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Introducing the Investing and Financing Cash Flows Sections of the Cash Flow Statement
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The next section of the cash
flow statement shows inflows and
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outflows of investments the business or
organization makes.
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This isn't limited to investments
in the day to day use of the word.
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It also can include asset purchases.
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Of course though,
this can also be stock purchases held for
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investment purposes, or
loans to third parties.
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When the company buys a stock,
you would see an outflow of cash here.
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When they sell the stock, you would
see an inflow or positive number.
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Note, I didn't say a profit or a gain,
simply inflow and outflows of cash.
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What I tend to see most often,
in the investing cash flow section,
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are asset purchases,
also known as capital expenditures,
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or purchases of PP&E.
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Sometimes people abbreviate
capital expenditures as CapEx.
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Let's look at Carnivals
investing activity section.
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You can see the first line
here is purchases of property,
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plant and equipment.
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We see a negative number or cash outflow.
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Carnival used $3,749,000,000 of
cash on these purchases in 2018.
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To be fair, cruise ships are expensive.
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Then, right below, there's a line for
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proceeds from the sales of ships, and
a positive number of 389 million.
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Note, this doesn't mean Carnival
made a profit, or gain, or
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loss from these proceeds.
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It simply means that Carnival's
sales of ships was a source for
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an inflow of 389 million in cash in 2018.
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There are a couple other line items here.
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And then we arrive at net cash
used in investing activities, or
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a 3,502,000,000 outflow of cash.
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The next section of the cash flow
statement is the financing cash flow
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section.
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This section shows all the inflows and
outflows of capital for the business, and
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can be thought of as how
the business is funded.
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At a higher level, there are basically two
buckets of funding that businesses use.
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Debt and equity.
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Typically, debt is borrowed and
includes some sort of interest payments.
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Equity is cash that's injected
into the business in exchange for
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an ownership share in that business.
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The dynamics surrounding equity and
debt funding is a major topic in finance
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that we're not gonna get
into in this course.
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That's for another day.
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Let's take a look at Carnival's
financing activities section.
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As we discussed, if the business is
raising debt, or paying back debt, it
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would show up in the financing activities
section of the cash flow statement.
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The first line says proceeds
from parentheticals,
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repayments of short-term borrowings, net.
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So it's a positive 417 million number,
which means that
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this was an inflow of cash or
a source of cash during the period.
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What do you think the net
means here though?
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Go ahead and pause the video and
think about it a bit.
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Okay, welcome back.
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The answer I was looking for is that
this net means that over this period,
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it's likely that Carnival both repaid and
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had proceeds from or
raised short-term debt.
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And the sum of those
transactions was positive.
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Next is principal repayments
of long-term debt and
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proceeds from issuance of
long-term debt is after that.
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Why are those not reported on a net basis?
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This is because these are much larger
figures that have a longer term
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impact on the business.
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Carnival is communicating more information
to the financial statement stakeholders
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by keeping these line items separate.
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So far, all of these line items
are related to debt sources of funding.
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However, the next line is dividends paid.
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Dividends are cash payments
made to shareholders,
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usually based on their share of ownership.
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So this is an outflow of cash in
the financing section of a cash
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flow statement because it's related to
the equity funding of the business.
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Next up are some line items
related to treasury stock.
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I'm not gonna get into what
that is in this course, but
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just know that it's also related to
the equity side of the business.
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After all the different line items related
to funding, activities are summed up.
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You can see a net cash used in
financing activities line item, and for
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Carnival, this was an outflow
of $1,460,000,000 in 2018.
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In the next video, we'll talk about
a few other important terms that often
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come up in the context of
the cash flow statement.
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