How to read a cash flow statement: Alphabet Inc case study

[@TheFinanceStoryteller]

Enjoyed this video? Then subscribe to the channel right now, and watch the related videos on how to read the income statement and the balance sheet: kzbin.info/www/bejne/iqCoXqKdnLacp7M

[@buffsurfer]

Hello, I'd like to thank you for all these videos. Very very useful and helpful. Please go ahead and make more videos. All the best and Thanks

[@TheFinanceStoryteller]

@@buffsurfer Thank you for the kind words!!! More videos coming.

[@Atsutane77]

Bright and logical breakdown with mentioning why line items from NIS must be added back. 👍 Hartelijk Dank!

[@TheFinanceStoryteller]

Graag gedaan! The cash flow statement takes some time to fully understand, but once you "get it", it can be one of the most insightful financial statements to review. Here are a few more cash flow statement examples of real world companies: kzbin.info/www/bejne/o4ulm6Z_jtd_rK8&pp=gAQBiAQB And free cash flow is the key variable that goes into discounted cash flow analysis, so it's important to know how that gets linked to (attempts at) valuation: kzbin.info/www/bejne/jZbdZ5JnYp6Kn7c

[@kennethbeard5553]

Philip, at about 3:40 you mention that most companies use the "indirect method" of Cash Flow reporting. Could you please comment briefly on this? What alternatives exist, how do they work, are there advantages / disadvantages and does is make a material difference as they should all always "balance back"? This topic of Cash Flow has always been more challenging to follow but your structured approach with clear explanation and supporting slides really make it easier to follow. I am analyzing a company of interest to test my comprehension of the application of this knowledge as well as learn about this company so I did the hi-level Cash Flow walk and it worked. In my example there were small absolute differences but I recognized that they corresponded to two line items (for adjustments "in assets accordance with IFRS5" which helped me to reconcile perfectly.

[@TheFinanceStoryteller]

Guess what? I have made videos on that. ;-) Direct method versus indirect method cash flow reporting: kzbin.info/www/bejne/eqqZmo2bltB_h5Y An example of the only US company that I know of that uses direct method cash flow reporting (CVS Health): kzbin.info/www/bejne/omGXhnaKfqekna8 Enjoy!

[@kennethbeard5553]

Thanks I watched and it explained what I needed to know. At least for the time being. Exploring the analysis of FS is like burrowing down a hole - it seems to be a never ending journey.

[@TheFinanceStoryteller]

Agree! Welcome to the club. ;-)

[@kirthikraja6889]

Great video. Though I had to watch this video twice for better understanding finally I got good content.

[@TheFinanceStoryteller]

Thanks for the feedback, Kirthik! I agree that I might be trying to cover too much in one video, but once I am in the flow I sometimes can't stop it. ;-)

[@SabinTee]

so glad i found your channel, everything is super helpful for my accounting classes

[@TheFinanceStoryteller]

Thank you, Sabin! Happy to hear that. Let me know if there are any topics that you think are missing so far on my channel, I am planning to make a lot of new content this year.

[@SpirosBanosOpenYourMind]

Amazing work, well done!!!

[@TheFinanceStoryteller]

Thank you for the kind words!!! Lots more finance case studies (cash flow statement and other financial statements) in this playlist: kzbin.info/www/bejne/hnqciWiPl8qelac

[@shivkuma100]

Is repurchases of capital stock returning money to shareholders (i thought that was treasury stock)? If not - what is it trying to achieve? Something to do with stock options ? But there is another line item there above it on stock based compensation...

[@TheFinanceStoryteller]

Yes, "repurchases of capital stock" is the term used in the cash flow statement for share buybacks during a period. This is seen as returning money to shareholders, as it decreases the number of publicly tradable shares, and should therefore make the remaining shares more scarce and valuable. "Treasury stock" is a balance sheet term of how many shares at a certain date (normally, the end of a quarter, or end of a year) have a status of having been repurchased but not reissued. Here's the link to my Treasury Stock Example video: kzbin.info/www/bejne/oZ-qfKOEbtiMn9k The line item on stock based compensation is indeed related to stock options and stock grants. The notes to the financial statements of Alphabet Inc should be able to give you more information on what is behind this number.

[@shivkuma100]

Thank you! Appreciate the reply... And awesome videos!

