Group Report: Analyzing Cash Flows in Corporate Accounting

This report analyzes the cash flow statements of Funtastic Limited, BHP Billiton, and Santos Limited, focusing on the importance of income statements and cash flow statements for investors. The report examines key sources and uses of cash, reasons for discrepancies between net income and cash flow from operations, and the generation of adequate cash flow for capital expenditures, working capital, capital expenditure trends, dividend trends, and net borrowing trends. The analysis covers various aspects of the cash flow statements, including items affecting cash flows and trends in working capital accounts. The report concludes by highlighting the usefulness of both financial statements for investors and the importance of understanding cash flow dynamics for effective business decision-making. The assignment also discusses the impact of dividend payments, excess cash flow generation, and the influence of working capital and other items on cash flow.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Author’s Note

1CORPORATE ACCOUNTING
Abstract
The purpose of this report is to undertake analyzing as well as evaluating the cash
flows of Funtastic Limited, BHP Billiton and Santos Limited. This report also shows
the importance of income statement and cash flow statement to the investors. This
report undertakes the analysis of different dimension of the cash flow statements of
these three companies such as key sources of cash, key uses of cash, reasons for
the difference between net income and cash flow from operations, generation of
adequate cash flow for capital expenditure payment, working capital, capital
expenditure trend, dividend trend, net borrowing trend, items having effects in cash
flow statements, trends in working capital account and others.

2CORPORATE ACCOUNTING
Table of Contents
Introduction...................................................................................................................3
Part A............................................................................................................................3
Part B............................................................................................................................4
Requirement 1...........................................................................................................4
Requirement 2...........................................................................................................7
Requirement 3...........................................................................................................8
Conclusion....................................................................................................................9
References.................................................................................................................10

3CORPORATE ACCOUNTING
Introduction
Cash Flow Statement is considered as an important financial statement for
the firms which demonstrate how the changes in income and balance sheet
accounts affect the cash and cash equivalent and this statement breaks the analysis
down in three activities which are operating, investing and financing activities (Ball et
al. 2016). Clear understanding about different aspects of cash flows is needed for
the management of the companies in order to make effective business decisions
(Ball et al. 2016).The main aim of this report is the analysis and evaluation of
different aspects of cash flows in three companies; they are Funtastic Limited, BHP
Billiton and Santos Limited. This report is helpful in building understanding on
different components of cash flow statement.
Part A
Both the income statement and cash flow statement are of great use for the
investors and the reasons are discussed below:
Income Statement – Income statement is considered as a crucial financial report for
the investors who have the need for detailed information prior to invest in a firm. This
statement provides the investors with all the information on sales to profit and
operational efficiency to different other non-operational aspects. All this information
assists the investors in getting a clear and concise picture of the current performance
of the business and the future expectations (Bonner, Clor-Proell and Koonce 2014).
For this reason, it can be considered as a reliable source for judging the condition of
the firms.
More specifically, income statement is important for the investors as it clearly
indicates whether a company is making profit or not. The income statement records
the total revenue and expenses of a business and profit or loss is derived by
subtracting the total expenses from total revenue (Christensen, Glover and Wolfe
2014). Investors can only find this information in the income statement. In addition,
income statements reflect timely update of the operations of the firms since it is
updates more frequently as compared to other financial statements. Since the
income statement provides a clear as well as concise picture of the company’s
current profitability, organizational managers as well as investors constantly review
the income statement for getting the most recent information on the company’s
operations. Investors get the classification of different revenues and expense of the
companies from the income statements (Brazel et al. 2015). All these aspects
implies that income statement is useful for the investors since it provides them with
the required information for investment decision-making.
Cash Flows Statement –Cash flow statement is considered as another crucial
financial statement for the investors since it informs them about the cash position of
the business. For a business to be successful there must be adequate cash in the
business for paying its expenses, bank loans, taxes and payment for the purchase of
new assets (Lewellen and Lewellen 2016). A cash flows statement helps the
investors in determining whether a business has adequate cash for the above
purposes. Income statements do not express anything about the principal payments
of the businesses, but the statement of cash flows informs the investors about where
the company has made the principal payments. As per the cash flow statement,
indication of using cash can be got in certain circumstances like increase in
inventory, extension of credit to the customers, purchase of capital equipment and

