Corporate Accounting: Cash Flow Statement Analysis

This report provides an analysis of cash flow statements in corporate accounting. It examines the uses and importance of cash flow statements in making key business decisions. The report analyzes the cash flow statements of Santos Ltd, BHP Ltd, and Funtastic Ltd. It also evaluates the financial strength of each company and recommends the best investment option.

Running head: CORPORATE ACCOUNTING
CORPORATE ACCOUNTING
Name of the Student:
Name of the University:
Author Note

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Abstract
The report is based on the cash flow statement and the uses of the cash flow. This
also analyse the uses of the cash flow statement in the context of the different key
business decision taken by the management. This paper evaluate the relevant
lecture and demonstrate the key accounting concept in respect of the cash flow
statement. This report also analyses the cash flow statement of the three companies
for the last three years. The three companies are Santos Ltd, BHP Ltd and the
Funtanstic Ltd. in the above of the cash flow analysis the report recommends to
invest in the BHP Ltd.

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Table of Contents
Introduction...................................................................................................................3
Discussion....................................................................................................................3
Part A............................................................................................................................3
Information content of Income Statement.................................................................3
Information content of Cash Flow.............................................................................4
Usefulness of Income Statement..............................................................................5
Usefulness of Cash Flow..........................................................................................5
Part B............................................................................................................................6
1. Analysis of Cash Flow Statement...................................................................6
2. Evolution of financial strength.........................................................................8
3. Selecting company..........................................................................................8
Conclusion....................................................................................................................8
References...................................................................................................................9

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Introduction
The report titled “Corporate Accounting” is prepared to show the
understanding of the cash flow statement. The report examine the relative
information of the cash flow statement and the income statement. By examine the
cash flow statement and the income statement of the firm, this report shows the
reason for its usefulness in the view of the investors. Further, the report analyse the
cash flow and income statement of the three company and answer the various
question related to this like source of income for each company in each year,
allocation of the such income and like. The chosen companies for this report are
BHP ltd, Santos Ltd and Funsatic Ltd. The report analyse the cash flow of BHP
limited to identify the source of cash, uses of cash, trend of cash flow and
comparison of the cash flow with net income. The report analyse the cash flow
statement of the Santos Ltd and Funsatic Ltd to identify the ability of firms to
generate the cash, cash generation of firm, uses of working capital of firms. This
report also evaluate the financial strength of the each company based on the
information provided on the cash flow and income statement of the company. Lastly,
the report recommends the best company to making the investment.
Discussion
Part A
Information content of Income Statement
Income statement is financial statement of any company that reported the
past financial performance of the company. This used to analyse the past
performance of the firm to predict the future performance of the company and to
assess the ability of to generate the cash for the company (Ali, Ormal and Ahmad
2018). This statement is also known as the statement of earnings and statement of
profit and loss.
The income statement of any firm content the information about the revenue
and expenses of the fir. This also content the resulting profit or loss of the firm for a
particular period. The firm in the financial report of the company publishes the
income statement for the relevant period. The income statement of any company
content the detailed income as well as the expenses of the firm for the given period.
This report shows the following information in the revenue part of the firm: -
 Sales: - The statement provides the full detailed information regarding the
main source of the firm that is sale. This shows the total aggregated amount
of sale made by the firm for the period.
 Other operating income: - This report also provides the detailed information
about the operating and non- operating income of the company for the
particular period. Like commission, rent, interest and others.
 Purchase: - The statement also provides the information about the total
purchase made by the firm for the period.
 Inventories: - The statement of income also provides the information of the
inventories like the purchase return, sales return as well as the remaining
stock of inventories that is closing stock.
 Expenses: - The statement provides the detailed information of the all
operating, administrative and financial expenses of the firm (Davidson 2016).
In this, the report considers the operating expenses like cost of sale, carriage

