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HI5020 Corporate Accounting: Issues in Cash Flow Statement Assessment Answer

Assessment Details and Submission Guidelines
TrimesterT1 2019
Unit CodeHI5020
Unit TitleCorporate Accounting
Assessment TypeGroup Assignment
Assessment TitleIssues in Cash Flow Statement
Purpose of the assessment (with ULO Mapping)
This assignment aims at developing a clear understanding of students on cash flows statement and use of cash flow statement to comprehend different key business decisions taken by the management. They will have to consult relevant literature and demonstrate understanding of
key concepts. As part of their assignment, they will also conduct a minor empirical analysis on cash flow statement. (ULO 1, 2, 4, 5, 6, 7)
Weight30 % of the total assessments
Total Marks30
Word limit3,000 words ± 500 words
Submission Guidelines
  • All work must be submitted on Blackboard by the due date along with a completed Assignment Cover Page.
  • The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers.
  • Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style.

Assignment Specifications

Purpose:

This assignment aims at developing a clear understanding of students on cash flows statement and use of cash flow statement to comprehend different key business decisions taken by the management. They will have to consult relevant literature and demonstrate understanding of key concepts. As part of their assignment, they will also conduct a minor empirical analysis on cash flow statement.

Assessment task:

Part A

Do the relevant research to critically examine the relative information content of income statement and statement of cash flows. Why do investors find both income statement and statement of cash flows useful?

Part B

Appendix A, B, and C contain cash-flow statements from three companies. Each cash-flow statement has Three years of data. Examine the contents of these cash-flow statements carefully. Answer the following questions about each of the three cash-flow statements.


  1. For each of the three years on the Statement of Cash Flows:
    1. What are the major sources of cash for each firm? What are the major uses of cash for each firm?
    2. What was the trend in cash flow from (continuing) operations for each firm?
    3. Was cash flow from operations greater than or less than net income? Explain in detail the major reasons for the difference between these two figures. (Answer this question using only Appendix B: Cash flow statement for BHP Limited).
    4. Was the firm able to generate enough cash from operations to pay for all of its capital expenditures?
    5. Did the cash flow from operations cover both the capital expenditures and the dividend payments made by the firm (if any)?
    6. If the firm has generated excess cash from operations, how did the firm invest the excess cash? If not, what were the sources of cash the firm used to pay for the capital expenditures and/or dividends?
    7. Did the firm use the working capital (current asset and current liability) accounts other than cash and cash equivalents as sources of cash, or uses of cash? (Answer this question using only Appendix B: Cash flow statement for BHP Limited).
    8. What other major items affected cash flows?
    9. What was the trend in capital expenditures for each firm?
    10. What was the trend in dividends (if any) for each firm?
    11. What was the trend in net borrowing (proceeds from borrowing less payments of short- and long-term debt) for each firm?
    12. What was the trend in working capital accounts? (Answer this question using only Appendix B: Cash flow statement for BHP Limited).
  2. Critically evaluate the financial strength of each of the three companies based on the evidence presented in the Statement of Cash Flows.
  3. If you are asked to evaluate these three companies for lending purposes, which of the three companies you will select for lending? Explain Why.

Appendix A: Funtastic Limited, Consolidated Cash Flow Statement for the year ended 30 June 2018


201820172016
Cash Flows from Operating ActivitiesAU$000AU$000AU$000
Receipts from customers46,46361,73194,773
Payments to suppliers and employees(54,777)(60,897)(98,145)
Cash (utilised)/generated from operations(8,314)834(3,372)
Income taxes refunded/(paid)49(25)(163)
Interest and other costs of finance paid(1,917)(3,559)(3,794)
Net cash outflow from operating activities(10,182)(2,750)(7,329)
Cash flows from investing activities


Interest and other investment income received2439651
Payments for plant and equipment(145)(888)(884)
Payments for other intangible assets(281)(540)(325)
Proceeds from sale of international subsidiary126--
Net cash outflow from investing activities(298)(989)(558)
Cash flows from financing activities


Proceeds from borrowings

2,630
3,6477,457
Repayment of commercial bills--(1,000)
Proceeds from share issue8,355-1,111
Costs from share issue(438)--
Net cash inflow from financing activities10,5473,6477,568
Net increase/(decrease) in Cash Held67(92)(319)
Cash and cash equivalents at the beginning of the year664764904
Effects of exchange rate changes on the balance of cash held in foreign currencies(13)(8)179
Cash and cash equivalents at the end of the year718664764


