[MUSIC] In this session, we will construct a cash flow statement by using an income statement for certain period and two balance sheets in the beginning and at the end of the period. This shows that these three financial statements are connected to each other. Now let's go back to PEN Company, Year 1, and I guess now you are familiar with these eight actions in year one. This is the income statement we constructed last week, and the profit before tax was $300. We already constructed the balance sheet at the end of year one, And this is on the right column on this slide. And in the beginning of the year, the company had nothing, so there are zeros, like column in the middle. As we now have an income statement and two balance sheets, we can construct the cash flow statement for PEN company in year one. To estimate the cash flow from operation, we begin with the net income, and we adjust items not related to cash, like depreciation. I told you that depreciation is a non-cash item, and they are items not shown in income statement, but they are on the balance sheet. For example, if there's an increase in inventory, it means that we paid cash to prepare for this inventory. And if there's an increase in accounts receivable, it means that we sold our products, but we have not collected cash yet, so there must be a minus for that. And if there's an increase in accounts payable, That means we haven't paid cash yet, so we should adjust it as an increase. We know that in year one, PEN Company's profit was $300 and there is a depreciation of $800. We paid $4,000 for production equipment, but at the end of the year one, we depreciated it by $800. But this is not involved with cash, and so we have to adjust that. And there is an increase in accounts receivable from 0 to $2,500 and inventory is increased by $1,000. So increase in inventory means that we paid $1,000 in cash, So this is a minus. An increase in accounts receivable means that we haven't collected $2,500 yet, but we included this when we estimated the profit, so that's a minus, $2,500. If we add up these four, the cash flow from operations is minus $2,400. The cash flow from investment is minus $4,000 because we purchased on equipment and paid $4,000 in cash. We know from financing, the cash flow was $7,000, $3,000 of investment, and $4,000 of loan. If you add all these cash flows, we get $600. And when we constructed the balance sheet, we monitored the cash flow on the first column, and at the end of year one, we got $600. So these two estimations agree. In summary, we constructed the cash flow statement from the income statement and two balance sheets.