Holmes Institute HI5020: Cash Flow Analysis Report, T1 2019

This report provides an in-depth analysis of cash flow statements for three companies: Funtastic Ltd, BHP Billiton, and Santos Ltd. The executive summary highlights the importance of financial statements in evaluating company performance, emphasizing the role of cash flow statements in understanding a company's financial position. The report delves into the major sources and uses of cash for each firm, focusing on operating, investing, and financing activities. It examines the trends in cash flow operations, differences between cash flow and net income, and the impact of capital expenditures and dividends. Furthermore, the analysis includes an assessment of each company's financial strength, considering factors such as cash flow from operations, investment of excess cash, and trends in net borrowing. The report concludes with insights into the financial health of each company, offering a comprehensive understanding of their cash flow dynamics.

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Finance
Executive Summary
To evaluate the performance of a company or to compare different companies it is essential
that the financial statements should be ascertained. This involves computation of ratios,
differentiating the cash flow statement and understanding the accounting concepts. The
present report deals with three companies that is Funtastic Ltd, BHP Billiton, and Santos Ltd.
The report stresses upon the cash flow statement and then as per the cash flow statement
various answers are derived such as major sources of cash flow of each firm whereby it is
seen that the cash flow from operating activities assumes the most important position. Other
important matters such as the difference between cash flow and net income are done followed
by major items that impact the cash flow and the trend in the capital expenditure. Considering
the details, the financial strength of the company is ascertained and answers relating to the
same are provided.
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Contents
Introduction...........................................................................................................................................4
Part – A..................................................................................................................................................4
Part B.....................................................................................................................................................6
 Major sources and usage of cash for each firm.............................................................................6
 The cash flow operations trend.....................................................................................................6
 Difference between cash flow and net income.............................................................................7
 Cash flow from operations is used to cover both the capital expenditures and the dividend
payments...............................................................................................................................................7
 Investment of excess cash and utilization of sources of cash........................................................7
 The major items that affected cash flows......................................................................................8
 The trend in capital expenditure of each company:......................................................................8
 The trend in Dividend for each company:......................................................................................9
 The trend in net borrowing............................................................................................................9
 Financial strength........................................................................................................................10
 Selection for Lending...................................................................................................................10
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13
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Introduction
The cash flow statement is one of the major statements that form part of the financial
statements and helps in projecting the cash position of the firm. This statement gives a real
picture of whether the business comprises of adequate funds or there is a shortfall (Leo,
2011). Cash position of the business needs to be adequate so that the business can flourish.
The report is based upon the cash flow statement of Funtastic Ltd, Santos Ltd, and BHP
Billiton. The report is based primarily on the cash flow statement and the overall discussion
and analysis give a glimpse of the functioning of the business. Three different companies is
present in the study and through their cash flow statement, a better understanding can be
grabbed regarding the performance and efficiency in terms of utilization of cash position.
Part – A
The financial statement user obtains information so that the position of the organization can
be known with ease. Moreover, investors can predict and evaluate the position through the
presence of a financial statement. The cash flow statement of the entity project the movement
of cash inflow and outflow. It is imperative that the business should attain a desirable level
of cash because it helps in keeping the wheels of the company revolving. Cash position is
always significant for the entity because then only the organization will be in a position to
maintain the position of a firm and meet the tax, expenses, loan, and purchases. Further, the
solvency of the organization can be attained through the cash position of the firm. It clearly
implies that the business should have sufficient level of cash because if not maintained the
business will fall short of funds and the debt obligations will be high (Madura & Fox, 2011).
Cash Flow Statements It is the statement that projects the cash inflow, as well as the outflow
of the organization for a specific year. This helps the organization in keeping a strong control
on the cash that is spent and the cash that is left behind (Lapsley, 2012). The cash flow
statement into three major divisions that is the operating, investing and the financing
activities. The cash flow statement is prepared on the basis of the cash flow statement. The
manner in which the cash comes in and go determines the manner of operations of the
company. With such a statement, the readers are able to know whether a huge amount of
funds is withdrawn from the business. This statement even helps in answering whether the
organization is out of cash or is operating on a profitable mode (Laux, 2014).
