HC1010 Accounting for Business 1: Financial Position Evaluation

This report provides a detailed financial analysis of a company, evaluating its profitability through ratio comparisons, analyzing its cash flow statement to identify financing, operating, and investing activities, and assessing its financial position by analyzing the balance sheet. The analysis includes a comparison of the company's financial figures over two years and against a competitor within the same industry. The report also examines corporate governance statements, management approaches, business operations, investment activities, financing activities, industry size, major competitors, and market share. Key financial ratios such as Return on Assets (ROA), Inventory Turnover Ratio, Quick Ratio, and Price/Earnings (P/E) ratio are calculated and interpreted to provide a comprehensive understanding of the company's financial health and market position. This document is available on Desklib, a platform offering a range of study tools and solved assignments for students.

HC1010 Accounting for Business
1

Contents
Executive Summary.....................................................................................................................................4
Introduction.................................................................................................................................................5
Section 1......................................................................................................................................................6
1. Analyze profitability by comparing 2 year’s financial figures and with that of competitor from
same industry...........................................................................................................................................6
2...............................................................................................................................................................6
2. Analyse cash flow statement to identify the company’s financing/operating/investing activities........9
4. Evaluate the company's financial position by analyzing the balance sheet....................................11
Section 2....................................................................................................................................................14
Ratio analysis........................................................................................................................................14
Section 3....................................................................................................................................................16
Corporate Governance statements and the practice of integrity policy..................................................16
Management Approach..........................................................................................................................16
Business Operations..............................................................................................................................17
Investment and Investment Activities....................................................................................................18
Financing and Financing Activities.......................................................................................................18
Industry Size..........................................................................................................................................18
Major Competitor..................................................................................................................................18
Market share of the Industry Players.....................................................................................................18
2

Conclusion.................................................................................................................................................20
References.................................................................................................................................................21
3

Executive Summary
This report explains about the financial position of the company by analyzing the profitability of
the organisation through comparison between the ratios of profitability so that the actual results
can be revealed. The main aim of the report is to provide the overall understanding about the
annual reports which will help in attaining the accuracy and accountability within the
organisation. For the practical implementation the ratios of BHP Billiton has been compared of
the current year with that of previous year and that of the competitor fortescue metals group ltd.
Cash flow is also analyzed so that the inflow and outflow of cash can be evaluated. The light has
also been thrown on the director’s report which will enable to understand he corporate
governance, various management approaches. The business operations of the industry are also
determined. With that the report also depicts about the market share of the industry.
4

Introduction
The report depicts about the various ratios and also explains the results of that ratio so that the
financial position of the company can be determined as well as the position in the external
market. The profitability ratios are much highlighted which will enable the shareholders of the
organisation in taking the investment related decisions. The cash flow statement is also evaluated
to know about the investing, financing and the operating activities. The turnover ratios evaluated
depicts about the return which the shareholder will get by doing the investment in the
organisation. The areas which will help in managing the risk are explained with that of the
actions and the attitude towards the reporting of financing. The business operations of the BHP
Billiton are highlighted so as to provide the understanding about their business areas and also the
share in various projects.
5

Section 1
1. Analyze profitability by comparing 2 year’s financial figures and with that of
competitor from same industry.
Comparison with last year's data
2.
3.
6
2017 2016
US$M US$M Increas
e/
decreas
e in $
Increase/
decrease
in %
Continuing operations
Revenue 38,285 30,912 7,373 23.85%
Other income 736 444 292 65.77%
Expenses excluding net finance
costs
-
27,540
-35,487 7,947 -22.39%
Profit/(loss) from equity accounted
investments, related impairments
and expenses
272 -2,104 2,376 -112.93%
Profit/(loss) from operations 11,753 -6,235 17,988 -288.50%
Financial expenses -1,574 -1,161 -413 35.57%
Financial income 143 137 6 4.38%
Net finance costs -1,431 -1,024 -407 39.75%
Profit/(loss) before taxation 10,322 -7,259 17,581 -242.20%
Income tax (expense)/benefit -3,933 1,297 -5,230 -403.24%
Royalty-related taxation (net of
income tax benefit)
-167 -245 78 -31.84%
Total taxation (expense)/benefit -4,100 1,052 -5,152 -489.73%
Profit/(loss) after taxation 6,222 -6,207 12,429 -200.24%