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on sale, duty and taxes sale along with the advertisement expense,
commission paid and other expenses related to sale. In the administrative
expenses, the company includes the expenses like depreciation of plant,
machine and equipment, electricity bills, insurance, rent, salaries and other
general expenses of the firm. Lastly, in the financial expenses the statement
consider the expenses like bad debt, provision of bad debt.
 Profitability: - Lastly, the income statement of any firm shows the profitability
of firm. This is most important part of the income statement for the reader.
The profitability of the firm show the profit earning capacity of the firm. The
statement content the gross profit of the firm as well as the net profit of the
firm for the period. The net profit here means the EBIT that is earnings before
interest and taxes (La Rosa, Moscariello and Bernini 2016). The statement
also provide the information about the operating profit and profit before
interest, tax, depreciation and amortisation (EBITDA). This information of the
firm helps the investors to make their investment related decision in the basis
of the profitability of the firm.
Hence, the income statement of any firm provides the information about the
profitability of the firm along with the all revenue and expenditure of the firm. This
helps to understand the past performance of the firm and to predict the future
performance of the firm in the basis of the past performance of the firm.
Information content of Cash Flow
The cash flow statement is the financial statement that shows the effect of
changes in the balance sheet and profit and loss account in the cash position of the
company. The cash flow statement is the part of the financial statement of the firm
published along with the annual report of the firm. The cash flow mainly content the
details of the cash incoming in the business and the cash outgoing from the
business. The cash flow only and only records the cash transaction of the business
both inward and outward (Auerbach and Devereux 2018). The main objective of the
cash flow is to maintain the records of the cash received by the company and cash
paid by the company.
The cash flow statement divides the cash transactions of the in three activities
and records accordingly. The cash transactions of all the three activities of the firm is
the main content of the cash flow statement. To understand the information contents
of the cash flow, this report explain the all three activities along with their contents
below: -
 Operating activities: - The operating activities of the company are
those activities those are related with the main business of the firm. In
this, the cash flow statement records all cash received and payment of
the firm related to main operation of the firm. In this, the cash receipt
from customers, cash paid to suppliers and employee, cash generated
from the operation, income tax paid (Reid 2018). Apart from the over
information of the cash transaction, the cash flow statement also
provides the net cash flow value of the firm in respect of the operating
activities.
 Investment Activities: - The second most important activity of the
business is the investing activity. Every company need to do the
several investment in the due course of the business. The cash flow
statement records the all transaction of the firm in relation to the

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investment made by the firm. In this part, the cash flow statement
records all the cash transaction that are related to the investment like
cash received from the sale of the equipment, dividend received by the
company from any investment of the firm, investment made by the firm
for the period and likes. This also content the net figure of the cash in
respect of the investments.
 Financing Activities: - The financing activity of the firm involves the
fund generated for the operating operation of the firm. This includes all
the cash transaction of the firm in respect of the financial activities of
the firm. The dividend paid by the company to its shareholder, loan
taken by the company from the investors are consider in this part of the
cash flow statement (Keefe and Yaghoubi 2016). Same like the other
two activities this also shows the net cash flow of the firm in relation to
the financing activities of the firm.
Apart from the above mention information related to the three activities of the
firm, the cash flow also, content the value of the available or the balance of the cash
in the beginning of the period as well as at the end of the period. This also shows the
net cash increase or decrease of the firm in aggregates of all three activities as the
result of the cash flow.
Usefulness of Income Statement
The income statement of any firm is very useful for the company as well as
the stakeholders of the company. The income statement is of the firm provides the
information of the firm for their past performance (Robinson and Sensoy 2016). This
also reveals the profit of the firm. The every stakeholder need the income statement
of the firm to make their decisions. Like, management need the income statement to
make several profitability related decision for the firm. Government need the income
statement to determine the income of the firm to calculate the tax liability of the firm.
Hence, the investor use the income statement of the firm in the following ways: -
 To analyse the performance of the firm: - As the income statement,
provides the information of the firm related to the past performance of the firm.
The investors use the income statement of the firm to analyse the past
performance of the firm as well as to predict the future performance of firm in
the basis of the past performance.
 To analyse the profitability of the firm: - The investor also use the income
statement of the firm to analyse the profitability of the firm. As the income,
statement provides the information about the profitability of the firm (Lee et al.
2017). Thus, the firm uses this information to analyse the profitability of the
firm.
 To determine the income earning ability of the firm: - The investors also
use the income statement of the firm to analyse the ability of the firm to
generate the income in the basis of the expenses incurred by the firm to
generate the revenue for the firm.
 To calculate profit margin of the firm: - The investors uses the income
statement of the firm to determine the various profit margin of the firm like
gross profit margin, net profit margin and likes.
 To make investment decision: - The investors use the income statement of
the firm to make the decision whether to invest in the firm or not.

