Corporate Accounting: Evaluation of Income and Cash Flow Statements

This study evaluates the usefulness of income and cash flow statements for investors and conducts a critical analysis of the consolidated cash flow statements of three companies. It also assesses the cash flow trends and compares them to net profit after tax and dividend payments.

Corporate Accounting

EXECUTIVE SUMMARY
The study-report summarizes thorough evaluation of relative information contents of income-
statement as well as cash-flow statement with aim to assess how these statements are useful for
investors. Moreover, study conducts critical analysis of consolidated cash-flow-statements of
three companies Santos Ltd, BHP Ltd and Funtastic Ltd to assess the actual comparative
performance of such corporations during period 2017 to 2019 with aim to explore different
financial aspects of each corporation, their strengths and identify which company is most
preferable for lending.

Contents
EXECUTIVE SUMMARY.......................................................................................................................2
INTRODUCTION.....................................................................................................................................4
MAIN BODY.............................................................................................................................................4
Part A......................................................................................................................................................4
Part B.......................................................................................................................................................7
CONCLUSION........................................................................................................................................30
REFERENCES........................................................................................................................................32

INTRODUCTION
Each organization needs to do some sort of accounting. This is essential for assess the financial
state of the company. Accounting, also regarded as bookkeeping, encompasses the selection,
examination, assessment, evaluation, presentation and distribution of financial details
(Schaltegger, Etxeberria and Ortas, 2017). There are several forms of accounting. Corporate
accounting is also one of them. It's better suited for corporations. Corporate accounting copes
with procedures like compiling cash-flows statements, tax returns, income statements and much
more. It may be employed to control specific business operations like acquisition, amalgamation
as well as the development of consolidated reports. The study-report covers different aspects of
corporate accounting in two distinct parts. The first part evaluates basic contents of cash-flow
statement & income-statement as to assess why these contents are useful for
stakeholders/investors. While other part evaluates consolidated-cash flow statement of
mentioned companies as to assess their real performance and identify other relevant aspects.
MAIN BODY
Part A
Reviewing information stated in income statements and cash-flows statements.
Financial statements of a company are compiled records which reflect the corporation 's
corporate practices and finance reports. Financial statements are audited by government bodies,
auditors, agencies, etc. as to ensure compliance and for accounting, finance or investment
objectives. The financial statements therefore mainly involve: balance-sheet, income statement
(P&L a/c) and Cash-flow statement. Financial statements of corporation provide investors with a
portrayal of all activities which go into the firm, where each transaction leads to its performance.
A cash-flow statement considered to be most insightful among financial statements since it
reflects cash created by the company in three major ways — via operations, investments and
financing (Liu, Zeng and An, 2017). The amount of such three segments is considered net cash
flows. Here is thorough review of contents and information of income and cash-flows statement:

Income statement- The income statement is accounting statement which displays how profitable
the company has been over the fiscal period. This indicates company's profits, minus
company's expenses and other losses. Here is review of information-content of income-
statement, as follows:
Sales/turnover: Sales turnover is the money earned by the corporation from the selling of
products. In finance, the words "selling" and "revenues" are sometimes used interchangeable
terms to describe same thing. this is necessary to remember that income does not always equal
cash earned. A proportion of sales may be charged in cash as well as a part may be charged out
on credits by means like trade receivables accounts. Sales revenue is displayed on income
statement both as gross sales figure or net-revenues.
Cost-of-goods sold: Usually referred to "COGS," which shows how much it takes to create all
the products/services company has provided to customers. COGS only include direct costs such
as materials, wage costs and transport costs (Hoang and Joseph, 2019).
Gross Profit: This is amount of what business get after deducting overall COGS from
turnover/sales. Gross profit demonstrates how profitable the company is, considering direct
costs, but prior considering overhead costs. This is a basic indicator of how effective a company
is.
General expenses: also refers to as operating expenses which include leases, banking & Internet
banking fees, machinery expenses, advertisement & promotional expenses, promotions, and all
other spending will require to keep running.
Operating earnings: This shows how profitable the company is after considering internal costs,
which company have more influence over, but prior to considering external costs, such as
mortgage interest rates and taxation, which company have little control over.
Net Profit: this figure which shows actual profitability status and net profit sum remain after
considering all business expenses.
Cash-flow Statement: A cash balance statement lays down the multiple kinds of cash-inflows
and cash-outflows (as well as cash-equivalents) which a corporation experiences which is
perhaps one most significant financial statements corporation can produce. understanding how to

