Importance of Corporate Accounting for Businesses

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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