Accounting and Reporting - Differences between net profit/loss and cash flows, Impairment of non-current assets, Ratio Analysis
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This report discusses the differences between net profit/loss and cash flows, Impairment of non-current assets, and Ratio Analysis in Accounting and Reporting. It also includes a discussion on which financial statement provides more useful and reliable information for investors. The report covers two companies, Funtastic Limited and Santos Limited, and provides insights into their financial performance. The report also includes references to relevant books and journals.
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Contents
INTRODUCTION...........................................................................................................................................3
PART A.........................................................................................................................................................3
1. Identify the major three (3) reasons for both Santos Ltd and Funtastic Ltd for the differences
between net profit/loss for the year (income statement) and cash flows from operations....................3
2. Has the cash flows from operating activities increased or decreased from 2019 to 2020?.................4
3. Which section of the cash flow statements will you look at to assess the long run prospects of a
company?................................................................................................................................................5
4. Explain how the item “Impairment of non-current assets” will affect the cash flows from operating
activities calculation..................................................................................................................................5
5. Explain how the increase or decrease in Accounts receivable and accounts payable affect the cash
flows from operating activities under indirect method of preparing cash flows from operating
activities section......................................................................................................................................6
PART B.........................................................................................................................................................6
Ratio Analysis...........................................................................................................................................6
Discuss what is indicated by the profitability ratios and solvency ratios that you have
calculated.DotheseratiosprovideyouwithanypotentialredflagaboutFuntasticLtd?..................................7
PART D.........................................................................................................................................................8
Based on your examination of the income statements and cash flows statements-which one of the
two statements provides investors with more useful information? Which one provides with more
reliable information?...............................................................................................................................8
REFERENCES................................................................................................................................................9
INTRODUCTION...........................................................................................................................................3
PART A.........................................................................................................................................................3
1. Identify the major three (3) reasons for both Santos Ltd and Funtastic Ltd for the differences
between net profit/loss for the year (income statement) and cash flows from operations....................3
2. Has the cash flows from operating activities increased or decreased from 2019 to 2020?.................4
3. Which section of the cash flow statements will you look at to assess the long run prospects of a
company?................................................................................................................................................5
4. Explain how the item “Impairment of non-current assets” will affect the cash flows from operating
activities calculation..................................................................................................................................5
5. Explain how the increase or decrease in Accounts receivable and accounts payable affect the cash
flows from operating activities under indirect method of preparing cash flows from operating
activities section......................................................................................................................................6
PART B.........................................................................................................................................................6
Ratio Analysis...........................................................................................................................................6
Discuss what is indicated by the profitability ratios and solvency ratios that you have
calculated.DotheseratiosprovideyouwithanypotentialredflagaboutFuntasticLtd?..................................7
PART D.........................................................................................................................................................8
Based on your examination of the income statements and cash flows statements-which one of the
two statements provides investors with more useful information? Which one provides with more
reliable information?...............................................................................................................................8
REFERENCES................................................................................................................................................9
INTRODUCTION
Accounting is a method of identifying, organizing, classifying, recording, summarizing and
communicating data concerning price movements, generally but not always in money units.
Although accounting is typically included in the definition of accounting, it is a much broader
term. It's also known as a transformational process since it converts raw data from accounting
into valid data. The transmission of data about something like a firm to relevant parties, such as
leaders and investors, is part of the control element of accounting. To analyses a corporation's
profitability and financial condition at a particular date, the outcomes of all activities more than
an amount of time must be collected, displayed, and understood. This report based on the two
organizations these are Funtastic limited and Santos limited. In this report consist of difference
between profit & loss statement, action of cash flow statement and defined indirect method to
prepare cash flow statement. At the end of the report conduct ratio analysis to know actual
position of business.
PART A
1. Identify the major three (3) reasons for both Santos Ltd and Funtastic Ltd for the differences
between net profit/loss for the year (income statement) and cash flows from operations
Cash flow statement
1. The Cash Flow Statement is a financial statement that illustrates the different cash-related
operations, such as operating, investment, and borrowing.
2. It is created in order to assess a company's money potential.
3. It is created based on a company's different operations, such as operating, acquiring, and
funding.
4. The Double Entry System is not used in this case.
5. Nominal statements, such as Income Statement, are not recognised.
6. It is created using the cash foundation of accounting.
Accounting is a method of identifying, organizing, classifying, recording, summarizing and
communicating data concerning price movements, generally but not always in money units.
