In this video, we will start discussing the statement of cash flows. We will start by discussing the need for it and how it is different from the income statement. We will list the three main parts of the statement of cash flows. We will also discuss how to calculate cash flows from operating activities, which is the first part of the statement of cash flows. The balance sheet tracks the change in a company's cash balance from one year to the next. However, it does not tell us why the cash balance changes. For example, Amazon had cash and cash equivalents worth 14.58 billion dollars at the end of 2014 and cash and cash equivalents worth 15.89 billion at the end of 2015. What caused the increase of 1.31 billion dollars in Amazon's cash and cash equivalents? The income statement does not track changes to cash, as everything is recorded on an accrual basis. Remember, accrual basis means a transaction is recorded on the income statement as soon as an economic event occurs, regardless of when the cash from this economic event is actually received or paid by the company. Profits or net income cannot pay a company's bills, because it does not represent cash. To that end, the income statement is not very helpful in tracking why cash and cash equivalents change every year. The statement of cash flows reports the different channels through which changes in cash during the year may be attributed to. This helps in determining the ability of a company to pay its suppliers, pay its employees, make interest and dividend payments, repay loans, buy PP and D needed for expansion, et cetera. The statement of cash flow separates the change in cash and cash equivalents from the beginning to the end of the year into three categories; namely cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Cash flows from operating activities are those related to the company's operations-related current assets and current liabilities. Cash flows from investing activities are those related to the company's non-current assets. Cash flows from financing activities are those related to the company's non-current liabilities and shareholder's equity. Let us first focus on determining the cash flows from operating activities. There are two ways to do this; one is through the direct method and the other is through the indirect method. Under the direct method of calculating cash flows from operations, cash inflows and outflows are directly reported. This method is simple and easy to understand. However, it is very costly for companies to maintain this method, as they have to maintain very detailed cash records. Under the indirect method of calculating cash flows from operating activities, adjustments to net income are made to reflect only cash receipts and disbursements. This is because net income is calculated following accrual principles and not on cash basis. The adjustments to net income typically fall into two categories. One is adjusting for items that affect net income, but not cash. Example of such items are depreciation and amortization expenses and credit sales. These are recognized on the income statement, though no cash has been paid or received for these. The second adjustment is for items that affect cash, but not net income. An example of this is raw materials and supplies that a company has purchased with cash, but has not sold as yet. This is not reflected on the income statement until the inventory is sold, but the cash paid to buy it is not recognized on the income statement. In this course, we will use an indirect method of determining cash flows from operating activities, as companies use this when they report their statement of cash flows in their annual report.