4CORPORATE ACCOUNTING
others which cannot be shown in the income statement (Francis et al. 2013). From
the statement of cash flows, the investors can gain the understanding whether the
company is running out of money while it has a good profitability position. At the
same time, the owners can know whether the owners of the company is taking too
much money out of the business. The investors are able in making effective
investment decisions in the presence of this information obtained from the cash flow
statement (Bhandari and Iyer 2013). In the presence of the above reasons, the
income statement and cash flow statement are useful for the investors.
Part B
Requirement 1
a) For Funtastic Limited, the major sources of cash are receipts from customers,
proceed from borrowings and share issue; and the major uses for cash are
payment to suppliers and employees, cash utilized from operations, interest
and other costs, payment for plant and equipment and intangible assets and
cost from share issue (Edwards, Schwab and Shevlin 2015).
For BHP Billiton, the major sources of cash are trade and other receivable,
dividend and interest received, proceed from interest bearing liabilities; and
the major uses of cash are depreciation and amortization, net finance cost,
impairment, trade and other payable, interest payment, income tax and royalty
related taxation payment, purchase of property, plant and equipment,
exploration expenditure, repayment of interest payment liabilities and dividend
payment (Edwards, Schwab and Shevlin 2015).
For Santos Limited, the major source of cash are receipts from customers,
drawdown from borrowings and pipeline tariffs and other receipts; and the
major uses of cash are payment to suppliers and employees, payment of
borrowing cost, payment for oil and gas assets, acquisition of subsidiary and
repayment of borrowing (Edwards, Schwab and Shevlin 2015).
b) The presence of a same trend can be seen for both BHP Billiton and Santos
Limited due to the fact that both these companies have been able in gentling
positive cash flows from their operations. However, different trend can be
seen for Funtastic Limited since the company has generated negative cash
flow from operation (Hribar and Yehuda 2015).
c) Cash flow from operations is greater than the net income of BHP Billiton.
Net income is a key metric of profitability while cash flow from operations
shows the necessary adjustments made to the net profit and this is the main
reason for the difference (Farshadfar and Monem 2013). Certain items are
treated differently in the cash flow statement as compared to the income
statement. Income statement demands the inclusion of non-cash expenses
such as depreciation, amortization and share-based payments, but these
costs do not reduce the amount of cash that the company generates in a
particular period. For this, they are added back into the cash flow statement.
These reasons create the difference (Farshadfar and Monem 2013).
d) Funtastic Limited has negative cash flow from operations that is not adequate
for paying its capital expenditures such as payment for plant and equipment
and payment for other intangible assets.
BHP Billiton has positive cash flow from operations such as that is adequate
for paying its capital expenditures that are purchase of property, plant and
equipment and exploration expenditure.

5CORPORATE ACCOUNTING
Santos Limited has positive cash flow from operations, but it is not adequate
for paying the capital expenditures that are exploration and evaluation assets,
oil and gas assets, other land, building, plant and equipment, acquisition of
subsidiary, costs associated with the acquisition and payment of borrowing
cost (Pouraghajan et al. 2013).
e) Funtastic Limited does not have any dividend payment where both BHP
Billiton and Santos Limited have made the dividend payment. It can be seen
that the cash flow from operations of BHP Billiton is adequate in covering both
the capital expenditure and dividend payment since the cash flow from
operation is higher than the combination of capital expenses and dividend
payment. Santos Limited is not able in making the dividend payment from
cash flow from operations since it is not adequate to pay off the capital
expenditures (Bradford, Chen and Zhu 2013).
f) It is not possible for Funtastic Limited to generate excess cash flows since
they have negative cash inflows. At the same time, it can be seen from the
following table that Santos Limited does not have excess cash flow for the
payment of capital expenditure. In the absence of excess cash flows, these
two companies used long-term borrowings and proceeds from different
aspects like sale of assets for generating cash to pay off the capital
expenditures (Gao, Harford and Li 2013).
At the same time, it needs to be mentioned that BHP Billiton has been able in
making excess cash flow from operations and it can be seen from the
following table:
It is crucial to mention the fact that BHP Billiton has used their excess cash
flow from operations for paying their capital expenditures such as purchase of