[@TheFinanceStoryteller]

You're welcome! Please spread the word. ;-)

[@Erez.Levi.Stocks]

Hello Philip. you said the commission fine record at income statement as expense but still not pay so it positive in accrued expenses. what happen when google pay this fine ? i believe if i understand right from you that in the CFOA we record outflow but what will happen in the income statement ? thanks

[@TheFinanceStoryteller]

Hello Erez! For 2017 CFOA, the $2.9B European Commission fine is "neutral". The cost has been recorded, but it has not been paid yet. Its effect is reflected in two lines in CFOA: the $12.7B in Net Income (which is lower due to the fine), and in the line "change in accrued expenses and other liabilities" (which is higher due to the fine). In other words, the effect on 2017 CFOA is zero, as these lines offset each other. The best way to analyze this is to think through the accounting journal entries, and figure out whether they are on the income statement or the balance sheet. In 2017 the company records: Debit EC fine expense (income statement) Credit accrued liabilities (balance sheet) In other words: reflected as an expense in the income statement, shown as a liability on the balance sheet, but no cash outflow in the cash flow statement (the cash account on the balance sheet is not affected). When the fine gets paid, this will happen: Debit accrued liabilities (balance sheet) Credit cash (balance sheet) In other words: no effect on the income statement (no "new" expense to be booked), but an effect on cash flow (CFOA) which is reflected as a cash outflow due to a decrease in accrued liabilities. On the balance sheet, both the assets and liabilities decrease, the balance sheet becomes "shorter". Hope this makes sense! As I am leading you down the path of learning about accounting journal entries, maybe my video on accruals can help a bit kzbin.info/www/bejne/onPZn4adfqyJpLc Or if you would like to get a bigger picture on what is called "adjusting entries" (dealing with timing differences between revenue and expenses on one side and cash settlements on the other side): kzbin.info/www/bejne/a2imhIdslLenjc0

[@Erez.Levi.Stocks]

@@TheFinanceStoryteller yes of course it make sense , thanks a lot. I wanted to ask and recommend you in case you have little time to make a video about the company you acquired and it went bankrupt. I like to hear about successes but I prefer to hear about failures and learn from them. What made you buy shares in a bankrupt company? How did you not recognize it was coming? or anything else. If it allows you it will be very interesting, thank you

[@TheFinanceStoryteller]

Not sure whether I will make videos about the topic, but here are some examples of companies I invested in that were in bad shape at the time of buying the shares: a luxury car manufacturer (always boasting about how things were going to be great), a mid-sized American bank (hoping it would recover or be bailed out by the government), an engineering installation company (trying to recover from a huge fraud). At the moment I bought the shares in the respective companies, I hoped that they had hit the "bottom" (in performance and share price), and the strategy/outlook they provided (painting an optimistic picture of the future) sounded fairly credible. None of them ended well. Full disclosure of my portfolio: kzbin.info/www/bejne/fXOvf36YhMyEatk

[@Erez.Levi.Stocks]

@@TheFinanceStoryteller First of all thanks for the video you sent me. Secondly do not think that I accidentally tried to criticize you, I just wonder if even people who know how to analyze high-level reports like yours fall from time to time. Thanks

[@TheFinanceStoryteller]

@@Erez.Levi.Stocks No worries! Yes, I do make these mistakes from time to time, but try to keep them small and learn from it. :-) I think the book "Antifragile" by Nassim Taleb would be something you would like. It talks about learning from making small bets, while staying afloat on a bigger scale.

[@PeupleVert]

Hey ! Great work . Thanks for making it way easier to grasp . However , got a question . You rightly said that Alphabet Inc earned 1,3 Bn in interests in 2017 as we can see in the income statement. But I guess these interests generated straight cash inflows to ABC .. Though, can't see any hint of these 1,3 Bn in both Financing and Investing cash flow statement .. Is this normal ? Thanks !

[@TheFinanceStoryteller]

You're welcome! Thanks for the kind words. The cash inflows for interest received are in cash from operating activities, per FAS95: kzbin.info/www/bejne/eqqZmo2bltB_h5Y In the CFOA section of the cash flow statement, you would not see this explicitly (i.e. it is not a separate line item in the indirect method), however the amount was already captured in the very first line of the CFOA section: net income.

