In this video, we're going to continue to follow our startup company through its initial set of financial statements. In particular, we're going to focus on the construction of the cash flow statement. We're going to look at the direct method for presenting the cash flow statement. And while this isn't very common in real world financial statements, it'll provide a good introduction to the indirect method which we'll be doing in a future video. So, the key thing under the direct method is, to first of all go back through all the transactions that occurred during the year and figure out which ones involved cash. So, if we go back to our company, these are the transactions that involved cash, and we've listed how much cash was involved in each of the particular activities. The next step is to go into each one and simply classify it as operating, investing, or financing. And so that's what we're going to do next. So, the first one was the company issued shares and got $60,000. Well, that clearly is a financing activity. So, we'll put it in that category. Next, the company used some of that money to buy plant. Well, that's going to be an investing activity. It's a negative number because that one is an outflow whereas the first one was an inflow. They bought some inventory on credit, So, that's not a cash flow so that's not on our list here. But then, they sold some of that inventory for cash. That is a cash flow, So, it does show up on the cash flow statement. Okay, $8,000 and that would be an operating activity. Next, the company paid the supplier for some of its credit purchase from before, now it's cash. Now, it's in the cash flow statement. Okay, this is an operating activity as well. The company made another sale, some of it was for cash, some of it was on credit. Only the cash part shows up in the cash flow statement. The credit part isn't in the cash flow statement because it's not cash. What category? Well, it would be in the operating section. Then, the company actually collected on some of the credit part. Now, it's in the cash flow statement, operating as well. And then, last but not least the company paid a dividend. A dividend is going to be a financing activity. And so that's going to show up down in the financing section of the cash flow statement. We can add up all of the different cash flows within each category, Okay, to get the overall cash from operations, cash from investing, and cash from financing activities and then put them together. Okay, the format of the cash flow statement would look something like this. In our cash from operations which was negative 1,000, we would show positive inflows, cash collected from customers, and then negative flows for the amounts that we're paying the suppliers. We also spent 50,000 to buy property plant and equipment, and had two different transactions down in the financing section, issuing some shares and then, paying a dividend. So, overall we would see the following from looking at our cash flow statement, We raised a lot of cash from financing activities, in particular, by issuing common stock. We used a lot of this cash to invest, in particular, buying property plant and equipment. Operations were a drain on cash of $1,000. But remember, income was positive 8,700. So, there's a difference between income and cash from operations here. Unfortunately the cash flow statement by itself doesn't explain much about why that is. Although, clearly it has something to do with the fact that not all the sales were cash sales, some of them were credit sales. We'll see under the indirect method, we're actually going to get more information about why income and cash from operations are different. Now, these characteristics, big inflow from financing activities mostly used for investing activities and cash from operations as negative, are very common characteristics in startup companies. The dividend that we saw probably not a good business decision at this point but it's there simply for illustrative purposes. In a future video we're going to redo the cash flow statement and do it under the indirect method, and then we're going to see how that's going to look different.
