Issues in Cash Flow Statement

Presented By: Presented To:

Pratima Parajuli Khokan Bepari

Student ID:EMV81034 Module: HI5020

Task 1: Individual Assessment Corporate Reporting

 Part A
Useful of Income statement and Cash flow statement for Investor
 Income statement shows the profit and loss of the company and it helps to investor in investment
decision process
 Cash flow statement shows how the company manage and generate cash from operating,
financing and investing activities
 Operating activities shows the sources and uses of cash from daily business activities within a
time period
 Financing activities shows how the finance of the company are managed
 Investing activities states how the investment is done over the period
 Cash flow statement helps an investor for understanding clearly from where company generates
cash
 Investors and managers can identify revenues and expenses separately related to non-business
activities from Income statement of the company
 Part B: Question 1

Question A (Major sources and uses of cash for each firm)

 Major source is from operating activities as receipt from customer, depreciation and amortization expenses and impairment.
 Major uses of cash for each firm are in financial activities as dividend paid, and in operating activities the major cash flow is
in unrealized FX loss on revaluation of intercompany loan and payment to supplies and employees.
 Other sources of income include interest from investment, sales of property and bank loan.
Question B (The trend in cash flow from operations for each firm)
 The trend in cash flow from continuing operation for BHP is increasing in nature where it is generating cash from operating
activities.
 The trend in cash flow from continuing operation for Santos LTD is also increasing in nature and generating positive cash
flow.
 The trend in cash flow from continuing operation for Funtastic LTD is losing cash from operating activities in all three year
which have negative effect in cash flow.
 Basically, cash flow trend is how the company’s cash flows or in comparison on the previous years. When the trend is
positive, it is an indication that the company is financially strong.
 On the other hand, a negative trend is a clear indication that the company is financially weak. The trend normally includes
financial cash flow, operating cash, and investment.
 Cont… Part B: Question 1
Question C (Compare and contrast the cash flow from operations with the net profit after tax in income statement
of the BHP Ltd)
 The net operating cash flow over the time is $16804, $18461, $17871 million from 2017, 2018 and 2019, whereas the
profit after taxation from continuing and discounted operation is $9185, $4823 and $6222 million from the year 2019,
2018 and 2017. The cash flow from operation is greater than the profit after taxation from continuing and discounted
operation.
Question D ( Whether the firms is able to generate enough cash from operations to pay for all of its capital
expenditures )
 Yes, BHP was able to generate enough cash flow to pay for capital expenditure. In 2019 the capital expenditure on
cash basis was $6250, in 2018 it was $4979 and in 2017 it was $3697. While the cash flow from operating activities for
2019 was $17871, in 2018 was $18461 and in 2017 was $16804.
Question E (Did the cash flow from operations cover the dividend payment made by the firm)
 Yes, BHP was able to cover the dividend payment amount by the amount of operating cash flow where the dividend
paid on 2019 was $11395 and in 2018 was $5220 and in 2017 was $2921 where the cash flow from operating activities
for 2019 was $17871, in 2018 was $18461 and in 2017 was $16804. Even though if we add the dividend paid to non-
controlling interest still the net operating cash flow have enough balance to cover the payment of the dividend.
 Cont… Part B: Question 1
Question F (How did the firm invest the excess cash)
 BHP has generated excess cash from the operating and is able to pay for the capital expenditures in 2017 and 2018
and 2019. In 2017 it has generated $18612, in 2018 it has generated $22949 and in 2019 it has generated $23428.
Where the excess cash is used in to manage the capital expenditure and to pay the shareholder dividend. When the
cash generated by firm is excess, it becomes easier to invest in government securities or debt or equity instruments.
With reference to the risk firm, a company can invest in government security or bonds of they do not want any risk.
When risk is desired the company can invest in debentures or shares. When risks increase, the company is likely to
invest in more returns.

