- [Instructor] 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.
Operating activities are what companies do every single day.
They collect cash from customers.
They pay cash to buy inventory,
pay cash to employees, pay cash for rent,
for advertising, 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 cash
than it's spending on a daily basis.
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 are events
that a business does every day.
Investing activities, investing in the productive capacity
of the business happens occasionally.
Now the third category in the statement of cash flows
is financing activities
and this is 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 the assets that a business needs.
Now a way to think of the statement of cash flows is this.
A business starts with financing activities.
I'm getting the financing, the capital,
to buy the assets, 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 activities,
investing activities and financing activities.
Let's look at examples of the statement of cash flows
for three companies about which you may have heard,
Tesla, Facebook and Amazon.
Now, the first thing I want you to look at
is the statement of cash flows for Amazon.
The company generated cash from operations
of over $30 billion.
They purchased a lot of plant and equipment.
This is often called CapEx
and they paid down a lot of their long term obligations
and they still have over $10 billion left.
Not bad for them.
Now, take a look at Tesla.
We often hear in the press
about Tesla and their lack of profitability
but from a cash flow point of view,
they have certainly generated some cash.
Last year, their operations provided
over $2 billion in positive cash flows.
They then took that cash
and plowed it back into the business in the form of CapEx.
Tesla's a startup company.
It's still growing and yes,
it's operations generate just enough cash
to pay for it's investing activities but still,
it's growing.
It's investing
and therefore it's needing constant cash inflows
from the providers of capital,
from banks and from investors.
So let's look at Facebook.
They are also generating
a lot of money from their operations,
enough money to like Amazon,
buy lots of PP and E as well as pay down long term debt.
Amazon and Facebook are called cash cows.
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 generating a lot of cash.
Now, I have some bad new about the statement of cash flows.
You're going to have to say goodbye
to the statement of cash flows at this point
because most financial statement analysis
is done without cash flow ratios.
The reason for this is that the cash flow statement
is so new, it's less than 30 years old.
In contrast, the balance sheet and the income statement
are over 500 years old
so the standard financial statement
and ratio analysis formulas
don't really include financial ratios related to cash flows.
Now, don't blame me.
Don't blame my brother.
The cash flow statement is just too new.
The balance sheet, the income statement,
the statement of cash flows,
those are our three primary financial statements.
In our analysis to follow,
we'll focus on the first two,
the balance sheet and the income statement.