[MUSIC] Now lets take a look at the cash flow statement for the year X2. First, we see that the changing cash is kind of small. Just 1,000 Euros positive, and if you look at the different sorts of cash flows, you see that the cash flow from operations is also small. Despite the fact that the profit, remember, was more than 7,000 Euros. Actually, the cash flow from operations is so small that it's not enough to finance the investments that the company's making. As you see here, the cash flow from investing activities is -19,000 Euros. But, we also have to say that one of these investment is a sort of discretionary investment in the stock of Apple that is not a necessary investment and therefore, at any point in time Christina can sell this stock and get the cash for other purposes. So, I wouldn't be too concerned about this, at the moment. Finally, we see that the cash flow from financing is positive, and actually, this is typical of companies that are starting, they need all the cash flow from financing. Why? Because the operations are not generating cash yet, and because they need to make a lot of investments in the beginning of the company. And so, with this cash flow from financing, we have enough to cover the investments that we need, and the overall effect in cash, is an increase in 1,000 Euros. An interesting thing now, is to compare profitability and liquidity. Remember that all the time, we are talking about for each transaction about the profitability and liquidity. Well, here you see that there is a difference, right? That all these differences that we have been pointing out during all the accounting for the transactions now show here on the income statement and the cash flow statement. So we have the positive profit of 7,140 Euros, and then we had that the cash only increase by 1,000. So why is that? So, the first thing that we see here to explain the difference between profit and cash is that sales are much bigger than the cash collections from customers. And so the first thing that we see here to explain the difference between profit and the changing cash is that sales, that we see in the income statement, are higher than the cash collected from customers. That's the case because not all of the credit sales have been collected. So if sales have not been collected, you're going to show probably, on the balance sheet under accounts receivable. Other differences that you see here. Because of the good sale it's just 148,000 Euros, but the payments to suppliers are much higher. This could be because we are purchasing more books than we are selling, and also because we are paying earlier to our suppliers. Any case, as you see here, it's not easy to see these differences. So the method that we have been using here, for the cash flow statement, is the direct method. In the direct method, the only thing we do is to take all the cash inflows and outflows from the T account and classify them under cash flow from operations, cash flow from investing, and the cash flow from financing activities. There is an alternative method to prepare and present the cash flow statement, it's called indirect method. In the indirect method, what we do is a reconciliation between the net profit that we have in the income statement, and the cash flow from operations. Now, the rest of the indirect method is the same as the direct method. So the cash flow from investing and cash flow from financing are estimated, are calculated, in the same way. The cash flow statement using indirect method, goes beyond the scope of this course, however if you read the technical note we had for today, assigned to this session, you're going to learn about it. The cash flow statement prepared with indirect method goes beyond the scope of this course, however, if you want to learn more about it, you only have to read the technical note that we had to sign for this week. Great! So, we are done with the preparation of the three main financial statements? The balance sheet, the income statement, and the cash flow statement. Now in the next video, I'm going going to do a quick recap of these three week. [MUSIC]