Question G (Whether the firm use working capital accounts or cash and cash equivalents)
 Trade and other receivable are increased which means the cash flow have decreased. Inventory is increased which
decreases the cash flow. Current tax assets have also increased due to which the cash flow is decreased.
 Trade and other payable has increases which causes increase in cash flow because the cash has not been paid yet,
provision have also increased which helps to generate more cash flow while interest bearing liabilities, liabilities
held for sale, other financial liabilities, current tax payable have decreased which have caused the lower cash flow
because cash was used to decrease the liability.
 Cont… Part B: Question 1
Question H (Major items affected cash flows for each firm)
 Receipt from customer increases the cash flow, exploration and evaluation of assets have decreased
the cash flow, repayment of borrowing have also decreases the cash flow, interest paid have also
decreased the cash flow, net income tax and royalty-related taxation paid have also decreased the cash
flow, purchase of property, plant and equipment have also decreased the cash flow.

Question I (The trend in capital expenditures for each firm)

 The CAPEX have declined from 2017 to 2019 due to the high investment in PPE and other intangible
assets.

Question J (The trend in dividends)

 The dividend received for the BHP is decreasing in term where the dividend paid has increased over
the period. In context, Santos LTD has an increasing trend in dividend received and dividend paid.
 Cont… Part B: Question 1

Question K (The trend in net borrowing)

 For BHP the borrowing is decreasing, where the borrowing for Santos LTD has increased in 2018
than that of 2017 but have decreased in 2019 lastly, the Fantastic LTD borrowing has declined in
2018 than that of 2017 but again increased at 2019.

Question L (The trend in working capital accounts of the BHP Ltd)

 Working capital = Total current assets – total current liability, The working capital for 2019 is
$11034, for 2018 is $21141
 Part B: Question 2
Evaluation of the financial strengths of the three companies
 BHP LTD is one of the companies to have the best and strongest financial strength among all three. It has the
highest amount of operating cash flow which helps to invest in the profitable opportunity and help to deal with
all of the cash related problem to the company.
 The objective of company is achieving profit as well as economic and social and goals
 Different ratios such as Net Interest Margin, Return on Equity (ROE), and Return on Asset (ROA) can be used
to measure the company’s financial strength.
 Net Interest Margin used for measuring the difference between the amount of interest paid out by the company
to the lenders and interest income generated by the company.
 Higher ROE gives the higher return to shareholders
 ROA shows the profitability of the company and it allows investors to determine whether the company’s
management can generate income through use of the available assets.
 Cont… Part B: Question 2
 The cash flow of BHP Ltd was $16804 in 2017, $18461 in 2018 and $17871 in 2019 (in million)
 The company has enough cash to pay dividend to shareholders because of higher dividend
 BHP LTD is one of the best company as per its financial strength among the three company because it’s cash
and cash equivalents increases overtime, for instance, it has $14108 in 2017, $15813 in 2018 and $15593
million in 2019.
 Santos LTD’s cash flow shows the operating cash flow have increased over the year from $1578 to $2046
million from 2018 to 2019.
 Due to decrement in cash and cash equivalent from $1316 in 2018 to $1067 million in 2019 , Santos LTD is
not able to pay dividend to investor, thus, it has weak financial position as compared to BHP.
 Funtastic LTD has negative cash and cash equivalent as well as weak operating cash flow over the period from
$10182 to $8030 million from 2018 to 2019, thus, company cannot be able to pay dividend to its investors.
 Among all three companies, Funtastic LTD has weak financial performance and position as compared to
Santosh Ltd and BHP Ltd
 Part B: Question 3
Best company for lending purpose as an investor

 I would select BHP Ltd to lending or investing purpose because it has strong cash flows in
comparison to Santosh Ltd and Funtastic Ltd.
 BHP paid greater dividend to the shareholder comparing to the Santos and Funtastic, which
shows the investor to get more return from the company.
 BHP Ltd has the highest cash and cash equivalent rather than two companies which is also
increasing in nature over the time period.
 I found the BHP ltd has highest cash and cash equivalent from operating, investing and
financing activities rather than the other two companies to invest in company.
 Conclusion
 Financial statement is a very important factor for all investor in order to measure
the strength and weakness of a company.
 Cash flow statement plays an important role for the estimation of amount of
money that the investor might get from the investment.
 Among three organizations, BHP Ltd has the strong financial strength due to its
highest amount of cash from operating activities.