Although accounting is typically included in the definition of accounting, it is a much broader
term. It's also known as a transformational process since it converts raw data from accounting
into valid data. The transmission of data about something like a firm to relevant parties, such as
leaders and investors, is part of the control element of accounting. To analyses a corporation's
profitability and financial condition at a particular date, the outcomes of all activities more than
an amount of time must be collected, displayed, and understood. This report based on the two
organizations these are Funtastic limited and Santos limited. In this report consist of difference
between profit & loss statement, action of cash flow statement and defined indirect method to
prepare cash flow statement. At the end of the report conduct ratio analysis to know actual
position of business.
PART A
1. Identify the major three (3) reasons for both Santos Ltd and Funtastic Ltd for the differences
between net profit/loss for the year (income statement) and cash flows from operations
Cash flow statement
1. The Cash Flow Statement is a financial statement that illustrates the different cash-related
operations, such as operating, investment, and borrowing.
2. It is created in order to assess a company's money potential.
3. It is created based on a company's different operations, such as operating, acquiring, and
funding.
4. The Double Entry System is not used in this case.
5. Nominal statements, such as Income Statement, are not recognised.
6. It is created using the cash foundation of accounting.
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Profit and loss statement
1. A profit and loss account is a financial statement that shows a company's operational results,
including the surpluses or income and shortfall or loss at the conclusion of the accounting cycle.
2. It is adequate to show the mission's net effect.
3. It is developed on the basis of numerous nominal accounts rather than multiple operations, as
is the case with the Cash Flow Statement.
4. Here, the Double Entry System is seriously enforced.
5. It simply keeps track of nominal accounts such as costs, loses, and profits.
6. The accrual method of accounting is used in the production of this report.
7. It shows a company's net income or loss in the format of operating earnings loss.
2. Has the cash flows from operating activities increased or decreased from 2019 to 2020?
Santos limited: The twin economic shocks of considerably reduced crude prices and the
COVID-19 epidemic affected Santos' operations in 2020. Santos has pledged to help the client
and society in limiting the pandemic's impact and ensuring high availability. To safeguard the
health and safety of its employees, the manager made a number of steps, like limiting travel,
adopting social separation procedures throughout our businesses, and changing field and offices
contractual relationships. As a consequence of these efforts, we have been able to maintain
operation at all of our locations to far. Santos also took financial measures that were appropriate
for the business climate to guarantee that the business remained low-cost, dependable, and
sustainable throughout the price of oil cycles. A $550 million (38 percent) decrease in projected
2020 capital spending, the delay of key expansion projects, a $50 million decrease in planned
2020 manufacturing costs, and a target free cash flow net profit oil price of less than $25 per
barrel were among them. Santos recorded net impairments of $895 million (before tax) in 2020,
mostly due to altered oil price expectations as a result of the COVID-19 pandemic's implications
on energy industry market dynamics, as well as resource revisions in Wes.
Futastic limited: Funtastic Limited's cash receipts from sales or credit sales combined
have decreased at such a quick rate that they have nearly half in three years. The share of
1. A profit and loss account is a financial statement that shows a company's operational results,
including the surpluses or income and shortfall or loss at the conclusion of the accounting cycle.
2. It is adequate to show the mission's net effect.
3. It is developed on the basis of numerous nominal accounts rather than multiple operations, as
is the case with the Cash Flow Statement.
4. Here, the Double Entry System is seriously enforced.
5. It simply keeps track of nominal accounts such as costs, loses, and profits.
6. The accrual method of accounting is used in the production of this report.
7. It shows a company's net income or loss in the format of operating earnings loss.
2. Has the cash flows from operating activities increased or decreased from 2019 to 2020?
Santos limited: The twin economic shocks of considerably reduced crude prices and the
COVID-19 epidemic affected Santos' operations in 2020. Santos has pledged to help the client
and society in limiting the pandemic's impact and ensuring high availability. To safeguard the
health and safety of its employees, the manager made a number of steps, like limiting travel,
adopting social separation procedures throughout our businesses, and changing field and offices
contractual relationships. As a consequence of these efforts, we have been able to maintain
operation at all of our locations to far. Santos also took financial measures that were appropriate
for the business climate to guarantee that the business remained low-cost, dependable, and
sustainable throughout the price of oil cycles. A $550 million (38 percent) decrease in projected
2020 capital spending, the delay of key expansion projects, a $50 million decrease in planned
2020 manufacturing costs, and a target free cash flow net profit oil price of less than $25 per
barrel were among them. Santos recorded net impairments of $895 million (before tax) in 2020,
mostly due to altered oil price expectations as a result of the COVID-19 pandemic's implications
on energy industry market dynamics, as well as resource revisions in Wes.
