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  • Alright! Here we are once again at mbabullshit.com. So our topic for this video is free cash flow,

  • ok, and sometimes also known as operating cash flow, or OCF, or free cash flow, FCF,

  • alright. So, remember you can always go back to mbabullshit.com. Alright, so let’s get

  • down to it. So, the focus of this video is to know, ok, is to know how financial managers

  • prefer to use a cash flow statement, ok, instead of a net income statement which is preferred

  • by accountant, alright. Now, these two statements are very similar, but they are not exactly

  • the same, alright. So, you will see now in a while why they are not exactly the same,

  • so, yeah, also, you will also see why in order to make a cash flow statement you must first

  • make a net income statement, alright, so now, let’s get down to it. So, as you remember

  • from your accounting subject, if you did take accounting, ok, in the net income statement

  • you have to include the cash sales, meaning the sales for which you already received cash

  • plus you have to include the accrued sales. Accrued sales means the sales which you made,

  • but for which you still did not yet receive the cash, so for example, if you earn a burger

  • shop, or a car shop might be a better example for this case, alright, if you sell a car

  • today and you customer drives the car out of your showroom, that is already considered

  • a sale, ok, so even if your customer did not yet pay you in cash, alright, even if he did

  • not yet pay you in cash, ok, as soon as the sale is made, or the sale is agreed upon,

  • then it is already considered a sale, and in accounting you already write that down

  • here, ok, as part of your sales, and you include that as part of your revenue in net income

  • statement, and then also in the net income statement, ok, we have to include the cost

  • of sales, ok, and the expenses, right. So, if you bought the car and you had to pay for,

  • or you had to buy tires for the car, you had to include that as part of your cost of sales.

  • Now, in accounting you will include both the case expenses and the accrued expenses, ok,

  • what are cash expenses? Cash expenses means if you buy the tires, and you pay cash to

  • your supplier, you include that in the net income statement. However, if you buy tires

  • and you don’t pay the supplier yet, ok, alright, then those are what you call accrued

  • expenses, but you already write that down in the net income statement already here,

  • alright. Now, another main thing which we include in the net income statement is our

  • depreciation expense, ok, so maybe in a car show room, you had to pay for, I don’t know,

  • tables and chairs, and you spent $1,000 on tables and chairs, and you expect the tables

  • and chairs to be useful for five years, ok, then you can say that there is a depreciation

  • expense of $200 a year for example, ok. So, that is just an example. It could be any amount.

  • The point is you have to include depreciation expense. If you don’t fully understand depreciation,

  • then I recommend that you go back to your accounting subject, alright, and then after

  • that we compute the net income before tax, alright, so let’s try it right now. Let’s

  • say that you had state cash sales and accrued sales combined of $200. Let’s say you had

  • cost of sales, and cash expenses, and accrued expenses, and also accrued cost of sales of

  • $70, and you also had depreciation expense of $10. We now can compute the net income

  • before tax of $120, ok, so this is how much you earn before tax, and this is considered

  • your net income, so take note that this $120 some of it is in cash maybe over here, and

  • some of it might be accrued, meaning you did not get the cash yet, alright. Now, using

  • your net income before tax, you now have to compute your tax, ok, so if we assume, or

  • pretend as an example, the tax is 35%, now remember, it might be a different percentage

  • in your exam, ok, it depends on your professor, but if taxes are 35%, well then how much is

  • 35% of $120? It is $42, ok, so $42. We subtract $42 that is why it is negative. We subtract

  • $42 from $120 and now we have our net income after tax and that is $78, so here we have

  • the net income after tax, and as far as accountants are concerned, this is the most important

  • part of the net income statement, right. The reason why you make a net income statement

  • is because you want to find out your net income after tax, ok. Now, very important, now, even

  • though accountants think that this is the most important part of the net income statement,

  • ok, financial managers have a different view. Financial managers usually, or quite often,

  • do not care about this net income after tax, ok. Financial managers also like to make an

  • income statement, but the reason they make an income statement is so that they will know

  • this amount, the tax amount. Financial managers don’t care so much about this, about the

  • net income after tax. They care more about this part of the net income statement, and

  • you will see why in a short while as we go through the cash flow statement, alright,

  • so let’s do that now.

Alright! Here we are once again at mbabullshit.com. So our topic for this video is free cash flow,

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