Corporate Accounting: Cash Flow Statement Analysis and Evaluation

This report delves into the realm of corporate accounting, focusing on the analysis of cash flow statements and their significance in evaluating a company's financial health. The report begins by explaining the information content and uses of both cash flow statements and income statements, emphasizing their role in assessing financial performance. It then transitions to a practical analysis, evaluating specific questions related to the sources and uses of cash for three companies: Funtastic Limited, BHP Limited, and Santos Limited. The report examines the trends in cash flow for these companies over a three-year period, providing a comparative analysis of their financial strengths based on their cash flow statements. The report covers operating, investing, and financing activities and their impacts on cash flow. The analysis includes the evaluation of cash inflows and outflows, and the comparison of key financial metrics across the three companies. The conclusion summarizes the findings and emphasizes the importance of cash flow analysis in corporate financial decision-making.

CORPORATE
ACCOUNTING- ISSUES IN
CASH FLOW STATEMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
Information content and uses of Cash Flow Statement and Income Statement...........................1
PART B............................................................................................................................................4
1. Evaluation of Following Questions.........................................................................................4
2. Evaluation of Financial Strength.............................................................................................8
3. Comparison of three companies with the purpose of lending..................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Corporate Accounting is a field of accounting through which company’s final accounts
are prepared. Corporate accounting helps companies in interpretation and analysis of cash flow
statement & financial position. Further, corporate firms also use corporate accounting in events
like merger, amalgamation and acquisition.
The below report elaborate meaning and usefulness of Income Statement and Statement
of Cash Flow. Further, this report analyses trends in different activities and items of cash flow
statement of three companies by evaluating their past three years’ data. Moreover, this report
examines financial strength of three companies on the basis of their last three years’ cash flow
statement.
PART A
Information content and uses of Cash Flow Statement and Income Statement
Cash Flow Statement and Income Statements are prepared by business firms with the
purpose of analysing their financial performance. Balance sheet of an organization is prepared on
the basis of Income Statement and Cash Flow Statement.
Statement of cash flow is prepared by corporates to evaluate their overall cash inflow
and outflow. This statement also benefits companies in determining all the available resources
which generates cash and use of those resources in firms’ business operations.
On the other hand, Income Statement is prepared with an objective of evaluating
financial performance of a corporate firm. With the help of this statement a corporate firm can
abstract its revenues, profits, expenses and losses. Cash flow Statement shows ability of
companies in generating cash whereas Income Statement amount of profit earned by company
during a particular period of time.
According to Balakrishnan, Watts and Zuo, (2016), Cash Flow Statement is prepared on
the basis of Net Profit calculated in Income Statement helps accountant of a corporate in
determining amount of cash generated from operating activity.
Cash Flow Statement
This Statement effect of change in various balance sheet elements such as Account
Receivable and Account Payables. Further, statement of cash flow shows overall efficiency of
business by calculating cash generated in different activities. Thus, it is divided in three activities
which are discussed below-
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Operating Activity- In operating activity over all cash in flow from operating activities
are analysed with actual cash outflow which in turn gives outflow or inflow from operations.
This activity helps business firms in measuring capability of a business in generating cash from
its operations. Further efficiency of production of a business firms is checked in operating
Activity.
Investing Activity- According to Maas, Schaltegger and Crutzen, (2016), it is examined
that investing activity shows cash generated from investments made by corporates such as
purchase of land & building, machineries and various other long term assets.
Financing Activity- With the help of this activity, a company can measure amount of
cash generated from sale of shares, debentures and money raised by bank loan.
Income Statement
Income Statement is a type of financial statement prepared by corporates. Income
Statement gives details of sales, purchases, gross profit, operating & non operating expenses.
Which in turn helps companies in determining amount of net income and earning per shares
(EPS). Amount of total income is calculated by subtracting total expenses & losses from total
revenues & gains. A standard format must be used by corporates while preparing their income
statement as different types of expenses are incurred in business operations (Watson, 2015).
Income Statement is also segmented according to the types of expenses & revenues such
as operating or non operating. Further, this statement also gives different types of profits such as
gross profit, net profit before interest and taxes and profit after interest & taxes. With this, profits
a company is able to calculate different types of profitability ratios such as Net Profit Ratio and
Gross Profit Ratio. This further benefits corporates in comparing their performance & profits
with previous year. Thus, this statement is also known as Statement of Profit & Loss.
