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The Operating Cash Flows section of the Cash Flow Statement
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The first section is
the operating cash flow section,
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usually this starts with net income,
and then reconciles
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different line items to arrive at cash
provided by operating activities.
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If you remember earlier in the course, we
talked about a few items that show up on
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the P and L as either expenses or
revenue for a given period.
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But they aren't actually paid for
or collected in that period.
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That is an intrinsic aspect of accrual
accounting, and the cash flow statement,
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among other things, helps communicate
some of those timing differences between
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revenue and expense recognition and
cash inflows and outflows.
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Let's take a look at the cash flow
statement for Carnival Cruises.
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In their operating activities section,
we can see it starts with net income.
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Then, a sub-section titled
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adjustments to reconcile net income to net
cash provided by operating activities.
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The first line in that sub-section
is depreciation and amortization.
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We talked about depreciation in
the previous stages, but remember,
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it's an expense to account for
the reduction in value of an asset.
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So, there's not actually cash going out
the door with a depreciation expense.
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So, here on the cash flow statement,
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we add back the depreciation
expense to net income.
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It's a quote source of cash, which we
are adding back to our net income.
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So you see a positive number there for
2018.
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So after all the line
items in this sub-section,
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we arrive at a total figure of 5 billion,
186 million.
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Then, the next sub-section
in the statement is
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changes in operating assets and
liabilities.
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Sometimes this will be called
changes in working capital.
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Let's look at the first line, receivables.
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This is the money people owe us related
to revenue that we haven't collected yet.
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So, when there is a negative number here,
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that means the amount of money people owe
us as an account receivable has gone up.
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When a current asset goes
up from period to period,
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that's a use of cash,
it hasn't been turned into cash yet.
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When it goes down, it will be a source
of cash, same for inventories,
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think about it.
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As the amount of inventories on
your balance sheet increases,
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you are using cash to
build up that inventory.
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When it declines, you are using that
inventory to convert it into cash.
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We're starting to get into a little
more advanced accounting topics.
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So, I don't wanna get too
far ahead of ourselves.
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The main point to realize
from this is that
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whatever it says on your net income or
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net profit line doesn't mean we generated
that amount of cash over this period.
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They are often quite different.
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Looking at Carnival's operating cash
flow section, we can see that for
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the fiscal year 2018
that ends in November,
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the business had a net
profit of $3,152,000,000.
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But Carnival actually generated 5 billion,
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549 million in operating cash flow.
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So, what do they do with
that $5.5 billion in cash?
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Well, that's a great question, and we'll
look at the next sections of the cash flow
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statement in our next video to answer it.
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