Corporate Accounting: Evaluating the Financial Health of Three Firms

Desklib provides past papers and solved assignments. This report analyzes cash flow statements of three companies.

Corporate Accounting
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Table of Contents
Part A...............................................................................................................................................4
Part B...............................................................................................................................................7
1.......................................................................................................................................................7
a)...................................................................................................................................................7
b)..................................................................................................................................................9
c)...................................................................................................................................................9
d)..................................................................................................................................................9
e).................................................................................................................................................10
f).................................................................................................................................................10
g)................................................................................................................................................11
h)................................................................................................................................................11
i).................................................................................................................................................12
j).................................................................................................................................................12
k)................................................................................................................................................13
l).................................................................................................................................................13
2.....................................................................................................................................................14
3.....................................................................................................................................................15
References......................................................................................................................................16
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Part A
Income statement refers to the detailed document which entails of all the relevant income and
expenses that take place in an organization. This statement is relevant so as to figure out the
gross profit, net profit as well as all the relevant sources of revenue in an organization for a given
accounting year .The income statement entails of two divisions named as primary section and
non-primary section. The primary section includes the income and expenses related to the
primary revenue generating transactions in a firm. The non-primary section includes the cash
incomes and expenses relating to the administration expenses and other non-primary business
activities (Gaille, 2018). The content of an income and expenses account is listed as follows:
The primary section of income and statement account entails of:
 Revenue sources which generally involves sales
 COGS
 GP margin
 The amount of purchases and sales made
 The remaining stock at the end of the year
The non-primary section of income and expense account entails of:
 Administrative expenses
 Selling and distribution expenses
 Interest expenses for the year
 Interest earned for the year
 Income from non primary sources
 N P margin for the year etc.
Some of the advantages of an income statement are explained as follows:
 It provides detailed information of all the relevant incomes that have accrued and received in
an accounting year from the primary and the non-primary sources for a firm.
 It provides detailed information of all the relevant expenses that have been paid or have
accrued for a financial year in a firm (Lacoma, 2017).
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 It aids in the investing process of the investors by providing them the information of GP and
NP.
 It also helps to identify the trends in net profit and gross profit for a firm for an accounting
year. This is beneficial for the investors as well as for the firm to compare its performance
with other competitors and with its own past performances as well.
A Cash flow statement is the one which entails of all the cash inflows and cash outflows that take
place in an organization. The cash flow entails of three major heads namely; cash earned from
operating activities, cash earned from investing activities and cash earned from financing
activities (abc-amega, 2019). All the major heads then entail of the relevant cash sources of
income and the relevant cash sources of expenses that take place during an accounting year.
The investors find both the statement of cash flow and the income & expenditure statement as a
relevant source to find their concerned information as they have various benefits and advantages
to the investors.
The three primary sections of a cash flow statement are listed as follows:
 Cash earned from operating activities
 Cash earned from investing activities and;
 Cash earned from financing activities
Some of the advantages of an income statement are explained as follows:
 Aids in making cash forecast for a firm :
One of the major advantages out of all the other advantages of a cash flow statement is that it
helps in making cash forecast for a firm as it entails of all the incoming cash and cash outgoing
that are supposed to take place in a firm. Also, the past cash flows help an organization to
forecast its future earnings and expenditures that take are likely to occur for the next accounting
years.
 Aids internal management
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It helps the internal management to formulate the cash related policies through predicting future
requirements with the help of past cash flow statements.
 It exhibits the true cash position of the firm
With the help of a cash flow statement, a firm can identify the true cash flow position that exists
with a firm. It also exhibits whether there is an increase or decrease in cash position from the
previous accounting years. It also helps to recognize the reasons that might have led to addition
or subtraction in the cash position for a firm (Gilbertcpa, 2015).