Uses of Cash Flow Statement- Various decisions related to operations, financials and
Investment are taken on the basis of capability of generating cash of all this activities running in
a business firm and these decisions can be made on the basis of information given in the cash
flow statement of business. Further, more uses of cash flow statements are discussed below-
Short term Planning- Cash Flow Statement is useful for managers & accountants of a
business firm in managing and monitoring resources which generate cash. Further, it enables
managers in making decisions to fulfil their short term liabilities by measuring amount of cash
available. This short term obligations includes payment of various expenses such as payment of
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dividend and taxes. Thus with this statement, managers can determine that whether company has
sufficient amount of cash to pay its liabilities or not (De Jong, 2016).
It is also useful for investors as with this statement investors can plan as in which
company they have to invest and how much money is to be invested in each resources.
Projection of Future Cash Flow- Cash Flow Statement also useful for business firms in
preparing budget on the basis of previous data. A company can project how much amount of
cash is required in future. Further, with the help of cash flow statement investors are able to
evaluate company’s liquidity and if company's liquidity is high than it influences investors in
making more investment.
Formulation of Financial Policy- With the help of cash flow statement, managers of
companies are able to make financial policy and it is also useful in making various decisions
related to replacement of assets and raising capital by issues of shares & taking bank loan. With
these managers also does planning of cash.
This statement is also useful in determining liquidity of a business firm. With this
statement a corporate firm can minimise its expenditures such as interest and cost of debts. It
also helps in determining income from a business operation on a daily basis. Which also benefits
investors in acquiring shares at a lower price and if cash flow position is strong than with that
investors can evaluate amount of dividend they are going to receive ion the upcoming years.
Uses of Income Statement
External Uses- Income Statement is prepared by companies with an objective disclosing
their financial performance to their shareholders and general public so that they can make
decisions of making further investment. This statement also helps shareholders in tracking
profitability of this investments. It is mandatory for the corporates to disclose their income
statement through annual reports and online websites. Further, creditors of companies also need
to check their efficiency so that it is essential for firm to disclose statement of profit & loss to its
stakeholders. It also helps stakeholders in comparing companies’ financial performance with
other companies operating under same sector (Miao, Teoh and Zhu, 2016).
Discloser of Income Statement also helps competitors in making strategies and achieving
long term success.
Internal Uses- Income Statement is also helpful form managers of corporates because it
helps them in making important decisions related to business expansion, diversification,
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enhancement of operational capacity and other decision related to investment in capital assets
which in turn helps investors because with expansion profits get raised and value of investors
money is also increased. Managers decisions regarding investment is based on companies’
profitability if its profits are increasing than managers think about making further investment.
Whereas if a corporate firm is suffering from losses than managers make decision of improving
and developing company’s production process and it all becomes possible with the help of
statement of profit & loss. Thus, this statement is useful in improving managerial efficiency of a
corporate firm.
According to (Florysiak and Goyal, 2016) this statement is useful in evaluating factors
which affects performance and profitability of business firms. Without Income Statement a
company is not able to prepare other statements such as Balance Sheet and Cash Flow Statement.
Income Statement gives details of expenses thus with it can minimise cost of operations
so that corporate can achieve higher profits and customer base. This statement is also useful in
achieving organisations objectives as with this company can evaluate its performance and make
strategies accordance with objectives. Further, this statement is also useful in maintaining all
operating cost of a business firm. As with this statement cost of manufacturing of a particular
product is determined and which is also useful in determining amount of profit margin.
By evaluating this statement company is able to use its resources in a most effective and
efficient manner. With all the above usefulness it is essential for a corporate to prepare Income
Statement (Ball and et.al., 2016).
PART B
1. Evaluation of Following Questions
a) Sources & Uses of Cash for each firm?
Funtastic Limited BHP Limited Santos Limited
Sources of Cash -Receipts from
customers.
-Interest and other
investment income
received.
-Proceeds from sale of
-Current Assets
(Inventories, Trade
Receivables)
-Dividends received -
Interest received.
-Net income tax and
-Receipts from
customers.
- Dividends received.
-Pipeline tariffs and
other receipts.
-Proceeds from
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international
subsidiary.
-Proceeds from
borrowings
-Proceeds from share
issue
royalty-related
taxation refunded.
-Proceeds from sale of
assets.
-Proceeds from
divestment of
subsidiaries,
operations and joint
operations, net of their
cash.
-Interest Bearing
Liabilities.
disposal of non-current
assets.
-Proceeds from
disposal of
subsidiaries.