Comparison with a competitor company
Particulars BHP
Billiton(2017
)
fortescu
e metals
(2017)
Increase/
decrease in $
Increase/
decrease in %
Revenue 38,285 8447 29,838 453.24%
Other income 736 14 722 5257.14%
Expenses excluding net
finance costs
-27,540 -5011 -22,529 549.59%
Profit/(loss) from equity
accounted investments,
related impairments and
expenses
272 0 272 0.00%
Profit/(loss) from
operations
11,753 3,450 8,303 340.67%
Financial expenses -1,574 -502 -1,072 313.55%
Financial income 143 19 124 752.63%
Net finance costs -1,431 -483 -948 296.27%
Profit/(loss) before
taxation
10,322 2,967 7,355 347.89%
Income tax
(expense)/benefit
-3,933 -874 -3,059 450.00%
Royalty-related taxation
(net of income tax benefit)
-167 0 -167 0.00%
Total taxation
(expense)/benefit
-4,100 -874 -3,226 469.11%
Profit/(loss) after taxation 6,222 2,093 4,129 297.28%
From the calculations above it can be noted that the company has attained the growth and there is
a high increase in the profits which are experiences and this is the case in the company itself also
and also in the comparison which is made with the other company (Fortescue Metal Groups
7

Limited, 2017). It is in better profitability position that any other business and also from the past
year the performance has been improved.
8

2. Analyse cash flow statement to identify the company’s financing/operating/investing
activities.
In the carrying out of the evaluation of the company, it is essential that the cash flow statement
of the company shall be analyzed. For that, all of the activities which are undertaken in the
business have to be analyzed inappropriate manner. The description in relation to all of the
aspects which are involved in this is as follows:
Operating activities: In this part of the statement the focus will be given to all the activities
which are undertaken in respect of the operations which are carried in the business. In this, there
are several incomes and expenses which are incurred and they all will have to be included under
this. The expenses which are incurred in the normal course of business such depreciation, finance
cost, and other payments (BHP Billiton, 2018). The incomes in this will be including dividend,
receivables, and income from sales. In the BHP the net cash flow from the operating activities is
increasing and it has risen from 10625 to 16804 and this is a positive factor as the company is
having the increase in the cash inflow which canbe used for the further expansion of the business
(BHP Billiton, 2018).
Investing activities: Under the company, there will be the purchase of the fixed assets which is
made and the payment that is made in respect of it in the cash will be included in this. With that,
the expense such as exploration, investment in equity accounted assets and other investments
will be included. The company sale some of the assets and the amount which will be received by
that will also be taken into consideration. In this, the company is having the negative balance as
there are more of the investment than the earing which is made. The company has obtained a
decline in this which is also favorable. The amount of this in 2016 was -7245 and that has
declined to -4161 in 2017 (BHP Billiton, 2018).
Financing activities: The company is making the issue of the shares and the amount which is
received from that and also from the borrowings will be incorporated in this. Then the payments
which are made in this respect such as dividends and other repayments which are made will be
taken into consideration. The share purchase in ESOP has been made and that also includes the
use of the cash. All of them in combined form results in the positive balance in 2016 which
9

amounts to 284 and in 2017 there is the negative cash flow which equals to -9133 (BHP Billiton,
2018).
The net balance of the cash at the end of the year is positive and that has increased which shows
that position of the company in terms of cash is favorable and it will be beneficial for the
company.
10

4. Evaluate the company's financial position by analyzing the balance sheet
2017 2016 Increa
se/
decrea
se in $
Increase
/
decrease
in %
US$M US$M
ASSETS
Current assets
Cash and cash
equivalents
14,153 10,319 3,834 137.15%
Trade and other
receivables
2,836 3,155 -319 89.89%
Other financial assets 72 121 -49 59.50%
Inventories 3,673 3,411 262 107.68%
Current tax assets 195 567 -372 34.39%
Other 127 141 -14 90.07%
Total current assets 21,056 17,714 3,342 118.87%
Non-current assets
Trade and other
receivables
803 867 -64 92.62%
Other financial assets 1,281 2,680 -1,399 47.80%
Inventories 1,095 764 331 143.32%
Property, plant and
equipment
80,497 83,975 -3,478 95.86%
Intangible assets 3,968 4,119 -151 96.33%
Investments accounted
for using the equity
method
2,448 2,575 -127 95.07%
Deferred tax assets 5,788 6,147 -359 94.16%
Other 70 112 -42 62.50%
Total non-current
assets
95,950 101,239 -5,289 94.78%
Total assets 117,006 118,953 -1,947 98.36%
11

