Shadowing-Übung: FIN 2 Calculating Operating Cash Flows - Englisch Sprechen Lernen mit Video

Welcome to module one of our class in corporate finance.

And this is the very first problem, problem 118.

You can click the link in the description to download a copy of this workbook for yourself.

This problem has us looking at operating cash flows.

Now I want to explain why we're going to look at operating cash flows.

If you just want to solve the problem, probably skip ahead four or five minutes.

We'll work through the problem.

It's a, it's a very quick problem.

But I feel like at the very start of the class, we should explain like, why, why are we doing this?

So I want to discuss just the concept of cashflow and why it's so important in finance.

And that'll sort of set the table for the rest of this chapter.

So if you take a finance course, you're going to find your instructor very obsessed with cashflows.

Just about every problem we look at in a finance course in some form

or another is going to discuss the cash flows of an investment or of a company or something like this.

And it's a really important concept in finance.

And the idea is to value a company, to value an asset, to value an investment, value its cash flows.

Now, I come at this from the perspective of an accountant.

I'm an accountant.

I'm a CPA.

I'm not a CFA, so I do want to let you know that I am not a finance professional.

I'm an accounting professional, an accounting educator.

I'm making these videos because students have requested that I make them.

And so I've had to work closely with a friend and colleague who helped me develop the material.

But he's the expert, not me in any of it.

Um, in finance cashflow is a crucial concept because it's very real in accounting.

A lot of things are based on estimates and projections.

Oh, how many debts do I think are going to go bad next year?

Or how many years do I think I'm going to use this building?

They're all guesses and finance folks say, well, the realest thing you can have is money, right?

The company generates money.

They pay it to you, the shareholder and the dividend that's real

and that's something of value that's what we want to base all of our work around is the cash flow

that the company is generating not some accountants estimates that are ingrained in the profits so

what our first chapter has us doing in this course is just going from those accounting numbers

which are definitely useful in accounting to cash flow numbers

which are much more useful in finance so you'll find in most finance classes, you'll be doing calculations like this early on,

taking accounting income statements and balance sheets and moving them over into cash flow information, not cash flow statements.

That's another accounting financial statement, but cash flow information, converting accounting information into finance information

so um a few more concepts and then we'll jump into the problem

uh the first thing is just this concept of okay a

company uses its assets to generate money right it uses its assets to generate money

and what can it do with the excess money it generates well

It can use it to buy more assets and to sort of satisfy its own assets.

So it can use it all on the left side of the equation.

But if it has extra money, it will often pay money out to creditors or pay money out to shareholders or likely both.

Well, from finance perspective, we're often playing the role of creditor or stockholder, right?

We buy bonds in a company.

That's we're creditors or we can buy stocks in a company.

Then we're investors.

So we're very interested in how good the company is at using its assets to generate cash flow

because that's money that's going to come to us potentially.

So we're very interested in the cash flow of the company because,

you know, it's important to us as investors or potential investors or lenders or potential lenders.

So how do I figure out the cash flow from assets?

Well, this can get further broken down.

And this is question one of our class has us looking at operating cash flow.

We'll get to that in just a minute.

Question two, we'll look at capital spending.

Three, change in networking capital.

And these are 1-1, 1-2, 1-3.

Question 1-4 has us looking at all three of them.

So let's focus in on operating cash flow.

This is the cash flow the company generates from its day-to-day business.

So Walmart sells stuff to us.

That's their cashflow from their day-to-day business.

They pay their employees money.

Maybe they buy goods from their suppliers and they sell stuff to us, right?

Those are the operating cash flows, the main operating cash flows of a big retailer like Walmart or Home Depot.

So operating cash flow is just the company basically doing what it does to make money.

Capital spending is them buying capital assets, That's like buying a new store or buying a new equipment to go in the store.

And obviously that's one way they could use their cash flows.

And lastly, change in networking capital is a little more technical, but it's basically the short-term assets and short-term liabilities, current assets and current liabilities,

how much money they have flowing in and out of those accounts.

But this video is focused on, or this problem one-one is focused on operating cash flow.

So with the preamble out of the way, well, let's get down to business.

So we're using, we're figuring out how much money the company's day-to-day businesses generated generating.

And the starting point here is an accounting income statement.

So let's read the question and see how we do.

Stranger company has sales revenues of $30,000.

The operating expenses are 21, including depreciation of three.

Company has interest of $1,000 and the tax rate is 25%.

What's the operating cash flow?

Okay, to figure this out.