-Drawdown of
borrowings.
Uses of Cash -Payments to suppliers
and employees.
-Cash Utilised in
Operations.
-Interest and other cost
of finance.
-Payments for plant
and equipment.
-Payments for other
intangible assets.
-Repayment of
commercial bills.
-Costs from share
issue (Arya and Nagar,
2018).
- Trade Payable.
-Interest Paid.
-Purchases of
property, plant and
equipment.
-Exploration
expenditure.
-Repayment of interest
bearing liabilities.
-Dividends paid -
Dividends paid to
non-controlling
interests
-Payments to suppliers
and employees.
-Restoration
expenditure. -
Exploration and
evaluation seismic and
studies.
-Royalty and excise
paid.
-Borrowing costs paid.
-Income taxes paid. -
Royalty-related taxes
paid.
-Exploration and
evaluation assets.
-Oil and gas assets. -
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Other land, buildings,
plant and equipment.
-Acquisition of
subsidiary, net of cash
acquired.
-Dividends paid.
-Repayment of
borrowings.
b) Trend in Cash Flow?
Funtastic Limited- By comparing Cash Flow Statement of Funtastic Limited for the last
three years it is evaluated that it is showing both increasing & decreasing trend. In the financial
year 2016 company is having a cash inflow of 764 AU$000 but in the year 2017 its cash flow
statement is showing a decreasing tend and overall cash generated by company is reduced to 664
AU$000. But in the year 2018 liquidity of company is improved and its cash inflow is increased
to 718 AU$000 (Pittman and Zhao, 2018).
Cash from operations of this firms is showing a decreasing trend as cash outflow from
operations are increasing year by year.
BHP Limited- Cash Flow Statement of BHP Limited is showing an increasing trend
which show that company has enough cash to pay its liabilities on time. Further, this trend also
shows that firm is improving its operations. By comparing cash flow statement for last three
years it is analysed companies cash generation capacity is enhanced by 54% in 2018 as
compared to the financial year 2016.
An increasing trend is measured in cash operations of this company.
Santos Limited- Cash generating capacity of Santos Limited is also showing an
increasing trend after 2017 which shows that now company is improving its operations.
Fluctuating trend in operating activity of this company is examined.
c) Difference between cash flow from operations and Net Income of BHP Limited?
Cash Flow from Operations of BHP Limited is greater than Net Income in all three
financial years. Because cash generated from operations does not include various non operating
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expenses such as depreciation, Interest, Taxes and adjustments made in current liabilities and
assets.
d) Is firms are capable to pay all its capital expenditure from operating cash?
Cash generated from operating activity by Funtastic Limited is not enough to make
payment to all of its capital expenses as company is operating cash outflow is increasing and it is
not capable to fulfil its operating expenses.
On the other hand, BHP Limited has enough cash flow from operating activity so that it
can make payment of all of its capital expenditure. Whereas, Santos Limited is also not
generating enough cash to pay its capital expenditure as firm is generating less cash inflow than
outflow in its investing activities.
e) Did the cash flow from operations cover both the capital expenditures and the dividend
payments made by the firm (if any)?
Yes, Cash Inflow from Operations of BHP Limited of the financial year 2017 and 2018
cover amount of capital expenditure and dividend which shows that company is running its
business in most effective and efficient manner. Further, it is also evaluated that cash from
operations is higher than the sum of capital expenditure and dividend paid.
f) Use of excess cash generated by firms in operations?
If any company generate more cash in its operations than that cash is used in payment of
outflows of other activities such as financing and investing. Excess cash used in payment of
dividend and for capital expenditures like purchase of fixed assets and their maintenance.
On the other hand, if operations of a firm is showing a net outflow than company will pay
amount of dividend and capital expenditure by taking loan from bank and by raising funds
through issue of equity capital.
g) Use of Current Assets and Current Liabilities as sources of cash by any firm
BHP Limited uses its current liabilities and assets as source of funds as there is an
increase and decrease in current liabilities and assets of company. Adjustments are done in
working capital such as inventory, trade receivables and trade payables. Thus, it is also
considered as a source of cash (Tian and Zhang, 2016, August).
h) Items affected cash flows?
Various items related to operating activities such as profit, tax, adjustment in current
liability, current assets and depreciations affects cash flow from operations. Further, sales and
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purchase of fixed assets (Plant, Machinery, land and Building) and other expenses made on
improvement of capital assets affects Cash Flow Statement. Items like share, debentures, loan
and dividends also affects cash flow from financing activity and which in turn affects over all
cash flow of a business firm.
i) Trend in capital expenditures for each firm?