The investors find both the income and expense statement and the cash flow statement an
important tool which helps them take their investment decisions in the future. The Income and
expense statement and the statement of cash flow are the one to understand the liquidity, cash
flow position, net profit and gross profit position which help a firm as well as the investors to
take their financial decisions in an efficient and informed manner.
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Part B
1.
a)
The major of income for each firm are explained as follows:
Fantastic Limited:
The major source of cash:
The greatest source of cash for this firm is its cash received from receipts of consumers.
 The cash received from interest activities.
 The cash amount received from selling the international subsidiary.
 The proceeds from borrowings.
Major sources of usage of cash for this firm:
 The payment made to suppliers and employees of the firm.
 Interest and other finance cost paid by the firm.
 The payment made for the purchase of machinery
 Payment made for the buying some intangible assets
 The cost incurred on the issuing of shares (Investinganswers, 2019)
BHP Limited
The major source of cash for this firm:
 The cash received from impairment of assets (tangible and intangible both)
 Dividends received
 Interest on investments received
 The proceeds received from the sale of assets
 The proceeds from disinvestments, and joint operations
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 The proceeds received from interest-bearing liabilities
Major sources of usage of cash for this firm:
 the interest paid
 royalty and income tax paid
 the payment made for settlement and cash management related instruments
 buying of other fixed assets
Santos Limited:
The major source of cash for this firm:
 the receipts received from customers
 dividends received
 pipeline and other tariffs received
 receiving the cash from the selling off of current assets
 proceeds received from the sale of subsidiaries
 the drawdown received for borrowings
Major sources of usage of cash for this firm:
 the payment made to the employees
 the payment made to the suppliers
 the cash expenditure is done on the restoration
 The payment made for royalty and excise.
 Proceeds from selling plant and equipment
 The cost paid on borrowings
 The dividends paid etc.
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b)
The cash flow trend from operations is Funtastic Limited has been increasing for all the given
years under the source of operations.For the other firm BHP Ltd., the cash flow from operations
has decreased drastically for all the given years. Especially, for the last year, the cash inflow
from operations has decreased to a great extent. For the firm Santos Ltd. the flow of cash from
operations, especially cash flow pertaining to receipts from operating activities has been
decreasing for all the three years. The dividends received and the pipeline inflow of cash have
also decreased for all the three years, for this concerned firm. The cash inflow from other
operating activities has also decreased for all the three years for this particular firm Santos
Limited. The overall inflow of cash from operational activities has also declined in the given
years for this particular firm.
c)
The inflow of cash from operations was more than the net income for BHP Ltd. for all the three
given years. The reason for this can be attributed to the stimulation of cash inflows from
operations, in all the three years for this firm Corporatefinanceinstitute, (2018). However, the
major reason can be attributed to the lack of sufficient income before taxation. The major
increase in the flow of cash from operations has led to the major increase in flow of cash from
operations for this firm.
d)
The flow of cash from operations for this firm BHP Ltd. makes for enough amount to pay for all
of its capital expenditure (Corporatefinanceinstitute, 2018). The cash from operations is 22,949,
18,612, and 12,091 for all the three years respectively. The capital expenditures were way less
than these cash inflows made by the firm from operations. Concluding this, it can be said that the
firm is able to meet all of its capital expenditure..
For this other firm, Funtastic Limited, the cash received from major operations was all in
negative and that too for all the three years. In such a case, the concerned inflow of cash from
operations cannot meet its capital expenditure requirements.
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In the case of , Santos Limited, its cash in flow from the operating activities can definitely meet
the capital expenditure for the last two years.In case of year first, it is not possible to meet the
capital expenditure from its inflows from operations.
e)
For the firm Funtastic Limited, the cash received from operations was not enough to pay for even
long term expenditures. Therefore, the payment of the dividends out of the cash flow from
operating activities is not possible for this concerned firm for any of the three years. The reason
for this is the negative cash flow from operating activities for this concerned firm for all the three
years.
