ok, and sometimes also known as operating cash flow, or OCF, or free cash flow, FCF,

alright. So, remember you can always go back to mbabullshit.com. Alright, so let’s get

down to it. So, the focus of this video is to know, ok, is to know how financial managers

prefer to use a cash flow statement, ok, instead of a net income statement which is preferred

by accountant, alright. Now, these two statements are very similar, but they are not exactly

the same, alright. So, you will see now in a while why they are not exactly the same,

so, yeah, also, you will also see why in order to make a cash flow statement you must first

make a net income statement, alright, so now, let’s get down to it. So, as you remember

from your accounting subject, if you did take accounting, ok, in the net income statement

you have to include the cash sales, meaning the sales for which you already received cash

plus you have to include the accrued sales. Accrued sales means the sales which you made,

but for which you still did not yet receive the cash, so for example, if you earn a burger

shop, or a car shop might be a better example for this case, alright, if you sell a car

today and you customer drives the car out of your showroom, that is already considered

a sale, ok, so even if your customer did not yet pay you in cash, alright, even if he did

not yet pay you in cash, ok, as soon as the sale is made, or the sale is agreed upon,

then it is already considered a sale, and in accounting you already write that down

here, ok, as part of your sales, and you include that as part of your revenue in net income

statement, and then also in the net income statement, ok, we have to include the cost

of sales, ok, and the expenses, right. So, if you bought the car and you had to pay for,

or you had to buy tires for the car, you had to include that as part of your cost of sales.

Now, in accounting you will include both the case expenses and the accrued expenses, ok,

what are cash expenses? Cash expenses means if you buy the tires, and you pay cash to

your supplier, you include that in the net income statement. However, if you buy tires

and you don’t pay the supplier yet, ok, alright, then those are what you call accrued

expenses, but you already write that down in the net income statement already here,

alright. Now, another main thing which we include in the net income statement is our

depreciation expense, ok, so maybe in a car show room, you had to pay for, I don’t know,

tables and chairs, and you spent $1,000 on tables and chairs, and you expect the tables

and chairs to be useful for five years, ok, then you can say that there is a depreciation

expense of $200 a year for example, ok. So, that is just an example. It could be any amount.

The point is you have to include depreciation expense. If you don’t fully understand depreciation,

then I recommend that you go back to your accounting subject, alright, and then after

that we compute the net income before tax, alright, so let’s try it right now. Let’s

say that you had state cash sales and accrued sales combined of $200. Let’s say you had

cost of sales, and cash expenses, and accrued expenses, and also accrued cost of sales of

$70, and you also had depreciation expense of $10. We now can compute the net income

before tax of $120, ok, so this is how much you earn before tax, and this is considered

your net income, so take note that this $120 some of it is in cash maybe over here, and

some of it might be accrued, meaning you did not get the cash yet, alright. Now, using

your net income before tax, you now have to compute your tax, ok, so if we assume, or

pretend as an example, the tax is 35%, now remember, it might be a different percentage

in your exam, ok, it depends on your professor, but if taxes are 35%, well then how much is

35% of $120? It is $42, ok, so $42. We subtract $42 that is why it is negative. We subtract

$42 from $120 and now we have our net income after tax and that is $78, so here we have

the net income after tax, and as far as accountants are concerned, this is the most important

part of the net income statement, right. The reason why you make a net income statement

is because you want to find out your net income after tax, ok. Now, very important, now, even

though accountants think that this is the most important part of the net income statement,

ok, financial managers have a different view. Financial managers usually, or quite often,

do not care about this net income after tax, ok. Financial managers also like to make an

income statement, but the reason they make an income statement is so that they will know

this amount, the tax amount. Financial managers don’t care so much about this, about the

net income after tax. They care more about this part of the net income statement, and

you will see why in a short while as we go through the cash flow statement, alright,

so let’s do that now.