Funtastic Limited- Cash Outflow from Investing Activity of Funtastic Limited is
increasing trend in 2017 as compared to 2016. Because, in 2016 company is spending 558 on
capital items whereas in 2017 its capital expenses are increased to 989. But in the year 2018 this
expenditure decreased to 298. Thus in 2018 capital expenditure of firm is showing a decreasing
trend.
BHP Limited- Capital Expenditure of BHP Limited are showing an decreasing trend in
2018 as compared to financial year 2016 as in 2018 capital expenses of firm are reduced by 32%.
Santos Limited- Capital expenditure of Santos Limited is showing a decreasing trend as
in 2016 company is paying 205 million Us Dollar whereas in 2018 this expenditure is increased
to 2373 million US Dollar.
j) What was the trend in dividends for each firm?
Dividend its paid by BHP Limited and Santos Limited. In BHP Limited amount of
Dividend Paid is increasing year by year thus there is an increasing trend in dividend.
Similarly, Figure of Dividend paid by Santos Limited is also showing an increasing trend
as company is distributing more dividend in financial year 2018 as compared to 2017.
k) What was the trend in net borrowing for each firm?
Trend in net borrowing of BHP Limited and Funtastic Limited decreasing whereas net
borrowings of Santos Limited are showing an increasing trend (McCarthy, O'Reilly and
Schneider, 2018).
l) What was the trend in working capital accounts?
Working Capital Accounts of BHP Limited are showing a decreasing trend as company is
not generating cash from its current assets and liabilities in the financial year 2018 in comparison
from 2016. In 2016 there is an inflow of cash from working capital but in 2017 which gets
reduced and company has an outflow of cash from working capital. Further, in 2018 also
company is not generating much cash from its working capital.
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2. Evaluation of Financial Strength
Funtastic Limited- Financial position of company is not much strong as company is not
able to generate cash from its operations which shows that customers are not satisfied with its
products and services. On the other hand, Funtastic Limited is also not able to pay its operating
and capital expenditures.
On the other hand, by evaluating financial activity of company it is analysed that
company is capable to raise capital or generate cash by issue of share capital and taking loan
from banks. But, with this company is not able to pay all of its outflows from investing and
operating activity. It is also reviewed that financial position of this firm is improving year by
year but till 2018 it is not capable to generate cash from its operations. Further, overall activities
of company is generating cash in the financial year 2018 and it is more than 2017 thus, it is
examineed that managers of company is making decisions with this its operations are improved.
BHP Limited- Financial Strength of this company is very strong as enough cash is being
generated from its operations so that company can pay its capital expenditures and dividends.
Further, it is also interpreted that BHP Limited is able to distribute more amount as dividend to
its shareholders with which more investors are making investment in company and with the
result of this market share and brand image of company is maximised (McLean and Talbert,
2016).
It is abstracted from the cash flow statement that company has enough liquidity and its
net cash flow is also increasing year by year. Further, working capital of company is also
increasing and BHP Limited also uses its current liability and assets as a source of cash. So, an
increase in sources of cash enhances financial strength of a company. Thus, financial position of
this company is very strong.
Santos Limited- There is an increase in cash from operation and capital expenditure of
Santos Limited year by year which shows that company is making investment in its business
expansion. Further, it is also reviewed that company is generating cash from financing activities
as compared to the previous years. Thus, financial strength of this company is also getting
stronger year by year. In 2017 overall cash inflow of company is reduced but in the year 2018 it
is also increased which shows a positive growth in its financials (Robinson and et.al.,2015).
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3. Selection of a firm with the purpose of lending
By evaluating cash flow statement of all the three firms it is find out that BHP Limited is
able to give money to other companies as company is able to generate excess cash after covering
all its capital expenditures. Whereas, Funtastic Limited and Santos Limited are not able to pay its
capital expenditure and other outflows from its operating cash.
Thus, BHP Limited are selected with the purpose of lending.
CONCLUSION
The above report outlined information included in Income Statement and Statement of
Cash Flow. Further, this report summarises usefulness of Statement of profit & loss and cash
flow statement. Moreover, above report concluded with an evaluation of cash flow statement of
three companies by comparing their last three years’ data. Further, this report summarises
financial strength and tends in operations of above stated three companies on the basis of their
cash flow statement.
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