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HI5020 Corporate Accounting, Holmes Institute, Australia

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Issues in Cash Flow Statement

Abstract: As investors we need cash flow, income statements and statement of financial position independently as per the prerequisite of IFRS as well as to comprehend the businesses all out task in a right way. In the event that if we rely on only one statement, which is getting info about the economic status, it will become predictable for the investors to estimate the amount that will be left with them after executing an action. Therefore, it is an important tool to use in measuring the ability of the firm's performance. It has compared the financial strengths of the three mentioned firms on how they are operating. We have seen which has strong cash flow and those that have weak cash flow.

Introduction: In this study we are investigating the use of cash flow and how it helps the investor to make decision as to whether to invest in the company or not. We will use all the resources available to learn on how to make proper decisions. We will compare the financial strength of each firm's cash flow and make a decision performs well. Also we will look at their capital expenditures, their major sources of cash, trends in their uses, borrowing trends, working capital changes and which firm if you were to choose for lending as well. Therefore it will help investors at the end of the day to make their viable decisions as far as their investment choice are concern.

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?

Answer: Clearly we do need cash flow, statements of comprehensive income and statement of financial position independently as per the prerequisite of IFRS as well as to comprehend the businesses all out task in a correct way or manner. In the event that we consider only one statement, which is explanation of economical status, it will become predictable for the investors to estimate the amount that will be left with them after executing an action. To decide on which choice to follow for putting your resources into certain firm that performs, we need a suitable perspective on every single step of the firm you are choosing to invest in. At the same time, every investor who wants to invest must be found in the wake of isolating the announcements. They are very important and crucial documents which will help the investor to choose which company he or she will invest in. These documents analyses all ways in which these firms gets their cash or spend as well.

We should investigate, which statement does what how it is important to use them in your decision making process.

Statement for income: It is basically a document that is amongst those that are most significant archives for a speculator's elementary leadership. It is a direct importance documentary data that is recorded in the reports and available records. After that it is changed into brief, ordered income and cost figures. This statement demonstrates the incomes and expenses of a firm for a particular period of time which it has operated in business. Interested parties or partners can realize the richness of significant the data on the expense description including the firm's business, held income, net benefit, and operating income. Thereby, this statement will give details over the increment/decrement in the revenue for that particular duration. From these numbers, prospecting investors or interested parties and even partners, can figure out and perceive indispensable data about the firm which they may be interested in. Normally, comprehensive income statement displays data which is reusable as the time permits, for instance we can say that this data can be used for 2-3 years consistently. It is anything but difficult to have contrast outcomes throughout from one period to another or following each other in that order and decide which firm has clear historical records and good cash flow development.

Cash Flow Statements: This is a clarification that gauges the company's ability to reliably make cash streams from everyday business tasks or exercises which are extraordinarily regarded by theorists or financial specialists. Working salary can uncover a company's real benefit. Utilizing this information, the pay declaration will uncover the net increment or decrease in real money development in the company's tasks for the period in which has worked in. Most pay proclamations are divided into three separate exercises: Working/working exercises, contributing exercises, and financing exercises. It's a standout amongst the most immaculate extents of cash sources and utilities, and is the everyway between other nitty gritty spending reports. A salary clarification is the heart for any business that is effective or means to stay in business for a significant lot of time or not so distant. It evaluates the proportions of money that comes into the firm and out of it above given term or time span. Therefore, a firm can screen how a great deal of cash it needs to pay expenses and buy assets. Salary clarifications use information from both pay announcements and bookkeeping reports. Using this information, the pay decree will reveal the net addition or decrease in genuine cash for the period. Most pay proclamations are apportioned into three separate exercises: Working/working exercises, contributing exercises, and financing exercises. Cash related prosperity is in all likelihood the underlying move towards continuing with a full life. Some bit of winding up fiscally instructed.

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Here are the gainful purposes of cash flow statement.

i) An income proclamation can let you know whether you're coming up in short cash while you are gainful or not.

ii) An income proclamation can let you know whether the proprietorsare removing a lot of cash from the business for other not meaningful use or not.

iii) You will see the consequences of structure stock, giving trade receivables to develop or paying providers or suppliers all the more rapidly without retaining some for future emergencies.

iv) Capital acquisitions appear as a very big expense

v) You will see what your bank credit payments are doing to your cash movement in the operation of business.

Evaluating the cash flow from operations (OCF): Working income can be found in the income statement, which usually reports that changes in actual cash verses its standing partners gives the income explanation, financial records and investor's value proclamation. In particular, the income statement reports where cash is utilized and produced over explicit periods of time in business and ties the standing statements altogether. It is the interpretation and procedure from which collections accounting to cash bookkeeping which owns the working expression so significant to the investor. By taking total compensation on the cash flow and making adjustments to reflect changes in the working capital records on the accounting report ( such as trade receivables, trade payables, inventories), the working income part demonstrates how cash was obtained within the period it is prepared. It is the interpretation procedure from which receivables accounting to cash bookkeeping that keeps the working expression so significant. The sources and employments of cash are separated into classifications of operating activities, contributing or investing activities, financing activities and at times, supplemental activities as well.