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Cash flow statement is a financial statement that shows the number of cash inflows and cash
outflows in an organization. It is also known as the statement of cash flows. The cash from
various activities is segregated in this statement. The cash generated is classified into its
respective activities namely operating, financing activities. A positive cash flow result
indicates that the company is doing well and there is a presence of a significant amount of
cash in the company. On the contrary, a negative cash flow indicates that the company is
facing a tough time as the revenues earned by the same are too low. A cash flow statement is
used by various readers and for various purposes (Melville, 2013). The shareholders of the
company, contractors, employees, directors, accountant, potential investors, potential lenders/
creditors are the people that show interest in the cash flow statement of an organization.
The users of the cash flow statement can easily ascertain the cash requirements of an
organization in the future by means of drawing comparisons between the current year’s cash
flows with that of the past year. The financial leverage of an entity can be improved through
its cash flow statement (Titman, Martin, Keown & Martin, 2016). This is because of the fact
that the statement of cash flow defines necessary changes that can be made so as to level up
the finances of the company. The statement of cash flows is the basis on which the cash
budgets for the next financial year can be prepared. The cash flow statement also states the
requirements pertaining to the current level of cash in an entity.
The income statement is a statement made prior to the balance sheet. It is the basis on which
the balance sheet of the company is made. Hence, it is apt to say that it is impossible for an
accountant to make the balance sheet of an organization without preparing the income
statement of the same. It is also known as the profit and loss account. This is due to the fact
that with the help of income statement one can determine the amount of net profit or net loss
is earned by an organization during a particular financial year. The statement is constructed
on a golden rule that debit what comes in and credit what goes out. This means the expenses
are to be reflected in the debit section while the sales and other income are to be represented
in the credit section.
The readers of the income statement can gather an understanding of the actual well being of
the company with respect to the finances earned by the same. Income statements are also
used by the investors so as to determine the ability of the company to provide price per share.
Sales, profitability, gross profit, retained earnings, operating income, and etc are the crucial
information derived by the readers from the income statement of an organization.
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The utility of the income statement is huge. It is used by the readers of the same to construct
appropriate decisions while used by the management of an entity so as to determine the
efficacy of its strategies. It allows the users of the same to draw comparisons with respect to
the financial performance of an organization between two or more financial years (Merslan
& Urgeghe, 2013).
Part B
 Major sources and usage of cash for each firm
The most important source of cash for the organization was from the receipts that were being
received from the customers while conducting the normal course of business for fetching
revenue. It was also observed that the results of the organization were declining continuously
because of which there were proceeds from borrowings that were added to the sources of
Funtastic Limited.
The organization Funtastic Limited generally used the cash for payment to suppliers and
other payments of interest. The Organization was also observed to purchase plant and
equipment or other intangible assets because of which the cash position of the organization
was not appropriate.
One of the most important sources of cash for the organization BHP Billiton was generated
from the operations conducted by it. Cash flow operations of the organization increased to a
great extent because of which that evidence and proceeds from the abilities were being able
to be fulfilled. The major payments made by the organization were in the form of interest and
other taxes that were required to be paid for the proper functioning of the organization.
Repayment of loans and other liabilities were also being made by using the funds generated
from operations.
The operating activities conducted by the organization in the last 3 years helped Santos
Limited to carry out the business smoothly. The major source of profit for the organization
was observed to be the operating activities that were being conducted by them in the last 3
years and also the borrowings that were being taken in order to fulfill the expenses. The
interest payments on loans, installation, royalties, and taxes were to be fulfilled because of
which the organization was in need of sufficient flows of funds.
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 The cash flow operations trend
The various trends that were being observed in the cash flow operations of the organization.
Generally, in all the three organizations the movement of cash both inwards and outwards
was maintained because of which proper business was carried out in various sections that
were primary in nature.
