Importance of Corporate Accounting for Businesses

This report focuses on the importance of corporate accounting for businesses and its usefulness to investors. It analyzes the information content of the income statement and statement of cash flow, as well as the major sources and uses of cash in companies like BHP Ltd, Santos Ltd, and Funtastic Ltd. The report also examines trends in cash flow from operations, compares it with net profit after tax, evaluates the ability to generate enough cash for capital expenditures, and assesses the coverage of dividend payments.

Corporate Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. Critical examination of the information content of the income statement and the statement
of cash flow and the reasons for usefulness of them for the investors........................................1
PART B............................................................................................................................................3
1. a. The major sources and uses of cash in all the firms.............................................................3
1. b. Trends in cash flow from operations for each firm..............................................................4
1. c. Comparison and contrasting of cash flow from operations with the net profit after tax in
income statement and major reasons for the difference between these two figures for BHP
Limited.........................................................................................................................................4
1. d. Ability of the firms to generate enough cash from operations to pay for all the capital
expenditures.................................................................................................................................5
1. e. Cash flow from operation covering any dividend payment which are made by the firm or
not................................................................................................................................................5
1. f. If the excess cash is generated from operations the how it is invested by the form if not
the the sources of cash that firm used to pay all the capital expenditures or dividends..............5
1. g. Firm is using working capital accounts other than cash and cash equivalents as sources of
cash or uses of cash......................................................................................................................6
1. h. The major items that affected cash flow in all the firms......................................................6
1. i. Trends in capital expenditures of each firm..........................................................................6
1. j. Trends in dividends for each firm.........................................................................................7
1. k. Trends in net borrowings for each firm...............................................................................7
1. l. Trend in working capital accounts of BHP limited..............................................................7
2. Critical evaluation of the financial strength of each of the firm on the basis of evidences that
are presented in the statement of cash flow and the above questions..........................................7
3. Recommendation and justification regarding lending one of the companies..........................8
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Corporate accounting could be defined as the process of analysing financial data of
companies which is recorded in the final accounts so that the actual position and performance of
company could be determined. If the business entities will not be formulating financial
statements properly then it may leave negative impact upon mind set of stakeholders because it
will create difficulty for them to analyse actual position of business. Main of this report is to
understand importance of corporate accounting for businesses so that expectations of
stakeholders could be met (Abernathy and et.al., 2019). There are two different parts of this
assignment. First part is focused with analysis of income and cash flow statement. Second part of
the report is based upon analysis of financial statements of different companies which are BHP
Ltd, Santos Ltd and Funtastic Ltd. for three years. This assignment covers various topics such as
critical examination of the relative information content of the income and cash flow statement
along with the usefulness of them to investors. Apart from this, statement of cash flow is also
analysed for three different companies so that major sources of funds, their trend and other
elements could be analysed.
PART A
1. Critical examination of the information content of the income statement and the statement of
cash flow and the reasons for usefulness of them for the investors
Income statement: It could be defined as the document which is formulated by
businesses for the purpose of keeping track record of all the transactions that are made by the
entity during the accounting year. It is also known as profit and loss account as it provides the
details about profitability of the enterprise. With the help of it, actual position of company could
be determined which facilitate internal as well as external stakeholders to analyse actual position
of the company. All the expenses and losses that are faced during the year along with the
incomes and gains for the year are recorded in it so that actual profits at the end of accounting
year could be analysed (Ainsworth and Deines, 2019).
Relative information content of the income statement: There are various types of
elements that are recorded in the income statement for the purpose of determining the actual
profits for the year. Various key elements that are recorded in it are expenses, incomes, losses
and gains. Some of the expenditures are legal costs, commission, insurance, postage,
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advertisement, salaries, wages, carriage, goodwill write off, transfer to reserves etc. Some of the
incomes that are also recorded in the profit and loss account are different types of receipts such
as interest, commission etc. The key losses that are recorded in income statement are gross loss,
loss on sale of asset etc. Some of the gain that are reflected in it are gross profit, gain on sales of
assets etc. With the help of income statement actual profitability of the company or ability to
generate profits in future could be analysed by external as well as internal stakeholders (Biddle,
Ma and Song, 2020).