6CORPORATE ACCOUNTING
property, plant and equity, exploration expenditure and other expenditures
(Gao, Harford and Li 2013).
g) According to the Cash Flow Statement of BHP Billion, the company has used
certain working capital account other than cash and cash equivalent as
sources of cash; they are trade and other receivable and inventories. In this
context, it needs to be mentioned that changes in current assets and liabilities
leads to the source of use of funds. Increase in accounts receivable is not
good for cash flows, but decrease works as cash. The same can be seen in
case of inventory as decrease in inventory supplies cash in the business.
Moreover, increase in current liabilities is helpful for supplying cash in the
cash flow statement (Baños-Caballero, García-Teruel and Martínez-Solano
2014).
h) It needs to be mentioned that there are other items that affected the cash
flows. One of them is payment of taxes. In case the companies do not set
aside money, they will be needed to pay huge cash for taxes that affects the
cash flows. Another crucial factor is the repayment of long-term borrowings. It
can be seen that the companies have to use huge amount of cash for
repaying the term loans of borrowings and this has certain major negative
impact on the cash flow of these companies (Bhattacharya, Desai and
Venkataraman 2013).
i) The presence of a common trend can be seen in all these three companies
which is the presence of negative cash flow from investing activities and it
implies that all these companies have more capital expenditure than capital
income. In addition, one common trend in capital expenditure for these three
companies is the payment for the non-current liabilities such as property, plant
and equipment. In the cases of Funtastic Limited and BHP Billiton, the capital
expenditure of these three companies fluctuates from the year 2016 to 2018.
However, in case of Santos Limited, increase in the capital expenditures can
be seen from 2016 to 2018. This is a crucial trend to consider (Tjhoa and
Hermawan 2014).
j) It can be seen from the provided cash flow statement of Funtastic Limited that
company does not have any dividend from 2016 to 2018. In case of BHP
Billiton, the company has paid normal dividend and dividend for non-
controlling interests and as per the trend, the company has increased the
dividend payment in the current year. In case of Santos Limited, the company
has received dividend and a decreasing trend can be seen in the recent year.
Moreover, Santos Limited has paid dividend in 2018 when they did not
provide any dividend in the previous year (Thanatawee 2013).
k) The following tables shows the net borrowings of the three companies:

7CORPORATE ACCOUNTING
It can be seen from the above tables that there is a decreasing trend in the
new borrowings of Funtastic Limited and the main reason is the non-payment
of any borrowings in the recent years. As per the second table, there is a
trend of negative net borrowings in the recent years for BHP Billiton which can
be considered as a positive aspect for the company. It implies that the
company has made some advance payment for their loans along with the
payment of exiting loans. The last table shows that there is an increase in net
borrowings of Santos Limited in the recent year (Nobanee and Al Hajjar
2014).
l) It can be seen from the cash flow statement of BHP Billiton that the trend has
changed in 2018 when their trade and other receivable has decreased, but it
increased from 2016 to 2017. In case of inventories, it can be seen that both
2018 and 2017 witness decrease in this current assets when it increased in
the year of 2016. Trade and other payable has increased in both 2017 and
2018 and it also increased from 2017 to 2018. Decrease in the same can be
seen in the year of 2016. Increase in provision and other assets and liabilities
can be seen in the years 2017 and 2016, but the same has decreased in the
year of 2018 (Wasiuzzaman 2015).
Requirement 2
The following discussion shows the evaluation of the financial strength of
these three companies from the cash flow analysis:
Funtastic Limited – It can be seen from the provided cash flow statement of the
company that there is negative cash flow from operations which indicates towards
the crucial fact that the revenue structure of the company is not able in covering all
expenses. This indicates towards the operational weakness of the firm. At the same
time, it can also be seen that the company has generated negative cash flow from
investing activities. This is because the company has heavily invested for the
purchase of new non-current assets and other intangible assets. This is a good sing
for the business as it indicates that the company is increasing its asset base. Lastly,

