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Statement of cash flows
Published on March 29, 2017 9 min
Other Talks in the Series: Analysing Financial Statements
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. Conceptually, 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, you know, paying for staff and suppliers, investing in CAPEX, paying dividends, and arranges these inflows and outflows in a meaningful standardized way which allows for comparisons across businesses.