compose and analyze cash flows statement is fast and efficient. this can let manager and other
stakeholders better see how corporation generates or expenses cash, how much cash is expended
or raised, which can give useful insights into the corporation 's finances. Here below is
evaluation of information-content of cash-flow statement, as follows:
Cash-flows through Operating Activities: The net sum of funds in or out of a corporation's day-
to-day operating activities is considered Cash Flow through Operations. There are operating
revenues and non-cash items like depreciation incurred (Harring, Jagers and Matti, 2019).
Because operating results are diminished through non-cash items like depreciation and
amortization) they have to be applied back to operating income in order to determine cash flows.
cash flow through operations is essential indicator since it shows the investor about the
profitability of the existing business strategy and activities. In long term, cash generation from
operations would be revenue inflows in return for the company to be sustainable and account for
usual outflows through investment and financing activities.
Cash through Investing Activities: Investment operations involve both forms and applications of
cash through investments made by a corporation. Buy or disposal of an assets, loans provided to
or obtained, or other payouts relating to mergers or acquisitions shall be specified in this section.
In brief, shifts in infrastructure, assets, investments are related to cash through investing.
Generally, cash changes through investment are "cash out" object, since cash is utilized to
purchase new machinery, buildings, or shorter-term assets like sellable securities. Conversely,
whenever a corporation relinquishes an asset, deal is perceived to be a cash in as to
determine cash from investments.
Cash through Financing Activities: Cash through financing operations requires channels of funds
from customers or financial institutions, and also the usage of cash provided to stakeholders.
Collection of dividends, buyback payments including redemption of the primary debt
(mortgages) are specified in this section (Warren and Jones, 2018). Adjustments of cash through
financing are regarded as cash in" if money is collected and cash-out if dividends are taken out.
Therefore, when a corporation sells bonds to public, the corporation collects cash financing; but,
when interests is accrued to bondholders, corporation reduces its capital.
Significance of income statement for investors:

Investors consider company's income statement to assess the performance of a business over
period. Investors watch at patterns in business expenditures and profits when the document
breaks down employee sales and expenditures. If a corporation is not prosperous or if the
earnings transition year over year, income statement allows them to know where sum is flowing.
The details regarding earnings per share is another crucial aspect for investors. That sum that a
corporation will pay to its shareholders on every share, if company paid out most of net profits as
dividends. Companies should not have to render such payments, however, and they generally
reinvest the cash back into company rather than paying this to shareholders. When a corporation
pays dividends to investors, the income statement would indicate how much corporation has paid
out.
Significance of cash flow statement for investors:
This allows investors to utilize information about company’s past cash-flows to forecast potential
cash-flows on that to based their investment choices (Ioannidis, 2019). It demonstrates
improvements in balance sheet and assists in the review of operations, acquisition and financing
operations. This gives insights into the liquidity including solvency of company and is crucial to
the sustainability and success of every company. This indicates the financial condition of the
organization over a span of time. This allows to provide information on cash-generating
capacities of the key operations of the organization. Stockholders and investors prefer to
contrast Cash-Flow Statements of several firms as they allow them to disclose the consistency of
their revenues. This helps to make the appropriate decision for them. Given that the corporation
has certain longer-term financial commitments, Cash Flow Statement helps investors and lenders
to assess the probability of redemption. It could be utilized to forecast accurately the pace,
quantities and volatility of potential cash flows.
Part B
1.Examination of cash flow of each company.
(a) Major source and uses of cash of each firm.
BHP limited:

Santos limited-

Funtastic limited:

Santos limited-

Funtastic limited:

(b) Trend in cash flow of each firm from operating activity.
2017 (Data in $
million) 2018 (Data in $
million) 2019 (Data in $
million)
15500
16000
16500
17000
17500
18000
18500
16804
18461
17871
Cash fl ow from operati ng
acti vity OF BHP LTD.

Trend- In accordance of above chart this can be find out that cash flow from operating of BHP
limited is fluctuating in all three years. Though, there is cash inflow in these three years and
highest was in year 2018 with a value of $18461 million while lowest was in year 2017. The
rationale behind fluctuation in cash flow from operating activity is increase and decrease in
operating income and expenses during each accounting cycle.
2017 (Data in $ million) 2018 (Data in $ million) 2019 (Data in $ million)
0
500
1000
1500
2000
2500
1248
1578
2046
Cash fl ow from operati ng
acti vity OF SANTOS LTD.
Trend- This company’s chart is showing progressive growth in cash flow from operating
activities. Growth between year 2018-19 was higher of $468 million. It shows a positive aspect
of company as they are able to manage their operational expenses in a manner so that there can
be availability of cash at the end of year.

