Hello, welcome to this lecture today My name is Justin light from thick numbers. And in this lecture we're going to be talking about the statement of cash flows. And so what the statement of cash flows is, it's actually a statement, it shows the movement and use of cash over a period of time. And this is very different from a profit and loss statement, in that the profit loss statement is actually measuring it is measuring performance over a period of time. But it looks at the accrual accounting process around items that haven't actually been collected in cash or paid out in cash, things like depreciation, things like accrued costs and accrued revenues. So therefore, the actual cash flow will be a different story than what the profit loss is telling us.
Because the cash flow is actually looking just purely at cash movements. And so really what this is actually telling us it's actually a story The statement of cash flows tells us a story from how do we get from point A to point B. Now, if we were just to take a year on a movement of cash, and we would see that it's gone up by $100,000. That's great. However, what is the story in between what has actually happened along the way, in that the ups and the downs and what we've actually spent our money on. And to be honest, if we were just to look at all the numbers as one big movement like this, there's not going to tell us a very good story is it.
So what we actually end up doing with cash flow statements is we actually classify them all of the cash flows into three different categories, operating, investing and financing. And so what this means is operating activities are all to do with the day to day operations of what the business is actually doing. So if you're in the business of selling fruits and vegetables, the operating activities will be cash flows to do with the business of selling fruit and vegetables. As an example, now for investing activities, this is all got to do with what is the business actually investing in, in terms of any fixed asset, property, plant equipment, intangibles, or any kind of business investments in other subsidiaries, where that you get actually get a return. Now, this is actually quite unique to the individual business. And it's got nothing to do with the operations of what the business is actually doing.
It's all got to do with what the business is investing in. Now you could have a dozen different businesses in same industry, but the amount of investment they make will be very unique to that business and to the shareholders of what decision they want to make to invest in that business. And it's got nothing to do with the core business. Like if you're in the business of selling fruit and vegetables. So it's nothing to do with that business. It's got to do with the actual management and investors of what they're actually investing in.
Now, finally, financing activities is all got to do with how the business is funded, in terms of whether it's through debt or equity and So a lot of this is looking at what loans you're taking out from financial institutions. And in terms of the cash inflows of new loans coming in and new borrowings, as well as cash going out to repay some of the loans. And it could also be looking at equity raising. So if you've raised equity by doing an IPO, or you've got a new investor on board, and you've actually then raised some capital, this is where this is the part of the statement, which will actually show that level of equity increase or decrease. And if you were to buy back some of the shares, or some of the shareholders were selling out, and there was a cash outflow to pay up that shareholder.
This is also the place of where the financing activities would be. And so really, what a statement of cash flow is doing it then it's breaking into three categories. So we can really segregate and tell a story about how the business is performing in terms of its cash flows from three different perspectives and just remember, operating to do with the operational part of business investing is got to do with what the business is. Investing in. And financing is how the business is funded. So as an example, let's say that this is the story about what's happened throughout the period of time to get from A to B, however, it doesn't really make a lot of sense.
So what we end up doing is, we end up classifying all the different cash flows throughout the business into different categories. And by then grouping them together into different categories based on definitions, then we can actually, for example, identify that all of these are the operating activities, and therefore we can understand the cash inflows and outflows of your prior activities. Now, some examples of this when you collect cash from customers. So this has got to do with actually looking at how much cash customers are painted. Then you've got cash paid to suppliers, and employees, as again, this is a different type of cash flows and cash outflow about the payments we make to our supplies and any wages and salaries. We to employees.
There's also some items about tax as well as interest paid that also looked at within operating activities. And some are breaking it into these different categories we can see to run this business as a core business. What is it? What are cash flows? It's not necessarily what is it costing us because remember, the profit loss will show us the true costs around accrual accounting. But this is purely from a cash flow perspective.
And if you've got strong operating cash flows, that's the most healthiest sign that the business is in good shape. Because at the end of the day, you want a business that is a cash cow that can generate really good cash. However, if you've got a business that's actually making really good profits, and really good revenues, but they're not actually able to collect the cash off their customers, and they're always in negative operating cash flow is a really bad sign that the business is in a lot of trouble. So cash flow is extremely important. You can then identify then a couple of these activities are actually investing activities. Now the way you actually determine In the investing activities is you actually look at all of the non current assets on the balance sheet.
And it's really that the movement between those non current asset accounts. And what you're actually looking for is any kind of acquisitions of property, plant and equipment, or acquisitions of intangibles. And if you sell any of those assets, likewise, any disposal and proceeds when you sell the asset, which is cash inflows into the business because when you sell an asset, you actually get money in. However, when you purchase the asset, you actually is a cash outflow. So it's a negative impact on your cash. Now, just going back one, one step for a second, when we actually just go back to operate activities for a second now, the way you actually determine the cash flows, is you actually look at the profit and loss and you actually look at the movement within all of the current asset and current liability accounts.
And so, by looking through each account, whether it's trade trade receivables, You can actually look and see what cash has actually been collected from customers by looking at your accounts receivable account. You can look at any cash outflows through your accounts payable, as well as any pre payments and any kind of accrued costs where you've actually made the payment, which is a cash outflow. So these are current assets, current liabilities, investing is the non current assets. And finally, financing activities. Let's say that we identify that these two items are actually financing activities, the finance activities, you need to look at your non current liability accounts, as well as the equity accounts of share capital. And so by looking through what is actually transacting through those accounts, you will actually determine your financing activities.
So if we see any net increases in borrowings, then we know that we've taken out new loans, if we've if we see that we've actually made some payments back to pay back the loan. Likewise, we can separate that into a separate category and report that is fine activity. And so really, it's about looking at all of your movements throughout the period of cash from opening balance of cash to closing balance, and then actually classifying them into categories so that we've got some numbers that actually tell us a story about how business is performing operationally. What are what are businesses investing in or what assets were selling, and finally, how the business is funded. And this is really looking at three different lenses of business performance. So that's it about cash flows, we're not actually going to go into the scope of creating cash flow within this course.
There's another whole course that we could probably do just on that topic alone. But this is really just an introduction so you can understand what cash flows are. And we'll leave it at that for today. We'll see you in the next lecture.