Futastic limited: Funtastic Limited's cash receipts from sales or credit sales combined
have decreased at such a quick rate that they have nearly half in three years. The share of
operating expenditures has increased. As a consequence, the OCF has decreased and is becoming
progressively negative. It's so terrible that management would have to borrow just to cover
operational expenses.
3. Which section of the cash flow statements will you look at to assess the long run prospects of
a company?
The operational part of the cash flow statement finishes with net cash supplied (used) by
operating activities, irrespective of whether explicit or implicit approach is employed. Mostly on
cash flow statement, that's the most significant fixed cost.
progressively negative. It's so terrible that management would have to borrow just to cover
operational expenses.
3. Which section of the cash flow statements will you look at to assess the long run prospects of
a company?
The operational part of the cash flow statement finishes with net cash supplied (used) by
operating activities, irrespective of whether explicit or implicit approach is employed. Mostly on
cash flow statement, that's the most significant fixed cost.
4. Explain how the item “Impairment of non-current assets” will affect the cash flows from
operating activities calculation.
When an asset is damaged, the impairment loss is included in the income statement
alongside any other operational expenses. Cash Flow Statement: Since there is no cash transfer
or effect on cash, the cash flow statement is unaffected by valuation adjustments. Impairment
losses are non-cash expenditures like depreciation, therefore when reconciliation operating profit
to cash cash flow from operations, they will be recycled later in the cash flow statement, much
like depreciation. Only if there are signs of deterioration are properties subjected to an
impairment examination.
5. Explain how the increase or decrease in Accounts receivable and accounts payable affect the
cash flows from operating activities under indirect method of preparing cash flows from
operating activities section.
As a source of cash, boosting accounts payable boosted cash flow by that precise amount. A
positive figure for accounts receivable indicates that cash was used, thus cash flow decreased by
that proportion. A decrease in accounts receivable has the opposite impact, resulting in an
increase in cash flow. A reduction in accounts payable indicates that money has been received to
contractors and customers. Cash is debited from Accounts Payable in this situation. When
utilising the Cash Flow Statement Indirect Method to calculate the cash flow from operations,
here's a basic rule of thumb.
PART B
Ratio Analysis
Category Ratio Formula Definition of
ratio
2020 2019 Improved
(Y /N)
Profitability Gross
profit
margin
Gross
profit /
Revenue
0.052 0.072 N
Net profit
margin
Net profit
for the
year /
Revenue
0.019 0.023 N
operating activities calculation.
When an asset is damaged, the impairment loss is included in the income statement
alongside any other operational expenses. Cash Flow Statement: Since there is no cash transfer
or effect on cash, the cash flow statement is unaffected by valuation adjustments. Impairment
losses are non-cash expenditures like depreciation, therefore when reconciliation operating profit
to cash cash flow from operations, they will be recycled later in the cash flow statement, much
like depreciation. Only if there are signs of deterioration are properties subjected to an
impairment examination.
5. Explain how the increase or decrease in Accounts receivable and accounts payable affect the
cash flows from operating activities under indirect method of preparing cash flows from
operating activities section.
As a source of cash, boosting accounts payable boosted cash flow by that precise amount. A
positive figure for accounts receivable indicates that cash was used, thus cash flow decreased by
that proportion. A decrease in accounts receivable has the opposite impact, resulting in an
increase in cash flow. A reduction in accounts payable indicates that money has been received to
contractors and customers. Cash is debited from Accounts Payable in this situation. When
utilising the Cash Flow Statement Indirect Method to calculate the cash flow from operations,
here's a basic rule of thumb.
