Issues in Cash Flow Statement

This report evaluates the cash flow aspects in three organizations - BHP Billiton, Santos Limited, and Funtastic Limited. It analyzes the cash flow statements and determines the capability of repayment of borrowings. Santos Limited is found to be the most appropriate entity for lending purposes.

Running head: ISSUES IN CASH FLOW STATEMENT
Issues in Cash Flow Statement
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ISSUES IN CASH FLOW STATEMENT
Abstract:
The fundamental objective of the report is to include the evaluation of various cash flow
aspects in three organisations, which include BHP Billiton, Santos Limited and Funtastic
Limited. The report is effective to develop an insight on the various components of the
cash flow statement. It has been analysed that that Santos Limited is able to generate
considerable amount of cash flows from financing activities, which is considerable
beneficial for the business operations of the entity. However, for BHP Billiton and
Funtastic Limited, these aspects are not evident from their cash flow statements. Thus,
Santos Limited out of the three organisations only possesses the capability of
repayment of borrowings within the stipulated time. Therefore, for lending purpose,
Santos Limitred is evaluated to be the most appropriate entity out of the three
organisations.

2ISSUES IN CASH FLOW STATEMENT
Table of Contents
Introduction:.......................................................................................................................3
Part A:................................................................................................................................3
Part B:................................................................................................................................4
Requirement 1:...............................................................................................................4
Question a:.................................................................................................................4
Question b:.................................................................................................................4
Question c:.................................................................................................................5
Question d:.................................................................................................................5
Question e:.................................................................................................................5
Question f:..................................................................................................................5
Question g:.................................................................................................................6
Question h:.................................................................................................................6
Question i:..................................................................................................................7
Question j:..................................................................................................................7
Question k:.................................................................................................................7
Question l:..................................................................................................................8
Requirement 2:...............................................................................................................8
Requirement 3:...............................................................................................................9
Conclusion:........................................................................................................................9
References:......................................................................................................................10

3ISSUES IN CASH FLOW STATEMENT
Introduction:
Cash flow statement is deemed to be one of the important financial statements
for the organisations that show the effect of the modifications of the income statement
and balance sheet statement accounts on the cash and cash equivalents and such
statement divides the analysis into three activities that comprise of operating, financing
and investing activities (Afrifa 2016). The sound overview regarding the various aspects
of cash flows is required for the management of the entities to make sound business
decisions. The fundamental objective of the report is to include the evaluation of various
cash flow aspects in three organisations, which include BHP Billiton, Santos Limited and
Funtastic Limited. The report is effective to develop an insight on the various
components of the cash flow statement.
Part A:
The cash flow statement as well as the income statement is of immense use for
the investors and the reasons are provided as follows:
Cash flow statement:
This statement is adjudged as one of the vital financial statements for the
investors, as it provides crucial information regarding the cash availability of any
business organisation. In order to ensure organisational success, there should be
sufficient amount of cash in the business so that it could settle its expenses, taxes, bank
loans and payment for buying new assets (Atanasov and Black 2016). By analysing the
cash flow statement, an investor could find out the cash availability for the following
purposes. The income statements do not provide any kind of information about the
principal business payments; however, the cash flow statement provides information to
the investors about those areas where principal payments are made by the entity, From
the cash flow statement, the cash indicator could be observed in different circumstances
such as rise in inventory, credit extension to the customers, buying capital equipment
and others, which could not be reported in the consolidated income statement (Ball et
al. 2016). In compliance with the cash flow statement, it is possible for the investors to
obtain an understanding of whether the firm is lacking money despite having adequate
amount of profit in hand. In addition to this, the owners could have an understanding of
whether they are withdrawing too much capital out of the business. By combining all
these aspects, the investors could be able to undertake sound investment decisions
after critical evaluation of the cash flow statement (Bilinski 2014).
Income statement:
One of the critical financial reports is the income statement, which is beneficial to
the investors having the requirement to obtain necessary information before they
undertake investment decisions. The statement provides all the necessary information
to the investors like sales, operational efficacy and profit to various other non-operating
aspects. Such information helps the investors to obtain concise and clear picture of the
existing business performance as well as the future expectations. As a result, income
statement is considered as a reliable measure in order to evaluate the business
conditions (Chang et al. 2014).

