Corporate Accounting: Cash Flow Analysis and Ratio Calculation for Telstra Corporation

This document provides a detailed analysis of cash flow statements and ratio calculation for Telstra Corporation. It includes a comparison of statement of cash flows of three chosen companies, calculation of ratios of three companies, and a discussion on the board of directors of Telstra Corporation.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Authors Note:

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CORPORATE ACCOUNTING
Contents
Question 1:.......................................................................................................................................2
Part A:..........................................................................................................................................2
Comparison of statement of cash flows of three chosen companies:......................................2
Cash flows from investing activities:......................................................................................2
Difference between direct and indirect methods of presenting cash flows:............................4
Part B:..........................................................................................................................................4
Calculation of ratios of three companies:....................................................................................4
Telstra Corporation and its ratios provided in Annual report:.................................................9
Question 2:.....................................................................................................................................11
Part A:........................................................................................................................................11
Part B:........................................................................................................................................12
References:....................................................................................................................................14

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Question 1:
Part A:
Comparison of statement of cash flows of three chosen companies:
Cash flows from operating activities:
In case of Rio Tinto the major category of cash flows in operating activities include cash from
consolidated operations, dividend received from equity accounted units, interest payment,
dividend paid to holders of non-controlling interests and payment of tax. In 2017 the company
collected cash of $16,670 million from consolidated operations and received dividend from
equity accounted units of $817 million. Net interest paid is $897 million with payment of
dividend to holders of non-controlling interests of $399 million. The company also paid tax of
$2,307 million in 2017 (Gordon et. al. 2017).
Woolworths Group on the other hand reported cash receipts of $65,498.9 million from customers
along with payment of $61,474.8 million to suppliers and employees of the company in 2017.
$234 million and $668.1 million were paid as interest and taxes respectively also reported under
operating activities of the company (Penman and Yehuda, 2015).
In 2017 Telstra reported $7,775 million as net cash generated from operating activities. The
operating activities cash inflows and outflows for the company include receipts of $31,288 from
customers; payment of $21,997 million to the suppliers and employees of the company; revenue
grants received by the company is $235 million and income tax paid $1,751 million.

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Cash flows from investing activities:
In investing activities an organization generally shows the amount of cash paid to acquire
any assets and receipts of interest from investments of the company. The cash flow statement of
Rio Tinto has disclosed that $2,373 million of net cash has been used in investing activities in
2017.The company has purchased property, plant and equipment (PPE) worth $4,482 million and
financial assets of $723 million (Harris, 2016). Major cash inflow from investing activities of the
company include $disposal of subsidiaries and joint ventures for $2,675 million and sale of
property, plant and equipment of $138 million in 2017.
Woolworths Limited has disclosed that it has received $279.8 million from sale of PPE in 2017
and $200.7 million from sale of subsidiaries and investments. The company has invested $253.2
million for development of PPE and $1,633.6 million for acquisition of PPE. Small payments of
$23 million has been made for acquiring intangible assets (Campbell, 2015).
Telstra in 2017 has invested $5,321 million for capital expenditures, i.e. acquisition of PPE and
intangible assets. The company has also made a cash payment of $63 million and $76 million for
acquiring business interests and other investments respectively.
Cash flow from financing activities:
Cash flow statements of Rio Tinto shows that the company has used net cash of $9,141 million
on financing activities that includes payment equity dividend to the shareholders of the company
$4,250 million and $2,795 million as repayment of borrowings. Also the company has used
$2,083 million for buy back of its own shares (Weber, 2018).
Woolworths Limited in its cash flow statement has reported that the company has used net cash
of $1,729.3 million in 2017 out of which $1,406.5 million for repayment of borrowings and

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$540.9 million for payment of dividend. The company has also received $184.1 million as
borrowings in 2017.
Telstra in 2017 has used net cash of $6,104 million in financing activities. Again most the cash
used is for repayment of borrowings of $4,571 million and payment of dividend $3,736 million
with $1,502 million being used for buy back of shares. The company has also collected $4,710
million from borrowings in 2017 (Hribar and Yehuda, 2015).
Difference between direct and indirect methods of presenting cash flows:
In direct method the cash flows, both receipts and payments from operating activities are
directly shown under different heads such as cash collected from customer and cash paid to
suppliers etc. Indirect method on the other hand uses addition and subtraction method by taking
net income from income statement to determine the net cash flow from operating activities
(Fazzini, 2018).
All the three companies, i.e. Rio Tinto, Woolworths Limited and Telstra Corporations have used
direct method to present their cash flow statements. It important to note that the only difference
in cash flow statements between direct and indirect method of presentation is in cash flow from
operating activities. Thus, the other two major types of cash activities are not affected by the
direct or indirect method of cash flow presentation (Papanastasopoulos, 2018).
Part B:
Calculation of ratios of three companies:
Cash return (Cash flow before tax x 100/ Equity invested)