1. Operating activities: are typical and center activities inside a business that produce money inflows and outpourings. This incorporates; all out offers of merchandise and enterprise gathered amid a period, installments made to providers of products and ventures utilized underway settled amid a period and installments made to workers or different costs made amid a period. It records a firm's working money development, the net of which is the place operating cash flow is determined.

2. Contributing activities: are records that changes in real money from the buy or clearance of property, plant and equipment or by and large long haul speculations.

3. Financing activities: are reports money level changes from the buy of the organization's own stock or raise of securities, and installments of premium and profits to investors.

4. Supplemental data: fundamentally everything that does not identify with the above classes.

Operating Cash Flows: It is a prized estimation apparatus as it enables investors to check what is happening in the background. For some speculators and investigators, it is viewed as money adaptation of net gain, since it cleans the pay proclamation of non money uses, such as amortization non-working capital and changes in current resources. OCF is a more significant measure of productivity that overall gain, as there is less chance to control to see pretty much beneficial.

Operating cash flow is a more important measure of productivity than general gain, as there is less chance to control operating cash flow to seem attractive much beneficial. With the death of severe guiding principle and guidelines on how disproportionately innovative a firm can be with its bookkeeping rehearses, never-ending profit control can without much of a stretch be spotted, particularly with the exploitation of operating cash. It is additionally a decent intermediary of an organization's net gain; for instance, an announced operating cash flow higher than net income is viewed as positive, as pay is really moderated since of the reduction of non-money things.

The Bottom Line: Working income is only one segment of a firm's income story, however it is likewise a standout amongst the most significant magnitudes of solidarity, productivity and the long haul future viewpoint. It is determined either directly or in a roundabout way and measures cash stream all through an organization over explicit periods. In contrast to net gain, operating cash flow rejects non-money things like depreciation and amortization which can distort a firm's genuine monetary position. It is a decent sign when an organization has solid working money streams with more money coming in than leaving. Cash flow significant evaluative marker for speculators. It catches all the positive characteristics of inside created money from the firm's tasks and screens the utilization of money for capital uses. Organizations with solid development in operating cash flow in all probability have increasingly stable overall gain, better dimensions to pay and build profits, and more chances to extend and climate downturns in the general economy or their industry.

Income is a significant evaluative marker for speculators. It catches all the positive characteristics of inside created money from an organization's tasks and screens the utilization of money for capital uses. On the off chance that an organization's money age is certain, it's a solid pointer that the organization is in a decent position to keep away from inordinate getting, extend its business, pay profits, and climate tough occasions.

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:

a) What are the major sources of cash for each firm? What are the major uses of cash foreach firm?

Answer:

b) What was the trend in cash flow from (continuing) operations for each firm?

Answer: Trend of cash flows

                                      2018          2017          2016

Funtastic Ltd                  10,182         2,750          7,329

Cashflow decreased by 4,579 in 2017 and increased by 7,432 in 2018

BHP Ltd                         17,561        15,876         9,840

Cash flows consistently increased in 2017 and 2018 by 6,036 and 1,685 respectively.

Santos Ltd                    1,578          1,248            840

Cash flows consistently increased in 2017 and 2018 by 408 and 330 respectively.

c) 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).

Answer:             2018       2017       2016

Net income        14,751    11,137     1,791

Net cash flow     18,461    16,804    10,625

So, answer is Yes. Because there were more cash received from trade receivables, inventories were turned into cash, more goods were received from suppliers, profits gained from sale of investment as well as dividends and interest received.

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d) Was the firm able to generate enough cash from operations to pay for all of its capital expenditures?

Answer: Whether cash flow obtained from operations pay capital expenditure.

                                                            2018               2017               2016

Funtastic Ltd Cash flow                              10,182                            2,750                                  7,329

                        Plant & Equipment  145                 888                             884

                        Intangible assets      281=(426)      540     = (1,528)        325    = (1,209)

                                                                        9,756                    1,222                    6,120

From above calculation, it was able to pay for all years.

BHP Ltd         Cash flow                              17,561                                  15,876                9,840

Plant & Equipment 4,979                    3,697                    5,707

                        Exploration expense           874                         966                     752

                        Exploration expensed         641                          610                    419

                        Other investing                     141=(6,635)   153= (5,426)  20  = (6,898)

                                                                        10,926                                10,450                2942   

From above calculation, it was able to pay for all years.

Santos Ltd     Cash flow                              1,578              1,248                          840

Net cash used to invest                  (2,373)                        (534)                           (205)                                                                             (795)             714                             635

Firm was unable for year 2018 but was able in 2017 and 2016

e) Did the cash flow from operations cover both the capital expenditures and the dividend payments made by the firm (if any)?

