Issues in cash flow statement

Introduction

Income statement is a financial tool to know about the total expenses and revenue of the organisation. Income statement helps the firms to understand the sources of the income and expenditures. Through proper understanding of the statement one can reduce the sources of expenditure. In this report there is analysis of cash flow statement of three companies Santos Ltd, BHP ltd. FUNTASTIC Ltd. the report contains detailed information about each activity of the cash flow statement and various trends are also highlighted. BHP ltd. is generating enough cash from operating items to meets it expenses. Other two companies are also able to meet there expenses through one source or other.

PART – A

The income statement is made up of revenue and expenses alongside the subsequent net gain or deficit over some stretch of time due to acquiring exercises. The income statement shows speculators and the board if the firm brought and generated cash during the period announced. Income and expenses are incorporated in the working segment of an income statement. Income comprises of money inflows or different upgrades of advantages of a substance, and expenses are comprised of money surges or other spending of benefits or bringing about of liabilities. Revenues and increases from non-essential business activities are incorporated in the non – operating side of the income statement. The "reality" of an income statement is the net gain that is determined in the wake of taking away the expenses from income. It is critical to financial specialists as it speaks about the benefit for the bookkeeping time frame owing to the investors.

Cash flow statement is one of the essential and vital functions of the organisation and considers cash from three sources—through operations, investing, and financing. The entirety of these three sections is called net cash flow. A cash flow articulation is a fiscal summary that gives total information with respect to all cash inflows an organization gets from its continuous operations and outside venture sources. An organization’s fiscal reports offer financial specialists and experts a picture of the apparent multitude of exchanges that experience the business, where each exchange adds to its prosperity.

The three unique areas of the cash flow proclamation can assist speculators with deciding the estimation of an organization’s value. Cash Flows from Operations – This segment of the cash flow includes cash flows from operations segment starts with total compensation, at that point accommodates all noncash things to cash things including operational exercises. Cash Flows from Investing – This is the second area of the cash flow explanation sees cash flows from investing (CFI) and is the after effect of speculation increases and misfortunes. Cash Flows from Financing – Cash flows from financing (CFF) are the last area of the cash flow articulation. The segment gives an outline of cash utilized in business financing.

The income statement and cash flow statement plays an important role for investors. Income statement helps the investors to know about all the operating as well as non operating revenues which is not possible through cash flow statements. Cash flow statements give an idea about the actual cash generated. By using the statements mentioned investors can take all the important and vital decisions regarding their investments. If the company has a positive cash flow from all sources then investors must show keen interest in investing. If the income statement shows more of increasing expenses then it may lead to decrease in the interest of the investor to invest.

PART – B

(Every figure is in us $ million)

1 (a) major sources of cash and utility

The major sources of cash for each firm and its uses are

Santos – For Santos firm the cash flow statement is bit complicated. The major source of cash flow for them lies from the operating activity. In 2017 they have generated a cash of 1,248 from operating activities. Out of which receipts from customers has contributed the highest positive amount of 3,217 and the components which have contributed a negative cash flow are payments to suppliers and employees, royalty and excise paid, borrowing costs paid, etc. cash flow from investing activities is negative that is (534). Cash flow from financing activities is also negative amounting to (1,518). The cash and cash equivalent at the end of the period is 1,213. In 2018, again cash flow from operating items has the greatest share of 1,578 in the cash flow in which payments to suppliers and employees have shown a negative amount of (1,816). Cash used in investing items has shown an amount of 2,373. In contrast to 2017, financing activities have shown a cash flow of 890. The total cash and cash equivalent for the period is 1,316. The trend continuous remains the same for operating items, investing and financing in 2019. Santos uses most of its cash for investing activities.

BHP – the major source of cash for BHP in 2017 is operating items. They have generated a cash of 18,612 from operations. Net interest paid is a component of operating items that has shown a negative cash flow for the consecutive three years. The net operating cash flow from operating item is 16,804 for the year 2017. The cash and cash equivalent for the year is 3,510. In 2018, the cash flow from operating item is 18,641. Cash used in investing activities is 5,921 and cash used in financing activities is 10,891. BHP has shown a cash and cash equivalent of 1,649 for the year 2018. In 2019, the major source of cash flow is again operating items. Cash flow from operations is 17,397. The cash flow from operations has reduced in comparison to 2018. Whereas, the trend of cash flow from investing items has changes. It has shown a positive cash flow of 2,607. The trend for financing activities remains the same. It has shown a negative amount of 20,528. The cash and cash equivalent for the year is a negative amount of 10,477. BHP has used its cash for repayment of interest, buying back of shares, payment of dividend and other financing activities.