4ISSUES IN CASH FLOW STATEMENT
The income statement is vital for the investors, since it provides clear indication
about the profit generating ability of the firm. The total revenue and expenses are
recorded in the income statement and by deducting the latter from the former, profit or
loss is calculated appropriately (Collins, Hribar and Tian 2014). This information could
be found only by the investors in the consolidated income statement. Moreover, the
operations are updated timely in the income statement, since update could be made
more rapidly in comparison to the other financial statements. Owing to the fact that clear
and concise overview of the current profitability of the firm is provided in the income
statement, the business managers and the investors analyse the income statement
continuously for obtaining the updated information on business operation. The investors
obtain the categorisation of various revenues and expenses of the firm from the income
statements (Cui 2017). This implies the usefulness of the income statement to the
investors, as they could have the needed information in order to make investment
decisions.
Therefore, it could be stated that the investors are benefitted by analysing the
cash flow statement as well as the income statement.
Part B:
Requirement 1:
Question a:
Funtastic Limited:
For this organisation, cash is received mainly from the sales made to the
customers, amount received from loans provided and issuance of shares. On the other
hand, cash is incurred for clearing the payments of the employees and the suppliers,
business operations, finance cost and other expenses, plant and equipment, intangible
assets and share issuance cost (DeFusco et al. 2015).
BHP Billiton:
BHP Billiton is observed to receive cash mainly from trade and other receivables,
amount received from interest-bearing loans, receipt of interest from loan provided and
dividend from shares in other firms. On the contrary, it has incurred cash mainly for
depreciation and amortisation, trade and other payables, impairment, net finance
expense, payment of interest, royalty tax, income tax, exploration expense, purchase of
property, plant and equipment, repaying interest-bearing loans and payment of dividend
to the shareholders (Donovan et al. 2014).
Santos Limited:
Santos Limited receives cash mainly from credit sales made to the customers,
interest on borrowings provided, pipeline tariffs and others. However, it incurs cash
mainly for settling the payments of its staffs and suppliers, interest on loan taken, oil and
gas assets, repayment of borrowings and oil and gas assets (Douglas, Huang and
Vetzal 2016).
Question b:
In terms of cash flow from continuing operations, Santos Limited and BHP Billiton
are observed to follow similar pattern, since they have produced positive cash flows

5ISSUES IN CASH FLOW STATEMENT
from their business operations. However, in case of Funtastic Limited, the cash flows
from continuing operations are found to be negative (Drobetz, Haller and Meier 2016).
Question c:
For BHP Billiton, the net income is observed to be more when contrasted with the
cash flow from operations. One of the crucial profitability measures is net income and
cash flows from operations reveal the relevant adjustments made to the net income;
thereby, creating the difference (Henderson et al. 2015). There are some items that are
not treated in a similar manner in the cash flow statement and the income statement.
There is no consideration of non-cash expenses in the income statement that constitute
of share-based payments, amortisation and depreciation. However, such costs do not
minimise the cash amount, which an entity generates in a specific year. Therefore,
addition is made to the cash flow statement, which leads to the difference (Hoskin,
Fizzell and Cherry 2014).
Question d:
Funtastic Limited:
The cash flows from operations are observed to be negative for Funtastic
Limited, which is not sufficient in order to pay capital expenditures that constitute of
plant and equipment payment as well as payment for other intangible assets.
BHP Billiton:
The cash flows from operations of BHP Billiton are positive and they are
sufficient when it comes to settling the capital expenditures comprising of property, plant
and equipment as well as exploration expenditure.
Santos Limited:
Like BHP Billiton, the cash flows from operations are found to be positive for BHP
Billiton as well. However, it is not sufficient for the firm to settle its capital expenditures
including exploration and evaluation assets, land, building, oil and gas assets,
settlement of cost of borrowings, subsidiary acquisition and plant and equipment (Kraft
and Schwartz 2015).
Question e:
No dividend payment is made by Funtastic Limited; however, dividend payment
is made by both BHP Billiton and Santos Limited. It could be observed that BHP Billiton
has adequate cash flows from operations that cover both capital expenditure and
payment of dividend, as higher operating cash flows could be observed compared to the
combination of dividend payment and capital expenditure. On the other hand, inability
could be observed in Santos Limited in settling its dividend payment from operating
cash flows, as it is not sufficient to settle capital expenditure (Lee 2014).
Question f:
Funtastic Limited could not generate additional cash flows owing to the negative
cash inflows. From the below-depicted table, it could be observed that there is absence
of excess cash flow for Santos Limited in order to settle capital expenditure. When there
is no adequate cash flows, the two entities used long-term loans and proceeds from