LIABILITIES
Current liabilities
Trade and other
payables
5,551 5,389 162 103.01%
Interest-bearing
liabilities
1,241 4,653 -3,412 26.67%
Other financial
liabilities
394 5 389 7880.00
%
Current tax payable 2,119 451 1,668 469.84%
Provisions 1,959 1,765 194 110.99%
Deferred income 102 77 25 132.47%
Total current liabilities 11,366 12,340 -974 92.11%
Non-current liabilities
Trade and other
payables
5 13 -8 38.46%
Interest-bearing
liabilities
29,233 31,768 -2,535 92.02%
Other financial
liabilities
1,106 1,778 -672 62.20%
Deferred tax liabilities 3,765 4,324 -559 87.07%
Provisions 8,445 8,381 64 100.76%
Deferred income 360 278 82 129.50%
Total non-current
liabilities
42,914 46,542 -3,628 92.20%
Total liabilities 54,280 58,882 -4,602 92.18%
Net assets 62,726 60,071 2,655 104.42%
EQUITY
Share capital – BHP
Billiton Limited
1,186 1,186 0 100.00%
Share capital – BHP
Billiton Plc
1,057 1,057 0 100.00%
Treasury shares -3 -33 30 9.09%
Reserves 2,400 2,538 -138 94.56%
Retained earnings 52,618 49,542 3,076 106.21%
12

Total equity
attributable to BHP
shareholders
57,258 54,290 2,968 105.47%
Non-controlling
interests
5,468 5,781 -313 94.59%
Total equity 62,726 60,071 2,655 104.42%
The financial position of the company is improving as there are increases which are noted from
the past year in the company. There is a high rise in the amount of the assets which are
maintained by the company (BHP Billiton, 2018). This shows that company is performing all of
the activities inappropriate manner and the position of the business is satisfactory which will help
in the attainment of future growth.
5.
13

Section 2
Ratio analysis
The company will ascertain the position of the company and for that analysis is carried out in
various ratios are calculated so that all the aspects of the business are included in this. The
calculationsfor the same are made and they are provided in the below part.
Particulars 2017 2016
Net income 6,222 -6,207
Total assets 117,00
6
118,95
3
Cost of goods gold 35122 26555
Inventory 3,673 3,411
Quick assets 17,383 14,303
Current liabilities 11,366 12,340
MPS 23.28 19.09
EPS 1.11 -1.2
Particulars Formula 2017 2016
ROA Net income/total assets*100 5% -5%
Inventory turnover
ratio
COGS/Inventory 9.56 7.79
Quick ratio Quick assets/current
liabilities
1.53 1.16
P/E ratio MPS/EPS 20.97 -15.91
ROA: This is the ratio whichrepresents the return on the assets and in that the company will be
required to calculate the earnings which are made by the company with the help of the assets that
are held by it (Laitinen, 2017). It can benoted that in 2016 there was the negative ratio as the
company has made losses but in the current year there are profits and due to that the ratio has
increased to 5% which is a positive factor (BHP Billiton, 2018).
Inventory turnover ratio: Under this, the cost of the goods sold is compared with the inventory
that is held by the business. By this, it is assured that appropriate balance of the inventory is
14

maintained and with that the issues in respect of the inventory will not be faced (BHP Billiton,
2018). There are the increases in the ratio from 7.79 in 2016 to 9.56 in 2017 (BHP Billiton,
2018). This shows that there will proper production which will be made and no shortage will be
faced.
Quick ratio: By the help of this ratio it will be possible for the company to evaluate the liquidity
position of the company. It will be determined that whether the company will be able to meet all
of the obligations which are arising in the business at the required time (Chiaramonte & Casu,
2017). In this, all the major liquid assets are considered which can be converted into cash in an
easy manner. There is a rise in this which is from 1.16 to 1.53 in the one year which shows the
favorable position (BHP Billiton, 2018).
P/E ratio: This is the price to earnings ratio in which it is determined that what the times that
market price is is to the earnings of the company (Piketty& Zucman, 2014). It can be noted that
there is the positive growth as this has converted from negative to positive which will be
beneficial for the business (BHP Billiton, 2018).
15

Section 3
Corporate Governance statements and the practice of integrity policy
The statement of the corporate governance helps in maintaining the integrity and the
transparency in the rules within the organisation. These statements are committed to the high
level of governance and with that the value and ethical standards and the integrity of corporate
with that of others (BHP Billiton, 2018). The main purpose of the corporate governance
statement is that it moves towards the high performance with the respect of responsibility within
every individual and rewards for the results. To maintain the integrity the rules and regulations
relating to the business conduct are included in the statements (Lewellen and Lewellen, 2016).
Management Approach
Taking and Managing Business Risk: The business risks are reviewed on the daily basis so
that the potential changes to the portfolio of assets are done through divestment so that the
effects upon the future results can be avoided. The audit committees are responsible for
managing the functions of the BHP (BHP Billiton, 2018). The identification and the management
of the risk are done so that the value can be enhanced to the shareholder’s investment and the
assets can be safeguarded.
Attitudes and action towards financial reporting: The financial statements of the organisation
are prepared in accordance with that of financial reporting standards (Perić and Đurkin, 2015).
The reporting standard which is used by the organisation is the International Financial Reporting
Standards. The governance and the compliance review the financial reporting and take actions so
that the misstatement or the financial breaches can be reduced (BHP Billiton, 2018).
Attitude towards information processing and accounting functions: The attitude of the
organisation seems to be positive as it ensures that the decisions of the organisation are taken
according to diversified culture so that the sustainability can be maintained (Perić and Đurkin,
2015). The accounting functions of the organisation are performed according to the rules and the
regulations prescribed so that the challenges can become the opportunities for the employees
(BHP Billiton, 2018).
16