FUNTASTIC - the major source of cash for FUNTASTIC in 2017 is financing items. They have generated a cash of 3,667 from financing items. The net operating cash used from operating item is 2,750 for the year 2017. The cash and cash equivalent for the year is 664. Cash used in investing activities is 989. In 2018, the cash flow from operating item is (10,182). Cash used in investing activities is 298 and cash flow from financing activities is 10,547. FUNTASTIC has shown a cash and cash equivalent of 718 for the year 2018. In 2019, the major source of cash flow is again financing items. Cash flow from operations is (8,030). The cash flow used from operations has reduced in comparison to 2018. Whereas, the trend of cash flow from investing items has been the same. It has shown a negative cash flow of 154. The trend for financing activities remains the same. It has shown a positive amount of 7,928. The cash and cash equivalent for the year is a amount of 465. FUNTASTIC has used its cash for payments to the suppliers and employees. Financing activity has remained the major source of cash flow for FUNTASTIC whereas; most of the cash is used in operating items.

(b) Trend in operating items

Santos – for the firm the cash flow from operating items continue to increase over the course of time. It has shown a trend of growth and increment. Cash flow from operations has remained the major source of cash for Santos. The cash flow from operations is 840, 1248 and 1,578 respectively for 2017, 1018 and 2019.

BHP - for the firm the cash flow from operating items has increase and then decreased over the course of time. It has shown a trend of growth and increment and then down fall. Cash flow from operations has remained the major source of cash for BHP. The cash flow from operations is 16804, 18461 and 17,871 respectively for 2017, 1018 and 2019.

FANTASTIC - for the firm the cash flow from operating items has increase and then decreased over the course of time. It has shown a trend of growth and increment and then down fall. But the case is different for FANTASTIC Company. Where the other two companies have shown a positive cash flow from operations and have operations as their major source of income, FANTASTIC has used major of its cash in operations. Cash flow from financing activities has remained the major source of cash for Santos. The cash flow from operations is 2750, 10,182 and 8,030 respectively for 2017, 1018 and 2019.

For BHP firm the cash flow from operating items has increase and then decreased over the course of time. It has shown a trend of growth and increment and then down fall. The cash flow from operations is 16804, 18461 and 17,871 respectively for 2017, 1018 and 2019. Profit after tax has increased from 3.7 billion to 8.3 billion in 2019. There is a difference between these two figures because cash flow from operations is only a part of the revenue whereas; income statement considers the total revenue for calculation of net profit after tax.

(d) The way of meeting capital expenditure

Santos was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017 and 2019 but it was unable to generate enough cash to pay its capital expenditure for the year 2018.

BHP was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017, 2018 and 2019. In fact, in the year 2019 there was no need for operating items to cover up the capital expenditures. It was automatically getting covered from selling of capital items and disinvestments.

FANTASTIC could not meet its capital expenditure through operating activities. It used financing activities to meets its capital expenditure.

(e) Source of covering dividend payments

In case of BHP the cash flow from operations covered the dividend payments for the three years. The dividend payments were 11395, 5,220, and 2921 respectively for the years 2019, 2018 and 2017. Whereas, the net operating cash flows were 17871, 18461, 16804 respectively for the years 2019, 2018 and 2017. From the above figures we can see that the dividend payments were less than the cash generated from operating items. Hence, BHP was in a position to pay its dividend from operating items.

In case of Santos the cash flow from operations could cover the dividend payments for the three years.

In case of FANTASTIC also the cash flow from operations could not cover the dividend payments for the three years. In fact the case was opposite here. Cash flow from operations was not the major source of cash flow for the company. Cash flow from financing activities remained the major source of cash flow for the company FANTASTIC. So, it was not possible for the company to cover its dividend payments from operating items.

(f) Sources of capital expenditure

Santos – the firm generated excess cash from operations. The major source of cash flow for them lies from the operating activity. In 2017 they have generated a cash of 1,248 from operating activities. In case of Santos the cash flow from operations could not cover the total dividend payments for the three years but could not cover the capital expenditures. However, it somehow paid the dividends and capital expenditures through borrowings and selling of investments.

BHP - In case of BHP the cash flow from operations covered the dividend payments for the three years. The dividend payments were 11395, 5,220, and 2921 respectively for the years 2019, 2018 and 2017. Whereas, the net operating cash flows were 17871, 18461, 16804 respectively for the years 2019, 2018 and 2017. The cash flow from operations also covered the capital expenditure. BHP was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017, 2018 and 2019. In fact, in the year 2019 there was no need for operating items to cover up the capital expenditures. It was automatically getting covered from selling of capital items and disinvestments.

FANTASTIC - In case of FANTASTIC also the cash flow from operations could not cover the dividend payments and capital expenditure for the three years. Cash flow from financing activities remained the major source of cash flow for the company FANTASTIC. So, it was not possible for the company to cover its dividend payments and capital expenditure from operating items. Proceeds from borrowings and proceeds from issue of shares were the main source for FANTASTIC to meets its capital expenditure and dividend payments.

(g) Usage of working capital

BHP limited used current assets and current liabilities as a source of cash. For any company they play a vital role. The current assets which were received during the period were used as a source of cash and it also used cash to pay its current or short term liabilities.

(h) Items affecting cash flow statement

Santos – apart from operating item the major item that affected the cash flow for the company was investing items. The investing items continued to show a negative balance because of which the cash flow was affected. Other items that affected the cash flow statements are payments to suppliers and employees, payments for oil, gas and assets; payments for acquisitions of subsidiary; dividends paid, repayment of borrowings.

