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  • Hi.

  • Else here.

  • And in this video, we'll be exploring the statement

  • of cash flows under ASPE.

  • The statement of cash flows is a last financial statement.

  • Although we still have the notes to the financial statements

  • to cover, they are not a statement,

  • but an important supplement to the statements.

  • Understanding the interconnection

  • between the statements is critical

  • when developing the statements.

  • In the balance sheet video, I demonstrated

  • the interconnection between the various statements using

  • slides.

  • Today, to show you a different view,

  • I'm going to use a matrix.

  • In the far left column, you see the statement name

  • and the amount that is carried to an other statement.

  • If you follow the row to your right,

  • you see which statement this amount is carried to.

  • Let's focus on just one row as an example.

  • Here you can see that the net income or net loss

  • amount from the income statement is added or deducted

  • from the opening retained earnings

  • on the statement of retained earnings.

  • In addition, it is used as the opening number for operating

  • activities in the statement of cash flows,

  • under the indirect method.

  • You can also see very quickly that the net income or net loss

  • is never used directly in the balance sheet.

  • By using a matrix, you can quickly

  • see the interconnection between different financial statements.

  • Let's go back to the full matrix and focus on the last row.

  • It shows that the cash balance from the current asset

  • section of the balance sheet is used as the closing cash

  • on the statement of cash flows.

  • If you look at the last column in the matrix,

  • you see that the two statements which

  • are interconnected with the statement of cash flows--

  • the net income or net loss from the income statement

  • and the closing cash balance from the balance sheet.

  • Consider using a matrix when you can,

  • as it's a very good visual representation

  • of the connection between the financial statements.

  • The statement of cash flows is divided into three activities--

  • operating, investing, and financing.

  • Descriptions of each of these activities

  • has already been covered in a previous video,

  • but let's just review them quickly.

  • Financing is activities that fund the company,

  • either through debt or equity.

  • Investing is activities that result from buying and selling

  • property, plant, and equipment, intangibles, or investments.

  • Operating is the activities that a company

  • does every day, selling or delivering goods or services.

  • To obtain an in-depth understanding

  • of these activities, please see my video

  • on business activities.

  • The statement of cash flows can be

  • prepared using the direct or indirect method.

  • There is no difference between the direct and indirect method

  • for both the investing and financing activities section

  • of the cash flow.

  • Under both methods, these two activities

  • are exactly the same.

  • That is not true, however, for operating activities.

  • The direct method lists the inflows and outflows

  • for each type of operating activity a company performs.

  • Cash flow categories shown include

  • cash collected from customers, cash paid to suppliers,

  • and cash paid to employees, just to list a few.

  • This method is considered more informative for stakeholders

  • and their decision making, because it clearly

  • shows the sources and uses of cash from operations.

  • The indirect method focuses on the differences

  • between net income under accrue accounting and cash

  • from operating activities under cash accounting.

  • It starts with net income and adjusts for non-cash items,

  • such as adding back depreciation expense

  • or deducting a decrease in accounts payable.

  • The indirect method is more difficult for users

  • to understand.

  • But that does not stop approximately 98%

  • of all US, European, and Canadian companies

  • from using the indirect method to calculate cash flows

  • from operating activities.

  • Why?

  • Because it is easier and less costly to prepare.

  • Are there any benefits for stakeholders

  • who use the statement of cash flows to assess a business?

  • Yes.

  • One benefit for stakeholders is that the indirect method may

  • highlight earnings management.

  • How?

  • By highlighting the difference between net income and cash

  • flows from operations.

  • We will further explore this concept

  • when we cover the development of cash flow

  • statements in a later video.

  • Considering the popularity of the indirect method

  • for the development of the statement of cash flows,

  • we'll be using the statement of cash

  • flows indirect method for purposes of these videos.

  • I will, however, also quickly show

  • you the direct method for comparison purposes.

  • Let's do a quick check of your understanding so far.

  • The payment of interest on a long-term loan is considered--

  • the answer is definitely not D. All cash outflows are included

  • on the statement of cash flows.

  • The answer is not B, investing activities.

  • Debt is never part of investments.

  • The answer is not C either.

  • Even though debt is part of financing activities,

  • interest paid on debt is on the income statement,

  • as an expense.

  • An income statement is the accrual accounting view

  • of the operating activities.

  • ASPE requires that it remain as part of operating activities.

  • The answer is therefore A, an operating activity.

  • An in-depth explanation of this will

  • be provided in a future video.

  • Now that we understand the activities that

  • make up the statement of cash flows,

  • we can look at an example.

  • Note that this statement is so large

  • that I've divided it into two slides,

  • so that you can see each activity better.

  • But the statement is actually one statement,

  • with the three activities listed immediately after each other.

  • Although I have set up the statement in columns

  • for easy viewing, the accounts can all

  • be listed in one column and the amounts in another.

  • As always, the statement starts with a heading,

  • which must include the company name,

  • the title of the financial statement,

  • and the period of time covered.

  • Note, similar to the income statement and the statement

  • of retained earnings, this statement

  • is for a period of time, most commonly one year.

  • The statement opens with the heading for operating

  • activities and then starts with net income

  • from the income statement.

  • All the other amounts are reconciling

  • items between net income from the income statement, which,

  • remember, uses accrual accounting,

  • and the cash flow from operations,

  • which uses cash accounting.

  • These items are known as non-cash items.

  • This includes things such as depreciation and the change

  • in current assets and liability accounts

  • from the balance sheet.

  • Again, an in-depth explanation of these adjustments

  • will be made in a future video.

  • For now, what's important is to simply understand

  • the structure of the statement and why

  • it is required under ASPE.

  • At the bottom of this section, we

  • see that operating activities resulted in a net cash

  • inflow of $21,400.

  • Investing activities are next.

  • You'll note there's a net cash outflow

  • of $7,500 due to the purchase of both equipment and investments.

  • A cash outflow from investing activities

  • is not unusual, because it means that the business is investing

  • in the future ability to generate revenue.

  • And that's a positive thing for investors and creditors.

  • Finally, let's look at the financing activities.

  • Here, we see that the owners of the business

  • contributed more cash to the business

  • and that the business paid down some of their debt.

  • We can also see that the business paid out dividends

  • to the owners.

  • This ties into the $2,500 we saw in the statement

  • of retained earnings as a dividend paid during the year.

  • A subtotal of the financing activities is then seen.