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CORPORATE ACCOUNTING
Companies Rio
Tinto
Woolworth
s
Telstra
Cash flow before tax 2017 (Net cash from operatoons
before tax)
16,191.
00
3,790.10 9,526.
00
Average equity (opening equity + closing equity) /2
Openng equity 45,730.
00
8,781.90 15,907.
00
Closing equity 51,150.
00
8,976.10 14,560.
00
Opening plus closing equity 96,880.
00
17,758.00 30,467.
00
Average equity (opening equity + closing equity) /2 48,440.
00
8,879.00 15,233.
50
Cash return (Cash flow before tax x 100/ Equity invested) 33
.42%
42.6
9%
62
.53%
Out of the three companies cash return is highest for Telstra as can be seen in the above table
with 62.53% followed by 42.69% for Woolworths Limited and 33.42% of Rio Tinto (Pappa,
2015).

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Quality of earnings ratio:
Quality of earnings ratio (Cash flow from operations / Net income)
Companies Rio
Tinto
Woolwort
hs
Telstra
Cash flow from operations 13,884.
00
3,122.00 9,52
6.00
Net income 8,851.
00
1,482.00 3,87
4.00
Quality of earnings ratio (Cash flow from operations /
Net income) Times
1
.57
2.1
1 2.46
As can be seen in the table above that the quality of earnings of Telstra is 2.46 times which is by
far the most out of three selected companies. Woolworths Limited’s quality of earnings ratio
with 2.11 times is also very good. Rio Tinto has 1.57 times of quality of earnings ratio which is
also quite good as anything greater than 1 for the ratio is considered good for an organization
(Dalnial et. al. 2014).
Solvency ratios:
Solvency ratio {(net income + Depreciation) / all liabilities}
Companies Rio Woolworth Telstra

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Tinto s
Net income 8,851.
00
1,482.00 3,874.
00
Add: Depreciation 4,375.
00
1,037.60 4,441.
00
13,226.
00
2,519.60 8,315.
00
All liabilities 44,611.
00
13,039.70 27,573.
00
Solvency ratio {(net income + Depreciation) / all
liabilities}
29.
65%
19.3
2%
30.
16%
Again Telstra has highest solvency ratio with 30.16% followed by 29.65% of Rio Tinto and
19.32% of Woolworths Limited. It is clear that the ability of Telstra to discharge its obligations
is better than other two companies (Phillips, 2016).
Capital expenditure commitment:
Capital expenditure commitment (cash flow from operations / Capital expenditures)
Companies Rio Woolwort Telstra

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Tinto hs
Cash flow from operations 13,884.
00
3,122.00 9,52
6.00
Capital expenditures:
Purchased of PPE 4,482.
00
1,886.80 3,72
5.00
Purchase of financial assets 723
.00
Purchase of intangible assets 23.0
0
1,59
6.00
Capital expenditures 5,205.
00
1,909.80 5,32
1.00
Capital expenditure commitment (cash flow from
operations / Capital expenditures) Times
2
.67
1.6
3 1.79
Capital expenditure commitment of Rio Tinto with 2.67 times is highest out of the three
companies selected suggest that the ability of Rio Tinto to discharge its capital obligation.
Telstra Corporation has a capital commitment expenditure of 1.79 times followed by
Woolworths Limited of 1.63 times (Kaur, Aggarwal and Gupta, 2017).

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Telstra Corporation and its ratios provided in Annual report:
Ratios as provided in Annual Report 2017 of Telstra Corporations are provided in the table
below.
Telstra
All amounts are in $ million
2016-
06
2017-
06
Revenue 25,834 25,912
Gross Margin % 71.9 57.7
Operating Income AUD Mil 7,110 2,067
Operating Margin % 27.5 8
Net Income AUD Mil 5,780 3,891
Revenue 100 100
COGS 28.05 42.29
Gross Margin 71.95 57.71
Rate of tax 31.57 31.4

