(Doc) Assignment on Corporate Accounting

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Corporate accounting

Rio Tinto
The company selected for the analysis is Rio Tinto. It is a pioneer in the iron ore and a leader
in the production of iron ore. The company has its operations spread to different continents
and is a multinational mining and mineral company. The company is listed in the ASX and
has US$ 40.030 billion revenue in 2017. The net income of the company stands at US$ 8.851
billion in 2017. The evaluation of financial statements of Rio Tinto is done below:
Cash Flow Statements
i. As per the annual statement of the company it is observed the Net income of the company
is evaluated in the statement. It is noted that the assessed net income consists of several of
various expenses and income that are notional in nature and the items are projected on the
balance sheet of the company. It is needed for the company to either add back or reduce the
noncash items and it rests entirely on the case. When the adjustment is given to the net
income, it is needed for the management to trace, as well as consider the change that happens
in the account of an asset that can impact the financial position of the company (Williams,
2012). In this scenario, the company adds back the noncash items in the form of a dividend
from equity accounted division. When it is done, the transactions influence the cash position
of the operating assets and are adjusted. In this scenario, the operating income is deducted
from the interest form. When it comes to the company, the subsidiary portion is ignored and
removed from the capital of the company while non-controlling assets from the equity
portion of the company’s capital. When the holders get a dividend then the same should be
deducted from the operating income or expenses. Moreover, the tax paid for the year is even
taken into consideration. It is a worth notice that the rate of interest has declined in the year
2017 but the taxes have increased (Northington, 2011). There is a strong urge in the share
prices and due to such an incident, there has been an increment in the amount of interest.
It has been noted from the operating activities of the company that the same has provided net
cash that amounted to $13884 million. In addition, it needs to be noted that the investing
activities of the company that made an adjustment for the gains, as well as losses from the
cash flow, were segregated from the cash flow (Northington, 2011). The noteworthy thing
that was noted in the annual report was that the company made a considerable purchase of the
plant and equipment, properties and other assets of intangible nature. In the year 2017, the
company made an investment of $4482 million that was diverted to the assets purchase.
Further, in the same year, the company had a huge sale of the investments that were in joint
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Rio Tinto
ventures, associates, and subsidiaries. The investment of the company was seen more in this
segment and this investment acted as a liquid fund for the company that is worth $723
million. The figure of the annual sales touched to $2675 million (Rio Tinto, 2017).
It has been observed that the companies are making unhealthy decisions in the requirement to
the economic purchases and investments that are being made even after the sales are weak
and only 40 million dollar annual sales are recorded which are not enough in order to take the
decision with the company have already taken. It was seen that the $138 million was being
funded for the sales proceed of the property, plants and many other intangible assets thus
making this type of decision regarding purchase so many assets even after low revenue which
is been incurred by the organization (Rio Tinto, 2017).
It has been observed that the company has made very few investments in the mutual fund and
also I have made several other Investments which amounted to dollar 18 million (Rio Tinto,
2017). It was also seen that the company hadn't made any type of investment in joint
ventures, Associates or share of subsidiaries. This type of company generally prices to find
the financing activities so that it can try and run its day to day operations without any
problems and these were the sources of the fund which were drawn primarily in order to
make the purchases.
The dividend which is paid to the stakeholders of the organization was estimated to be around
$4250 million. It was also necessary that the stakeholders were informed about the high sales
and the profits of the organization. The borrowing of the company this year amounted to $18
million which was inexistent when compared to the borrowings of the last year which were
estimated to be around $4413 million.
It was also made necessary in order to analyze the performance of Rio Tinto. The funds
which are utilized by the company in the past 3 years were used in order to compare the
earnings of this year. There were a lot of transactions relating to the noncash and operating
expenses incomes, net income from profit and loss statement and operating income that is
needed to be analyzed in order to compare the data. After the analysis is false clear that the
operating income for the year 2015, 2016 and2017 was $12102 million, $11368 million and
$16670 million respectively (Rio Tinto, 2017). The income from these operations for the year
2015 2016 and 2018 was the first to be $9383 million, $8465 million and $13884 million
respectively. With the increase in the operating profit, the expenses were also said to be
decreased because of the fact that there were negligible borrowings made this year. Hence,
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Rio Tinto
after analyzing the data of the previous years it was clear that the firm has encountered huge.
Net cash flow of operations in this year compared to the data of past few years.
Investing and financial activities are the base of operating income and are always in sync
with one another. Also, it is observed that investments made in properties, assets, etc. are
proving to be beneficial for the organizations operating income.
After assessing all the financial activities that have been made in the past, it was observed
that the current year had enormous cash outflows in comparison to them. The cash outflows
of the financing activities were estimated to be around $7670 million, $7491 million and
$9141 million in the respective years of 2015, 2016 and 2017. It was also reported that the
shareholders were being paid higher dividends in this year as compared to the dividend which
was paid to them in the last few years. It was also observed that the additional borrowings of
the organization became inexistent as compared to the data of 2015 and 2016. Also,
transactions relating to the purchase of its own share from the shareholders as disinvestment
of shares were being recorded in the statements.