Appendix B: BHP Limited, Consolidated Cash Flow Statement for the year ended 30 June 2018


2018
US$M
2017
US$M
Restated
2016
US$M
Restated
Operating activities


Profit before taxation14,75111,1371,791
Adjustments for:


Depreciation and amortisation expense6,2886,1846,210
Impairments of property, plant and equipment, financial assets and intangibles333193186
Net finance costs1,2451,4171,013
(Profit)/loss from equity accounted investments, related impairments and expenses(147)(272)2,104
Other597194467
Changes in assets and liabilities:


Trade and other receivables(662)2671,387
Inventories(182)(687)521
Trade and other payables719512(1,272)
Provisions and other assets and liabilities7(333)(316)
Cash generated from operations22,94918,61212,091


Dividends received709636301
Interest received290164128
Interest paid(1,177)(1,148)(829)
Settlement of cash management related instruments(292)(140)
Net income tax and royalty-related taxation refunded17337435
Net income tax and royalty-related taxation paid(4,935)(2,585)(2,286)
Net operating cash flows from Continuing operations17,56115,8769,840
Net operating cash flows from Discontinued operations900928785
Net operating cash flows18,46116,80410,625
Investing activities


Purchases of property, plant and equipment(4,979)(3,697)(5,707)
Exploration expenditure(874)(966)(752)
Exploration expenditure expensed and included in operating cash flows641610419
Net investment and funding of equity accounted investments204(234)(217)
Proceeds from sale of assets8952993
Proceeds from divestment of subsidiaries, operations and joint operations, net of their cash34− 187166
Other investing(141)(153)(20)
Net investing cash flows from Continuing operations(5,060)(3,724)(6,018)
Net investing cash flows from Discontinued operations(861)(437)(1,227)
Net investing cash flows(5,921)(4,161)(7,245)
Financing activities


Proceeds from interest bearing liabilities5281,5777,239
(Settlements)/proceeds from debt related instruments(218)36156
Repayment of interest bearing liabilities(4,188)(7,114)(2,781)
Purchase of shares by Employee Share Ownership Plan (ESOP)
Trusts
(171)(108)(106)
Dividends paid(5,220)(2,921)(4,130)
Dividends paid to non-controlling interests(1,582)(575)(62)
Net financing cash flows from Continuing operations(10,851)(9,105)316
Net financing cash flows from Discontinued operations(40)(28)(32)
Net financing cash flows(10,891)(9,133)284
Net increase in cash and cash equivalents from Continuing operations1,6503,0474,138
Net (decrease)/increase in cash and cash equivalents from
Discontinued operations
(1)463(474)
Cash and cas

Answer

HI5020

Management accounting


Introduction 

This report reflects the key understanding of the usefulness of the cash flow statement, income and expenses statement and other financial statements which are used by company to reflect its financial performance.  It is analysed that the cash flow statement, tells the investors about the actual cash which the organisation generates from its operations. On the other hand, income statement reflects the income earned and expenditure made by company in its business operation. This report reflects the key details of the changes in the cash flow statement of the different companies and financial analysis of highly cash outflow items and low cash outflow items in the financial statements.

PART A

Usefulness of Cash Flow Statement:

With the ramified economic changes, every organization needs to assess the changes in the cash flow from the business and possible factors affecting the cash inflow and outflow. In the era of accrual system of accounting, the investors are not in a position to understand the actual cash generated by the business by looking at the income statement. Therefore, they evaluate the analysis the profit and loss account. The income statement represents the revenue that has been calculated using the accrual basis and not the cash basis. The potential returns that the investments made in the organisation will generate depend upon the cash generation also in addition to the revenues. Past have shown several examples of the organisations which were highly profit generating but eventually fell because of insufficiency of cash. Hence, the cash flow statement, tells the investors about the actual cash which the organisation generates from its operations, investments and financing activities. The areas where cash has been put to use are also clarified (Miao, Teoh, and Zhu, 2016). 

Usefulness of income statement

Through income statement the investors are able to get a closer look into the company’s operations like revenues, operating expenses, administrative and selling expenses, taxes and etc. through this statement the investors get to know the actual position of organisation when it comes to profit making. A comparison of different years’ income statement can enable the investors to analyse the growth in profitability and the ultimate potential of returns. Hence, through the income statement the investors can prioritise their investment choices (Black, 2016).

