Corporate accounting proves to be an essential aspect in the determination of the company's financial strength. In the current scenario, it can be stated that the flow of cash of Santos Limited, BHP Limited and Funtastic Limited is taken into consideration and analyzed. The cash flow statements helped in the analysis of the cash flow of the three companies which highlighted the activities related to investment, finance and operation. After conducting the analysis of the cash flow statement it is observed that the BHP Limited Company has gained improvement in all the three types of activities in the last three years. Therefore, the company which gets selected for the purpose of lending is BHP Limited over Funtastic Limited and Santos Limited.
Accounting for cash flows is important and one of the most vital aspects that are to be conducted by organisations every year. It is supposed that the cash flows help to determine the overall income, loss and a lot more information. As per the current case study, it is found that there is a need for an analysis based on the cash flow statement of three years for three companies. The cash flow statements help in the analysis of the operating, financing and investing activities. The report aims at determining the key decisions of business taken up by the investors from the statement of cash flows.
To examine critically the appropriate information on the income statement and statement of cash flow. State the reasons for finding both the cash flow statement and the income statement to be useful by the investors
It has been observed that the income statement and the statement of cash flows is very important as they help to determine the balance sheet of the company. It has been found that the cash flow statements are a type of financial statement that briefs the amount of cash equivalents which are leaving or entering an organisation. According to the statement of cash flows, it can be determined how well an organisation takes hold of the position of cash. Moreover, it can be also said that the cash flow statements help to determine the process pursued by the companies in generating cash to pay the debt obligations of the company. Accordingly, it can also be stated that the cash flow statements help in the determination of the process pursued by the company in generating the revenue to fund its operational costs. It has been noticed that the cash flow statement helps in the determination of the income statement and also the balance sheet of the company.
The difference that lies between the cash leaving or entering an organisation can be calculated through the method of accrual accounting. It can be stated that accrual accounting needs the companies to register the expenses and revenues during the time of the transactions and not during the time when cash is exchanged. It has been evaluated that this type of transactions seem to be much complex in nature, whereas during such situations the cash flow statements help the investors to sort out the problem. The statement of the flow of cash has been vital for the investors as it casts light on the actual cash generated by the company. On the other hand, it has been evaluated that the income statement includes noncash expenses and revenues, which is excluded by the cash flow statement. It has been observed that one of the most vital traits which determine a potential investment for a company is its ability in generating cash. It has also been observed that many of the organisations enjoyed the profits at the primary stages but staggered later due to improper cash flows. According to the cash flow statements, the condition of the company proves to be evident for the investor.
It has been observed that the cash flow statements are segregated into three sections based on the type of generation and utilization of cash. According to the generation and use of cash flows, three sections of cash flows could be related to the operating, financing and investing activities. According to the cash flows related to the operating activities, it helps to determine the cash produced by the company from its base business excluding the peripheral activities. According to the cash flows related to the operating activities, the condition of the company can be stated based on the ability of it in producing cash. As per the cash flow related to the investing activities, it deals with the cash amounts contributed to the investments. It has been noticed the investments are mainly made on the items similar to new equipment required to run the business. As per the cash flows related to the financing activities, it deals with the transactions which are made with the owner and debtor of the company. Thus, based on the cash flow statement the investor could predict the condition of the company which helps in taking important decisions.
1. Find the following questions from the cash flow statement of three companies for three years.
a. Major uses and cash sources for the individual firms
Table: Cash Flow of Funtastic Limited
As per the cash flow statement of the company, it is seen that the company invested a sum of AU$ 3063 in purchasing the equipment and maintenance of the plant and other intangible assets. It was also noticed that the company spent AU$ 213819 on the payments of the employees and its suppliers. Thus, as per the analysis, it can be stated that the company has a good workforce. It is also noted that the net cash outflow of the company was AU$ 7,329 in the year 2016. On the other hand, it is noticed that the cash outflow dropped to AU$ 2,750 in the year 2017. Relatively, the cash outflow of the company rises to AU$ 10,182 in the year 2018. Thus, it can be stated that the company has developed itself from the past years.
From the cash flow statement, it has been noticed that the prime sources for the cash for the company are based on the operating activities. The sources are similar to the finance costs, inventories, taxation profits and trade. According to (Hanlon, et al. 2017), the operational cash proves to be a source of revenue or the company which helps the investors to determine the process of investment. As per the context of BHP Limited, the operation cash subjects to the interest paid, income tax and the dividend received. Moreover, the activities related to investing also stand as the source of cash for the company, which draws the interest of the investors. It is noticed that the net cash flow for investment is US$M 4,161 of the company in 2017, while US$M 5,921 in 2018. It is also noticed that the cash equivalents and the net overdrafts of the company at the end of 2017 were AU$ 14,108, while AU$ 15,813 in 2018. From the cash flow statement, it can thus be said that the company is developing at a good pace which helps the company to draw investors.