[@ak47niko]

Hi there. Just stumbled upon your videos and they are great! One thing perplexes me. Accounts payable 2016: $2,041; 2017: $3,137. The difference is $1,096. However, cash flow at 3:55 states that the movement is $731. In a similar fashion I can't tie any other movements to the balance sheet in your other video about ABC's balance sheet. What am I missing? Thanks!

[@TheFinanceStoryteller]

Hello Nick! Thanks for the compliments. Be aware that on the cash flow statement, the "Changes in assets and liabilities" are stated by Alphabet Inc net of effects of acquisitions (see the header above that section). So it could be that $731 + A/P assumed during the year through acquisitions = $1,096. Unfortunately, we have no way to verify that, as in Note 8 Acquisitions we only get an aggregate number for 2017 "$28 million was attributed to net liabilities assumed". The other factor I can think of (but have no way to verify) is that there could be a currency translation difference between how things are stated on the balance sheet versus how they are stated on the cash flow statement. This would only have an effect if a significant amount of Alphabet Inc's A/P would be in non-USD invoice currency. Please subscribe to the channel! I have some more finance case studies for you in this playlist (including a balance sheet comparison Alphabet Inc vs Facebook) kzbin.info/www/bejne/r5Kao4WQf6h_e8U

[@ettavictor4804]

4:51 shouldn't "stock-based compensation expense" count in the CFFA?

[@TheFinanceStoryteller]

Hello Etta! Good thinking, as most of the stock related line items (proceeds from issuing stock, paying dividends, buying back shares) are accounted for in CFFA. However, what we are doing here in the CFOA section, is to convert the numbers from a profit-based net income view to a cash-based CFOA view. Stock-based compensation is an expense that we deducted in the income statement to be able to calculate net income, but this expense is not paid in cash but in stock, therefore we need to add it back to get to CFOA. It is similar to how depreciation works in the cash flow statement: it was deducted as an expense to get to the correct net income, but has to be added back for CFOA as depreciation is not paid to anyone. Does that help? P.S. Stock here means equity (shares), not inventory (goods).

[@ettavictor4804]

@@TheFinanceStoryteller So these are more like employee earnings in equity instead of financing by issuing new shares?

[@TheFinanceStoryteller]

Correct! Stock-based compensation, also called share-based compensation, refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company. So on top of receiving a salary, they receive stock options. See also my video "What is equity": kzbin.info/www/bejne/h2LdZGxrqptjrrc

[@ettavictor4804]

@@TheFinanceStoryteller Thank you for that.

[@TheFinanceStoryteller]

Happy to help! :-)

[@sirl1364]

Loved the detailed analysis and walkthrough , one thought came into mind from CFFA : repayment of debt, typically would a company repay this amount from CFOA and or their current cash balance? Also i feel the cash flow statement doesnt give detail on the timing of cash inflows and outflows during the FY , im currently practicing on a companys cashflow statement in where their cfoa and cash balance is insufficient to repay their debt in full , in where it seems like their availment of new debt was used partially ( as the availment was much larger than the repayment during the FY) to repay old debts , but wouldnt that result into a refinance instead?( the company doesnt state it as a refinance) I would love to hear your thoughts on how this work. Thank you again for putting out amazing content!

[@TheFinanceStoryteller]

In response to your first question: take a look at the "cash flow profiles" at different stages of a company's lifecycle kzbin.info/www/bejne/i3jHY5-ie6ecg6M It would be very nice if a company doesn't have to touch its "regular" cash balance, and be able to use (during the same year) the CFOA inflow to cover both CFIA and CFFA outflow. For companies listed on the stock market, you can download the quarterly financial statements, and get an idea of the cash inflows and outflows during the year. Also, in the cash flow statement, on the line item level of the CFFA section, you tend to find separate lines for (for example) Payments on long-term borrowings, and Proceeds from long-term borrowings. That should help in your analysis. In addition, companies usually have many tranches of debt, so just categorizing things as "old debt" vs "new debt" may be too aggregated a level. Hope this helps!