For the firm BHP Limited, the cash flow from operations was really good. The cash flow from
operations for all the three years was huge and was able to pay the capital expenditures. In
addition to this, the cash flows were so high that the firm could have paid the cash payment for
dividends out of the capital expenditure itself. This was very easily possible for the firm BHP
Limited.
For this firm, Santos Limited, the amount of cash received out of primary activities can neither
meet dividend payment nor the long term expenditure payments of the firm.In the second year,
however, the dividend was not paid by the firm. in the third year, the firm could have paid for the
dividend as well as for the capital expenditure of this firm.
f)
For the firm, Funtastic Limited, the cash flow from operations was not positive for all the three
years. Therefore, the question of it of investing the excess cash is out of context for this firm and
that too, for all the three years.
For the firm, BHP Limited, the cash flow from operating activities was really huge for all the
three years (Myaccountingcourse, 2019). This is a really good sign for the firm. The way in
which a firm can invest its excess cash is dependent upon the will of the directors and other
financial authorities of the firm. This firm decided to invest in various items, the excess cash
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generated from operations. This includes purchasing of property, plant, and types of equipment
which can further bring in more cash for the firm. The other investment was made in exploration
expenditure. A portion of the excess cash was spent on other investments made by the firm.
Therefore, these are the ways in which a firm can invest its excess cash flow from operations.
For the firm, Santos Limited, the firm does not have too much excess cash from its operating
activities. However, it has made a few investments which are purchasing oil and gas assets. The
other investment has been made in purchasing the land, buildings, plant, and equipment for the
operations. Some of the investments have been made in the acquisition of subsidiary in the first
year as well.
g)
Yes, the firm has used its working capital in sources of cash and usage of cash. The change in
inventory required additional funds which mean management has to use their cash in inventory
management. Further, the company can retrieve cash funds through the increment of trade
payables in their working capital requirements.
h)
The other major items which have affected the cash flows are many. As the cash flow statement
entails of various items and various transactions it is highly likely that each transaction and event
affect the cash inflow or cash outflow in some or the other way for all the three firms and that too
for all the three years.
The major items which have affected the cash flows statement are the cash flows from investing
activities for the firm Funtastic Limited. This entails of the payment for plant and equipment
(Corporatefinanceinstitute., 2019). The payment made for the purchase of other intangible assets
has also had a major effect on the cash outflows of the firm. Also, the cash inflow from the
proceeds of the sale of the international subsidiary has had a major effect in the cash inflow of
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the firm. The cash flow from investing activities has also had a major impact on the cash inflow
which included the cash inflow from borrowings in the first year.
For the firms, BHP Limited and the major activities are cash flow from financing activities
which include proceeds from interest-bearing liabilities. The other financing activity which had
a major impact on the cash flow of this firm was Repayment of interest-bearing liabilities
(Accountingtools, 2018).
For the firm Santos Limited, the activity which has impacted the cash flow in a major way was
the net of cash acquired from the Acquisition of subsidiary in the first year. in the cash flows
from investing the major impact was laid by the transaction ‘Drawdown of borrowings’ which
was a huge amount in the first two years.
i)
The trend in capital expenditure for each firm differs on the need and availability of the cash for
each firm in all the three years.
For the first firm, the capital expenditure entails of Payments for plant & machinery by the firm.
the other capital expenditure was the payments for other intangible assets made by the firm in all
the three years.
For the firm, BHP Limited, the capital expenditure entails of a number of transactions in all the
three years. The first major capital expenditure of the firm was on Purchases of property, plant,
and equipment. The other capital expenditure was on Exploration expenditure expensed and
included in operating cash flows for this firm for all the three years.
For the firm, Santos Limited, the capital expenditure includes buying of Oil assets, gas assets and
Other long term assets such as land & equipment.
j)
The trend in dividend for Funtastic Limited was none as no dividends were paid by this
concerned firm in any of the year. The trend in dividend for BHP Limited was high in the first
year. This fell down in the next year and then again fluctuated to a higher level in the third year.
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