 Difference between cash flow and net income
It was observed that the total cash flow of the operations conducted by the organization were
much higher than the net income which clearly states the fact that the organization was
continuously conducting various operating activities (Gowthrope, 2011). Also, it should be
clearly understood that the net working capital is the difference between the total assets and
liabilities of the organization. In order to find the total net income, expenses should be
deducted from the total cash inflow and outflows that are observed in the operating activities.
 Cash flow from operations is used to cover both the capital expenditures
and the dividend payments
In the case of BHP Billiton clearly noticed that the total cash flow of the operation conducted
by was significantly rising. It could be clearly observed that the cash flow jumped from
10645 million dollars to 18641 million dollars by the year 2018. The capital expenditure that
was being incurred by the organization in terms of acquisition of assets was generated with
the help of the operations conducted by it. Also, the operation that will be conducted by the
organization will be able to meet the sufficient payments of the dividend. Further, in the case
of Funtastic Limited it was observed that the cash utilized from operating activities was not
sufficient for fulfilling all the capital expenses because of which for the dividend was not
being issued by the company.
In the case of Santos Limited, it was observed that the organization has a positive cash flow
of operations because of which it was fulfilling the dividend and capital expenditure and
further the cash flow of operations was efficient in order to be all such expenses.
 Investment of excess cash and utilization of sources of cash
It was really observed in the case of BHP Billiton and Santos Limited that they had positive
cash inflows because of the operations that have been conducted by them. Therefore they also
have the availability of surplus cash that can be used to fulfill their capital expenditures and
also call out a dividend for their investors and other stakeholders. Whereas, on the other hand,
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Funtastic Limited is not having sufficient cash position because of which it is not able to
fulfill the expenses of the company.
While analyzing the accounts of BHP Billiton it can be clearly stated that the working capital
of the operations witnessed by the organization to fulfill the current assets and liabilities were
sufficient in nature. The presence of the current assets and other cash inflows has the
organization to fulfill all the expenses and other obligations easily (Damodaran, 2012). In the
previous years, The Organization was not able to conduct proper business because of which it
is empowering companies present function with the help of the cash and other cash
equivalents.
 The major items that affected cash flows
It was observed that for the organization Funtastic limited all the payments that were made to
suppliers and other receipts from customers were mainly affecting the cash flow operations of
the organization. Some other activities like borrowing and proceeds from shares also affected
the organization's position (Merslan & Urgeghe, 2013).
The net cash flows BHP Billiton were sufficient even after the payment of interest. Items like
plant and property or other equipment were major interest bearing impacts on the cash flow
of the organization.
The customers and the payments that were being made to the suppliers were the major items
that impacted the cash flows of Santos Limited. Also, the investing activities that were being
carried out by the organization for consideration of major points were impacting the cash
flow statements of the organization (Creswell, 2014).
 The trend in capital expenditure of each company:
The total net cash outflow and other investing activities acquired from the assets clearly
indicated that the organization Funtastic Limited was trying to expand the business. Various
types of assets both tangible and intangible were being acquired by the organization. The net
cash flow from investing activities amounted to 298 million dollars.
For the organization BHP Billiton a figure of 5921 million being observed as the total cash
generated with the help of investing activities.
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The organization Santos Limited also conducted various investment activities that helped to
generate revenue and improvise the organizations business. Oil and gas assets, land buildings,
explorations, etc were being acquired by the organization.
 The trend in Dividend for each company:
The profits earned by an organization are the sole basis on which the dividends are declared.
Higher the revenues earned by the company, higher shall be the amount of dividend payment
(Melville, 2013). There was no dividend payment seen in Funtastic Limited for the financial
year 2018. On the other hand, there is a prominent rise seen in the dividend payment in BHP
Billiton. The company paid a dividend of $4130 in the year 2016 while the amount of
dividend paid by the same in the year 2018 was around $5220. This enhancement can be
attributed to the rise in the level of profits earned by the company.
The trend of dividend payment in Santos Limited is seen to be very irregular. The company
paid a dividend of around $73 million in the year 2018 while the same paid nothing and $43
million in the year 2017 and 2016 respectively. This disturbance in dividend payment is
highly on account of the irregular level of profits earned by Santos Limited.
