HI5020 Corporate Accounting: Analyzing Cash Flow Statement Issues

This report provides a comprehensive analysis of cash flow statements, crucial documents for financial decision-making. It examines the relationship between income statements and cash flow statements, highlighting how investors utilize these statements to assess a company's profitability and ability to repay debts. The report delves into the major sources and uses of cash, focusing on operating, investing, and financing activities. It further analyzes trends in cash flow from operations, capital expenditure, dividends, net borrowing, and working capital across different firms. The report compares the financial strength of multiple firms, assessing their suitability for lending purposes and making critical business decisions. The analysis includes examples from Fantastic Ltd, Santos Ltd, and BHP Ltd, examining their cash flow patterns and financial health. The report uses financial data from the years 2016-2018 to support its findings and conclusions.

Cash Flow Statement 1
ISSUES IN CASH FLOW STATEMENT
By (Name)
The Name of the Class
Professor
The Name of the School
The City and State
Date

Cash Flow Statement 2
Issues in Cash Flow Statement
Abstract
This paper focuses on the understanding of cash flow statement and how to compare
cash flow statements for different periods and come up with critical business decisions.
The paper will also cover different sections of activities of cash flow statement such as
operating activities, investing activities and financing activities. Sources and uses of
cash and cash equivalent from each section will also be discussed widely. The paper
will go on to analyze the financial strength of different firms using cash flow statements.
There will also be comparison of different firms to determine the one with the strongest
financial base and also to determine the suitable firm for lending purposes.

Cash Flow Statement 3
Table of contents
Introduction………………………………………………………………………………………4
Importance of income and cash flow statements to investors……………………………...4
Major sources and uses of cash……………………………………………………………….4
Trends of cash flow from operations………………………………...………………….…….5
Difference between cash from operations and net income………………………………...5
Financing capital expenditure……………………………………………………………….....5
Payments of dividends………………………………………………………………………….5
Working capital…………………………………………………………………………………..6
Items affected by cash flows………………………………………………….………………..6
Trends in capital expenditure……………………………………………………..……………6
Trends in dividends……………………………………………………………..………………6
Trends in net borrowing………………………………………..............................................7
Trends in working capital …………………………………………………………….………..8
Comparing financial strength of firms…………………………………………………...…….8
Best firm for lending…………………………………………………………………………….9
Conclusion ……………………………………………………………………….……………...9
References ……………………………………………………………………………………10
Bibliography……………………………………………………………………………………11

Cash Flow Statement 4
Introduction
Financial information is a very powerful information will is needed by not only the
management for decision making but also is relevant to the entire public. Nearly all the
organization’s stakeholders require financial information to make their day to day
decisions for the organization. Cash flow statement is one of the organization’s
documents that carry a lot of relevant financial information for decision makers. This
statement gives a picture of the organization’s ability to generate cash and put it into
reasonable uses. The investors use cash flow statement to determine the firm’s ability
to pay back its debts and thus be able to decide on which company to lend money to
and how much to lend (Gupta et al., 2014 pp.649-660)
Part A
Income statement and statement of cash flow are closely related documents as
far as relative information is concerned. The two documents usually show the ability of
the company to generate income and to put it into a profitable use. While income
statement shows the profit made by the company, statement of cash flow shows the
company’s cash movement both in and out of the organization (Lee, 2014)
The interest of investors is to invest in a company that can pay back the return on
investment. Therefore, investors will rely on the income statement to determine whether
the company is able to make profits or not. Because it is only out of profit that a
company can be able to pay back its investors. A company which is able to make more
profit is likely to attract a lot of investors since ability of a company to continue making
profit is one of the indicators of a good economic performance. (Du,et al., 2015, pp.284-
299)
Income statement only shows the amount of profit made over a certain period of
time and it does not show how such profit was used. Here the statement of cash flow
comes in because this document is able to show how the generated income was put
into use at each level of the company’s activities. Most investors are interested to know
how a company has been paying out dividends in the past and such information will be
available in the cash flow statement. Others will be interested in knowing the
composition of the company’s finances, whether it gets more from the operating
activities, investing activities or financing activities. All this information will be retrieved
from the statement of cash flow (Collier, 2015).
Part B
1. Analysis for the cash flows