8CORPORATE ACCOUNTING
Funtastic Limited has positive cash flow from financing activities which indicates
towards the fact that the company has been able in raising cash for their business
through financing activities such as proceed from borrowings, proceed from issue of
share and others (Chang et al. 2014).
BHP Billiton – It can be seen from the cash flow statement of BHP Billiton that the
company has been able in generating positive cash flows from operating activities
which indicates that the revenue structure of the firm has covered all the
expenditures and this can be considered as a strength of the company. At the same
time, it can also be seen that the company has generated negative cash flows from
investing activities for the purposes of purchase of non-current assets and others
and other investments. It is a positive aspect for the company which shows the
increase in the asset base of the company. Lastly, BHP Billiton has fetched negative
cash flow from financing activities which shows that the company has to pay cash for
the purpose of dividend payment, repayment of liabilities and others. This can be
considered as a weakness for the company due to the presence of large cash
outflows (Larkin 2013).
Santos Limited – It can be seen from the cash flow statement of Santos Limited that
the company has generated positive cash flows from the operating activities which is
a good aspect for the firms as it shows the ability of the company for generating cash
from operating activities. At the same time, it can also be seen that the company has
negative cash flow from investing activities which due to the purchase of different
non-current assets and acquisition of business which can be considered as a major
positive aspect for the business of Santos Limited. At the same time, Santos Limited
also has positive cash flows from investing activities due to the drawdown of
borrowings. It implies that the company has generated cash from their investing
activities. All these aspects together show the financial strength of the company
which is crucial for the business success (Pivorienė 2017).
Requirement 3
It can be seen from the cash flow statement of Santos Limited that the
company has positive cash flow from operating activities from 2016 to 2018 that are
US$1578 million, US$1248 million and US$840 million respectively and the company
has received the highest amount that is US$3740 million from receipt from
customers. It implies that the company has generated majority of fees from their
main business operations. Apart from this, it can also be seen that the company has
invested huge amount of money for investing activities for the purposes of
purchasing assets like exploration assets, oil and gas assets, land, building and
plant, acquisition of new business and others (Samet and Jarboui 2017). These are
the indications of the expansion of the business of the company which is a good
sing. Lastly, it can also be seen that Santos Limited has been able in generating
cash from the financing activities that is majorly helpful for the business of the
company. All these aspects together indicate towards the major business strength of
Santos Limited. Other two companies do not have all these aspects. In the presence
of all these positive aspects, it can be said that Santos Limited will be able in
repaying the borrowings at timely manner (Kramná 2014). Thus, Santos Limited is
the appropriate company for the purpose of lending.

9CORPORATE ACCOUNTING
Conclusion
It can be seen from the above discussion that both the statement of income
and cash flows provide the investors with certain crucial information for the
investment decision-making process; and this these two statements posses upmost
importance to the users. In addition, the above discussion also shows the
importance of cash flow statements for ascertaining the financial position as well as
financial strengths of the firms. The above discussion shows the major sources of
cash and uses of cash for these three companies. It can be observed from the above
analysis that Santos Limited has the optimal cash flow position where they have
been able in fetching positive cash flows from operating and financing activities
which is crucial for the company. Based on the analysis, Santos Limited is
recommended for the lending purpose since the company has the position to repay
the borrowings in timely manner.