Business Operations
Image: Operating Model
Source: BHP Billiton Annual Report, 2018
BHP Billion is the multinational mining, iron ore and metal company operating in Australia
(BHP Billiton, 2018). It was founded in 1885 and has ranked as one of the third largest company
in respect of revenue. The operations of the organisation are in minerals including the assets
group which extracts the copper ore, with the automated train to feed underground crushing and
storage. With this it also deals with the western Australian Iron ore (Perić and Đurkin, 2015).
17

Investment and Investment Activities
The organisation have made various investments such as the investment if the shareholders
(Lewellen and Lewellen, 2016). The organisation has made the social investment which
amounted to be $80.1 million in the financial year 2017. It showed that the cash generated from
the investment activities have been decreasing over the year as in 2015 it was $11502 and in
2017 it was $4161 (BHP Billiton, 2018).
Financing and Financing Activities
The organisations have made the financing from the external sources so that the overall capital of
the organisation can be raised (Perić and Đurkin, 2015). The cash flow from the financing
activities showed the fluctuating results and the amount generated has been increased from $284
to $9133 (BHP Billiton, 2018).
Industry Size
The industry size of the organisation is wide as it has 65000 employees who are working to
provide the quality of services to client. According to 2017 survey the revenue earned by the
organisation was US$38.285billion (BHP Billiton, 2018).
Major Competitor
The competitors of the organisation are:
 Fortescue Metal Group
 Arconic Inc.
 RIO TINTO LIMITED
 Vale S/A
Market share of the Industry Players
 The revenue of the Fortescue Metal Group in the year 2017 was $8.447 billion and was
founded in 2003 with more than 2000 workers (Fortescue Metal Groups Limited, 2017).
18

 The number of employees in the Arconic Inc. is 41,500 according to 2016 survey and the
revenues earned were 12.4 billion.
 The revenues earned in 2016 were $33,781 which showed the increased in the financial
ratio of RIO TINTO Limited.
 According to the survey of 2014 the number of employees is 76531 and the revenue
earned was 34 billion in 2017 (BHP Billiton, 2018).
19

Conclusion
From the above discussion it can be concluded that the financial position of the organisation is in
good condition which will help in attaining the sustainability within the organizational structure.
The horizontal and the vertical analysis of the organisation are done to evaluate the trend
analysis of the organisation. The various ratios such as inventory turnover ratio, gearing ratio and
quick ratio are calculated so that the financial performance can be determined. The overall
ethical standards are explained by highlighting the operations of the business. The cash flow
statement is also analyzed so that the investing and financing activities items can be determined
with the change on those activities. Besides this the report also highlights that how the
organisation manages the risk so as to compete with the competitive environment. Major
competitors of the same field are also determined.
20

References
 BHP Billiton, 2018. Annual Report 2017. [Online]. BHP Billiton. Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf. [Accessed On 29 May 2018]
 Chiaramonte, L., & Casu, B. (2017). Capital and liquidity ratios and financial distress.
Evidence from the European banking industry. The British Accounting Review, 49(2),
138-161. Fortescue Metal Groups Limited, 2017. Annual Reports. [Online]. Fortescue Metal
Groups Limited. Available at: https://www.fmgl.com.au/docs/default-source/default-
document-library/fy2017-annual-report.pdf?sfvrsn=1f931875_2. [Accessed On 29 May
2018]
 Laitinen, E. K. (2017). Profitability Ratios in the Early Stages of a Startup. The Journal
of Entrepreneurial Finance, 19(2), 1-28.
 Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal
of Financial and Quantitative Analysis, 51(4), pp.1135-1164.
 Perić, M. and Đurkin, J., 2015. Determinants of investment decisions in a crisis:
Perspective of Croatian small firms. Management: journal of contemporary management
issues, 20(2), pp.115-133.
 Piketty, T., & Zucman, G. (2014). Capital is back: Wealth-income ratios in rich countries
1700–2010. The Quarterly Journal of Economics, 129(3), 1255-1310.
21