Corporate Accounting: Cash Flow Statement Analysis

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Corporate accounting
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Abstract
The purpose of the assignment is to analyse and assess the importance and usefulness of
the cash flow statements in helping the management and the external users to take alert
decisions regarding the cash situation of the company and identify the reasons for the cash
problems a company might be facing while operating its operations. An effort has been made
to critically evaluate and compare the cash flow statement and income statements of the
company. Also, a thorough analysis of cash flow statements for 3 companies has been done
to find solutions to different questions posed in the assignment. And a conclusion has been
drawn basis on the analysis done earlier.
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Table of Contents
Abstract.................................................................................................................................................................3
Introduction...........................................................................................................................................................6
Part A.................................................................................................................................................................... 7
1............................................................................................................................................................................. 9
a......................................................................................................................................................................... 9
b......................................................................................................................................................................... 9
c......................................................................................................................................................................... 9
d.......................................................................................................................................................................10
e.......................................................................................................................................................................10
f........................................................................................................................................................................10
g.......................................................................................................................................................................11
h.......................................................................................................................................................................11
i.........................................................................................................................................................................12
j.........................................................................................................................................................................12
k....................................................................................................................................................................... 12
l.........................................................................................................................................................................13
2...........................................................................................................................................................................14
3...........................................................................................................................................................................15
Conclusion..........................................................................................................................................................16
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References.........................................................................................................................................................17
Introduction
Financial Statement of the company plays a vital role for the company as it enables the
management and other external users to draw decisions from the study of the data available
from the financial statements and hence arrive at a conclusion regarding the financial position
and performance of the company. The assignment’s main area of concern is cash flow
statement, its analysis and the issues relating to it. Cash Flow statement plays a vital role in
analyzing and assessing the cash situation of the company, such that it helps in identifying
the sources of cash funds and the areas in which they are invested. Such analysis will enable
the company to understand the root causes of the cash problems faced by the company over
a period of time so that the issues can be addressed and corrective actions can be taken on a
timely basis.
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Part A
The income statement is the vertical statement prepared by the management for reporting
the financial activities and transactions undertaken by the company over a period of time.
Such a statement helps in the calculation of the profits earned from the business operations
and thus enables the users to ascertain the financial performance of the company for the
period. Transactions are classified under different categories and hence are reported as per
their classifications. The major distinction made is the income and expense related
components and transactions that took place in the year. The distinction is further made into
operations related components such as direct expenses, Sales, purchases etc. and non-
operational components such as admin expenses, interest income, other fixed expenses etc.
This enables the company to calculate the profit resulting from just the operations part of the
business. Non-operating components of the income statement suggest the miscellaneous
expenses charged from the profit earned from the operations and thus reducing the net profit
as a result (Sayari, et. al., 2013).
Cash Flow Statements are the statements prepared at the year-end to analyse the cash
inflows and outflows of the company. It is to ascertain the sources of funds and where those
acquired funds are invested in. A cash flow statement is divided into 3 parts:
Operating activities: These refer to the activities undertaken in the process of business
operations and thus are directly related to the manufacturing of goods or provisions of
services depending on the nature of the company and the industry it operates in.
Financing Activities: These activities refer to those activities which are concerned with the
procurement of funds from different sources and also include cash payments such as interest
incurred on loans taken (Kirkham, 2012).
Investing Activities: These activities are those activities that are concerned with the
application of the procured funds and thus also involve any return generated from such
investments.
Investors require both Income statement and cash flow statements to make alert decisions
with respect to the financial condition and performance of the company. Income statement
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helps them to decide whether the company is profitable and will provide with expected returns
over the years whereas Cash Flow Statements helps in ascertaining the liquidity position of
the company, such that if the company will be able to pay off its debts along with interest on a
timely basis. Both the statements have a different role to play and thus are mutually inclusive
when it comes to the decision-making process.
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Part B
1.
a.