[@sirl1364]

@@TheFinanceStoryteller i have tried the suggestion you gave me regarding reading the quarterly reports. I have a question regarding quarterly and annual , is it that from quarters 1 to 3 are combined to show the aggregate info on the annual Financial statement on what happened during the whole FY. In where for example in CFFA during Q1 the company reported a payment of long term debt of 10Million then on Quarter 2 it reported a payment of long term debt of 20Million. If the concept i brought up is correct , would that mean that on the Q2 , the first reported 10mn debt payment was already made during Q1 while the increase of 10mn was paid during the Q2 period of that FY , while fastforwarding to the annual report keeping the numbers simple they report a long term debt payment of 40mn for the FY in where in they paid 10mn each quarter but you would only figure that out if you opened each quarterly report ? In where the formula would look something like : current Qrter - Previous Qrter = amount paid or received during current Qrter ?

[@TheFinanceStoryteller]

Yep. If a consolidated statements of cash flows covers the first nine months ("year-to-date"), then Q3 YTD minus Q2 YTD gives you the number for Q3 itself. A balance sheet is a picture at a point in time, so you are always current on that one. For income statements, they usually give you the current quarter by itself, and the year-to-date next to it.

[@stevengreidinger8295]

This was not a bad introduction to basic terminology for the cash flow statement. In this particular case, Alphabet generates such enormous free cash flow and has such enormous financial reserves, that cash is not constraining its activities. Cash flow statements become much more interesting when companies cannot do everything they would like to do because they are short of cash. At that point, they have to really turn on the strategy. Get help looking at several companies that require financing or at the brink of bankruptcy for deeper insight.

[@TheFinanceStoryteller]

I agree, Steven! I have recently done a video on solvency and liquidity where I discuss the JC Penney bankruptcy case kzbin.info/www/bejne/sGXdo4RpqMaAqas (lack of free cash flow was part of the problem) and a webinar on the Hertz bankruptcy kzbin.info/www/bejne/kKGmgYucnJKrZ9E Hope these are helpful for you as well!

[@Naz-yi9bs]

Again, another wonderful video. Thank you so much. I watched it twice but still seem confused as to why is the "Accounts receivable" negative? Also, why is that a good thing for cash flow and vice versa, can't get my mind around that.

[@TheFinanceStoryteller]

Hi Naz! Usually, we look at Accounts Receivable on the balance sheet at a point in time (the balance sheet date). In this case of reading a cash flow statement, we look at the changes in the Accounts Receivable (AR) balance between one year-end and the next year-end, in other words the "flow" of the amount (up or down) during a 12-month period. If this AR balance goes up, then the impact on cash flow is negative: there are more "open invoices" (as yet to be paid) at the new year-end versus the previous year-end. Maybe my video on the direct method vs indirect method of cash flow reporting can help (this one is a bit technical): kzbin.info/www/bejne/eqqZmo2bltB_h5Y Or alternatively, my video on working capital kzbin.info/www/bejne/jqercp-rnpJ1pNE

[@Naz-yi9bs]

@@TheFinanceStoryteller That explanation makes perfect sense. The negative AR balance on the cash flow statement is good for the cash flow amount because it's the invoices that were paid from last year-end to this year-end statements and therefore, it needs to be added to the cash flow to determine the total amount. As you explained. You're an amazing teacher! Will be joining your KZbin channel soon. Thank you again.

[@TheFinanceStoryteller]

You're almost there. Let me give you one more example. If the AR balance last year-end was $100 and this year-end $110, then that's an increase in the AR balance (on the balance sheet) between the two measurement dates, which equates to a negative $10 effect on cash flow during the year (as the amount of unpaid invoices has increased) shown as change in working capital ($10). The net increase by $10 in the balance could be the result of issuing $200 in new invoices to customers, and collecting $190 (this $190 can consist of the full $100 of open invoices at the start of the year, plus $90 out of the new invoices). Does that make sense?

[@Naz-yi9bs]

@@TheFinanceStoryteller Customers paying invoices brings cash into the company which reduces the AR balance on a year-end to year-end basis on the balance; which is a positive for cashflow calculations. Where I was confused was the opposite of this transaction. If the AR account on the balance sheet increases on a year-end to year-end basis, I wasn't seeing how the cash balance was being impacted. I figured inventory would reduce and maybe the company needs to use more cash to replenish the inventory by the same amount it decreased and therefore, that's why it was a negative impact on cash flow calculations on the cashflow statement. But, after re-watching your video on working capital: kzbin.info/www/bejne/jqercp-rnpJ1pNE @ 2 minutes into the video, you explain the direct impact of working capital on cash. I believe I understand now; the increase in the AR balance on the balance sheet on a year-end to year-end basis decreases the working capital and that equates to a decrease in cash, which has a negative impact on cash flow calculations on the cashflow statement.