Statement of cash flow: It is one of the key financial statements which are generated by
the companies for the purpose of recording all the transactions that are made during the year.
There are three main activities that are focused in the formulation of it. These are operating,
investing and financing. There are various types of elements that are recorded in it. By using it
the investors or other stakeholders can analyse that the business is having high or low liquidity.
While formulating it the businesses will be required to make sure that only cash transactions are
recorded in it. All the non cash transactions are ignored during formulation of it (Crane and et.al.,
2019).
Relative information content of the statement of cash flows: All the increments and
decrements in current assets and liabilities are adjusted in it. Apart from this, the details about
buying an asset, making investment in a project, issuing shares, making redemption of
debentures, repayment of shares etc. are recorded in it so that actual inflow and outflow of funds
for the year could be determined (El-Bassiouny and El-Bassiouny, 2019).
Reasons due to which investors find both the statements useful: While planning to
invest in an organisation the investors analyse actual profitability as well as liquidity of the
company so that right decision for investment could be taken. The information which is recorded
in income and cash flow statement is used by them to analyse both the aspects. In order to
determine profitability and liquidity investors will need to evaluate the statements. The relative
information content will help them to analyse that the business is performing well or not. Apart
from this, they also determine the potential rate of return which could be provided by the
company in future by analysing the final accounts (Habib and Hasan, 2019).
The above discussion states that income and cash flow statement are useful for investors
as the key elements that are focused by them while making investment in an organisation are
profitability and liquidity. Detailed information of both of them could be gathered by assessing
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the final accounts. If an organisation will not be able to keep detailed information in the
statements then it will be very difficult for it to attract large number of investors. Apart from this,
investors can also determine the potential rate of return which could be generated by them on the
investments. For this purpose, they can evaluate the returns that are offered by the enterprise to
the existing shareholders. It states that the information which is represented in both the
statements are very useful for the investors as it facilitate them in effective decision making
(Johnson, 2019).
PART B
1. a. The major sources and uses of cash in all the firms
BHP Ltd: From the annual report of year 2017 of the entity it has been analysed that for
this year the major sources of cash were proceeds from interest bearing liabilities, proceeds from
sale of assets, exploration expenditure etc. On the other hand the uses of cash for the same year
were purchase of property, plant and equipment, exploration expenses, repayment of interest
bearing liabilities, dividend paid etc. For 2018 the main sources of funding were net investment
and funding and the exploration expenses that were included in operating cash inflows. The uses
of funds for this year were very high which are taxation paid, interest paid, purchase of property,
payment of liabilities, dividend paid etc. For the year 2019, the major sources of cash were
operating cash inflow from discounted operations, exploration expenses, proceed from
divestment of Onshore US etc. The uses of cash for the year were dividends, share buy back,
repayment of the liabilities, net investment and funding of equity accounted investments, tax and
interest payments(Annual report of BHP Ltd, 2017).
Santos Ltd: The annual report of year 2017 of the company is showing that major
sources of funds for the year include receipts from customers, drawdown borrowings etc. The
uses of cash for the same year were repayment of borrowings, payment for oil and gas assets,
borrowing cost paid, payment to supplier and employees etc. For year 2018 the major source of
finance was receipts from customers and drawdown of borrowings. The uses for the year were
payment to suppliers and employees, payment for oil and gas, payment for acquisition etc. For
year 2019 the sources of cash were receipts from customers, drawdown of borrowings etc. The
major uses of finance for year 2019 were repayment of borrowings, payment of dividend, oil and
gas assets, suppliers and employees (Mepham, 2020).
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Funtastic Ltd: The annual report of the company for year 2017 is reflecting the major
uses and sources of cash for the company. The major sources includes receipts from clients,
interest received, proceeds from borrowings etc. The uses for the same year are payment of for
tangible assets, plant and equipment, interest etc. Annual report of year 2018 is showing that
major sources of cash for the company are receipts from customers, proceeds from sale of
international subsidiary, borrowings, share issue etc. The main uses of the cash for the year are
payment to suppliers and employees, interest, costs from share issue etc. From the annual report
for year 2019 it has been analysed that sources of cash for the year are receipts from customers,
proceeds from borrowings and share issue (Muslu and et.al., 2019). Apart from this, the uses of
cash for the year are costs from share issue, repayment of commercial bills etc.