PART B: 

Answer to question no-1

Answer to question no-1 (a)

Funtastic Limited: the major sources of cash include receipts from customers, proceeds from borrowings, proceeds from share issue, receipt of interest and investment income and a one-time receipt from sale of international subsidiary in year 2018.

The major uses of cash include, payment to suppliers and employees, financing costs, payment for plant & equipment and intangible assets, and a repayment effected of commercial bills in year 2016 as latest.

BHP Limited: the major sources of cash include, cash portion of business profits, receipts from receivables, sale of inventories, trade credit from payables, interest and dividend receipt, proceeds from asset sale, proceeds from interest bearing liabilities, and net cash flow from discontinued operations.

The major uses of cash include, income tax and royalty related tax payments, interest payments, restocking of inventories, creation of provisions, payment for trade payables, purchase of property, plant and equipment, expenditure on exploration, repayment of interest bearing liabilities, and dividend payment.

Santos Limited: the major sources of cash include receipts from customers, pipeline tariffs and other receipts, disposal of non-current assets, drawdown of borrowings, and disposal of subsidiaries in year 2018. 

The major uses of cash include, payment to suppliers and employees, payment of borrowing costs, purchase of exploration and evaluation assets and oil and gas assets, repayment of borrowings, payment of royalty and excise and related taxes and payment of income taxes. 

Answer to question no-1 (b)

Funtastic Limited: the organisation is in the business of manufacturing, marketing and selling of branded merchandise which includes homewares, toys, confectionary and etc. The cash flows reported from operating activities are all from continuing operations of business. The trend shown by them is a rise yet negative in financial year 2017 as compared to financial year 2016, but a steep fall in financial year 2018 as compared to both financial year 2016 and 2017.

BHP Limited: the organisation deals in natural resources and has multiple business channels. Hence, it is bound to have several operations that have been discontinued. The cash flows from continued operation are showing an upward trend from US$9,840 M in year 2016 to US$17,561 M in year 2018 which is almost double. The most obvious reasons are rise in the profit before taxation which is because of rise in business revenues. 

Santos Limited: the organisation is Australia’s second most producers of oil and gas. The statement of cash flows shows the cash flows from operations which completely attribute to the continuing operations. These cash flows are showing an upward trend from US$840 M in financial year 2016 to US$1578 M in financial year 2018.

Answer to question no-1 (c)

Cash flow from operations is higher than the net income for BHP Limited for all the three financial years. The net income presented is on accrual basis and also comprises of certain non-cash expenses like depreciation and amortisation and impairment. These items do not deduct the cash of business. Also the change in current liabilities and current assets is required to be adjusted from net income for acquiring the cash flows from operations. The negative amount beside the trade and other receivable and inventory depict slow account receivable and decreased inventory management efficiency and vice versa. The negative amount beside trade payable shows payment to payables while positive amount shows receipt of trade credit. These are some of the reasons that have caused the cash flows from operations to exceed the net income (Hribar, and Yehuda, 2015).

Answer to question no-1 (d)

Tables have been presented for each organisation depicting whether cash flow from operations covers the capital expenditure or not:

FUNTASTIC LIMITED
PARTICULARS201820172016
AU$000AU$000AU$000
cash flow from operations-10182-2750-7329
    
capital expenditure   
payment for plant and equipment145888884
payment for other intangible assets281540325
 42614281209
Is cash flow from operations sufficient?noNoNo


BHP LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations184611680410625
    
capital expenditure   
Purchase of property,  plant and equipment497936975707
exploration expenditure (not deducted from operating cash flows)233356333
 521240536040
Is cash flow from operations sufficient?yesyesYes


SANTOS LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations15781248840
    
capital expenditure   
Exploration and evaluation assets66146128
Oil and gas assets490483500
Other land, buildings, plant and equipment1054
Acquisitions of oil and gas assets104918
 576683650
    
is cash flow from operations sufficientyesYesYes

Answer to question no-1 (e)

Tables have been presented below which show whether cash flow from operations is able to cover the capital expenditure and dividend or not:

FUNTASTIC LIMITED
PARTICULARS201820172016
AU$000AU$000AU$000
cash flow from operations-10182-2750-7329
    
capital expenditure42614281209
dividend payments000
total42614281209
    
is cash flow from operations sufficientnonono


BHP LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations184611680410625
    
capital expenditure521240536040
dividend payment:   
controlling interest 522029214130
non-controlling interest158257562
total12014754910232
    
is cash flow from operations sufficientyesyesyes


SANTOS LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations15781248840
    
capital expenditure576683650
dividend payment73043
total649683693
    
is cash flow from operations sufficientyesyesyes

Answer to question no-1 (f)

The following tables show whether the cash flow from operations is in excess of capital expenditure and dividend or not, and if in excess then by what amount (Bremberger, Cambini, Gugler, and Rondi, 2016),

FUNTASTIC LIMITED
PARTICULARS201820172016
AU$000AU$000AU$000
cash flow from operations-10182-2750-7329
    
total of capital expenditure and dividend42614281209
    
is cash flow from operations sufficientnonono
excess operating cash flows, if any000


The organisation has cash used in operating activities. There is no scope of covering capital expenditure and dividend by operating cash flows hence. The organisation seems to be covering the capital expenditure and dividend from its financing cash flows, i.e. by proceeds of borrowings and share issue (Bhullar,  Bhatnagar, and Gupta,  2018).

BHP LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations184611680410625
    
total of capital expenditure and dividend12014754910232
    
is cash flow from operations sufficientyesyesyes
excess operating cash flows, if any64479255393


The organisation might be investing the surplus cash flow from operations in paying off the financing liabilities like interest bearing liabilities, ESOP, etc. By doing this the company can reduce external borrowing costs.

SANTOS LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
cash flow from operations15781248840
    
total of capital expenditure and dividend649683693
is cash flow from operations sufficientyesyesyes
excess operating cash flows, if any929565147


The organisation might be using the surplus in paying off the borrowings, and keeping the remaining amount to settle future working capital obligations.

Answer to question no-1 (g)

BHP limited had definitely used the working capital accounts other than cash & cash equivalents as sources and uses of cash. The reduction in current assets like trade receivables and inventory and rise in current liabilities like trade payables and provisions is taken as source or cash. Rise in the current assets like trade receivables and inventories, and fall in the current liabilities like trade payables and provisions is taken as use of cash (Lewellen, and Lewellen, 2016). 

Answer to question no-1 (h)

Funtastic limited: the major non-operating items that have affected the cash flows include payment for plant and equipment, and payment for purchase of intangible assets for all three financial year. It is specifically for financial year 2016, when repayment of commercial bills has used cash of AU$1,000,000. The cash inflow is extended by the receipt of interest and other investment income, and proceeds from borrowings (Baker, and Weigand,  2015).

BHP Limited: the cash flow is mainly affected by the purchases made by organisation for property, plant and equipment in all three financial years. Exploration expenditure has also caused a significant effect on the cash flows. Other than these the repayment of interest bearing liabilities and payment of dividends has reasonably affected the cash position of the organisation. The only major source of inflow of cash is proceeds from interest bearing liabilities. 

Santos Limited: other than inflows and outflows from operating activities, the cash flows have been brought down due to capital expenditures like exploration and evaluation assets, oil and gas assets, and property, plant and equipment in all three years. Repayment of borrowings has also been significant. The cash position is brought up by disposal on non-current assets, drawdown of borrowings and proceeds from issue of shares.

i)

Funtastic limited: the expenditure on capital assets has increased in comparison to financial year 2016 in year 2017 from AU$1,209,000 to AU$1,428,000. For financial year 2018 the capital expenditures has drastically fallen to AU$426,000. The reason is completely attributable to negative operating cash flows.

BHP Limited: for BHP Limited, the trend is completely reverse. In financial year 2017, the capital expenditure fell to US$4,053 M from US$6040 M in financial year 2016. Also, for financial year 2018, the capital expenditure rose to US$5,212 M in financial year 2018. The improved capital expenditures are due to improved operating cash flows.

Santos Limited: For Santos Limited, the capital expenditure has shown a small rise from US$650 M to US$683 M for financial year 2017. While in financial year 2018, the capital expenditures fell significantly to US$ 576 M. this could be due to heavy investment already being made in business.

Answer to question no-1(j)

Funtastic Limited: there had been no dividends for business

BHP Limited: the trend as shown in capital expenditures is followed same in dividends. Dividends for both controlling and non-controlling interest, was US$4,192 M in year 2016 US$3,496 M in year 2017, US$6,802 M in year 2018. 