10CORPORATE ACCOUNTING
References
Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V., 2016. Accruals, cash flows,
and operating profitability in the cross section of stock returns. Journal of Financial
Economics, 121(1), pp.28-45.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working
capital management, corporate performance, and financial constraints. Journal of
Business Research, 67(3), pp.332-338.
Bhandari, S.B. and Iyer, R., 2013. Predicting business failure using cash flow
statement based measures. Managerial Finance, 39(7), pp.667-676.
Bhattacharya, N., Desai, H. and Venkataraman, K., 2013. Does earnings quality
affect information asymmetry? Evidence from trading costs. Contemporary
Accounting Research, 30(2), pp.482-516.
Bonner, S.E., Clor-Proell, S.M. and Koonce, L., 2014. Mental accounting and
disaggregation based on the sign and relative magnitude of income statement
items. The Accounting Review, 89(6), pp.2087-2114.
Bradford, W., Chen, C. and Zhu, S., 2013. Cash dividend policy, corporate pyramids,
and ownership structure: Evidence from China. International Review of Economics &
Finance, 27, pp.445-464.
Brazel, J.F., Jones, K.L., Thayer, J. and Warne, R.C., 2015. Understanding investor
perceptions of financial statement fraud and their use of red flags: Evidence from the
field. Review of Accounting Studies, 20(4), pp.1373-1406.
Chang, X., Dasgupta, S., Wong, G. and Yao, J., 2014. Cash-flow sensitivities and
the allocation of internal cash flow. The Review of Financial Studies, 27(12),
pp.3628-3657.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., 2014. Do critical audit matter
paragraphs in the audit report change nonprofessional investors' decision to
invest?. Auditing: A Journal of Practice & Theory, 33(4), pp.71-93.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax
savings. The Accounting Review, 91(3), pp.859-881.
Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct
method cash flow components for forecasting future cash flows. The international
journal of accounting, 48(1), pp.111-133.
Francis, B., Hasan, I., Song, L. and Waisman, M., 2013. Corporate governance and
investment-cash flow sensitivity: Evidence from emerging markets. Emerging
Markets Review, 15, pp.57-71.
Gao, H., Harford, J. and Li, K., 2013. Determinants of corporate cash policy: Insights
from private firms. Journal of Financial Economics, 109(3), pp.623-639.
Hribar, P. and Yehuda, N., 2015. The mispricing of cash flows and accruals at
different life‐cycle stages. Contemporary Accounting Research, 32(3), pp.1053-1072.
Kramná, E., 2014. Key input factors for discounted cash flow valuations. WSEAS
Transactions on Business and Economics.

11CORPORATE ACCOUNTING
Larkin, Y., 2013. Brand perception, cash flow stability, and financial policy. Journal of
Financial Economics, 110(1), pp.232-253.
Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New
evidence. Journal of Financial and Quantitative Analysis, 51(4), pp.1135-1164.
Nobanee, H. and Al Hajjar, M., 2014. An optimal cash conversion cycle. International
Research Journal of Finance and Economics. March (120), pp.13-22.
Pivorienė, A., 2017. Real options and discounted cash flow analysis to assess
strategic investment projects. Economics and Business, 30(1), pp.91-101.
Pouraghajan, A., Mansourinia, E., Bagheri, S.M.B., Emamgholipour, M. and
Emamgholipour, B., 2013. Investigation the effect of financial ratios, operating cash
flows and firm size on earnings per share: evidence from the tehran stock
exchange. International research journal of applied and basic sciences, 4(5),
pp.1026-1033.
Samet, M. and Jarboui, A., 2017. CSR, agency costs and investment-cash flow
sensitivity: a mediated moderation analysis. Managerial Finance, 43(3), pp.299-312.
Thanatawee, Y., 2013. Ownership structure and dividend policy: Evidence from
Thailand. International Journal of Economics and Finance, 5(1), pp.121-132.
Tjhoa, E. and Hermawan, A.A., 2014. Informativeness of earnings and cash flows:
Evidence in Indonesia, Malaysia, and Thailand banking industry (pp. 1-28).
University of Indonesia Working Paper.
Wasiuzzaman, S., 2015. Working capital and firm value in an emerging
market. International Journal of Managerial Finance, 11(1), pp.60-79.