreciation and our amortization. So, um, I'm gonna do this, I want to show this kind of properly. So I'm gonna do equals add. And this is a little bit of a tricky kind of, this is a little bit of a not tricky, but just, what I call concatenation just to make to, to kind of use labels that exist, but add some text to them.

So I'm gonna add in quotes, I should do add colon in quotes, put a space in there too.

And then I'm gonna concatenate with an with an ampersand.

That's an ampersand. Now what is that? That's sign ampers. Yeah, that's then what's the at sign now? That's just the at sign.

Okay, thank you. That's why I need you here, Yolanda.

and I'm gonna go up and get that label from above.

So now what's gonna happen here is it's gonna basically say add depreciation and then I can copy down and it's gonna add amortization.

So I'm adding back to net income because these two expenses lowered my net income in a non-cash way, putting this into balance sheet or four rules of cash.

What's happened here is depreciation and amortization lowered my asset balance assets go down. It means that, that we're implying cash went up and that's why I'm adding them back here, adding back.

So then I'm gonna go equals and go up and grab the 9,118 and then the 8,581.3. So again, I need to go in here now and I need to knock out these two O's to show that I've captured those two. Okay? Now the next thing I need to do here is I'm looking on the income statement.

I don't see any other kind of non-cash items. What would those be? Well, I don't even wanna get into it. Now essentially I've captured the only two non-cash items that are on the income statement.

Now I need to go into those working capital accounts to get the, all those accrual as my instructor used to call 'em the poisons of accrual accounting teased out, right? So all of these other O's relate to working capital.

Now what I could do here is I could actually do all of those kind of in a line here, change in accounts receivable, change in inventory, change in blah, blah, blah, and do all the way down.

Most models that you're gonna work in don't do that because they like to be succinct with the working capital.

So they're gonna do the working capital calculation somewhere else in kind of a scratch paper area and they're just gonna bring in that net change amount. So what I'm gonna do over here is I'm gonna do kind of a, you know, a sort of working capital change.

And the way I'm gonna do that is I'm gonna just link to those working capital accounts over here, which are my accounts receivable inventory and other, and then I'm gonna go over to my liabilities and get the accounts payable and the oops, get the accounts payable and the taxes payable. And that's, that's all I've got for working capital.

That's all that I've got for working capital.

Now there's some other Os but they're not current.

So only current can go in working capital. That's kind of a rule.

And now what I can do here is I can do this calculation, uh, I don't even need to do this. I can just copy these across.

I can do this calculation by calculating my OWC.

Now what's my OWC in each year? My OWC is gonna be the net of the assets and liabilities.

So in other words, I can do this this way just like I did in the problem above, which is to take the change here.

This is the change in each of these accounts.

It's last year minus this year here, and then this year minus last year for the liabilities, right? That's the total kind of change in these accounts.

And I can go ahead and I, I can actually put that on my cashflow statement.

I would not be wrong to do that.

So my total change is that 4,177.8.

Another way to do it, however, is to do kind of all of that math off to the side and then bring the total on now that, that would be this number here.

But you know what I'm saying is I can kind of like keep them, keep the numbers whole until the very end.

So the way I would do that is I would take the sum of all of my working assets and subtract the sum of all of my working liabilities.

And if I did that from, this is year zero or is it year one? How did we do it here? Yeah, year zero.

What's happening here? Well, my assets are going down.

My working capital has an asset balance because it's assets minus liabilities. That asset balance is going down.

Assets going down means that I have a positive cash flow from those working capital accounts.

So either way that I do this is, you know, is, is fine, is correct.

Probably what we see more often than not is what I sort of did second here, which is to go over to my cashflow statement and do the change in OWC and then link to this calculation off somewhere else in the model. So I don't really care which one you do, I don't think we'll have time to do another one in class, but I will give you the solutions and you know, do I, you know, do one on your own for sure and you know try it whichever way works best, you know, for you is fine with me.

But the reality is, is that either way you do it, it's the same answer.

It's just the question of what you wanna present, right? So now I can go through and I can make sure that I tick off the three asset working capital accounts and the three liability working capital accounts. And I'm almost done with my operations section.

I just have one more to do, which is gonna be that change in deferred taxes.

Now that can't be included here in OWC because that we know it's a long-term change. It's in the long-term section, non-current section.

There can be current deferred taxes.