PART B
Ratio Analysis
Category Ratio Formula Definition of
ratio
2020 2019 Improved
(Y /N)
Profitability Gross
profit
margin
Gross
profit /
Revenue
0.052 0.072 N
Net profit
margin
Net profit
for the
year /
Revenue
0.019 0.023 N
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Efficiency Accounts
Receivable
turnover
Revenue /
Average
Trave and
other
receivables
26.5 23.8 Y
Average
days sales
uncollected
365 days /
Accounts
receivable
turnover
40 days 25 days N
Inventory
turnover
Cost of
sales /
Average
inventory
19.43 26.19 Y
Inventory
turnover in
days
365days/
Inventory
turnover
29 days 35 days Y
Solvency Current Current
assets /
Current
liabilities
0.71 0.61 Y
Quick (Current
assets –
inventory)
/ current
liabilities
0.51 0.47 Y
Discuss what is indicated by the profitability ratios and solvency ratios that you have
calculated.DotheseratiosprovideyouwithanypotentialredflagaboutFuntasticLtd?
A solvency ratio is a significant indicator used by future business creditors to assess an
organization's capacity to pay long-term financial commitments. A solvency ratio is an indicator
of a long - term solvency that determines if its cash flow is adequate to fulfill its lengthy
commitments. An unfavourable ratio might suggest that a firm is at risk of defaulting on its
financial commitments.
Net margin, or the ratio of operating earnings to total sales, is a useful statistic for
assessing profitability. Since a single dollar amount of profit is insufficient to measure the
company's financial performance, the net margin ratio is critical. The profitability ratio is used to
evaluate a corporation's capacity to produce revenue in relation to its expenditures and other
costs connected with revenue production during a given time period. The final outcome of the
firm is represented by this ratio.
Receivable
turnover
Revenue /
Average
Trave and
other
receivables
26.5 23.8 Y
Average
days sales
uncollected
365 days /
Accounts
receivable
turnover
40 days 25 days N
Inventory
turnover
Cost of
sales /
Average
inventory
19.43 26.19 Y
Inventory
turnover in
days
365days/
Inventory
turnover
29 days 35 days Y
Solvency Current Current
assets /
Current
liabilities
0.71 0.61 Y
Quick (Current
assets –
inventory)
/ current
liabilities
0.51 0.47 Y
Discuss what is indicated by the profitability ratios and solvency ratios that you have
calculated.DotheseratiosprovideyouwithanypotentialredflagaboutFuntasticLtd?
A solvency ratio is a significant indicator used by future business creditors to assess an
organization's capacity to pay long-term financial commitments. A solvency ratio is an indicator
of a long - term solvency that determines if its cash flow is adequate to fulfill its lengthy
commitments. An unfavourable ratio might suggest that a firm is at risk of defaulting on its
financial commitments.
Net margin, or the ratio of operating earnings to total sales, is a useful statistic for
assessing profitability. Since a single dollar amount of profit is insufficient to measure the
company's financial performance, the net margin ratio is critical. The profitability ratio is used to
evaluate a corporation's capacity to produce revenue in relation to its expenditures and other
costs connected with revenue production during a given time period. The final outcome of the
firm is represented by this ratio.
PART C
Investment decision
As per the analysis of profit and loss statement of Funtastic Company in 2020 has loss
before tax was 9205 and after tax loss was 9313. On the other side of Santos company loss
before tax in 2020 was 306 and after tax loss of the company was 357. EBIT is a statistic that
evaluates a company's total financial performance before interest, taxes, depreciation, and
amortisation. Buyers decided to examine EBIT to evaluate if a troubled business will be able to
repay a leveraged buyout deal's interests. EBIT is now widely used to measure a company's
financial performance and to assess enterprises with varying tax rates and amortization
strategies. EBIT has a number of disadvantages, including the fact that it is not an alternative for
assessing a business's cash flow and can make a corporation appear to get more funds to pay debt
than it actually has. EBIT also overlooks the integrity of a company's performance, making it
appear less expensive than it is. On the basis of net loss of before tax any organisation does not
analysis actual financial performance so company not able to take investment decision.
For the investment decision requires to know investment activities from cash flow and
balance sheet provide all the assets and liabilities information. It supports to take all investment
decisions in proper manner.
PART D
Based on your examination of the income statements and cash flows statements-which one of the
two statements provides investors with more useful information? Which one provides with
more reliable information?
The income statement, balance sheet, and statement of cash flows are the three major aspects of
financial statements. These reports are meant to be read and others to give a full view of a
company's financial situation and results. Every one of the financial reports might be argued to
be the most significant, but the ultimate decision is determined by the customers' requirements.