2017 (Data in $
million) 2018 (Data in $
million) 2019 (Data in $
million)
-12000
-10000
-8000
-6000
-4000
-2000
0
Cas h outf low from oper ati ng
acti vity of funtas ti c ltd.
Trend- This company’s chart is showing that there is negative cash flow in all three years. As
well as cash outflow is increasing year by year in a huge manner. The reason behind this poor
performance can be ineffective strategy to manage or control the operational expenses.
(c) Comparison of cash flow from operations and net profit after tax.

2017 (Data in $ million) 2018 (Data in $ million) 2019 (Data in $ million)
0
5000
10000
15000
20000
25000
30000
6222 7744 9520
16804
18461 17871
Difference between net profit
after tax and cash flow from
operations
Net profit after tax Cash flow from operations
Analysis- From above graph, it can be measured that in each year, company has higher amount
of cash flow as compared to net profit after tax. This is so because of number of activities
included in each statement.
(d) Are firms have enough cash flow to pay all capital expenses.
BHP limited- As above stated that this company generated cash inflow from operations. Though,
value of cash flow fluctuated but they have enough cash inflow to cover their capital expenses.
Santos limited- Similar to above company, they also have positive and progressive cash flow in
each of three years. From this amount of cash inflow, they can take viable decisions to make
capital expenses till the value of cash flow.
Funtastic limited- This company faced negative cash flow in three years. They did not produce
any cash from performed operations. Thus, this company has no enough cash to do capital
expenditures.
(e) Did the cash flow from operations cover the dividend payment made by the firm (if any)?

2017 (Data in $ million)
2018 (Data in $ million)
2019 (Data in $ million)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2921
5220
11395
16804
18461
17871
BHP LIMITED
Dividend paid Cash flow from operations
Analysis- In each year, company produced enough amount of cash inflow to make payment of
divided. Company paid highest divided in year 2019 of $11395 million irrespective to cash
inflow of $17871 million.

2017 (Data in $ million)
2018 (Data in $ million)
2019 (Data in $ million)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0
73
251
1248
1578
2046
Santos lim ited
Dividend paid Cash flow from operations
Analysis- In year 2017, company made no payment of dividend even there was enough cash
inflow. In rest of two years, they paid dividend of $78 and 251 million.
Funtastic- This company did not make any payment of dividend due to negative value of cash
flows.
(f) How firm invested excess cash flow.
BHP limited:
2017- Company produced cash inflow of $16804 million and in accordance of this they made
investment of $5607 in such activities:

Purchases fixed
assets Investigation
expense Net investment and
funding of equity
accounted
investments
Other investment
0
500
1000
1500
2000
2500
3000
3500
4000
4500 4252
968
234 153
Capital expenditure by BHP
limited ($ m illion) in year 2017
2018: This company invested amount of $5994 million in below mentioned activities such as:

Purchases fixed assets Investigation expense Other investment
0
1000
2000
3000
4000
5000
6000
4979
874
141
Capital expenditure by BHP
limited ($ m illion) in year 2018
2019: In this year, company made higher investment of $8042 million as compared to rest of two
years. They invested in below mentioned activities:
Purchases fixed
assets Investigation
expense Other investment Net investment and
funding of equity
accounted
investments
0
1000
2000
3000
4000
5000
6000
7000 6250
873 289 630
Capital expenditure by BHP
limited ($ m illion) in year 2019

Santos limited:
2017- Out of $1248 million cash inflow, this company made investment of $689 million in
below mentioned assets:
Investigation of
assets Oil and gas
assets Other fixed
assets Acquisition of oil
and gas assets Borrowing costs
0
100
200
300
400
500
600
Investigation of
assets
Oil and gas assets
Other fixed assets
Acquisition of oil
and gas assets Borrowing costs
Capital expenditure by Santos
limited ($ m illion) in year 2017
2018: Out of $1578 million cash inflow, this company made investment of $2525 million in
below mentioned assets:

Investigatio
n of assets Oil and gas
assets Other fixed
assets Acquisition
of oil and
gas assets
Acquisition
of
subsidiary
Costs
associated
with
acquisition
Borrowing
costs
0
500
1000
1500
2000
2500
Investigation of
assets
Oil and gas assets
Other fixed assets
Acquisition of oil
and gas assets
Acquisition of
subsidiary
Costs associated
with acquisitionBorrowing costs
Capital expenditure by Santos
limited ($ m illion) in year 2018
2019: This company invested cash flow from operations in such expenditures:

