[SOUND] Hello, welcome to Financial Accounting: Advanced Topics here at University of Illinois. Today we are going to talk about cash flow statement. Here's a bit of an overview of what we're going to do today. First we are going to compare net income to cash flows. And then we will briefly discuss what kind of information we can learn form cash flow statement. And finally we are going to spend a lot of time on preparation of cash flow statements. So what is net income? Well that number that you see at the end of the income statement is net income. In other words, net income summarizes firm's revenues, expenses, gains and losses. Net income is a useful proxy for profitability. However, net income doesn't tell you anything about company's liquidity position. For example, company can be very, very profitable but it doesn't necessarily mean that company's also generating a lot of cash. If you want to learn company's liquidity position, you have to look at cash flows. And we have cash flow statement to analyze company's cash inflows and cash outflows in a systematic manner. So what kind of information we can learn from cash flow statement? First of all, by looking at cash flow statement, you can learn where cash generated and how this cash is spent within a firm. Second, by looking at cash flow statement, you can evaluate the company's operating, financing, and investing policies. Third of all, by looking at cash flow statement, you can compare net income to cash flows generated from operations so that you have an idea about company's earnings quality and I'm going to have a discussion about this soon. And finally cash flow statements help you to predict future cash flows much more precisely. Cash flow statements have three parts. The first and the most important part is cash flows from operations. Here we will see from the company's core operations how much cash is generated. The second component is cash flows from investing activities. Here we will see how much cash is spent or generated, company's investment activities and most of the time when I say investment, you should think about fixed assets. And finally, the third component is cash flow from financing activities. Here we will have an idea about company's cash generation or cash spending on financing activities. By financing I'm talking about equity issuance, dividends, and bank loans. Here is an example of a cash flow statement from Walmart at the end of year 2015. And let's first concentrate on the last box. The first number on the last box is net increase in cash and cash equivalents of 1,854. This is the amount of cash generation, net cash generation, in year 2015. The second number is cash and cash equivalents at the beginning of the year and that amount is 7,281. So we know beginning amount of cash, we know the amount of cash change within the year 2015 and if we sum them up we are going to find the last number on this box, which is cash and cash equivalents at the end of the year of 9,135. In other words, cash flow statement explains to you in detail how cash of Walmart changed between year 2014 and 2015. And this amount of cash change is 1,854. So the question here is, where is this cash exchange coming from? The first and the most important section of cash flow statement is, cash flow from operations. And that is the first box in the slide. How much is the cash flow from operations for Walmart? It is 28,564. That's a huge positive number. So Walmart generates this much of cash from its core operations, which is buying and selling groceries. Secondly, we have cash flows used in investing activities of negative because the number is in parentheses, 11,125. This is the total amount of cash used in investing activities. And thirdly, we have cash used in financing activities of again minus because it is again in parentheses, 15,071. So basically cash flow from operations, cash flow from investing activities and cash flow from financing activities will give you net cash change in the year 2015 of 1,854. Now, we are going to spend some more time on preparation of cash flow statements.