6ISSUES IN CASH FLOW STATEMENT
other aspects such as selling portions of their fixed assets in order to generate cash for
paying the capital expenditure (Lewellen and Lewellen 2016).
It is necessary to state that BHP Billiton has produced excess cash flows from
operations, which could be seen from the table represented as follows:
A notable fact to mention for BHP Billiton is that it has utilised its excess cash
flows for settlement of its capital expenditures like exploration of expenditure, purchase
of plant, property and equipment and other expenditures (Miao, Teoh and Zhu 2016).
Question g:
From the cash flow statement of BHP Billiton, different accounts of working
capital are observed to be used by BHP Billiton besides cash and cash equivalents as
cash sources. These sources primarily constitute of inventories, trade and other
receivables and others. It is to be noted that changes in short-term assets and liabilities
results in the source of utilisation of funds. When there is increase in accounts
receivable, it is not a healthy indicator for cash flows; however, the decline functions in
the form of cash. The situation is observed to similar when it comes to inventory, since
fall in inventory increases the cash availability of the business. In addition, when current
liabilities increase, there would be supply of cash in the cash flow statement (Mitchell et
al. 2015).

7ISSUES IN CASH FLOW STATEMENT
Question h:
Cash flows are affected by a number of items and one such item could be
identified as the tax payments. If the firms do not preserve considerable cash amount,
they are needed to incur heavy tax payments having effect on the cash flows. Another
influential dynamic includes the repayment of long-term borrowings. It could be
observed that the entities have to utilise significant cash amount so that they could
repay long-term loans and this is observed to have adverse influence on their cash
flows (Nekhili et al. 2016).
Question i:
One common trend is similar among all the firms and they include the presence
of negative cash flows from investing activities. In other words, it could be stated that
these organisations have lower capital income in contrast to their capital expenditures.
Moreover, another similar trend in capital expenditure for the firms includes the
settlement of the payment for non-current assets like plant, property and equipment. For
BHP Billiton and Funtastic Limited, fluctuations could be seen in capital expenditures of
these entities between 2016 and 2018. However, for Santos Limited, capital
expenditures have increased steadily in the same period, which is a necessary aspect
for consideration (Palea 2014).
Question j:
Based on the cash flow statement of Funtastic Limited, it could be observed that
there is absence of any dividend for the firm between 2016 and 2018. BHP Billiton is
observed to incur normal dividend as well as non-controlling interest dividend and
based on the trend; the firm has raised the payment of dividend in the existing year.
Even though Santos Limited is observed to receive dividend, the trend is found to be
declining in the current period. In addition, dividend is incurred in 2018 when no
dividend is provided in the past period (Robinson et al. 2015).
Question k:
The below-stated tables depict the new borrowings of the three entities:

8ISSUES IN CASH FLOW STATEMENT
The above tables make it apparent that the net borrowings of Funtastic Limited
have fallen, since it has not incurred any payment of its borrowings in the current period.
The second table shows negative trend in terms of net borrowings in the current period
of BHP Billiton and this is a suitable aspect for the firm. This implies that the firm has
made prepaid loan payment and the payment of current loans. The final table reveals
the rise in net borrowings of Santos Limited in the current period (Schaltegger,
Etxeberria and Ortas 2017).
Question l:
From the cash flow statement of BHP Billiton, it could be observed that the fall in
trade and other receivables of the firm has changed the trend; however increase could
be observed between 2016 and 2017. For inventories, it could be observed that current
assets are observed to decrease in both 2017 and 2018 despite the fact that it has
increased in 2016. The hike in other assets and liabilities and provisions could be seen
in 2016 and 2017; however they have fallen in the year 2018.
Requirement 2:
The below discussion reveals the analysis of the financial strength of the three
firms from the cash flow statement:
Funtastic Limited:
After critical evaluation of the cash flow statement of Funtastic Limited, it could
be observed that the cash flows from operations is negative. In other words, it could be
stated that the revenue structure of the firm is not adequate to cover all expenses. Thus,
the operating efficiency of the firm is not sound. The cash flows from investing activities
of the entity are observed to be negative as well. The reasons are that it has made huge
investments in order to buy fixed assets as well as other intangible assets. This is a
favourable signal for the firm denoting that the asset base of the organisation is
increased over time. Finally, the entity is observed to have positive cash flows from
financing activities and this is an indication that it is collecting cash for the business via
financing activities like proceeds from share issuance, proceeds from borrowings and
others (Sweeney 2014).
BHP Billiton:
The cash flow statement of BHP Billiton is observed to fetch positive cash flows
from operating activities denoting the fact that the expenses could be covered by the
revenue generated from the organisation. This could be deemed as the strength of the
firm. However, the cash flows from investing activities are found to be negative, since it
has made significant investments in purchasing fixed assets as well as others. This is a
favourable indication, since the assets of the organisation have increased over time.
Finally, BHP Billiton has produced negative cash flows from financing activities that
reveals that the firm has to incur cash for payment of dividend, repayment of liabilities
as well as others. This is a drawback of the firm, since it has higher cash outflows
(Mitchell et al. 2015).