Cash Flow Statement 5
a. Major sources of cash for Fantastic ltd and Santos ltd are receipts from
customers while BHP ltd is from operating activities. The major uses of cash
for BHP ltd is in purchasing property, plant and equipment while for both
Fantastic and Santos is in payment of suppliers and employees.
b. Both Fantastic ltd and BHP ltd have the same trend. They have a slight
improvement from the year 2016 to 2017 but they both experienced a drop in
the year 2018. Santos ltd had a steady improvement from the year 2016 all
the way to 2018.
c. Cash flow from operations is greater than the net income. This is because net
income is arrived at by subtracting some of the expenses which are not in
cash form. An expense such as depreciation, impairments of property and
other equipment does not involve any movement of cash out. As a result,
such expenses are reversed back in order to arrive at the cash generated
from operations. Cash flow statement is interested in showing the movement
of cash in and out the firm and does not put into consideration any expense
which does not involve movement of cash.
d. The firm was able to generate enough cash from operations to finance its
capital expenditures because the cash generated from operations is more
than the amounts spend on capital expenditures as indicated below;
2018 2017 2016
Cash generated from operations 22,949 18,612 12,091
Purchase of property, plant and
equipment
(4,979) (3,697) (5,707)
Surplus cash 17,970 14,915 6,384
The firm was able to generate, in US $ 22,949,000 in the year 2018,
18,612,000 in 2017 and 12,091,000 in the year 2016. The capital expenditure
for the firm was as indicated in the above table. The firm was therefore able to
meet all the capital expenditure using its cash from operations and still have
surplus of $17,970,000 in the year 2018, $14,915,000 in 2017 and $
6,384,000 in the year 2016.
This indicates a strong financial strength of BHP Ltd as cash from operations
are the main source which a firm should depend on for its expansion and
investments.

Cash Flow Statement 6
e. The cash generated from operations was enough to cover both the capital
expenditures and pay dividends to the shareholders. The firm was able to pay
dividends for all the three years which was paid by cash from operations.
In the year 2018, the company paid dividends of $(5,220+1,582)
=$6,802,000. The firm was still able to pay dividends from cash generated
from operations because after spending on capital a surplus of $17,970,000
was still available which is enough to cover for the dividends paid that year.
The dividends for the year 2017 was amounting to $(2,921+575) =
$3,496,000 which is less than the surplus cash from operations for that year
after the firm’s capital expenditure
In the year 2016, the firm paid out dividends worthy $(4,130+62) =
$4,192,000. The firm’s surplus for that year after capital expenditure was
$6,384,000 which will be able to meet the payment for dividends for that year.
f. As per the calculation in the previous solution, the cash generated from
operations was in excess. The firm was able to meet the cost of capital and
dividends and still be in a position to invest the remaining cash. From its
statement of cash flow, we can see that the firm invested on purchase of
shares by Employee Share Ownership Plan (ESOP) Trust. This indicates that
the firm invested the excess of the cash from operations.
g. The firm used working capital as sources of cash. From the statement of cash
flow for BHP ltd, the firm has factored the changes in assets and liabilities as
sources and uses of cash. Decrease in trade and other receivables were
treated as a source of cash while increase in trade and other payables was
treated as uses of cash.
h. The other major items which affected cash flows were dividends paid and
received, interests both paid and received, taxes and royalty paid and
purchases of property, plant and equipment.
i. Fantastic ltd spent $145,000 on capital expenditure in the year 2018,
$888,000 in 2017 and $884,000 in the year 2016. The expenditure for the
year 2017 and 2018 is fairly the same. This amount is seen to drop slightly in
the year 2018. For BHP ltd, the amount spent in the year 2016 is $5,707,000
which is higher compared to $3,697,000 spent in 2017. In the year 2018,
$4,979,000 was spend which is a slight increase compared to the spending in
2017. Santos ltd had a fairly constant amount spent on capital expenditures
for the three years.

Cash Flow Statement 7
j. For BHP ltd the dividends paid in the year 2016 were higher compared to
2017. In the year 2018 the firm paid the highest dividends of the three years.
For Santos, higher dividends were paid in the year 2018 compared to 2018.
The firm did not declare any dividends in the year 2017.
k.
Funtastic 2018 2017 2016
Proceeds from borrowing 2,630 3,647 7,457
Payments of debts (438) - (1000)
Net borrowing 2,192 3,647 6,457
Funtastic Ltd had a very amount of borrowing in the year 2016. The borrowing
for the firm has reduced in the year 2017 and even further in the year 2018.
Although the firm has been able to reduce the borrowing with a significant
amount over the three years, it can be seen that it has not been able to repay
its debts in the year 2017. The firm has a lot of unpaid debts and it needs to
improve on the generation of cash from its operations in order to be able to
repay the outstanding debts.
BHP 2018 2017 2016
Proceeds from borrowing 528 1,613 7,395
Payments of debts (4,406) (7,114) (2,781)
Net borrowing (3,878) (5,501) 4,614
BHP Ltd had a net borrowing of $4,614,000 in the year 2016 and thereafter
the net borrowing was a negative. This means in the year 2017 and 2018 the
firm committed itself into repaying its debts other than borrowing. This was
possible because the firm was able to generate enough cash from its
operations to finance day to day activities and thus there was no need for
more borrowing. This gesture also indicates a good financial health for the
firm and can also be interpreted as a good overall performance for all the
firm’s activities.
Santos 2018 2017 2016
Proceeds from borrowings 1,193 783 -
Payments of debts (220) (2,442) (147)
Net borrowing 973 (1,659) (147)