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Net margin 22.37 15.02
Asset turnover ratio 0.62 0.61
Return on Assets 13.81 9.11
Interest Coverage ratio 8.04 8.75
Current Ratio 1.02 0.86
Quick Ratio 0.9 0.7
Debt/Equity 0.92 1.02
From the above ratios it is clear that the emphasis in ratio calculations in annual report of the
company was more on profitability, liquidity and solvency position of the company. In contrast
Carslaw and Millis emphasized on the importance of developing ratios taking into consideration
of cash flow statements and income statement of an organization. Thus, the emphasis was
equally divided in cash flow statement and income statement. Thus, obviously there is significant
difference between the ratios calculated in this document as per Carslaw and Mills journal on
developing ratios for effective cash flow statement analysis (Mohanram, Saiy and Vyas, 2018).
The ratios calculated in the annual report shows the profitability, liquidity and solvency position
of the company whereas the ratios calculated in this document is more on the quality of earnings,
cash return and ability of the company to generate cash from business operations (Lin et. al.
2015).

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Question 2:
In order to complete this part of the document Telstra Corporation has been chosen.
Part A:
Telstra Corporation as per the annual report 2017 has 9 non-executive or independent
directors.
The company has 9 female and 13 male directors in total. It is a quite a diverse board
both as per the gender equality and presence of independence directors.
John P Mullen: Mr Mullen is a non-executive director of the company since July, 2008
with extensive experience and knowledge of international transportation. His experience helped
the company to achieve better operational efficiency in managing the resources of the company.
Andrew Penn: Andre Penn’s career span over 30 years in Executive position of number
of multi-nationals before joining Telstra. His experience and managerial skill has helped the
company to expand its business over the years.
Joe Pollard: With extensive knowledge in legal services Joe Pollard and his department
provides legal services to Telstra Group.
John P Mullen in total has 33 years of experience, i.e. 25 years’ experience in different
companies before appointed as non-executive director of Telstra in 2008. Andrew Penn as
already explained has in total 30 years of experience. Joe Pollard has experience of more than 25
years.
No, none of the three directors are on any other Board except Telstra Corporation.

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Part B:
Telstra Corporation is one of the foremost companies in all across the globe when it
comes to Telecommunication industry. The financial performance and position of the company
are of significant interests of all its stakeholders. The annual report 2017 of the company
contains the financial statements of 2017 with corresponding figures of 2016. Taking into
consideration the information provided in the annual report of the company a brief discussion on
the financial performance, position, growth in equity and expected future growth is made here.
The income statement of the company reflects the ability of the company to generate
revenue and profits over the years. In 2014 the company’s revenue was $25,119 million that
increased to $25,912 million in 2017. The net income from continuing operations of the
company however, over the years have decreased. In 2014 the company earned net income of
$4,549 million. In the next year it reduced to $4,286 million and $3,832 million in 2016.
However, in 2017 the company has been to reverse the declining trend in profitability slightly by
earning a net income from continuing operations of $3,874 million. Thus, it would not be
incorrect to state that the profit of the company has not been stable over the years.
The company has been regular when it comes to payment of dividend to the equity
shareholders of the company. In fact each year the quantum of dividend has increased. In 2014
the company paid a dividend of $3,567 million that has increased to $3,736 million by the end of
2017. As a result the shareholders’ equity has also grown year after year. In 2017 the
shareholders’ equity stands at $14,541 million whereas it was merely $13,822 million in 2014.

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Each year the company invests significant amount of cash on investment activities to
expand its business operations. Purchase of plant, property and equipment along with acquisition
has always been a strategy of the company to grow its business. In 2017 the company has used a
net amount of $4,279 million on investing activities.
The company has continued with its strategy of providing top quality services to the
customers at relatively low prices. There has been no significant changes in its strategy but the
company certainly recognizes the challenge of rising competition in the market and hence,
always looking to improve its services.

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returns. Contemporary Accounting Research, 32(1), pp.243-279.
Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Detecting fraudulent
financial reporting through financial statement analysis. Journal of Advanced Management
Science, 2(1).
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Macmillan, Cham.
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classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2),
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cycle stages. Contemporary Accounting Research, 32(3), pp.1053-1072.
Kaur, M., Aggarwal, N. and Gupta, M., 2017. An Investigation into Returns from Financial
Statement Analysis among High Book-to-Market Stocks. Indian Journal of Economics and
Development, 13(2), pp.353-358.

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Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement fraud:
The analysis of the differences between data mining techniques and experts’
judgments. Knowledge-Based Systems, 89, pp.459-470.
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Weber, M., 2018. Cash flow duration and the term structure of equity returns. Journal of
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