9ISSUES IN CASH FLOW STATEMENT
Santos Limited:
The cash flow statement of Santos Limited makes it apparent that the cash flows
from operating activities of the entity are found to be positive. This is a sound prospect
for the entity since, it denotes the ability of the entity in producing cash flows from
operating activities. Along with this, it could be observed that the cash flows from
investing activities of the organisation are found to be negative because it has
purchased different fixed assets along with acquisition of other businesses. This is a
sound aspect from the business perspective of Santos Limited. The cash flows from
investing activities are found to be positive for Santos Limited as well because of
earnings made from the provided loans. This represents that the entity is producing
cash from the investing activities. These aspects reveal sound financial condition of the
firm necessary to ensure business success (Henderson et al. 2015).
Requirement 3:
According to the cash flow statement of Santos Limited, it is evident that the
organisation has produced positive cash flows from operating activities over three-year
period. The values are $1,578 million, $1,248 million and $840 million respectively in
2016, 2017 and 2018. In addition, it has received the maximum money owing to its
customers amounting to $3,740 million. This implies that the entity has provided
maximum fees from its core operations of the business. Besides, it has been identified
that the entity has made heavy investment in order to purchase fixed assets such as oil
and gas assets, exploration assets, building, land, plant, new business acquisition as
well as others (Kraft and Schwartz 2015). These aspects indicate that the firm is
planning to expand its business operations and activities, which is a favourable signal.
Finally, it could be observed that Santos Limited is able to generate considerable
amount of cash flows from financing activities, which is considerable beneficial for the
business operations of the entity. Hence, these factors state that Santos Limited has
managed to increase its business strength considerably over the years. However, for
BHP Billiton and Funtastic Limited, these aspects are not evident from their cash flow
statements. Thus, Santos Limited out of the three organisations only possesses the
capability of repayment of borrowings within the stipulated time. Therefore, for lending
purpose, Santos Limitred is evaluated to be the most appropriate entity out of the three
organisations.
Conclusion:
Based on the above discussion, it could be stated that one of the critical financial
reports is the income statement, which is beneficial to the investors having the
requirement to obtain necessary information before they undertake investment
decisions. The statement provides all the necessary information to the investors like
sales, operational efficacy and profit to various other non-operating aspects. On the
other hand, the cash flow statement is adjudged as one of the vital financial statements
for the investors, as it provides crucial information regarding the cash availability of any
business organisation. In order to ensure organisational success, there should be
sufficient amount of cash in the business so that it could settle its expenses, taxes, bank
loans and payment for buying new assets.
It has been analysed that that Santos Limited is able to generate considerable
amount of cash flows from financing activities, which is considerable beneficial for the

10ISSUES IN CASH FLOW STATEMENT
business operations of the entity. However, for BHP Billiton and Funtastic Limited, these
aspects are not evident from their cash flow statements. Thus, Santos Limited out of the
three organisations only possesses the capability of repayment of borrowings within the
stipulated time. Therefore, for lending purpose, Santos Limitred is evaluated to be the
most appropriate entity out of the three organisations.

11ISSUES IN CASH FLOW STATEMENT
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12ISSUES IN CASH FLOW STATEMENT
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