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Principles of finance ah la shmoop What is cash flow

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Well it's cash that flows from your company hopefully in

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gushers But why would you calculate cashflow separately from earnings

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Well because often they are very different That is a

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given company might have this year spent a load of

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cash buying a new factory It's cash will have flowed

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the outward you know in the wrong direction from what

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you want it or it's three years later And the

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company is depreciating the value of that factory for which

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it paid a boatload of cash in a previous year

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So it still has to show noncash losses on its

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income statement or its earnings Got it So you're going

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to depreciate the downright ing of the value of that

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factory but they cash flow from the company in that

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year set of earnings is solid That is ah company

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showing earnings of one hundred million dollars might have depreciated

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forty million dollars that year in factory depreciation expenses that

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were non cash So that company may have actually had

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cash flow in excess of their earnings like one hundred

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forty million dollars instead of one hundred So you have

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to track cash flow as another indicator of company profitability

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or really risk getting lost And there is in place

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a standard format for the manner in which company's cash

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flows give reported In essence there are three sub totaled

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reports that comprise cash flow You start with cash from

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operations basically that's just starting with net income and then

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adding back depreciation amortization After cash from ops you calculate

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cash generated or sucked away from infesting activities Right Like

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if you bought a new tractor smelting plant you spent

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cash it was sucked away If you sold forty thousand

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acres you realized you didn't really need any more Because

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you're outsourcing your plutonium dumping that china will Then you

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generated cash And finally your third section is cash flows

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from financing activities So if you you know bought back

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your own stock than you consumed cash from that financing

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activity poor if you raised money in an ai po

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or a secondary offering while you generated cash from that

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financing activity got it all right Normal income statement earnings

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are rough ported on an accrual basis That is they

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include placeholders for the decline in value of that tract

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Or smelting factory that you will someday have to replace

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But reducing the value of that factory by twelve million

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dollars a year for twenty years on your books is

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a non cash charge It's van tum Until you you

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don't have to go a cash to go build a

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new one then it's not so phantom but the world

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changes fast especially in the land of technology and a

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lot of things that accountants thought would die in five

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years which costs five million dollars To start could be

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replaced bigger better faster stronger five years after they were

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purchased for like one tenth of the price of which

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they were being advertised away like think about how much

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computers used to cost versus you know what an iphone

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is today so paying attention to the actual thing that's 00:03:13.918 --> [endTime] being advertised or depreciated is key here Oh no

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