Answer: Whether cash flow cover capital expenditure and dividend payment.

2018               2017               2016

Funtastic Ltd:            Cash flow                              10,182                           2,750                           7,329

                        Plant & Equipment              (426)   (1,528)            (1,209)

Yes able to cover capital expenditure only. No dividends paid

BHP Ltd:        Cash flow                              17,561                                  15,876                9,840

Capital Exp.                          (6,635)                                (5,426)               (6,898)

                        Dividends paid                                 (5,220)                        (2,921)                        (4,130)                       

                                                                        5,706                      7,529                  (1188)

This shows that it was able to pay year 2018 and 2017 but unable year 2016.

Santos Ltd:    Cash flow                              1,578              1,248                          840

Dividend paid                                     (73)               -                                   (43)

Net cash used to invest                  (2,373)                        (534)                           (205)

                                                                        (868)               714                             592 

This shows that it was able to pay for year 2018 and 2016. No dividends paid 2016.

f) 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?

Answer: Whether firms generated excess cash or not

Funtastic Ltd: No excess cash was generated thus no investment it did. But it used other sources to pay the capital expenses.

BHP Ltd: Yes, it generated excess cash and invested on equity accounted investments and other investments not specified properly.

Santos Ltd: Yes, it had excess cash and acquired a subsidiary and other investing activities which are not correctly specified.

g) 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).

Answer: Whether BHP Ltd uses working capital accounts as a source of cash.

                                                            2018               2017               2016

Trade and other receivables                      (662)               267                 1387

Inventories                                        (182)               (687)               521

Trade and other payables              719                 512                 (1,272)

Prov. For other assets & Liabilities              7                   (333)               (316)

                                                            (118)               (241)               320

No, it did not work for 2018 and 2017 but only worked for 2016 only.

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h) What other major items affected cash flows?

Answer: Other major items affected cash flows for each firm

Funtastic Ltd: Major ones were; borrowings, repayment of commercial bills and cost of issuing shares.

BHP Ltd: Major ones were; payment of tax, payment of interest, proceeds and repayments of interest bearing liabilities.

Santos Ltd: Major ones were payment of taxes, drawdown and repayments of borrowings.

i) What was the trend in capital expenditures for each firm?

Answer: Trend for capital expenses for each firm.

                                                        2018             2017             2016

Funtastic Ltd: Plant & Equipment         426              1,528            1,209

The trend shows it kept on decreasing from year 2016 to 2018 throughout consecutively.

BHP Ltd: Capital Exp.                         6,635            5,426            6,898

This shows that it they decreased in 2017 and increased in year 2018.

Santos Ltd: Capital Expenses              2,373             534                205

This shows that it increased constantly from year 2016 to 2018. No dividends paid 2016.

j) What was the trend in dividends (if any) for each firm?

Answer: Trend of dividends for each firm.

                                                    2018              2017            2016
Funtastic Ltd: No dividends the firm paid during all these years

BHP Ltd: Dividends paid                5,220               2,921           4,130

This shows that it payment decreased in 2017 but increased year 2018.

Santos Ltd: Dividend paid                73                     -                43

This shows that it increased for year 2018 and 2016. No dividends paid 2017.

k) What was the trend in net borrowing (proceeds from borrowing less payments of shortand long-term debt) for each firm?

Answer: Trend of net borrowing for each firm

Funtastic Ltd: It did not do any borrowing throughout the three years

BHP Ltd: There borrowings kept on decreasing constantly throughout the three years.

Santos Ltd: Borrowing increased in the year 2017 but decreased in the year 2018

l) What was the trend in working capital accounts? (Answer this question using only Appendix B: Cash flow statement for BHP Limited).

Answer: Trend of working capital for BHP Ltd.

In reference to calculation in (g) above, it kept on decreasing in year 2017 and 2017 respectively.

2. Critically evaluate the financial strength of each of the three companies based on the evidence presented in the Statement of Cash Flows.

Answer: Evaluating financial strength of each firm.

Funtastic Ltd: It is very weak since its working capital is very negative and creates a lot of debts which is very dangerous to its operation. It needs to reduce its expenses and purchase of assets as well.

BHP Ltd: the firm has less borrowings i.e less obligations to pay, it has invested more on capital assets, it is not running out of money that means, owners are not taking too much from the firm, and its working capital base is very strong.

Santos Ltd: It is very strong since it manages its cash flow, maintains its asset base, it has less borrowing from outside the firm that is banks and other institutions.

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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.

Answer: If were to choose which for financial lending

I would choose BHP Limited.

Reasons; the firm has less borrowings i.e less obligations to pay, it has invested more on capital assets, it is not running out of money that means, owners are not taking too much from the firm, and its working capital base is very strong.

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