From the cash flow statement, it is observed that the company involves in operating activities similar to the payment of income tax, restoration expenditure, payment of excise and costs borrowed. As per (Goh, et al. 2016), it can be stated that the investing activities are helpful to the investors for determining the company performances. As per the current case, it is noted that cash equivalents of the company were US$M 2,026 in 2016, US$M 1,231 in 2017 and US$M 1,316 in 2018. As per the cash flow statements, it is evident that the cash flow of the company has dropped in the year 2018 from 2017.
b. Cash Flow trend from the operations
It could be stated that the trend of cash flow is a vital factor in the analysis of the company’s progress. Based on the viewpoint of (Yaplee and Chien, 2016), it could be stated that the ratio analysis proves to be useful in the measurement of cash management conducted by the companies. In accordance with the cash flow trend, the ratio based on the inventory turns of Santos Limited, BHP Limited and Funtastic Limited helped to gain a clear insight of cash flow trend. From the analysis conducted on the organization’s cash flow gap helps to determine whether the company is following the trend of cash flow or not. From the current case, it is seen that BHP Limited follows the cash flow trends while the other two does not. This is said on the basis of the cash flow trend which has improved only for BHP Limited from the year 2016 to 2018 whereas the others lag behind.
c. To determine whether the flow of cash is lesser or greater than the net income. Elaborate on the major reasons for the difference in details.
The flow of cash can be stated as the backbone for a company, based on which investors judge the organisation. As opined by (Kabir and Rahman, 2016), the company’s net income is carried out from the income statement. In the present case, the net income of BHP limited is 482.3 crores US$ while the flow of cash was 15,813 US$M. From the difference, it is observed that the company’s net income is greater than that of the flow of cash. (Qiu, et al. 2016), stated that the net value related to cash is observed by focussing over the end balance of the cash from a period to another. In the present case, it has been found that the net income was greater than the cash flow value. As per the cash flow statements, it is stated that the company enjoys low return from earnings. This is supposed to brief that the returns from the property investments, plant and equipment are low for the company.
d. To find out whether the firm generated ample cash to pay all its capital expenditures
The operating activities include the cash flows which also includes the cash flows of the financing and investing activities. As stated by (Ramsay and Sarlin, 2016), the operating activities deal with the purchase and sale of the property, equipment and plant along with borrowing and repaying debt. From the cash flows of Funtastic Limited, it is observed that it deals with the operating cash, customer receipts, and income tax refunds. It was noted that the company generated AU$ 10,182 in the year 2018 from the operating activities. Accordingly, it was noted that BHP Limited generated an amount of US$M 22,949 in 2018 and Santos Limited generated US$M 1,581 in the year 2018 from the operations. As per the analysis, it is said that the companies were able to pay its capital debt.
e. To find out whether the flow of cash covered both the dividend payments and the capital expenditures which was made by the firm
The flow of cash helps to determine that the cash generated from the operations help in covering both the dividend payments along with the capital expenditures. As stated by (Kieso, et al. 2016), the investing activities of the firm help in gaining a deep insight into the information related to the inflow and outflow of cash. It is seen that Funtastic Limited, generated AU$ 10,547 while BHP generated AU$ 10,891 and Santos limited generated AU$ 890 in the year 2018. As per the analysis, it is observed that Funtastic Limited and BHP Limited changed drastically in the last three years. On the other hand, it is noticed that Santos Limited suffered as much of its cash out flowed due to dividends and borrowing repayments in the year 2016, 2017 and 2018.
f. Investment of excess cash
The investment of excess cash is stated as an important process in the operational activities for gaining a profitable outcome. As commented by (Hope, et al. 2017), the investment of excess cash gives fewer profits as compared with the other firm’s investments. It is noted that neither Funtastic Limited nor Santosh Limited has invested its excess cash whereas BHP Limited is found to have invested US$M 141 in 2018.
2. To evaluate critically the strength of the individual companies in respect of finance according to the cash flow statement
From the cash flow statements, it is evident that the operating activities of Funtastic Limited have developed in the year 2018, with respect to 2016 and 2017. It has been noted that the investing activities have lowered to 298 in 2018, with respect to 2017 and 2016. It is evident that the financing activities have increased thus stating that the financial strengths of the organisation have also increased.
From the analysis of the cash flow, the operating activities of BHP Limited have increased to 22,949 in 2018 which states that the company’s financial strength is high. It has also been observed that the cash flow of investment has enhanced in 2018 with respect to previous years. It is also noticed that the financing cash flow has also increased from the past years which states its financial strength.
It is observed that the cash flow of the operating activities has soared in the present year than the last years of 2017 and 2016. The investing activities in 2018 were 2,373 which are more than that of the last years. On the other hand, the cash flow of financing activities has lowered in 2018, with respect to the last years. Thus, it can be stated that the financial strength of the company is of moderate nature.
3. To select the company that would be the best for the purpose of lending and also state the reason for the selection
Figure 1: Cash Flow for BHP Limited
It is evident that BHP Limited deserves to be selected as it has improved its performances positively with respect to the previous years. As stated by (Cella, 2019), the activities stated in the balance sheets are vital for the analysis of the company’s performances. It is found that all the activities of BHP Limited have improved from the last years. Thus, it can be stated that it will be advantageous for the purpose of lending which is supposed to help in gaining more profit.
From the above discussion, it can be concluded that the statement of cash flow of BHP Limited Company is positive as the company improved in investing, financing and operating activities. Accordingly, it can be stated that the improvement in the three types of activities helps to highlight the financial strength of the company. Thus, it can be stated that the improvement in the three factors help the company to gain an advantage over the other competitors. From the statement of the cash flows, the investors get the view of the company where it is forecasted that the investment is supposed of gaining profits at a later phase. On the other hand, it could be stated that Funtastic Limited and Santos Limited holds limited financial strength in the market.
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