Investment decision
As per the analysis of profit and loss statement of Funtastic Company in 2020 has loss
before tax was 9205 and after tax loss was 9313. On the other side of Santos company loss
before tax in 2020 was 306 and after tax loss of the company was 357. EBIT is a statistic that
evaluates a company's total financial performance before interest, taxes, depreciation, and
amortisation. Buyers decided to examine EBIT to evaluate if a troubled business will be able to
repay a leveraged buyout deal's interests. EBIT is now widely used to measure a company's
financial performance and to assess enterprises with varying tax rates and amortization
strategies. EBIT has a number of disadvantages, including the fact that it is not an alternative for
assessing a business's cash flow and can make a corporation appear to get more funds to pay debt
than it actually has. EBIT also overlooks the integrity of a company's performance, making it
appear less expensive than it is. On the basis of net loss of before tax any organisation does not
analysis actual financial performance so company not able to take investment decision.
For the investment decision requires to know investment activities from cash flow and
balance sheet provide all the assets and liabilities information. It supports to take all investment
decisions in proper manner.
PART D
Based on your examination of the income statements and cash flows statements-which one of the
two statements provides investors with more useful information? Which one provides with
more reliable information?
The income statement, balance sheet, and statement of cash flows are the three major aspects of
financial statements. These reports are meant to be read and others to give a full view of a
company's financial situation and results. Every one of the financial reports might be argued to
be the most significant, but the ultimate decision is determined by the customers' requirements.
REFERENCES
Books and Journal
Sujana, Z. H., 2021. The Effect of Good Corporate Governance and Accounting Information
Systems on the Quality of Financial Statements. JASa (Jurnal Akuntansi, Audit dan
Sistem Informasi Akuntansi). 5(1). pp.168-174.
Agostino, D. and Arnaboldi, M., 2021. From preservation to entertainment: Accounting for the
transformation of participation in Italian state museums. Accounting History. 26(1).
pp.102-122.
Wei, Q., 2021, April. Research on the Teaching Reform of Accounting Course under the
Background of Innovation and Entrepreneurship. In 2021 2nd Asia-Pacific Conference
on Image Processing, Electronics and Computers (pp. 132-135).
Rotondo, G., 2020. Closing the Technology Skills Gap in Accounting Education: Making Excel
Certification a Student Responsibility. Business Education Innovation Journal. 12(1).
КАМІЛ, А., 2020. Accounting Indicators for Controlling in the Context of the Integrated
Reporting Formation. Облiк i фiнанси, (1), pp.45-51.
Gierusz, M., 2020. Accounting for goodwill in the context of the usefulness of financial
statements. Zeszyty Teoretyczne Rachunkowości. 165(109). pp.11-32.
Moy, M. and et.al, 2020. Conditional accounting conservatism: Exploring the impact of changes
in institutional frameworks in four countries. Journal of Contemporary Accounting &
Economics. 16(3). p.100214.
Books and Journal
Sujana, Z. H., 2021. The Effect of Good Corporate Governance and Accounting Information
Systems on the Quality of Financial Statements. JASa (Jurnal Akuntansi, Audit dan
Sistem Informasi Akuntansi). 5(1). pp.168-174.
Agostino, D. and Arnaboldi, M., 2021. From preservation to entertainment: Accounting for the
transformation of participation in Italian state museums. Accounting History. 26(1).
pp.102-122.
Wei, Q., 2021, April. Research on the Teaching Reform of Accounting Course under the
Background of Innovation and Entrepreneurship. In 2021 2nd Asia-Pacific Conference
on Image Processing, Electronics and Computers (pp. 132-135).
Rotondo, G., 2020. Closing the Technology Skills Gap in Accounting Education: Making Excel
Certification a Student Responsibility. Business Education Innovation Journal. 12(1).
КАМІЛ, А., 2020. Accounting Indicators for Controlling in the Context of the Integrated
Reporting Formation. Облiк i фiнанси, (1), pp.45-51.
Gierusz, M., 2020. Accounting for goodwill in the context of the usefulness of financial
statements. Zeszyty Teoretyczne Rachunkowości. 165(109). pp.11-32.
Moy, M. and et.al, 2020. Conditional accounting conservatism: Exploring the impact of changes
in institutional frameworks in four countries. Journal of Contemporary Accounting &
Economics. 16(3). p.100214.
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