1. b. Trends in cash flow from operations for each firm
BHP Ltd: From the cash flow statements of the company for year 2017, 2018 and 2019
it has been analysed that the company's cash flow for the years is following fluctuating trend. For
2017 it was 14108 which was increased in 2018 up to 15813 and then decreased up to 15593 in
2019 (Annual report of BHP Ltd, 2018).
Santos Ltd: The cash flow statement of the company is also following the fluctuating
trend but the balance of cash at the end of each year was positive. For 2017 it was 1231 and for
2018 it as 1316 which shows that company followed increasing trend for two years. For 2019
cash flow was 1067 which reflects that for this year the trend was decreasing.
Funtastic Ltd: From the annual report of the company it has been analysed that the cash
flow of the company followed increasing trend for first two years and for the last year which is
2019 it followed decreasing trend.
1. c. Comparison and contrasting of cash flow from operations with the net profit after tax in
income statement and major reasons for the difference between these two figures for BHP
Limited
From the annual report of BHP Ltd it has been analysed that cash flows for year 2017,
2018 and 2019 were 14108, 15813 and 15593 respectively. The income statement is showing net
profits after tax for these three years are 6222, 4823 and 9185. The difference in net profits and
cash flows is very high. All the transactions that are recorded in the income statements are not
listed in cash flow but all the transactions that are increasing profits will be recorded in the cash
flow statement. Such expenses that are having capital nature are not recorded in profit and loss
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account. The main reasons for the difference is non cash expenses that are recorded in income
statement but ignored while formulating cash flow statement (Napier and Stadler, 2020). In cash
flow only cash transactions are recorded and it was the main reason for the difference in the cash
flow and net profit after tax.
1. d. Ability of the firms to generate enough cash from operations to pay for all the capital
expenditures
BHP Ltd: The annual reports for 2017, 2018 and 2019 are reflecting that the company
was able to pay all its capital expenses as the cash flows were very high (Annual report of BHP
Ltd, 2019).
Santos Ltd: From the cash flow statements of the company for 2017, 2018 and 2019 it
has been analysed that the ability of the firm to pay all its capital expenses was good as the
closing balance of cash for these years is showing positive results.
Funtastic Ltd: The consolidated cash flow statement of the enterprise is showing high
ability of the entity to meet all the capital expenses as the cash flow from all the operations for
the years 2017, 2018 and 2019 were positive.
1. e. Cash flow from operation covering any dividend payment which are made by the firm or
not
BHP Ltd: Cash flow from operations of the company for years from 2017 to 2019 is
covering dividend payments which were made by the firm during the years.
Santos Ltd: The statement of cash flow is showing that total cash flow from operations
for year 2017, 2018 and 2019 is also covering the dividend payment which was made by the
enterprise (Annual report of Santos Ltd, 2017).
Funtastic Ltd: From the consolidated statement of cash flows for year 2017, 2018 and
2019 it has been analysed that the cash flow does not cover any dividend payments as the entity
has not made any dividend related payment.
1. f. If the excess cash is generated from operations the how it is invested by the form if not the
the sources of cash that firm used to pay all the capital expenditures or dividends
BHP Ltd: In 2017 excess cash was generated by the company so the cash was invested
by buying property, plant and equipment. In 2018 and 2019 excess cash was not generated and
payment of dividend made from receipts from suppliers.
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Santos Ltd: The firm has not invested any excess cash anywhere during the year 2017 to
2019. The payments of dividend were made from receipts from customers (Annual report of
Santos Ltd, 2018).
Funtastic Ltd: The cash flow statement of the company is reflecting that the excess cash
which was generated from operations for years 2017, 2018 and 2019 was used to make payments
fro plant, equipment and intangible assets. No payment regarding dividend was made during the
period of three years from 2017 to 2019.
