Understanding Cash Flow Statement and its Utility in Business Decision Making

This report provides an understanding of the cash flow statement and its utility in business decision making. It explores the cash flow operations and major sources and usage of cash for different companies. The report also discusses the difference between cash flow and net income, and analyzes the trend in capital expenditure and dividend payments for each company. Additionally, it provides insights into the impact of cash flows on business operations.

CORPORATE ACCOUNTING

Executive Summary
The business decision happens on a number of parameters. It is done by evaluating the financial statements
and various other parameters. Cash flow statement is a vital component when it comes to the assessment of
the business. In this report, the understanding of the cash flow statement is provided followed by the utility
of the cash flow statement. The assignment is based upon the cash flow of Funtastic Ltd, BHP Billiton, and
Santos Ltd. From the overall assessment, it can be predicted that cash flow plays a predominant role in
taking a relevant decision. As per the cash flow statement, it can be ensured that among the three BHP
Billiton is placed in a better fashion because it has strong fundamentals and better operations.
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Contents
Introduction..................................................................................................................................................................4
Part – A.......................................................................................................................................................................... 4
Part B............................................................................................................................................................................. 6
 Major sources and usage of Cash for each firm.....................................................................................................6
 The trend of Cash flow operations........................................................................................................................6
 Difference between cash flow and net income.....................................................................................................6
 Cash flow from operations cover both the capital expenditures and the dividend payments..............................6
 Investment of excess cash and utilization of the sources of cash..........................................................................7
 The major items that affected cash flows..............................................................................................................7
 The trend in the capital expenditure for each company:.......................................................................................7
 The trend in Dividend for each company:.............................................................................................................8
 The trend in net borrowing...................................................................................................................................8
 Financial strength..................................................................................................................................................9
 Selection for Lending.............................................................................................................................................9
Conclusion...................................................................................................................................................................11
References...................................................................................................................................................................12
References...................................................................................................................................................................13
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Introduction
The cash flow statement is vital from all perspective and it is a mirror to the cash position of the business.
The cash flow statement helps the business is stating whether the business comprises of adequate cash at all
point of time. A business should have adequate cash at all time to ensure that the functions will move
steadily. The cash flow position of BHP Billiton, Funstastic Ltd, and Santos Ltd is selected for the study.
The report will deal with various parameters of the cash flow statement and evaluation will be done on the
cash flow statement of each company.
Part – A
The users of the financial statements of an organization seek certain information so as to evaluate the actual
well being of the same. The investors can ascertain the cash position of an organization by means of
reviewing its cash flow reports. The cash flow report of an entity projects the cash inflows and cash
outflows of the same (Venanci, 2012). The readers of financial statements find such an organization
desirable that always necessarily maintains an adequate level of cash in hand. The significance of cash is
huge for the functioning of an organization (Adra & Barbopoulos, 2018). Having a sufficient level of cash
in hand means that the organization can easily take care of all its expenses, taxes, bank loans, purchases,
etc. A sufficient level of cash determines the solvency of an organization. This means that in the absence of
an adequate level of cash the company might become insolvent as it will no longer be capable of settling its
expenses and other debt obligations (Davies & Crawford, 2012).
Cash Flow Statements: These are the statements that reflect the cash inflows and cash outflows of an
organization for a financial year. This allows the organization to keep a check on the cash that is spent in
order to pay certain dues and cash that is left with the same. A cash flow statement can be segregated into 3
distinct activities that are investing activities, financing activities, and operating activities. Balance sheets
and profit and loss statements are the basis on which the cash flow statements are constructed (Leo, 2011).
The rise and fall in the level of cash are reflected from the cash flow statements and therefore, it is highly
significant for the well being of the company. Through these statements, readers can understand if too
much money is withdrawn from the business (Drury, 2011). Also, it is easy to construe the fact that if the
organization is running out of cash in hand while being profitable at the same time.
