In this video, we're going to apply what we learned about the cash flow statement to a real world set of financial statements. Our company is a large, US-based multinational whose main focus is in consumer goods. So we're going to take a look at all three sections of the cash flow statement and try to emphasize what we can learn by looking at the individual lines and how to interpret them. So, the cash flow statement, remember, reconciles the change in the cash account on the balance sheet. It starts with the beginning balance and shows why the ending balance is different than that and how much of that is due to operating, investing, and financing activities. If we look at the subtotals for each of those sections, we see, first of all, operating cash flow is positive in each of the years. And in fact, it's 14,873 in the most recent year. The operating cash flow is large enough to more than cover the amount that the company is spending on investing activities in each year. In the most recent year, that was only 6,295. So, operations more than covers investment, which leaves money left over for other things. And if we look down in the financing section, we can see that they're actually spending money to return funds to investors. These characteristics, large positive cash from operations, big enough to fund investments with money left over to return to investors is consistent with the characteristics of mature profitable companies. So let's take a look at each of the three sections now individually. Let's start with the cash from investing section. First of all, note that it's a negative number overall, which means that we're spending money. The money that we're spending now, hopefully, is going to generate cash from operations in the future. The cash flow statement not only tells us how much we're investing, but it also tells us what type of investments we're making. Note that the biggest line item here is cash associated with capital expenditures or CapEx. These are usually investments in property plan and equipment. We also see that the company makes acquisitions. There's a separate line item for those. And in fact, at the most recent year, their acquisition activity has picked up quite a bit. We can also see that the company is investing in financial securities as well, especially in this most recent year. The middle year, 2xx2, is the year where the investing cash flows are the lowest. And if we look at that in more detail, it's not actually because they invested in new things less, it's because they sold off some old things more. Remember that the investing section of the cash flow statement not only shows how much you're paying to invest, it also shows how much you receive when you sell off some of those investments. Now, remember that the investing section of the cash flow statement only shows cash investments. If we were to have made an acquisition, say, by issuing shares, we wouldn't see that in the cash flow statement. The footnotes would tell us about all of our acquisition activity, but the cash flow statement only talks about the cash part. Similarly, a cash flow statement in the US is not going to show R&D activities or advertising activities in the investing section either. US GAAP doesn't consider those to be assets. It expenses those on the income statement. And similarly, they show up as subtractions in the operating section of the cash flow statement. If you wanted to view these as investing activities for purposes of your own analysis, you would be free to move them down, but the statements themselves don't do that. Now let's turn to the financing section. A negative number, remember, means we're paying cash to our stakeholders. This is common in mature profitable companies. You're taking money that they gave you in the past and now returning it to them, hopefully, with some interest or dividends or those kinds of things as well. In contrast, young growing companies would be showing positive cash from financing activities. They're getting money from investors, not actually paying it back. Well, which type of investors are we paying money to? If we take a look at the individual line items, we see that dividends are big and also, they're buying back a lot of their own stock. That's the treasury stock line item. If they're buying back their own stock, chances are, shares are going down. So if dividends are going up, but shares are going down, dividends per share must be going up quite a bit. The share repurchases or the treasury stock transactions are a very popular type of transaction these days. Many activist groups are trying to push management to return more cash to shareholders. Their concern is that management has a natural incentive to hold on to too much cash and maybe is investing in things that aren't as profitable as shareholders could do on their own. So, now on to cash from operations. As we've mentioned, this is the most complicated section of the cash flow statement. It starts with net earnings, in this case, earnings from continuing operations, and then makes a long series of adjustments to get to cash from operations. Note that the very first adjustment is an addition for depreciation and amortization. So, in which year did depreciation add the most cash? Well, it might be tempting to say, the middle year, 2xx2, because that's the year we see the biggest plus for depreciation. But remember, depreciation does not add cash. This plus on the cash flow statement is merely designed to offset the minus that's associated with the calculation of net income where we're subtracting depreciation expense their. Depreciation is an expense in the income statement, but it's not a cash outflow. So this add back adjust sit out. A similar type of thing is how we would interpret the addition on the cash flow statement associated with goodwill impairment charges. When we impaired goodwill or write it down, that's an expense on the income statement, but it's not a cash outflow. So if it's a subtraction on the income statement but is not a cash outflow, we have to add it back on the cash flow statement. The subtraction in income and the add back in the adjustments exactly offset each other and we get to zero net cash outflow. Now, many people take a look at a non-cash charge like this, which is then added back on the cash flow statement, and say, "If it's not cash, it's not important." You have to be careful about those kinds of statements. When we write down an asset, even though we're not paying cash when that happens, implicitly, what we're saying is, we don't expect this asset to yield as much benefits in the future. So we're not saying current cash is lower. We're actually saying future cash is going to be lower, and that is important to know about. Amongst the many other adjustments we see in the operating section are two that should look familiar. One is a subtraction for the change in receivables. When we see a subtraction, that's saying that what's up in the income statement is too high relative to what we actually received in terms of cash. In particular, in the most recent year, we see the adjustment is 415. We're saying we made sales that were 415 higher than what we collected in cash. So the cash flow statement has to adjust the sales number, which is implicitly in the income statement number that we're starting with, downward by that amount to reflect the amount of cash that we actually got. There is a similar adjustment, but in the opposite direction associated with payables, a plus 1,253. That's saying that in income, we subtracted some expenses that we haven't paid yet. And the adjustment for payables is offsetting some of that expense to again reconcile income to cash from operations. So the cash flow statement for a real company tends to be fairly long and complicated looking, but don't be too intimidated by it. Take your time and try to take a look at the individual line items so that you can figure out what's going on. Overall, we see that cash from operations was positive. In fact, it was big enough to fund all of the company's investing activities with enough money left over to be able to return some funds to stakeholders as well, in particular, to shareholders. This is consistent with the characteristics of a large and mature profitable company.