1. g. Firm is using working capital accounts other than cash and cash equivalents as sources of
cash or uses of cash
From the cash flow statement of BHP Ltd it has been analysed that the company is using
working capital accounts other than cash and cash equivalents as sources and uses of cash. The
cash flow statements for 2017, 2018 and 2019 is showing the changes in current assets and
liabilities as sources and uses of finance. Some of these items are trade and other receivables,
inventories, trade and other payables and other provisions (Orazalin, 2019).
1. h. The major items that affected cash flow in all the firms
BHP Ltd: During the years 2017 to 2019 the major items that affected the cash flow of
the company are payment of interest, tax, dividend, purchase of plant, property and equipment,
exploration expenditures (Rathore, 2019).
Santos Ltd: The key items that affected the cash flow of the organisation during three
year's period from 2017 to 2019 are payment to supplier and employees, oil and gas assets,
repayment of borrowings, payment of dividend etc.
Funtastic Ltd: The items that are affecting cash flow of the company for years from
2017 to 2019 are payments to suppliers and employees, interest, plant and equipment, other
tangible assets etc.
1. i. Trends in capital expenditures of each firm
BHP Ltd: From the statement of cash flow of the company from 2017 to 2019 it has
been analysed that the trend of capital expenditure is increasing as the value of them is increasing
during these three years.
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Santos Ltd: The trend of capital expenditure of the entity during the period of three years
from 2017 to 2019 is fluctuating as the value of them for these years is changing continuously
(Annual report of Santos Ltd, 2019).
Funtastic Ltd: The cash flow statement of the enterprise is showing increasing trend for
the capital expenditures of the company for the years from 2017 to 2019.
1. j. Trends in dividends for each firm
BHP Ltd: The cash flow statements of the company for years 2017 to 2019 is showing
that the dividend of the entity is following increasing trend since last three years.
Santos Ltd: Dividend of the company is following increasing trend as the value of it is
increasing for all the years from 2017 to 2019.
Funtastic Ltd: The company has not made any payment during the years 2017 to 2019
so there is no trend identified in the dividend of the organisation (Annual report of Funtastic Ltd,
2017).
1. k. Trends in net borrowings for each firm
BHP Ltd: From cash flow statements of the enterprise for years 2017 to 2019 it has been
analysed that the net borrowings are following the decreasing trend.
Santos Ltd: The cash flow statement of the enterprise is showing that the value of net
borrowing is following fluctuating trend as it was increased in 2018 and decreased in 2019.
Funtastic Ltd: By analysing the cash flow statement of the enter[rise it has been
analysed that during first two years the trend for net borrowings was increasing and for 2019 the
trend was increasing (Annual report of Funtastic Ltd, 2019).
1. l. Trend in working capital accounts of BHP limited
BHP Ltd: By evaluating statement of cash flow of the organisation it has been analysed
that the working capital accounts of the company are following the fluctuating trend because the
values of them is changing during the accounting years from 2017 to 2019 (Schroeder, Clark
and Cathey, 2019).
2. Critical evaluation of the financial strength of each of the firm on the basis of evidences that
are presented in the statement of cash flow and the above questions
BHP Ltd: From the cash flow statement of the company it has been analysed that the
enterprise is very strong as it is having fluctuating trend in the cash flow from operations. For
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2017 the closing balance of cash was 14108 which was increased up to 15813 in 2018 and then it
was decreased in 2019 up to 15593. It shows that the company is able to generate enough cash
for meeting all the capital expenses as the cash flow for all the years was very high. Apart from
this, it also reflects that the liquid strength of the company is also very good that helps it to carry
out all its operations in systematic manner. Additionally, the company has also made yearly
payment of dividend to all the investors that reflects its good financial strength (Susanto and
Masli, 2020).
Santos Ltd: The cash flow statement of the company is showing that the financial
strength of the enterprise is good as the closing balance of the statement was showing positive
results. Apart from this, the organisation was also able to meet all its capital expenses which
helps it to maintain its liquidity. It has also made dividend payments to the investors so that their
interest could be maintained in the business (Wang, Li and Liu, 2020).
Funtastic Ltd: The cash flow statement of the company is showing that the enterprise is
financially strong as its closing balance of cash is positive for all the years that are 2017 to 2019.