Cash flow statement allows the readers to ascertain the actual amount of cash exit and entry in the
company. The statement offers reliable information pertaining to cash-based transactions in the
organization (Deegan, 2014). Cash flow statement allows the users to determine the upcoming cash
requirements by enabling them to draw comparisons between the ongoing year’s cash budgets with that of
the previous year (Madura & Fox, 2011).
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The statement offers alterations that should be necessarily made so as to enhance the financial leverage of
the organization. The statement is usually constructed so as to determine the present level of cash required
in the organization as well as to develop a cash budget for the upcoming period. The income statement is
also known as the profit and loss statement (Gibson, 2010). It is a statement used to evaluate the net profits
or net loss earned by an organization. It is one of the most important financial statements used so as to
evaluate the financial performance of an organization. The income statement is prepared prior to the
balance sheet of the company. This statement provides an overview of the revenues earned and expenses
incurred by an organization for a particular time period (Vanderbeck, 2013).
An income statement is used by the investors so as to evaluate the actual performance of an organization
over a specific period. Investors also rely on the income statements of an organization so as to determine
the value of the same as it has the tendency to affect its price per share (Gowthrope, 2013). The income
statement is prepared by following a golden rule that is debit what comes in and credit what goes out. This
means that the expenses and losses are all reflected in the debit side while incomes and gains are reflected
on the credit side of the income statement. Income Statement: The income statement offers a clear picture
of the entity’s performance for a particular period (Laux, 2014). The income statement is not only
beneficial for the investors but it is also crucial for the management of an organization. With the help of the
income statement, the management of an organization can measure the effectiveness of its strategies. The
statement is highly significant for investors as with the help of the same they can initiate constructive
decisions (Titman, Martin, Keown, & Martin, 2016). The investors can derive a lot of valuable information
from the income statement of the organization such as its profitability, sales, gross profit, retained earnings,
operating income, etc. Also, income statements offer information for not less than 2 periods which makes it
easy for the investors to draw comparisons between the results from different years and thereafter, evaluate
the enhancement in the results and construe appropriate investment related decisions (Lapsley, 2012).
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Part B
 Major sources and usage of Cash for each firm
The major source of cash for Funtastic Limited comprised of the receipt from customers meaning the
normal course of business fetched revenue to the company. However, the receipts had a declining trend.
further internal sale of subsidiary fetched $126 million to the company and further, there were proceeds
from borrowings that added to the sources of Funtastic Ltd.
The major use of cash for Funtastic happened in the form of payment to the suppliers and payment of
interest. Further, the company purchased plant and equipment and other intangible assets thereby funds
moved out of the organization.
The major source of funds for BHP Billiton was in the form of cash generated from operations. It has been
witnessed that the cash flow from operations of the company increased to a significant extent. Further, the
other sources comprised of receipt of dividend proceeds from liabilities that were interest bearing in nature.
For BHP Billiton, the major payment happened in the form of payment of interest and payment of income
tax that constituted the fund's movement out of the organization. Moreover, dividends were paid with the
repayment of interest-bearing liabilities that led to the usage of the funds.
For Santos Ltd, the major source happened from the cash flow from operating activities that indicated a
positive trend in the past three years. Moreover, the source of funds happened from the drawdown of
borrowings. There were multiple activities that led to the flow of funds such as payment to suppliers,
expenditure on restoration, payment of borrowing costs, royalty and taxes.
 The trend of Cash flow operations
Yes, the trend in the cash flow appeared from the main or continuing operations of the firm. In all the three
companies, the movement in and out of the firm happened by way of main activities that are directly
relatable. As discussed above the main inflow and outflow appeared from the sections that were primary in
nature.
 Difference between cash flow and net income
The cash flow from operations was higher than the net income and this can be attributed to the fact that the
total cash flow is the operative cash flow together with the net income of the company. On the other hand
the net working capital is the difference that exists between the assets and liabilities. The cash flow projects
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the cash inflow and outflow that appears from the operating activities while net income is earned revenue
minus the expenses (Needles & powers, 2013).