Those are okay to include but don't include anything long-term in the working capital. So now I'm gonna do again, I'm gonna do that concatenation thing. I'll go up a level here, change in in quotes ampersand, and I wanna link to this deferred tax cell, which is, sorry I didn't do equals which is that cell B300. It's gonna gimme change in deferred taxes.

Now I'm gonna be a little bit nitpicky here because I don't like having capital letters pop up in the middle of my labels.

So I'm just gonna do, use the lower function here and wrap my B300 reference in that lower function.

And then it lowers that sell text into lowercase. That's kind of like, you know, you learn that sort of stuff when you're, when you're working as you know, first year analyst and you constantly have you know, an associate like Yolanda was, I had mentioned was an associate.

I didn't work directly for Yolanda, but I remember having to bring stuff up to her on 28, I think it was Yolanda, I think that was 28.

And associates are always telling you to change things and make it look different and can you put this in here and can you put, put that here and move this over here and put a, and you're just like, ugh, you know, because you were here till 4:00 AM you know.

So they will often say, you know, can you make that lowercase in that label? And that's how you do it. That's how you learn that stuff, okay? Change in deferred taxes equals, this year minus last year because it's a liability.

So I wanna show that if the liability went up, cash went up, okay? And now I think I can actually x off all of my O's here.

I don't have any left and I can total this up. I, so my total cash flow from operations, I'm just gonna do CFO here because I don't have any other tricks. I could have done another concatenation, but, make that bold. Put a line there.

And we have total cashflow from operations. So that's done.

And we're gonna move on to cashflow from investing.

So I'm just gonna put that in here, change this to investing.

And here we're gonna have a little bit of work to do because right away I need CapEx and I don't have an actual CapEx amount a account or a total. So I need to do that calculation, that base calculation. So my CapEx kind of base analysis is going to be just like we did above. I'll just move these over here to the right so that it looks kind of cool.

And then I'm gonna do my beginning amount of my PP&E, which is from the balance sheet.

And then my ending amount of PP&E from the balance sheet I'm solving for my additions. That's the CapEx.

But I know my subtractions, that's the depreciation.

So you could put the depreciation in here as positive or negative.

Probably for right now I'm gonna put it as negative just because I wanna show you, you know, the, the formula's a little more clearly. So I, I started with 66,926, I got to 69,632. But the way I got there was, the first thing that happened was I got, I went down by 9,118 because that's lowering the asset balance.

So how do I get from 57,808 to 69,632, I've gotta add something of roughly, you know, 10, uh, 12, 12,000 here. I gotta add about 12,000.

Now I don't have to guess, I can just do the ending amount minus the sum of or the net of these two. And that's gonna gimme the 12, roughly 12,000 that I was looking for, right? I just basically, I'm acknowledging here that my depreciation makes the beginning balance go down.

So how do I get from that low amount up to the ending balance? Well, I gotta add assets and that's my CapEx.

Now here's where you gotta be careful because CapEx is making my base analysis go up. That's why it's an addition.

But in in cashflow terminology it's making an asset go up.

That means it's cash going out or down, right? So we gotta make that minus 11,824.2.

And now I can come over here and I can x out my, I and I have to do the same exact thing for my intangibles as well.

So I'm gonna just kind of copy this sort of thing down here.

I'm gonna go get my beginning balance for my intangibles, that's the 141,214.1 and then get my ending balance, which is the 132,632.8. So intuitively here what's happened, intangibles went down. So analytically speaking that means that we wrote off or we amortized more than we added. So that's something that you just wanna make a note of.

Okay? Now I'm solving for the a I don't know what my intex or my purchases is.

So I gotta go up here and get my amortization and do the same exact math, which is equals my ending balance minus the sum or the net of those. Oh I didn't do it as a negative, so I gotta fix that.

That's falling apart here, hang on, make that negative because it's making the assets go down equals ending balance minus the sum or the net of these two accounts. And lo and behold, what this tells us is that there were no purchases of intangibles that were only amortizing here. So there there is none. There are none. So we can, we can skip that.

We've captured the 8,581.3 change already, which decreased the intangibles by adding back amortization to net income done. Okay, so my intangibles are done.

And now last thing I have here for I are investments, so I'll be cheat a little bit here. I'll x that out now and I just wanna go back and get my change in investments and that's gonna be equal to assets I do last year minus this year. And that gets me to a total change of total, sorry, total CFI of 14,469.

