Hi, and welcome to part seven:
The Statement of Cash Flows
in this HSTalks lecture series
on Analyzing Financial Statements.
My name is David Bond.
There's no question
in relation to accountants.
I'd call it a joke,
but accountants don't really do jokes,
what do you get
if you ask an accountant what 2+2=?
Whatever you want it to be.
And I don't think
that's particularly fair
or potentially even funny,
but I can also understand
why many people think like this.
If you've been watching some
of the earlier videos in this series,
I'm sure you do as well.
You only have to look at depreciation
which we covered in part five.
depreciation makes a lot of sense,
and there's good reason it gets included
in the income statement.
But to calculate it, it does require
number of subjective decisions.
And once it's subjective,
people tend to believe it less,
and that's often why cash
seems to be preferred to profit.
Even then why the need
for a statement of cash flows?
All we need to do
is to turn to the balance sheet
and we can see the opening
and closing cash amounts.
For example, if we turn
to Qantas's 2016 balance sheet,
we can see they had $2.91 billion
in cash and cash equivalents.
For our purposes, we'll define cash
as physical cash
and cash in bank accounts,
but in reality, the definition
is a little broader than that
hence cash equivalents.
But their balance
at the 30th of June, 2015 was 2.91
and at the 30th of June, 2016 is 1.98.
From this, we can tell that
nearly a billion dollars
more cash has left the business
and come in
during the last financial year.
What we don't know is why.
Were they in a price war
and weren't able to generate cash
from customers as easily as previously?
Have fuel prices or wages increased?
Have they invested in CAPEX?
From the limited information here,
it's hard to know.
And this is where the statement
of cash flows comes in.
It shows the ways
in which an entity generates cash,
you know, from customers,
from selling land,
from borrowing money, or uses cash,
paying for staff and suppliers,
investing in CAPEX, paying dividends,
and arranges these inflows
in a meaningful standardized way
which allows for comparisons