 Cash flow from operations cover both the capital expenditures and the
dividend payments
In the case of BHP Billiton, it is noted that the cash flow from operation increased in all the three years
thereby signifying that the business comprises of more inflow of funds. The cash inflow jumped from
$10645million in 2016 to $18641 million in 2018. The capital expenditure of the firm that is the payment
for the acquisition of assets was easily covered by the cash generated from operations. Moreover, the
amount generated from the operations was sufficient to meet the payment for the dividend.
For Funtastic Ltd, cash was utilized from operating activities and hence the cash was not sufficient for the
capital expenditure. Further, no dividend was issued by the company.
While in the case of Santos Ltd, the company was able to have positive cash flow from operations and
hence, was able to pay towards the dividend and capital expenditure. The cash flow operations were
sufficient to pay for such expenses.
 Investment of excess cash and utilization of the sources of cash
In the case of BHP Billiton and Santos Ltd, the company had positive cash flow from operations that
signifies the availability of surplus cash and this cash was utilized to pay for the capital expenditures, as
well as dividends. On the other hand, when it comes to Funastic Ltd, it can be said that the company had
negative cash from operations that means the cash was utilized in the business. In this case, the payment for
expenditure from cash and cash equivalence from the previous if any and the company further used the
form of bank overdraft that helped to provide funds.
When it comes to BHP Billiton it is noted that the firm used the working capital to empower the operations
that are witnessed by the difference in the current assets and current liabilities. The change in current assets
and liabilities can be a source of funds if the current assets rank ahead of the current liabilities. The
presence of more current assets reveals that there is more liquidity and hence the business will be able to
discharge the obligations. It was only in the year 2016 that the current assets were excess of current
liabilities, however, in 2017 and 2018 it was negative and hence used with the cash and cash equivalence to
empower the company’s functioning.
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 The major items that affected cash flows
For Funtastic Ltd, payment to suppliers and receipts from customers was the main items that affected the
cash flow of the company. Other items that affected the activities were borrowings and proceeds from
shares.
For BHP Billiton, the net cash from continuing operations was high and even the payment of interest.
Further, items such as purchases for plant and property payment of interest-bearing liabilities impacted the
cash flow.
For Santos Ltd, the major items that impacted the cash flows are receipts from customers and payment to
suppliers. Further, the major outflow was in the investing activities and hence a major point of
consideration. On the financing side, the drawdown of borrowings impacted the cash flow.
 The trend in the capital expenditure for each company:
Funtastic Ltd - In this company, the net cash had an outflow in the domain f investing activities that means
the company has acquired assets and this is an indication that the company is vouching ahead to expand the
business. The net cash outflow from the investing activities came to $(298) million. The company acquired
plant and types of equipment and other intangible assets.
BHP Billiton – Even BHP reflected a figure of -$5921 million indicating that cash was used in investing
activities and it can be said that the business is opting for expansion. Hence, it is a good scenario for the
business. The company acquired plant property and equipment and incurred expenditure related to
explorations that are the chief practice of the business. Hence, it projected a favorable scenario for the
company.
Santos Ltd – Similar trend was noted in the case of Santos Ltd where the company incurred expenses in
relation to investment purposes. The company had cash outflow from investing activities that project the
expansionary motive of the company. It acquired oil and gas assets, land buildings, explorations, etc.
 The trend in Dividend for each company:
For Funtastic Ltd there was no case of dividend payment. However, dividend payment was observed in the
case of BHP Billiton that indicated a sharp surge in the payment of dividend in each of the three years. This
indicates that the dividend payment was high owing to the increment in the profit level. The payment of
dividend amounted to $5220 in 2018 as against a sum of $4130 in 2016. Hence, the sharp increment is a
positive outlook when it comes to the perspective of the company.