Basically, they've given us an accounting income statement.

Let's prepare that income statement.

So we have sales of $30,000.

And the income statement is the summary of revenues and expenses and take your revenues, your amount your company earned minus your expenses, your costs.

And that tells you how profitable the company was.

So let's figure out the accounting profits of this company.

Sales are 30K.

Operating expense, what is it?

21,000, but it says including depreciation of three.

I want to split out the depreciation.

It's going to become relevant later.

So our operating expenses, excluding depreciation, 21 minus 3, are $18,000.

Our depreciation expense, I'm being very shorthanded here because we're just asked to calculate something, calculate operating cash flow.

We're not asked to prepare in good form an income statement or something like that.

If they'd asked me for good format, I would, you know, spend more time on dollar signs and underlines and things like this.

But in any event, sales minus operating expenses minus depreciation is 30 minus 18 minus 3, 30 minus 21.

100

That's $9,000.

101

And that is our EBIT.

102

Now, EBIT stands for earnings before interest in tax.

103

In accounting, I would call this operating income.

104

But in a finance class, we're going to call it EBIT.

105

But we're essentially referring to the same thing there's maybe some small differences here there

106

but for all intents and purposes we're talking about the same thing uh

107

so earnings before interest in tax well then let's take away interest

108

which was a thousand to get us down to eight

109

which is our earnings before tax take away the i

110

because we we did take away the interest and that brings us down to our taxes

111

our taxes were 25 25 of 8 000 i can do

112

in my head it's 2 000 a quarter of eight is two and

113

that brings us to our bottom line our net income our

114

earnings our profits this company made six thousand dollars okay so there we have a beautiful sort of of income statement,

115

but we haven't answered the question.

116

What are the operating cash flows?

117

There are so many ways a person could calculate this.

118

I'm gonna show you the one that I've seen most commonly in finance textbooks.

119

And it says, start with EBIT and work from there.

120

So that's what we'll do.

121

We'll start from EBIT and we'll work from there um so

122

if i have my ebbet

123

which was nine thousand dollars now i need to look above ebbet

124

and below ebbet i'm going to look above ebbet

125

and i'm going to say is there anything up there

126

that should have been excluded well sales typically

127

that involves cash flow most my operating expenses involve cash flow

128

because you know so again think of walmart they sell stuff to you

129

while they get money from you

130

when you buy a bag full of stuff operating expenses they pay their employees they pay them with money

131

so that involves cash flow the one

132

that sticks out though is depreciation there's no cash flow with depreciation depreciation is called a non-cash expense

133

so it's a special expense and we're gonna deal with depreciation throughout the course

134

so it's just worth knowing okay depreciation never involves cash

135

so ebit isn't cash flow because it includes depreciation So we want to know cash, right?

136

So let's take that depreciation out of our EBIT.

137

Now, how do I take it out?

138

Well, I went 30 minus 18 minus three is nine.

139

Well, let's pretend I didn't have that.

140

It would be 30 minus 18.

141

It should be 12.

142

So this should be 12.

143

So I'm going to actually have to add back depreciation.

144

So I add depreciation of 3,000.

145

So now my subtotal is 12, right?

146

So it's, again, there's many different ways we could calculate this this is one

147

of them um okay let's look below the line we got two more expenses we got interest

148

because this is earning before interest and tax we got interest

149

and tax interest can involve cash

150

but it's not considered an operating cash flow it's not considered part of the day-to-day business of the company uh

151

and it's it's a payment out to creditors right

152

so it's something different it's a different kind of cash flow

153

taxes though are operating cash flows this two thousand dollars in

154

taxes is a two thousand dollar deduction from our cash so minus two thousand

155

equals nine plus three is 12 minus two is 10

156

that is my operating cash flow which we will abbreviate in this course as OCF.

157

So the formula is EBIT plus depreciation minus taxes.

158

Now, later in the course, we will go through so many different ways to calculate this.

159

You can really calculate OCF in myriad different ways, but it becomes a really useful and powerful number.

160

Right now, okay, you know, we're just like, we're calculating it going through like an intellectual exercise.

161

later in the class, we will use this number to do powerful things.

162

So I hope you'll stick with me because I want to do powerful things together.

163

And just, you know, if you're planning to stick with me, I hope you'll hit one of those buttons.

164

Thanks for watching.

165

Have a great day.

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See you in the next video.

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Bye-bye.

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Shadowing-Übung: FIN 2 Calculating Operating Cash Flows - Englisch Sprechen Lernen mit Video

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