Cash Flow Statement 8
Santos ltd had no borrowing in the year 2016 and very little in 2017.
However, there was a significant increase in borrowings in the year 2018.
This means that the firm has not been able to generate enough cash to
finance its activities especially in the year 2018. Its ability to generate cash
has declined which can be interpreted as a poor financial performance.
l. The trend in working capital accounts for BHP ltd is a continuous drop of the
net changes in current assets and liabilities. There is a steady decrease of the
same right from the year 2016 through 2017 to the year 2018.
2. Funtastic Ltd
The firm has a negative net cash flow from the operating activities. This
means that the firm does not have enough working capital to finance its daily
operations. In this case, the firm suffers liquidity problem and it is likely to face
difficulties in paying its current debts and thus facing a liquidation risk.
The firm has also a negative net cash flow from investing activities. The firm thus
depends largely on financing activities which means that the firm is likely to be on
a high gearing which is a financial risk. Generally, Funtastic ltd can be
considered to be operating on a weak financial base.
The firm has a high amount of outstanding debts as evidenced by the
computation of the net borrowing. This indicates that the firm has been struggling
to repay interests and principal from the borrowed funds. As mentioned earlier,
this condition puts the firm in a great risk as the creditors may opt to file for its
liquidation.
BHP Ltd
The firm has a very strong working capital evidenced by high cash levels
generated from operating activities. This gives the firm a high financial strength
since it can be able to pay its current debts as and when they fall due. Though
the firm does not generate much from the investing and financing activities, the
fact that it has surplus cash from operating activities is enough for the firm to be
considered to have a strong financial base.
From the calculation of net borrowing, we have seen that the firm is
committed into repaying its debts and thus the net borrowing for the year 2018
and 2017 is negative. BHP Ltd is a good company to invest in because it is able
to pay its debts as well as dividends to its shareholders. The financial strength of
a firm lies in its ability to generate enough cash to finance its operations, pay its
debt and dividends to the shareholders and invest the surplus cash to generate
more and more cash to the firm.
Santos Ltd

Cash Flow Statement 9
The firm seems to draw its cash from both operating and financing
activities. Though the firm does not have much from investing activities, it can be
seen that the firm has tried to strike a balance between the cash generated
internally and borrowed cash. In as far as the firm is not much geared; it will said
to be fairly strong in terms of financial strength.
Then does not perform well with the investing activities but in overall the firm has
a surplus cash and cash equivalent available in every end of the year for the
three years under consideration.
The firm managed to pay its debt for the year 2016 and 2017 but it
borrowed again in the year 2018. This can be associated with the inability of the
firm to generate enough cash to finance its operations.
3. BHP ltd is the best firm for lending. The firm is able to generate enough cash
from operating activities which it can use to repay the loans from lenders. From
its statement of cash flow, the firm generates enough cash to pay its debts and
still be able to declare dividends to the shareholders. The ability of the firm to
declare dividends to the shareholders indicate that the firm has already paid all
its liabilities since dividends is considered as the last decision of the most firms.
In the financing section of the firm’s statement of cash flow, most of the activities
are repayment of both short term and long term liabilities. This means the firm is
no longer depending on the borrowing and that it can now finance all its activities
from internally generated cash. If any firm does not depend on borrowing, it
means that the firm shifts its focus into maximizing the shareholders wealth by
either paying out dividends or investing the surplus cash to generate more
income to the firm. Investor will prefer investing in BHP Ltd because they are
assured that the firm in in a position to pay both debts and interests as and when
they fall due.
Conclusion
Cash flow statement has been seen as a very important document for
decision making. Many of the financial decisions depend largely on the
information derived from the cash flow. From cash flow statement, one is able to
determine the major sources of cash for the firm and also see the uses in which
such cash is committed to. Investors use cash flow statement to gauge the firm’s
ability to pay its debts and decide on whether or not to invest their capital to such
firms. The firm’s financial strength is best measured by use of cash flow
statement.

Cash Flow Statement 10
References
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information
for decision making. John Wiley & Sons.
Du, N., Stevens, K. and McEnroe, J., 2015. The effects of comprehensive
income on investors’ judgments: An investigation of one-statement vs. two-
statement presentation formats. Accounting Research Journal, 28(3), pp.284-
299.
Gupta, J., Wilson, N., Gregoriou, A. and Healy, J., 2014. The value of operating
cash flow in modelling credit risk for SMEs. Applied Financial Economics, 24(9),
pp.649-660.
Lee, T.A., 2014. Cash Flow Reporting (RLE Accounting): A Recent History of an
Accounting Practice. Routledge.

Cash Flow Statement 11
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Cash Flow Statement 12
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