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Principles of Finance: Unit 3, What is Cash Flow 17 Views


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There are three sub-totals that comprise cash flow: cash from operations, cash from investing activity, and cash from financing activity. Johnny Cash just missed the cut.

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Transcript

00:00

Principles of finance ah la shmoop What is cash flow

00:05

Well it's cash that flows from your company hopefully in

00:09

gushers But why would you calculate cashflow separately from earnings

00:14

Well because often they are very different That is a

00:17

given company might have this year spent a load of

00:22

cash buying a new factory It's cash will have flowed

00:26

the outward you know in the wrong direction from what

00:28

you want it or it's three years later And the

00:31

company is depreciating the value of that factory for which

00:35

it paid a boatload of cash in a previous year

00:38

So it still has to show noncash losses on its

00:42

income statement or its earnings Got it So you're going

00:45

to depreciate the downright ing of the value of that

00:49

factory but they cash flow from the company in that

00:52

year set of earnings is solid That is ah company

00:55

showing earnings of one hundred million dollars might have depreciated

00:58

forty million dollars that year in factory depreciation expenses that

01:02

were non cash So that company may have actually had

01:05

cash flow in excess of their earnings like one hundred

01:08

forty million dollars instead of one hundred So you have

01:10

to track cash flow as another indicator of company profitability

01:15

or really risk getting lost And there is in place

01:18

a standard format for the manner in which company's cash

01:22

flows give reported In essence there are three sub totaled

01:25

reports that comprise cash flow You start with cash from

01:29

operations basically that's just starting with net income and then

01:33

adding back depreciation amortization After cash from ops you calculate

01:39

cash generated or sucked away from infesting activities Right Like

01:44

if you bought a new tractor smelting plant you spent

01:47

cash it was sucked away If you sold forty thousand

01:50

acres you realized you didn't really need any more Because

01:53

you're outsourcing your plutonium dumping that china will Then you

01:57

generated cash And finally your third section is cash flows

02:01

from financing activities So if you you know bought back

02:06

your own stock than you consumed cash from that financing

02:10

activity poor if you raised money in an ai po

02:13

or a secondary offering while you generated cash from that

02:16

financing activity got it all right Normal income statement earnings

02:21

are rough ported on an accrual basis That is they

02:25

include placeholders for the decline in value of that tract

02:29

Or smelting factory that you will someday have to replace

02:33

But reducing the value of that factory by twelve million

02:36

dollars a year for twenty years on your books is

02:39

a non cash charge It's van tum Until you you

02:43

don't have to go a cash to go build a

02:45

new one then it's not so phantom but the world

02:48

changes fast especially in the land of technology and a

02:52

lot of things that accountants thought would die in five

02:55

years which costs five million dollars To start could be

02:58

replaced bigger better faster stronger five years after they were

03:02

purchased for like one tenth of the price of which

03:05

they were being advertised away like think about how much

03:07

computers used to cost versus you know what an iphone

03:10

is today so paying attention to the actual thing that's 00:03:13.918 --> [endTime] being advertised or depreciated is key here Oh no

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