- The third primary financial statement
is the statement of cash flows.
Conceptually, the statement of cash flows
is quite simple, cash in, cash out.
The insight of accountants is to
separate those cash flows into three
categories, operating activities,
investing activities, and financing activities.
Those three categories of cash flows
are what are reported in the statement of cash flows
and the statement of cash flows
summarizes cash inflows and outflows
for a period of time.
Now, operating activities are
what a company does every single day.
They collect cash from customers.
They pay cash for inventory, they
pay cash to employees, for rent.
They pay for advertising.
They pay for research and development.
All those things are operating activities.
Think of operating activities as the things
that a business does every single day
and hopefully, a company would
generate cash from its operating activities.
You would hope that a business
would be collecting more
on a daily basis than it's spending.
Now, the second category in the
statement of cash flows is investing activities.
Investing means investing in the
productive capacity of the business,
buying machines, buying land, buying buildings,
those are investing activities.
In contrast to operating activities,
which happen every single day,
investing activities happen occasionally.
You don't buy land and buildings every
single day, you do that on occasion.
Operating activities, again, are things
that a business does every day.
Investing activities, investing in
the productive capacity of the business,
that happens occasionally.
Now, the third category in the
statement of cash flows is financing activities
and this exactly what it sounds like,
financing, borrowing money, repaying
those loans, getting cash from investors,
paying dividends to investors,
getting the capital or financing
to buy those assets that a business needs.
Now, a way to think of the statement of cash flows
is this, with financing activities,
I'm getting the financing, the capital,
to buy the assets, those are the
investing activities to then conduct
the operations, the operating activities.
These are the things that a business does.
The statement of cash flows is built around
operating, investing, and financing activities.
Let's look at examples of the
year end statement of cash flows
for three companies about what you've heard,
Coca-Cola, ExxonMobil, and Walmart.
Now the first thing I want you
to look at is the statement of cash flows
for ExxonMobil, particularly look
at their investing activities.
Billions upon billions of dollars
of investing activities.
They're constantly investing in
the productive capacity of their business.
This business needs large machines
and buildings and equipment
and lots of land and you see that
reflected in investing cash outflows for ExxonMobil.
These are often called capital expenditures or CapEx.
Now, I want you to look at the
statement of cash flows for Coca-Cola and Walmart.
We call these companies cash cows.
Turns out, Exxon is also a cash cow.
The reason we call them cash cows
is that their operations generate
more than enough cash to pay for
all their investing activities with cash left over.
They're just generating lots of cash.
Wouldn't you like to be a personal cash cow
where your daily cash flows were
enough to pay for all your cars
and houses and land and everything
else you needed to buy in cash?
That's Coca-Cola, that's Walmart and that's ExxonMobil.