On the other hand, its performance was not very good as compared to rest of the two companies
as it has not made any payment of dividend to the investors for the three years (Annual report of
Funtastic Ltd, 2018).
3. Recommendation and justification regarding lending one of the companies
By analysing the financial strength as well as performance of BHP, Santos and Funtastic
it has been analysed that the company which is highly sustainable and string in finance point of
view is BHP. If an entity or the investors will be willing to invest in one of them then it should
make investment in BHP Ltd as the cash balance of it for three years that are 2017, 2018 and
2019 was very high as compared to rest of the two companies. Apart from this, the organisation
is also making payment of dividend on yearly basis of that it can fulfil requirements of all the
investors and meet their expectation level. The best suitable option for lending one of the
companies is BHP because of its very good financial situation in the market and good liquidity
(Weir, 2019) .
CONCLUSION
From the above project report, it has been concluded that corporate accounting is a
technique which is used in evaluation of business position as well as performance for the purpose
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of making future decisions. There are two main types of financial statements that are used for the
purpose of evaluating actual performance of the company. These are income and cash flow
statement. With the help of them, actual liquidity and profitability of the firms could be analysed.
Cash flow statement could be used by the firms for the purpose of evaluating that the business
will be able to meet all the future goals or not. There are various types of elements that are
analysed while evaluating performance of the company. These are dividend, trend in the cash
flow, ability to pay all the capital expenses and borrowings etc. While willing to make
investment within an organisation investors try to analyse the best suitable option for investing
funds. For this purpose, cash flow statement of all the companies is analysed.
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REFERENCES
Books and Journals:
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Ainsworth, P. and Deines, D., 2019. Introduction to accounting: An integrated approach. John
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Journal of Accounting, Auditing and Finance, Forthcoming.
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the age of globalization. Oxford University Press, USA.
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Habib, A. and Hasan, M. M., 2019. Corporate social responsibility and cost stickiness. Business
& Society. 58(3). pp.453-492.
Johnson, M., 2019. Corporate finance and the securities laws. Wolters Kluwer Law & Business.
Mepham, M. J., 2020. Accounting in eighteenth century Scotland (Vol. 3). Routledge.
Muslu, V., and et.al., 2019. Corporate social responsibility report narratives and analyst forecast
accuracy. Journal of Business Ethics. 154(4). pp.1119-1142.
Napier, C. J. and Stadler, C., 2020. The real effects of a new accounting standard: the case of
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Orazalin, N., 2019. Corporate governance and corporate social responsibility (CSR) disclosure in
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Rathore, S., 2019. International accounting. PHI Learning Pvt. Ltd..
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
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Susanto, D. and Masli, A., 2020. CEO Power and Corporate Outcomes What Can We Learn
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Weir, K., 2019, July. The logics of biodiversity accounting in the UK public sector. In
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Online
Annual report of BHP Ltd. 2017. [Online]. Available through:
<https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf>
Annual report of BHP Ltd. 2018. [Online]. Available through:
<https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf>
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Annual report of BHP Ltd. 2019. [Online]. Available through:
<https://www.bhp.com/-/media/documents/investors/annual-reports/2019/
bhpannualreport2019.pdf>
Annual report of Santos Ltd. 2017. [Online]. Available through:
<https://www.santos.com/wp-content/uploads/2020/02/2017-annual-report.pdf>
Annual report of Santos Ltd. 2018. [Online]. Available through:
<https://www.santos.com/wp-content/uploads/2020/02/2018-annual-report.pdf>
Annual report of Santos Ltd. 2019. [Online]. Available through:
<https://www.santos.com/wp-content/uploads/2020/02/2019-annual-report.pdf>
Annual report of Funtastic Ltd. 2017. [Online]. Available through:
<https://www.annualreports.com/HostedData/AnnualReportArchive/f/ASX_FUN_2017.
pdf>
Annual report of Funtastic Ltd. 2018. [Online]. Available through:
<https://www.annualreports.com/HostedData/AnnualReportArchive/f/ASX_FUN_2018.
pdf>
Annual report of Funtastic Ltd. 2019. [Online]. Available through:
<https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_FUN_2019.p>
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