- The third primary financial statement
is the statement of cash flows.
The statement of cash flows is the baby
of the financial statements.
The balance sheet and the income statement,
they've been around for over 500 years.
The statement of cash flows, about 30 years.
Now, the statement of cash flows is just what its name says,
it's a statement of cash flows.
The statement contains a report of cash in
and cash out separated into three categories,
operating activities, investing activities,
and financing activities.
Now, operating activities are those things
that a company does every single day,
collecting cash from customers, paying cash to employees,
paying cash for rent, paying cash for utilities.
Investing activities involve investing
in the productive capacity of the business.
Investing activities are things that you do occasionally.
Occasionally you invest
in the productive capacity of the business.
You buy new buildings, you buy new machines,
and occasionally you sell old buildings
and you sell old machines.
Now, financing activities are the activities needed
to get money necessary to buy assets
and to maintain operations.
And obviously, in a course in finance, financing activities
are going to prove to be very important.
Cash comes in from financing activities
through borrowing money
and getting new investments from shareholders.
Cash goes out for financing activities
through paying dividends to shareholders, repaying loans,
and perhaps through buying back shares from shareholders.
So let's look at a real cash flow statement.
This is for Walmart for the year end of January 31st, 2018.
When you look at a statement of cash flows,
the first number you should look at
is cash from operating activities.
This is the amount of cash generated
through the things that the company does every single day.
For the year end of January 31st, 2018,
Walmart's operations generated cash of $28 billion.
Now, what's the first thing
that Walmart should do with that cash?
Walmart needs to spend money to maintain
and perhaps expand its productive capacity.
So a key Walmart investing activity is spending cash
to buy new land, to buy new buildings,
to buy new equipment, and to buy new trucks.
This is called capital expenditures, or CAPEX.
Now, during the year end of January 31st, 2018,
Walmart spent $10 billion on these capital expenditures.
From operations, Walmart generated over $28 billion.
Of that amount, $10 billion had to be used
to buy new land, buildings, and equipment.
The remaining $18 billion is called free cash flow.
Free cash flow is a very interesting name
because the name tells you exactly what it is.
It is the cash that the company is free to use
in whatever way they deem desirable.
The amount of free cash flow
represents a company's financial flexibility.
So what did Walmart do with its free cash flow?
We can see that in the financing activities section
of the statement of cash flows.
Here, you see that Walmart received some cash from new loans
and used $13 billion dollars in cash
to repay some old loans.
Walmart also paid $6 billion
in dividends to its shareholders.
Walmart generated so much surplus cash during the year
that the company actually used $8 billion of company cash
to buy back shares of stock from its shareholders.
Remember that the key number in the statement of cash flows
is cash from operating activities,
in the case of Walmart, $28 billion.
If a company is generating positive cash
from their operating activities,
the things that they do every single day,
that's a good sign.
If that number is negative,
well, it turns out there are some problems.
So the third primary financial statement
is the statement of cash flows,
the amount of cash in and the amount of cash out
for a certain period of time in a company's operating,
investing, and financing activities.