The sources of cash for a firm under the cash flow statement are various such as the amount
received from activities of main operations, the amount of cash received from the activities of
investing and the amount of cash received from the financing activities in a business. For the
firm Funtastic Limited, the major cash source is the funds it receives from the customers in all
the three years (Corporatefinanceinstitute, 2019). For the firm BHP Ltd. the amount of cash it
has received as the profit before taxation for the three given years 2016, 2017 and the year
2018. For this firm also the cash generated from activities is the highest. For the third firm
Santos Limited, the major source of cash funds is the same i.e. the cash generated from the
operating activities.
b.
The trend in cash flow from operations can be identified for all the three years separately by
taking a look at the cash flows for all the three years under the head of cash funds generated
from the operations. For the first firm; Funtastic Limited, the trend in cash flows from this head
is negative for all the three years. This is not a good thing for a firm as negative cash flows
from operations depict a wrong image for the cash position of the firm (Accountingcoach,
2019). The trend in cash flow for the other firm is decreasing for all the three years
subsequently, which is not a good sign for the firm. Although the cash flows are positive. For
the firm named, Santos Limited, the amount the funds received in cash from the operating
head is although positive but has been declining continuously for all the three given years.
c.
The net income of the firm, BHP Ltd. is less than the cash from operating activities of the firm.
The profit before taxation is also less than for this firm so the profit after taxation i.e when
finance cost is deducted and the depreciation and amortization are charged, both will be less.
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d.
The firm Funtastic Ltd. has the cash flows from its operational activities as negative and so
the question of paying for its capital expenditures out of its cash from main activities is out of
context (Wallstreetmojo, 2019). The firm BHP Ltd. is generating a good amount of cash from
the major operational activities and thus it can pay for its capital expenses out of the cash
from operating income. The third firm, Santos Ltd, although has a positive cash flow from
operational activities so at the same time, it is possible for this firm to pay for all of its capital
expenditures. This states that the funds received from operations for the firm are not enough
at all to pay for its capital expenditures but for the other two firms, the funds from operations
can pay for the capital expenses of the respective firms.
e.
For the first firm (Funtastic), being the cash flows in negative for the operational activities is
not positive so the firm is not capable of paying for its capital expenditure. This firm does not
pay any dividends so there is no need to account for dividend payment.
For the firm, BHP Ltd. the cash flows for the operating activities are good enough for all the
three years to pay for the dividends as well as for the capital expenditures both. This shows
that the operational efficiency of this firm is the best out of all the three firms.
For the firm Santos Ltd., the cash funds received from operations are enough for the capital
expenditures and also for the payment of dividends in the first and the last year. However, the
firm does not pay any dividend for the second year.
f.
The cash generated from the operations for the first firm Funtastic Ltd. is in negative for all the
three years given in the cash flow statements. So, there is no question for the excess cash
generation from the activities from operations for this firm. For the firm named BHP Ltd., the
cash flow from operations is in really huge amounts. This is because the firm is efficient
enough to generate cash from its main activities of operations. The excess cash generated
from the operations for this firm is used to pay for the interest obligations/financing cost of the
firm. The income tax has been paid from this excess generated. The other expenses have
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been paid from this excess cash such as buying of the machines, plants, the amount of debt
related expenses have been settled through this excess cash, the number of liabilities having
an interest-bearing has been paid from this excess cash. The amount to shareholders in the
form of the dividends has been paid out of the excess cash generated from operations for this
firm etc.
The firm named Santos Ltd. does not have too much of excess cash generation from its
activities from operations but still some of its expenses such as the payment of dividends,
exploration and evaluating assets, payment for oil assets and payment for gas assets have
been paid from this excess cash, some of the plants have been bought and machinery has
also been bought (Accountingtools, 2019).
g.
The change in working capital refers to the net of current assets i.e. the amount remaining
after deducting the current liabilities from the current assets. For the firm named BHP Ltd.,
the changes in current assets for the first year are more than the changes in current liabilities
so this is used as a use of cash in the first year.
In the second year for this firm, the change in current assets is more than the change in
current liability, here the changes in working capital are used as a source of cash for the year
2017.
For the year 2016, the change in current assets is less than the change in current liabilities,
so this has been used as the usage of cash by the firm BHP Ltd. for the third year.
h.