Santos Limited: the organisation has just paid dividend for year 2016 and 2018. In year 2016 the dividend payment had been US$43 M and US$73 M in year 2018. The dividends have just got double of what they were in 2016.

Answer to question no-1 (k)

Tables have been presented:

FUNTASTIC LIMITED
PARTICULARS201820172016
AU$000AU$000AU$000
borrowings263036477457
less: 
 
repayment of commercial bills001000
net borrowings263036476457


The trend followed by the net borrowings is downward. 

BHP LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
borrowings: 
 
interest bearing liabilities52815777239
debt related instruments036156
total52816137395
less: 
 
settlement of debt related instruments21800
repayment of interest bearing liabilities418871142781
total440671142781
net borrowings-3878-55014614


After assessing the cash flow statement and balance sheet of the company, it could be inferred that the net borrowings have fallen. This means the company is able to generate enough internal cash from operations that can suffice business needs (CHANDREN, AHMAD, and ALI,  2017).

SANTOS LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
drawdown of borrowings11937830
less: 
 
repayment of borrowings2202442147
net borrowings973-1659-147


The net borrowings have risen in financial year 2018 in comparison to both financial year 2017 and 2016. This could be due to the needs of business expansion and high cash usage in the investing activities. This shows that company has increased its overall outcomes and also increasing the profitability throughout the time (Baker,  and Kapoor,  2015).

Answer to question no-1 (l)

TREND IN WORKING CAPITAL ACCOUNTS
BHP LIMITED
PARTICULARS201820172016
US$MUS$MUS$M
increase in current assets: 
 
trade and other receivables66200
inventories1826870
decrease in current liabilities 
 
trade and other payables001272
provisions0333316
increase in working capital84410201588
Decrease in current assets:
trade and other receivables02671387
inventories00521
increase in current liabilities: 
 
trade and other payables7195120
provisions700
decrease in working capital7267791908
net increase/(decrease) in working capital118241(320.00)


The working capital has risen for financial year 2016 in comparison to financial year 2016. For financial year 2018, the working capital has fallen (Wasiuzzaman, 2015). This reflects that company has increased its investment in the current assets which has resulted to the stronger liquidity. Nonetheless, it might result to high cost of capital due to the blockage of the more funds in the business value chain. 

PART B: 

Answer to question no-2

Funtastic limited: based upon the analysis of the cash flow, the financial strength of the business seems to be high market standing. Although the company’s operating cash flows are extremely negative, the organisation is still able to raise money from shareholders (Track, 2017).

BHP limited: the financial strength is high cash generation from operation which covers interest costs completely depicting high interest coverage. Also the company is paying ample amount of dividend representing satisfied shareholders. The extravagant dividend amount when compared with the amount of additional borrowings also depict high debt equity ratio (Caires, 2018).

Santos limited: the company’s financial strength is high rise in cash flow from operations which is able to cover the capital expenditure and dividend payments (Martí-Ballester, and Simon, 2017). 

Answer to question no-3

While lending, it is important to look for security of repayment of periodic costs and eventual payment. The organisation which generate sufficient cash to cover its expenses be them revenue or capital and still has surplus cash is an optimal lending choice always. In the comparison done in part “f”, one thing is very clear that BHP Limited has highest surplus available after payment of capital expenditure and dividends (Murfin, and Petersen, 2016). This excess can easily be used by the organisation for payment of borrowing costs and principal amount. If a decision of lending has to be made, the first priority is off course is of BHP Limited (Athari, Adaoglu, and Bektas,  2016).  After that, the Santos Limited can be considered for lending. However, BHP is priorities because of huge surplus of operating cash flows which presents strong cash held by the organisation after meeting the working capital commitments even. Funtastic Limited is totally not a good option as its operating cash flows themselves is negative (Gitman, Juchau, and Flanagan, 2015). This reflect that high cash outflow from the business is the negative indicator for the future growth of the organizing. Company needs to lower down tis cash outflow by implementing the effective financial management strategy (Ahmed, 2015).

Conclusion 

After assessing the whole report, it could be inferred that Santos Limited can be considered for lending as it has been keeping high cash outflow.  BHP is priorities because of huge surplus of operating cash flows which presents strong cash held by the organisation after meeting the working capital commitments. This shows that company has good amount of cash inflow in its business. Funtastic Limited is totally not a good option as its operating cash flows themselves is negative. All of these companies needs to strengthen its cash flow management strategy to survive in long run. 

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