 The trend in net borrowing
Funtastic Ltd – The financial statements of the company suggests that the same has indulged
into a lot of borrowings. It can be said that there has been a constant flow of borrowings in
the company. However, though these borrowings are constant yet the drop in the same is
significant. The borrowing of the company shows a downward trend as the same has come
down to $2630 in FY 2018 from $7457 in FY 2016. This signifies that Funtastic Limited has
got ridden of most of its borrowings by means of repaying the same.
BHP Billiton –The financial records of the company suggests that there hasn’t been any kind
of borrowings in the same other than the borrowings related to debt related instruments.
Santos Ltd – The financials of the company suggests that the debts of the same have seen
both the downward and upward trend. There has been a rise in the borrowings of Santos
Limited. The borrowings of the company has enhanced to $1193 million in FY 2018 from
$783 million in FY 2016.
The financials of BHP Billiton suggests that its current assets are falling weaker in front of its
current liabilities. The current liabilities of the company are higher than the current assets
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owned by the company. This indicates an unfavorable current ratio earned by the company.
The current assets owned by BHP Billiton are insufficient to pay the short-term debt
obligations of the company. Owing to this reason the company has a negative trend with
respect to its working capital. The net working capital of the company is at -$(118) million
and -$(241) million for the year 2018 and 2017 respectively.
 Financial strength
Funtastic Ltd
The cash flow statement of Funtastic Limited indicates a negative value. This suggests that
there is a cash outflow from operating activities in the company. In other words, the operating
activities of the company are not strong enough. Therefore, the company must take effective
measures so as to strengthen the cash flows from its operating activities (Sword, 2018).
BHP Billiton
The cash flow statement of BHP suggests that the company has a strong cash flow from
operating activities. The cash flows of the company enhanced to $18641 in FY 2018 from
$10625 in FY 2016. The financial strength of the company is also great as the investing
pattern of the same is on account of utilization of funds in the financing activities.
Santos Ltd
The cash flow statement of Santos Limited suggests that there is a favorable cash flow from
operating activities. This signifies that the company is operating efficiently and is able to
generate revenues at a good pace. The investment of cash in financing activities of the
company is quite probable (Needles & Powers, 2013).
BHP Billiton ranks number one amongst all the aforesaid companies with respect to its
financial strength. The cash flows of the company from its operating activities are strong and
so are the investing activities of the same. The company has a strong grip in the market and
enjoys a competitive advantage over its arch rivals. The revenues earned by the company are
seeing an upward trend and the business of the same is expanding at a fast pace.
 Selection for Lending
The lending of money is a very critical decision. There are several factors on which the
decision of lending is taken. Institutions that lend money must conduct necessary research
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about the ones who apply for loans. Comparing all the aforesaid companies, it can be
concluded that BHP Billiton is the most preferred choice with respect to money lending
amongst all the three. This is because of the fact that the company qualifies almost all the
parameters depending on which the money is to be lent. The financials of BHP suggests that
it has a profound cash flow from its operating activities and the company is able to repay its
borrowings mush ahead of time (Bauer & Hann, 2010). The operational activities of BHP are
strong enough which makes it easier for the company to pay off its debt obligations. The flow
of revenues in the company is also strong. The constant enhancement in the profits earned
can be proved with the fact that the company is able to pay more and more dividends year
after year. Also, the investing activities of the company are also strong enough which is also
why the business of the same is growing at a fast pace (Petty et. al, 2012). To conclude, it can
be said that BHP Billiton is in a favorable position and it qualifies all the parameters for
selection of lending.
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Conclusion
Comparing the cash flow statement of the aforesaid companies, it can be concluded that BHP
Billiton is performing best amongst all. The company has a strong cash flow from its
operating activities. This is all because of the implementation of appropriate strategies and
effective execution of the same by the management of the company. The company is able to
utilize its resources in the best possible way and has been successful in generating a generous
amount of revenues. There is an increment in the revenues earned by the company year after
year which makes it desirable amongst all the aforesaid companies. There is also a rise in the
dividends declared by the company as the revenues earned by the same is enhancing year
after year.
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