As the cash flow entails of a number of items which results in cash inflow and also in cash
outflow so these activities are bound to change the position of cash flow in the firm. For the
first firm, Funtsatic Ltd. , the major activity which affects the cash flow are the amount paid by
the firm to the vendors and the employees of the firm. The finance cost paid by the firm for the
loans taken also affects the cash flow of this firm. The buying of intangible assets also affects
the cash outflow of this firm. The amount received from the sale of international subsidiary is
also affecting the cash flow for this firm in a huge way.
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For the second firm named, BHP Ltd. the major activities which affect the cash flow are the
cost of finance paid in the form of interest by the firm. The amount of tax and the amount paid
on royalty also affect the cash flow of the firm in a major way. The expenditure is done on
exploration also affects the cash flow in a big way.
For the firm Santos Ltd., the receipts received from the pipeline bring in a lot of cash for the
firm for all the three years. The number of funds paid to employees and the vendors leads in a
cash outflow for the firm.
i.
The expenditure on capital for the first firm which is Funtastic Ltd is very low the year 2018
but in the year 2017, the expenditure was the highest out of all the three given years. For the
year 2016, the expenditure on capital was reasonably high ( Accountingtools, 2018).
For the firm, BHP Limited, the trend of the expenditure in the capital is high for the year 2018
and 2016, however, the expenditure decreased for the year 2017.
For the firm Santos Ltd, the expenditure on capital assets is more or less the same for all the
three years and the fluctuations are not much.
j.
The firm fantastic ltd. does not pay any dividends. The firm BHP Ltd. pays a dividend to its
shareholders and the trend is the highest for the year 2018, medium for the year 2016 and the
least for the year 2017 (Corporatefinanceinstitute, 2019).
The dividends paid by the firm Santos Ltd. is the highest for the year 2018, no dividend has
been paid in the year 2017 and the dividend for the year 2016 is less than that of the year
2018.
k.
The trend in net borrowings for the firm Funtastic Ltd for the first year is that the net borrowing
for the year 2018 is more than the year 2017. The net borrowings for the year is in negative
which means the sum repaid to the borrowers is more than the sum borrowed in the second
year (Readyratios, 2019).
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l.
the Working capital for the year 2018 was the most in amount for the firm BHP Ltd. For the
second year, the working capital was positive but less than that of the year 2018. In the year
2016, the working capital was more than all the given years.
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2.
In the given case, cash flow statements of 3 companies – Funtastic Limited, BHP Limited and
Santos Limited is provided, and thus a detailed comparison is required for the same. Cash
flow statements help to ascertain the liquidity and solvency position of the company’s such
that eventually it helps in the assessing and ascertaining of the financial position of the
company.
Fantastic Limited has been spending more and comparatively less on its operating activities
such that in all the given 3 years, there has been a cash outflow from the operating activities.
This outflow has been increasing gradually over the years, which shoes inefficiency in its
operations. Financing activities have also shown cash outflow in the 3 years, but in this case,
it has been gradually decreasing, suggesting that the company is investing less over the
years. Financing Activities shows cash inflows in all the 3 years (increasing gradually) and
hence suggests that the company has been taking more loans over the years, which might
not suggest a financially healthy condition for the company in the future (Call, et. al., 2013).
BHP Limited has been showing a gradual increase in its receipts from operating activities
such that it suggests that the company is performing well and making optimum use of the
funds sourced through financing activities. Investing activities have been showing a
decreasing trend, such as the company has been spending less on its investments over the
years. Financing activities have been reducing over the years such that the company has
been paying its debts gradually over the years, which shows strong financial condition.
Santos Limited to have shown a positive increase in the cash receipts from the operations
such that the cash inflow has been increasingly showing the operational efficiency of the
company is getting better over the years. Outflows on the investing activities have increased,
suggesting the company is investing more in the assets, which will bear fruits in the future.
Financing activities have shown irregular trends over the year such that company had paid
back its debts in 2017, but acquired more loans in the last year and hence deteriorating the
financial condition of the company (Chang, et. al., 2014).
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