On the other hand, the trend of dividend in the case of Santos Ltd was uneven because it paid a dividend in
the year 2016 amounting to $43 million while in 2017 it could not pay and then again in 2018 the dividend
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payment amounted to $73 million. This indicates that the trend in the dividend of the company is uneven in
nature. further, it also stresses that the profit earning capacity of the company has been uneven and hence,
there has been different in the dividend payment.
 The trend in net borrowing
Funtastic Ltd - the proceeds from borrowing is a major component in this company as the borrowing has
been consistent. The borrowing decreased from a figure of $7457 in 2016 to $2630 in 2018. This
emphasizes that the company has repaid the borrowing and hence there is a decline in the borrowings of the
company. It is a strong indication that the business has repaid a majority of the debts.
BHP Billiton – In the case of BHP, there has been no sign of borrowing rather the borrowing might in the
form of debt related instruments.
Santos Ltd – for Santosh, it is noted that both the increment and repayment of debts happened. This
indicates that the company uses borrowings and repay it. The drawdown of borrowings increased from
$783 million in 2016 to $1193 million in 2018.
The trend in working capital of BHP has been negative in the past two years because the current assets are
less as compared to the current liabilities. Hence, it is observed that in 2017 and 2018 the networking
capital appeared at -$(241) million and -$(118) million. It provides a clear cut indication that the current
liabilities are more in the company as compared to current assets and hence there might be difficulty in
repayment of the obligations (Mersland & Urgeghe, 2013)
 Financial strength
Funtastic Ltd - going by the evaluation of the cash flow statement it can be said that the company is having
outflow from the operating activities and hence is a major cause of concern. When it comes to operating
activities it needs to be noted that the figure should be positive because it helps in the operation of the
company (Merchant, 2012). However, fantastic Ltd fails in this regard. The investing pattern of the
company is string followed by the financing activities however, the operating activities fall weak.
BHP Billiton
BHP comprises of cash flow from operations meaning the operations of the company is helping in reaching
a formidable position. The net operating cash flows increased from $10625 million in 2016 to $18641 in
2018. Hence, it is a favorable condition for the company. further, the investing patter of the company is
strong followed by the utilization of funds in the financing activities. Hence, the financial strength is high
in this regard
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Santos Ltd
Similar to BHP, Santos Ltd has a positive cash flow from operating activities. This means the business of
the company is effectively placed that helps in earning and gathering potential returns. The cash flow from
operations of the company is strong followed by the cash used in investing activities. Moreover, cash was
sued in financing activities.
Considering all the three mentioned company, the financial strength of BHP Billiton ranks high owing to
the presence in the market and the strong cash flow ensures that the business does not suffer from lack of
funds.
 Selection for Lending
Lending is done based on various parameters. For lending, the best selection will be BHP Billiton as it has
strong fundamentals and comprises of strong cash flow from operating activities. This means that the
operations of the company are strong and if the company borrow money then it can easily repay because
the operations are strong. Another major indicator that justifies the company selection is the payment of
dividend (Melville, 2013). This means that the company has sufficient profit as it pays dividend constantly.
From the entire scenario, it can be judged that BHP ranks ahead of all the companies and hence, is in a
favorable position. Loans taken by BHP can be easily repaid without any hassle. Further, the investing
activities indicate that the business is expanding and hence, all parameters go for the selection of BHP.
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Conclusion
The overall study gives a strong insight into the cash flow position of three different companies. It is
evident that the company should have positive cash flow from operations as it indicates the cash generated
from the operating activities. Moreover, the business needs to invest in tangible and intangible assets that
will speak volume regarding the expansion of the business. Moreover, the financing activities project the
payment done and received in respect of the financing activities where the payment of the dividend is seen
from a positive point of view. The overall study, therefore, projects that among all the three companies
BHP Billiton is better placed because of the positive cash flow from operations together with the
investments done in assets. Furthermore, another important consideration is that of the dividend payment
that has been continuous beating the other two companies that are Funtastic Ltd and Santos Ltd.
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