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 To estimate the return of investment: - The investors also use the income
statement of the firm to calculated the estimated rate of return in their
investment as this income statement also contains the earnings per share.
Usefulness of Cash Flow
Same like the income statement, the cash flow statement is also an important
part of the financial report and have the various uses in the decision making process
for the firm. The helps the investors to make the various investment related decision
for the firm. The following the same main points in which the investor use the cash
flow statement: -
 To analyse the source of income: - The cash flow statement provides the
information about the source of the cash of the firm (Lessambo 2018). Hence,
the investors use the cash flow statement determine the main sources of the
firm from which the company mainly generates its income.
 To analyse the allocation of income: - Secondly, the investors of the firm
uses the cash flow statements of the firm to identify the areas where the
company mainly expend or invests its cash.
 To know the net cash generation: - The investors of the firm also uses the
cash flow statement to know the net cash generation of the firm for the period.
This helps the investors to understand the cash position of the firm.
 To know the cash position: - The investors also use the cash flow statement
to know the cash position of the firm both in beginning and the ending of the
financial period (Lewellen and Lewellen 2016). This also shows the changes
in the cash balance of the firm.
 To make the investment decision: - The investors to make their decision
regarding the investment in company also use the cash flow statement. This
provides the information about available cash in firm to meet its liabilities
hence, the investors made their investment decision accordingly.
Apart from the above uses, the cash flow statement also have several other uses,
not only for the investors but for the management and the other stakeholders of the
firm too.
Part B
1. Analysis of Cash Flow Statement
A. Major sources and usages of cash
The major sources of income for the Santos ltd are the receipt from the
customers, dividend received; pipeline tariffs and income from other operating
activity and the major uses are payment to suppliers, oil and gas for assets,
dividend paid and acquisition of subsidiary.
For, Funtastic Ltd, the major sources of cash flow are receipt from customers,
proceeds from loans and the proceed from the share issues. While, the major
usages of cash in this firm are the payment to suppliers and employee, cost of
share issues and the interest and other cost of finance paid.
The main sources of cash for the firm are the dividend received; proceed from
interest bearing liabilities and the profit before taxation. While, the major usage of
the cash for the company are dividend paid, purchase of property and the income
tax and royalty.

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B. Trend in cash flow
The BHP Ltd shoes the decreasing trend in the net cash flow from the
continue operation as the value of the net cash flow is decreasing. The Santos
Ltd shows the increasing trend in the in their net cash flow from the continued
operations. Lastly, the Funtastic Ltd shows the mix trend in the cash flow from
continuing operation.
C. Difference in cash flow and net income
Yes, the net cash flow from the continue operation is the more than the
net profit of the firm because of the other incomes of the firm. The major
reason of this difference are the income of the firm from the different sources
apart from the operating income.
D. Cash for capital expenditures
The firm Santos Ltd and the BHP Ltd was able to generate the enough
cash to meet its capital expenditure but Funtastic Ltd was not able to generate
the enough cash to meet its capital expenditures.
E. Cash flow cover
No, the cash flow from operation does not cover the capital expenditure
and the dividend (Weber 2018). The cash flow from investment cover the
capital expenditure and the cash flow from financing covers the dividend.
F. Excess cash and less cash generation
The excess cash can be invest in the machineries, plants and other
fixed assets. While, the firm can meet their capital expenditure by issuing the
shares and/ or borrowing the fund in case of less cash generate by the firm.
G. Sources and uses of cash for BHP
The company does not use the working capital as the source of cash
but use cash to purchase the assets like plant, equipment and same like.
H. Effective items
The cash flow statement of any firm is directly affected by the cash
transaction of the firm. Apart from this the efficiency and the profitability
effects the cash flow of the firm.
I. Trend of capital expenditure
Here, the Santos Ltd and the BHP Ltd shows the increasing trend in
the capital expenditure. While, the Funtastic Ltd shows the mix trend in the
capital expenditure.
J. Dividend trends
The BHP Ltd shows a mix trend in the dividend pay- out. While, the
Santos Ltd shows the increasing trend in the dividend and Funtastic Ltd does
not paid any dividend in last three year.
K. Trend in Borrowings

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The BHP Ltd does not have borrowings while the Santos Ltd shows the
increasing trend in the borrowings. The Funtastic Ltd. shows the downwards
trend in the borrowings.
L. Working capital trends
The BHP Ltd shows the mix trend in the working capital as the value of
the working capital decrease in the year 2017 and the decreases in the last
year.
2. Evolution of financial strength
The financial strength of the BHP Limited is strong as the firm have the
net cash flow I the positive but there is a downward trend. The profitability of
the firm is high and the also have the high value in the assets of the firm.
The Santos Ltd shows that the company have an average level in the
financial strength. As the company shows the positive net cash flow but not
much. The reason behind this positive cash flow in the borrowings.
Lastly, the Funtastic Ltd also does not have much stronger financial
position as the company hardly manages the net cash in the positive. The firm
also issued its shares and taken the borrowings to meet its capital
expenditure.
3. Selecting company
The report recommends to the investors that the investors consider the
BHP Ltd for their investments as BHP generate the high net cash flow among
them. The company also shows the high net flow from the operating cash flow
than the net profit and does not have any borrowings in the last three years.
Conclusion
This paper concludes that the income statement and the cash flow statement
is the part of the financial report of the company. The income statement provides the
information about the profitability of the firm while the cash flows records all the cash
transaction of the firm. The both is very useful for the firm. Lastly, the paper
concludes and recommends that BHP Ltd has performed well and does not have any
borrowing in the last three years. Hence, investors should invest in the BHP Ltd for
the high return.

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