[@lukeh4901]

Thank you for this very useful explanation. However, I didn't quite understand your explanation about accounts receivable in CFOA. Is it recorded as a negative because we are removing non-cash income?

[@TheFinanceStoryteller]

Hello Luke! Thank you for the kind words. When preparing a cash flow statement using the indirect method, you basically start off with net income and then do two main things: 1) adjusting for non-cash items that were included in the income statement (depreciation, stock-based compensation, etc), and 2) adjusting for changes in working capital (accounts receivable, inventory, accounts payable, etc). If accounts receivable on the balance sheet go up, then that means cash (as an offset) on the balance sheet goes down, which is reflected as a negative amount (cash outflow) in the cash flow statement. Changes in accounts receivable levels are in "category 2". See also my discussion of the cash flow statement direct vs indirect method: kzbin.info/www/bejne/eqqZmo2bltB_h5Y

[@tezduhcreatorzwane3249]

The video was and still helpful, so is there by any means you could just produce another one focusing only at 6 months period . Reading the cash flow of a company, specifically speaking a clothing company.

[@TheFinanceStoryteller]

Thanks for the suggestion. I find cash flow statements fascinating, so might do another one of these soon. However, I do prefer the full year look, which seems to "cancel out" some of the noise that might happen in a quarter.

[@kasaggakirabo-ij3mn]

thank u man . i aleast know can make sense of it

[@TheFinanceStoryteller]

Good to hear! The best way to understand cash flow statements is to go through a few of them: kzbin.info/www/bejne/g5a6fYeQh9qAi5I&pp=gAQBiAQB

[@angelosenlob1557]

bravo. I am learning a lot. Good method. Saluti e auguri

[@TheFinanceStoryteller]

Grazie 1000! :-)

[@nicolassuarezblog]

GREAT, I loved it, great job,

[@TheFinanceStoryteller]

Thank you very much! That was a fun but intensive series to make, analyzing income statement, balance sheet, and cash flow statement for Alphabet Inc 2017. I have more recently followed it up with a balance sheet comparison between Alphabet Inc and Facebook based on latest quarterly numbers: kzbin.info/www/bejne/r5Kao4WQf6h_e8U

[@Goodluck-iv3jw]

thank you for shareing

[@TheFinanceStoryteller]

Thanks for watching!

[@mozpassion8996]

What about the provision that they in the PL?

[@TheFinanceStoryteller]

You compare the amount of accrued liabilities on the balance sheet at the end of the period to the amount at the start of the period. The change in accrued liabilities is the effect on CFOA. Accrued liabilities going up is a positive for CFOA, accrued liabilities going down is a negative for CFOA.

[@vishwamithran8853]

thank u sir upload more vedios

[@TheFinanceStoryteller]

Thank you, Vishwa! 33 new videos so far in 2020, so I am going at a good rate....

[@mozpassion8996]

Hi there, if the company generated 37.1bln CFO how dos they made investiments of 94bln? Where the Money came from?

[@TheFinanceStoryteller]

The cash inflows and cash outflows related to marketable securities are an ongoing activity at Alphabet Inc. During 2017, $74B of cash came in, when marketable securities matured (reached the end of their investment period) or were sold. This $74B, plus part of the $37B CFOA, was reinvested into marketable securities (the line item of $92.2B).

[@angelosenlob1557]

if you want to do it really GREAT, for us students, do the same for different sample COMPANIES from differents sectors/industries ....thank you in advance.

[@TheFinanceStoryteller]

Yes, I am planning to do that! Have only done a few so far. Here's the link for the Amazon to Google financial comparison: kzbin.info/www/bejne/hnqciWiPl8qelac and balance sheet comparison Google versus Facebook kzbin.info/www/bejne/r5Kao4WQf6h_e8U and Walmart income statement kzbin.info/www/bejne/oKDZfIqXit2Xo7c

[@nonittiwari2796]

Hii