In this video, learn how to identify the components of the statement of cash flows. This only deals with money that is liquid.
- The statement of cash flows or cash flow statement is the report of the amount of cash collected and cash paid. The structure of the statement of cash flows is to separate the cash flows into three categories. Operating activities are the things that you do every single day, your operations. For example, Walmart collects cash from its operating activities when it collects cash from selling items to you and me. Examples of cash outflows from operating activities are cash paid for wages, for utilities, for taxes, and for interest. The next category is investing activities. Here, the word investing means investing in the productive capacity of the business. So cash outflows from investing activities are buying new buildings, buying new land, buying new machines. The third category of cash flows is financing activities. Financing activities are just what they sound like, borrowing money and getting new investment cash from owners. Common cash outflows from financing activities are the repayment of loans and the payment of dividends to owners. Here's the cash flow statement for Walmart for the year ended January 31, 2019. When you look at a cash flow statement, the first number you should look at is cash from operating activities. Walmart's cash from operating activities for the year ended January 31, 2019 is almost $28 billion. That means that Walmart's day-to-day operations during this year generated a surplus cash of $28 billion. If the operating cash flow number is negative, that means that daily operations are actually burning cash. Often, a startup company is paying for all of expenses, but hasn't yet quite got its customers to start paying. But negative operating cash flow is not sustainable in the long term. The computation of operating cash flow starts with net income and then includes the effect of events that cause a difference between net income and operating cash flow. For example, the depreciation expense amount subtracted in computing net income is added back when reporting operating cash flow because depreciation is a non-cash expense. During the year ended January 31, 2019, Walmart paid an additional $1.311 billion to its suppliers in order to increase its supply of inventory. That additional $1.311 billion is shown as an operating cash outflow. The computation and reporting of operating cash flow is a fascinating topic all by itself. We have an entire course in the LinkedIn Library titled Running a Profitable Business: Understanding Cash Flow. All right, what are you going to use this positive operating cash flow for, this $28 billion? Well, the first thing you'll want to do is to buy some new stuff to enhance the productive capacity of your business. Maybe you've got to replace some buildings or some trucks. In the year ended January 31, 2019, Walmart spent $10 billion for new property and equipment, along with another $14 billion to buy other businesses. Let's compare the amount of cash Walmart generated from their operating activities to the amount of cash needed for its investing activities. Walmart generated $28 billion from operations and used $24 billion for investing activities. The surplus is about $4 billion. This is called being a cash cow. A cash cow is a company that generates so much cash from its day-to-day operating activities, that it can pay for all its new buildings, land, and trucks in cash and still have cash left over. The final section in the statement of cash flows is the financing activities. Here you see that Walmart received about $12 billion in cash from some new long-term loans, probably in connection with the business acquisitions mentioned in investing activities. Walmart also paid $6.5 billion in dividends. Walmart generated so much operating cash during the year that the company actually used $7 billion of surplus company cash to buy back shares of stock from its own shareholders. Remember that the key number in the statement of cash flows is cash from operating activities, almost $28 billion for Walmart. If a company is generating positive cash from their operating activities, that's a good sign. If that number is negative, there are some problems. Walmart doesn't have any cash flow problems.
- Describe line items that appear on financial statements.
- Differentiate between the three types of financial statements.
- Interpret current accounting issues and trends.
- Calculate the market capitalization of a company.
- Identify the most important expense for a retail company.
- Explain the use of common size financial statements.