Investigatio
n of assets Oil and gas
assets Other fixed
assets Acquisition
of assets Acquisition
of
subsidiary
Costs
associated
with
acquisition
Borrowing
costs
0
100
200
300
400
500
600
700
Investigation of
assets
Oil and gas assets
Other fixed assets
Acquisition of
assets
Acquisition of
subsidiary
Costs associated
with acquisitionBorrowing costs
Capital expenditure by Santos
limited ($ m illion) in year 2019
Funtastic limited: This company made no investment due to lack of availability of cash inflow in
all three years.
(h) Uses of working capital as a source or uses of cash.
BHP limited:

(i) The items which affected cash flow of each firm.
BHP limited-
 More number of capital expenditure- In relation to investment activity, this can be stated
that due to more number purchase of fixed assets company faced loss that resulted in cash
outflow.
 More debts- Under financing activity, it can be seen that there is cash outflow because of
increased expenses of interest on loan.
 Operational activities- This aspect is making positive impact on company’s cash flows. It
is so because more number of operating activities are producing higher cash receipts
which resulted in positive cash flow.
Santos limited-
 Operational activities- In relation to this aspect, company’s cash flow has been affected
by those activities which resulted in positive cash flow.
 Higher capital expenditure- This company made purchase of different assets from a
limited amount of cash inflow. It resulted in cash outflow under investing activities.

 Higher payment of debts- In each year, company made payment of higher interest on loan
which became cause of cash outflow.
Funtastic limited-
 Uncontrolled operational expenses- This company affected by those activities which
resulted in higher operating expenses.
 Financing activities- Company’s cash flow from financing activities was affected in a
positive manner due to more number of gain over given loan.
 Capital expenditures- Company’s cash flow from investing activities affected negatively
because of improper allocation of fund.
(j) Trend in capital expenses of each firm.
2017 ($ Million)
2018 ($ Million)
2019 ($ Million)
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Capital expenses MADE BY BHP LIMITED

Trend- This graph is indicating that company’s capital expenditures increased year by year. It is
so because of positive cash flow from operations.
2017 ($ Million)
2018 ($ Million)
2019 ($ Million)
0
500
1000
1500
2000
2500
3000
689
2525
1074
Capital expenses made by santos limited
Trend- This company fluctuated their expenses in accordance of their need. After year 2018,
there was huge fell down in company’s expenses.
2017 ($ Million) 2018 ($ Million) 2019 ($ Million)
0
500
1000
1500 1428
426
152
Capital expenses made by funtastic limited

Trend- This company dropped their capital expenses year by year. It is so because of negative
cash flow from operations.
(k) Trend in dividend.
2017 (Data in $ million)
2018 (Data in $ million)
2019 (Data in $ million)
0
2000
4000
6000
8000
10000
12000
2921
5220
11395
Dividend paid by bhp limited
Trend-This graph is showing progressive trend in dividend paid by company. The highest
divided which is paid by company was of $11395 million in year 2019.

2017 (Data in $ million)
2018 (Data in $ million)
2019 (Data in $ million)
0
50
100
150
200
250
300
0
73
251
Dividend paid by santos limited
Trend- Except year 2017, company paid dividend in a progressive manner because of more cash
inflows in these two years.
Trend in net borrowings.
2017 (Data in $ million) 2018 (Data in $ million) 2019 (Data in $ million)
0
1000
2000
3000
4000
5000
6000
7000
8000 7156
4406
2764
Net borrowings of bhp limited
Trend- This graph is showing fell down in net borrowings year by year. It shows that company’s
dependency has been reduced over debts.

2017 (Data in $ million) 2018 (Data in $ million) 2019 (Data in $ million)
0
200
400
600
800
1000
1200
1400
783
1193
592
Net borr owings of santos
limited
Trend-This company’s chart is showing fluctuation in net borrowings as per their need. The
highest net borrowing was in year 2018 of $1193 million.
2017 (Data in $ million) 2018 (Data in $ million) 2019 (Data in $ million)
0
1000
2000
3000
4000
5000
6000
3647
2630
5666
Net borr owings by funtas ti c
limited