So we're getting there.

The last thing I have at this point is the financing.

So the financing activities usually are pretty easy, but again, we have one more base analysis to do and that base analysis is gonna be for that retained earnings account. So I'm gonna do the debt first.

I'm gonna do change in short-term debt. I think we had short-term debt, didn't we? No it's payable, sorry. And then change in long-term debt.

So notes payable are a form of short-term debt, but we should, we should try to be consistent in our, in our labels.

And that's gonna be equal to this year minus last year because the, that shows that it went up means cash came in, we borrowed some more. Go over here to my notes, exit out. Long-term debt is next.

That's gonna be same thing.

This year's long-term debt minus last year's that went up as well.

And the next thing that I have here is my common stock.

Why would common stock go up? Well, it would go up if we issued more stock that's gonna be equal to this year minus last year.

So obviously we raised a bit of capital that's done.

And now the order here is a little bit odd. I mean, I think typically if I think I'm gonna look at Apple, see how Apple does it, but I think we would show let me just see where their retained earnings is relative to their, they don't have any treasury stock.

I think treasury stock would, would be net of common stock kind of thing, like a contra account. So we're, we're, we're showing it sort of in our balance sheet. We're showing retained earnings.

Kind of sandwiched between, I, I don't think that that's typically how companies do it, but I'm gonna do the treasury stock next and I'll do the base analysis last change in treasury stock.

And that's gonna be equal to again, treasury stock increased.

So if we increase treasury stock, that means that we're buying back more stock, right? So it's negative because it's a contra equity account.

So we can still handle it as this year minus last year.

And that's showing us that we bought more of our stock on the open market.

And then last thing we have to do is we need to figure out what dividends were paid. And I need another one of those kind of pesky base analysis here.

Now I'm starting with my retained earnings from the start of the year and I'm going to go to my retained earnings from the end of the year.

And now what made my retained earnings go up? Did I hear that correctly? Yes. Net income.

And so now we've got a different kind of base analysis because we're solving for the S. So what's happening here is that we're saying that,

my beginning retained earnings immediately jumped up by the amount of net income. But, but how did I get down to 80? How did I get from like, you know 109 to 80? Well, I must have paid some dividends of 29,416, and I'm gonna put this all in wrap it in a negative just so that we can get the negative showing for dividends.

So my dividends here is going to equal this 29,416.5.

And now what I've got here are my, is my total CFF if I add these three together, this is gonna tell me what my total change in caches my net cash flow, which is the sum of these three accounts.

Now what that tells me is kind of that number that I was looking for up here, 37,105, as you can see in my Excel little handy sum check, right? So I, I know I did this right, I know I did this right? I mean I used, I used the patented method anyway. And to my knowledge, there has not been a mistake in the world yet by anyone who's used this.

But what I need to do is I need to show the investors exactly what happened.

So I take my beginning cash from that beginning balance sheet of the cash and the short-term investments.

I add that to the, to the net cash flow or I add the net cash flow to that amount, and that's gonna tell me what my ending cash is, 63,000.5. And just to check again, if I add these together here, that in fact is the 63,000.5.

So there's a little bit more drama to it when you kind of just leave the cash alone and don't lump it in.

But when we're modeling this going forward and when we do valuation going forward, I will bet you a dollar two, a donut, not to go back to the bakery, but that's an old expression that you're gonna lump cash and marketable securities together.

So we have calculated a cashflow statement together, and what I'm gonna do is I'm gonna recommend that you try work out eight on your own.

I will publish the answers to this. I will publish the solution file and I'll also post mine my notes and my file as well so that you have kind of what we did in class in case maybe you, you got a little bit behind but you wanted to keep up with my notations here.

I will post that as well, just kind of gimme to the end of the day and I'll do that.

And I'll leave it at that. If you have any, you know, questions as you're working through it, by all means feel free to shoot me an email. I wanna thank you Yolanda, for, for joining in as well. Thank you all for being, for being good students. And I guess I'll see you next week when we're gonna do a little bit of M&A accounting next week with consolidation accounting and purchase accounting and things like that. So it sounds a little daunting, but it's really not, and it's really important for understanding investments.

So until then, I will I will say farewell and I look forward to to working with you again next week.