Other comprehensive income
iii) Unrealised revenues, expenses, profits and losses are accounted as other comprehensive
income. Once the underlying transactions are finished such unrealised revenues, expenses,
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Rio Tinto
gains and losses are realised. It is accounted in the profit and loss statement for deriving net
income (Rio Tinto, 2017). The net income ascertained from the Income statement under IFRS
is excluded of such unrealised revenues, expenses, profits and losses that are also known as
other comprehensive income. Accrual basis of accounting is the most preferred accounting
method for preparing financial statements (Williams, 2012). The transactions are posted or
accounted in the financial statements on the basis of their occurrence. Such transactions are
accounted differently when the cash associated with such transactions are received or paid.
For example, XYX Limited undertook a contract of selling books. As soon as the customer
receives the delivery of the products, XYX Limited will record the sales proceeds as revenue.
The ownership of the risks associated with books gets transferred to the customer and is
treated as a valid sales contract. Such sales are required to be recorded in the statement of
comprehensive income and also as receivables in the statement of financial position for the
year.
iv)There should always be a gap between the amount thought by the receiver and the paid
amount in order to make pension payment. If the amount thought by the receiver is lower
than the amount received the company will suffer a loss (Melville, 2013). An employee’s
tenure of working and his designation in the company is the basis on which his rate of
pension depends while expectations are legitimately common. Any subsequent changes can
result in either profit or loss. It was noticed that the gain/loss in postretirement benefit in Rio
Tinto came down to USD 90 million in 2016 and USD 6 million in 2017 as compared to USD
619 million in 2015 (Rio Tinto, 2017). The pension paid was more than the expected
payment. This change is on the account of the alterations in the actuarial assumptions and not
because of the alterations in the post-retirement benefit.
The reimbursement of some of the amount of tax payment is possible. This amount cannot be
accounted as profits or losses. The amount encountered fell to USD 12 million in 2016 which
was around USD 175 million in 2015 (Rio Tinto, 2017). The government of the United States
and France introduced some new additions in the corporate tax section in the form of
postretirement benefit plans.
v) The subsidiary transactions and foreign equity investments in the form of functional
currency that is valid for a defined period are projected by way of some adjustments in the
financial statements. When the equity foreign currency is seen as similar to foreign currency
that also comprises gain and loss on foreign currency as forwarding exchange contracts, it
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Rio Tinto
shifts to the reporting presenting statements from the financial statements (Melville, 2013). If
the methods of equity evaluated the transactions in the financial statements of the company to
be strong and well constructed, foreign currency transactions in the form of foreign entity
invested could have been noticed altogether with intercompany foreign transactions which
have an extended time span (Libby et. al, 2011). For evading the foreign currency exposure
of a net investment in a foreign operation, infusion of gain or loss on a copied instrument that
could take the form of a foreign currency transaction gain and that has been positioned and
has been approved as prevarication instruments.
Corporate Income Tax
vi) The tax expenses as compared to the preceding year are calculated to have increased by
two and a half times. The tax expenses reportedly collected during the year were about USD
3965 million.
vii) The percentage of tax collected is not construed from the above-mentioned figure. The
company is entitled to pay 19 percent of its income as taxes. The amount of taxes required to
be paid are subjected to reimbursement in some areas that might reduce the figure to some
extent.
viii) The company had a deferred tax liability of around USD 233 million for the year 2017.
The amount ascertained is not able to build up the gap between the accounting and taxing of
timing related issues. Deferred tax liability accrues when the income statement accounts
legitimate expenses for a considerate amount in the present year and also at the same time are
allowed or disallowed for another value or on the basis of different methods of calculations in
the taxation rules applicable to the organization (Bodie et. al, 2014).
ix) The deferred tax considered by Rio Tinto is none other than the current tax. The liability
of tax stood at USD 3965 million. It should also be taken into due consideration that the
income tax expense and the payment of income tax are altogether two different aspects. To
arrive at the income tax figure, it is required to adjust deferred tax, arrears, and advances
from the payment of tax (Bodie et. al, 2014).
x) The tax for the year is reflected in the company’s profit and loss account. The cash flow
statement reflects the outflows of tax items. The profit and loss account statement of the
statement has accounted debit of tax value that was accrued. The payment of TDS, advance
taxation, interest, penalty, etc is considered so as to evaluate the final payment. This accounts
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Rio Tinto
for the gap and dissimilarities between the two statements as the results projected in those
statements are in contrast with each other.
xi) The financial represented and projected by the company is in contrast with the general
disclosure of taxation. On reconciliation of accounts, it is noticed that there are certain
dissimilarities. The combination is also found in the element of tax that is reflected in both
the parent and subsidiary (Graham & Smart, 2012). With such projection, it becomes difficult
and troublesome for a normal investor to indulge in.
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Rio Tinto
References
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Graham, J. and Smart, S. (2012) Introduction to corporate finance. Australia: South-Western
Cengage Learning.
Libby, R., Libby, P. and Short, D. (2011) Financial accounting. New York:
McGraw-Hill/Irwin.
Melville, A. (2013) International Financial Reporting – A Practical Guide. Pearson,
Education Limited, UK
Northington, S. (2011) Finance. New York, NY: Ferguson's.
Rio Tinto. (2017) Rio Tinto Annual Report and accounts 2017 [online]. Available from:
http://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 19 May 2018]
Williams, J. (2012) Financial accounting. New York: McGraw-Hill/Irwin.
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