Trend- In last year 2019, company increased their borrowings with a value of $5666 million. It
shows the dependency of loan of this company.
(l) Trend in working capital accounts.
Trend: This table is showing that company’s working capital is higher in each year which shows
that they have enough current assets in order to make payment of current liabilities. In each year,
company’s working capital is increasing which indicates a positive trend in growth of liquidity.
2. Financial strength of each company.
In accordance of above done analysis regards to the cash condition of each business, it can be
observed that each company has some strengths and limitations. It relies on firms how they work
with vulnerability and leverage their assets effectively. Below the strengths of three companies
listed that is addressed in this way:
BHP limited-
 The key positive point of this organization is that it has created massive sums of cash
inflows from business operations for all three years. This was made possible by the
efficient control of gross revenue and expenditures under each operation.
 Excessive capital inflows from running activities is used by the company in an
appropriate manner to buy various forms of fixed assets.
 Along with this corporation's emphasis on borrowing is too narrow which states the
productivity of funds.
Santos limited-

 The strength of this business is that the cash flow from different operations has grown in
a comprehensive way. It indicates that the organization has increased its financial
efficiency.
 The corporation paid the dividends only because there was a substantial volume of cash
inflow, and did not bear any burden to fund the dividend.
 Along with in 2018, the organization generated net cash inflows from all three
operations, demonstrating that they offset cash outflows from borrowing and acquisition
activities at the end of the year.
Funtastic limited:
 In 2018, the organization created cash inflows from its overall operations. This indicates
that they were similarly concentrated on all three activities.
 The business created positive cash inflows from financing activities that demonstrate that
they handled their debts and shares properly in all three years.
 This organization has wisely acquired the investments by using a limited portion of the
loan without suffering any losses.
3. Selection of a company for lending purpose.
If I have an option to pick up one business for the purpose of lending, then I would prefer
Funtastic Limited. The reasoning for this is that, it is the only one whose cash flow from funding
operations is optimistic. It means that this organization will be able to recover the principal sum
in a successful way for given loan.
CONCLUSION
From above study-report this has been inferred that significance of cash Flow Statement
in company is that this ascertain cash inflows or outflows for a specified time-period. This
information of the liquidity condition of the firm will not only allow the business or investors to
intend for the shorter or longer term, however can also allow to analyze the appropriate amount
of cash required in the business. Cash flow as well as income statement is regarded to be
beneficial and important tool for management of the corporation for the purposes of shorter-term

planning, together with control of cash-fund. In order to fulfil the various obligations, each
business entity must maintain an adequate quantity of liquid cash reserves so that,
whenever requirement arises, company can pay same amount. Therefore, cash flow statement
allows the financial planner to estimate cash flows in near term by using previous cash
inflows and outflows info.

REFERENCES
Books and journal:
Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate accounting and
reporting for sustainability–attributes and challenges. Sustainable Development, 25(2),
pp.113-122.
Liu, Y., Li, X., Zeng, H. and An, Y., 2017. Political connections, auditor choice and corporate
accounting transparency: evidence from private sector firms in China. Accounting &
Finance, 57(4), pp.1071-1099.
Hoang, T.C. and Joseph, D.M., 2019. The effect of new corporate accounting regime on earnings
management: Evidence from Vietnam. Journal of International Studies, 12(1).
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Ioannidis, J.P., 2019. The importance of predefined rules and prespecified statistical analyses: do
not abandon significance. Jama, 321(21), pp.2067-2068.
Harring, N., Jagers, S.C. and Matti, S., 2019. The significance of political culture, economic
context and instrument type for climate policy support: a cross-national study. Climate
policy, 19(5), pp.636-650.
Online:
Annual report of BHP limited for year 2017. [online] available through:<
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf>
Annual report of BHP limited for year 2018. [online] available through:<
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf>
Annual report of BHP limited for year 2019. [online] available through:<
https://www.bhp.com/-/media/documents/investors/annual-reports/2019/
bhpannualreport2019.pdf>
Annual report of Santos limited for year 2017. [online] available through:<
https://www.santos.com/wp-content/uploads/2020/02/2017-annual-report.pdf>
Annual report of Santos limited for year 2018. [online] available through:<
https://www.santos.com/wp-content/uploads/2020/02/2018-annual-report.pdf>
Annual report of Santos limited for year 2019. [online] available through:<
https://www.santos.com/wp-content/uploads/2020/02/2019-annual-report.pdf>

Annual report of Funtastic limited for year 2017. [online] available through:<
https://www.annualreports.com/HostedData/AnnualReportArchive/f/ASX_FUN_2017.pd
f>
Annual report of Funtastic limited for year 2018 & 2019. [online] available through:<
https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_FUN_2019.pdf>