BHP – Apart from operating items the major item that affected the cash flow for the company was financing items. The financing items continued to show a negative balance because of which the cash flow was affected. Other items that affected the cash flow statements are net repayment of interest bearing liabilities, buy back of shares, payments of dividend, payment of non controlling interest, purchase of property, plant and equipment; and exploration expenditure.

FANTASTIC –financing has been the major item that has affected the firm. Financing activities have shown a continuous positive figure over the period of three years. It has been a major source for cash flow of the company. Apart from financing activities the major components that have affected the firm are payments for intangible assets, payment of commercial bills, costs incurred due to issue of shares. The major factor that has affected the firm in a negative manner except all this is payment to suppliers and employees. It accounts for the highest negative amount or the highest payment made for the company.

(i)Trends in capital expenditure

The capital expenditure for Santos tends to increase. The capital expenditure for BHP increases over the period of time. The amount of capital expenditure for BHP is 3697, 4979, 6250 for 2017, 2018 and 2019 respectively. From the figures it is very clear that the capital expenditure has increased over the period of time. The capital expenditure for FANTASTIC has decreased for the three consecutive years.

(j) Trends in dividends

Santos – the trend of dividend payments has increased for the company over the time period of three years. The amount of dividend payments for 2017, 2018, 2019 is 0, 73, and 251 respectively. It shows that the company is putting efforts to attract more shareholders towards the company by paying dividend. It is also clear that the company understood the importance of paying dividends as the payment of dividend was zero in 2017.

BHP – for BHP dividend payments has increased for the company over the time period of three years. The amount of dividend payments for 2017, 2018, 2019 is 2921, 5220, 11395 respectively. The growth in dividend payment is high for BHP as compared to the company Santos. As a result more shareholders will invest in BHP in comparison to Santos.

(k) Trends in net borrowings

The trend in borrowing has increased for three of the companies respectively. Santos and BHP’s borrowing is more than that of FANTASTIC.

(l) Trends in working capital

The working capital of BHP firm has decreased over the period of time working capital is calculated by subtracting current liabilities from current assets. And the current liabilities of BHP have shown a constant increase and in fact the current assets have decreased.

Financial position analysis

Monetary quality is indispensable for a business to be effective. It is a key part fundamental for a business to continue, develop and at last return cash-flow to proprietors. At its most fundamental level, money related quality is the capacity to produce benefits and adequate income to take care of tabs and reimburse obligation or financial specialists. The financial strength for BHP Company is better than that of Santos and FANTASTIC. BHP has a better financial strength because of its excellent cash flow statement. The major source of cash for BHP in 2017 is operating items. They have generated a cash of 18,612 from operations. Net interest paid is a component of operating items that has shown a negative cash flow for the consecutive three years. For the firm the cash flow from operating items has increased. BHP was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017, 2018 and 2019. In fact, in the year 2019 there was no need for operating items to cover up the capital expenditures. In case of BHP the cash flow from operations covered the dividend payments for the three years. The dividend payments were 11395, 5,220, and 2921 respectively for the years 2019, 2018 and 2017. BHP has shown a good position in all the factors hence it has a better financial position.

Decision regarding lending money

If asked to lend money it would be best to choose FANTASTIC firm. It has shown a positive cash flow from financing activities for the three consecutive years. It shows that the firm is able to meet its financial obligations properly. Hence, FANTASTIC should be chosen to lend money. Lending to BHP Ltd. is not a good option because they have negative cash flow throughout the years. The investing activity is also rising of FANTASTIC Ltd. which indicates that the company is growing. Though the operating cash flow is negative because of high rate of operations it would be good to lend money to FANTASTIC Ltd.

Conclusion

The conclusion that can be drawn is that all the companies are performing well in their aspects. If one company is good in one field then the other excels in some other area. BHP’s performance is the best amongst the all. It is able to meet all its expenditure through operating activities. It also has the highest cash flow when compared to other companies. It will attract the investors. Overall performance of BHP is satisfactory.

References

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Leal, L. T. Y., Girao, L. F. D. A. P., Lucena, W. G. L., & Martins, V. G. (2017). Persistence, value relevance, and accruals quality in extreme earnings and cash flow situations. RAM. Revista de Administração Mackenzie, 18(3), 203-231.

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ABSTRACT

Operating activities for all the three companies tend to increase over the period of time. Major source of cash flow for Santos and BHP is operating activities. Whereas, the major source of cash for FANTASTIC is financing activities. For firm SANTOS the cash flow from operating items continues to increase over the course of time. It has shown a trend of growth and increment. For BHP the cash flow from operating items has increase and then decreased over the course of time. For FANTASTIC the cash flow from operating items has increase and then decreased over the course of time. Santos was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017 and 2019 but it was unable to generate enough cash to pay its capital expenditure for the year 2018.BHP was able to generate enough cash from its operating items to pay for its capital expenditure for the years 2017, 2018 and 2019. FANTASTIC could not meet its capital expenditure through operating activities. It used financing activities to meets its capital expenditure.

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