FIN1 Intro to Cash Flows and the Financial Statements

Welcome to our course in corporate finance and welcome to module one. You can see the title cash flows and the financial statements. Our course in corporate finance in general is very interested in the future. Cashflow of a business of a financial instrument. It's sort of, we value financial assets based on cashflow. And one of the most valuable tools we have in finance is financial statements produced by accountants. Now, accountants are not as obsessed with cashflow as we are here in finance. And so as a consequence, we have to take accounting information and make sure we understand it well and convert that over to cashflow information. So that's a fundamental concept that we're covering here in chapter one. You will hear in your finance course, in this one, in your classroom, if you're taking the course at a university or college, you'll hear this phrase all through finance course. The phrase is present value of future cash flows. That's the value of any financial asset, the value of anything, really the present value of the future cash flows. And I just thought I'd pose a pretty straightforward dilemma. And this is a question that finance seeks to answer. So if we have a friend, let's just say we have a good friend and they say, I promise to pay you $1,000 in 365 days. One year from now, I'm going to give you a thousand dollars. And it's a friend we love. It's a friend that we trust and we believe them when they say that. And they say, how much money would you give me today in order for me to fulfill that promise? So in other words, what is this thousand dollar promise? By the way, I know what you're thinking. We're living in an age of AI. You're probably thinking, oh, this guy, he had AI draw a portrait of Grover Cleveland here, the person on the thousand dollar bill. No, no, no. I know it's what it looks like, but I did that all by hand. Uh, but you might not believe me, but I'm telling you the truth. So in any event, our friend promises to pay us a thousand dollars in 365 days. What's that worth to us today? Well, that's a question finance seeks to answer, but I hope you're saying, well, it's gotta be less than a thousand, right? Like put a number and imagine your best friend says, I'll give you a thousand dollars a year from now. How much would you give that person today in order to cash in on that promise? Would it be $950? Would it be 900, 800? What, how much would you discount that? How much of a discount would you need in order to say, okay, I'll, I'll take the deal from that's the question fundamentally finance is obsessed with. And if you say, well, I'd only do it for $600, right? I don't really trust my friend. Well, imagine there's a market full of people and your friends putting it out to lots of offers. Maybe somebody else will do it for seven. Maybe somebody else will do it for eight. What's the right price, right? What's the right price on this promise? That is the fundamental question of finance. Now, this is a pretty simple thing to value, but you can imagine it gets much more complex. And in fact, it gets much mathier. Uh, when I was a kid, I always wanted to get into something that involved math and money. I chose accounting. I should have chose finance. Finance involves a lot of math. And I would suggest to you, your professor, if they allow it, you're going to want to learn how to use a financial calculator. It'll be very useful for your test. Now I'll show you how to do all the exercises we do by hand, but you'll see how much quicker it is. So we'll do it by hand. We'll also do exercises in our financial calculator. So when you want to learn finance, my suggestion is get very good with a financial calculator. I'll use the BA two plus, and I'll show you how to use that through our videos. Uh, but you know, if you have a Casio or some other brand, they're all very similar. Certainly all produce the same results. So, uh, find out what your professor will allow or not. And if they allow you to use a financial calculator for goodness sakes, it's a great tool that you ought to use. I'll show you how to do everything by hand, but a financial calculator will help. So with all that having been said, I'm so excited that you're with me. Module one, we're going to learn how to convert financial statement information and to understand financial statement information and how to convert it into something more useful for finance, which is cashflow information. Let's get started. I can't wait to get going. See you in the next video.