Assignment Coversheet

Unit Title Corporate Accounting

Unit Code HI5020
Assessment Type Individual Assessment
Assessment Title Issues in Cash Flow Statement
Contact Details Student ID
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 CORPORATE ACCOUNTING
ISSUES IN CASH FLOW STATEMENT

Abstract

Income Statement shows the performance of the organization during the year as it covers the areas of
revenue generation, areas of expenditure and the profit/loss incurred by the organization during the
year. Profitability of the company helps to decide whether the company can be going-concern in the long
run and whether the company will be able to achieve growth in its earnings. Cash flow statement shows
the movement of cash in the organization during the year. It shows the areas from where the
organization generated cash during the year and the areas where the organization applied the
generated cash. Basically, cash flow statement shows the generation of cash and application of such
generated cash. The elements of income statement are revenue and expenditures of the organization.
Cash flow statement consists of evaluation of cash flow from three different activities i.e. cash flow from
operating activities, cash flow from financing activities and cash flow from investing activities. Cash flow
from operating activities covers the movement of cash involved in running the operations of the
organization. Cash flow from financing activities covers the movement of cash involved in financing i.e.
lending of funds and payment of interest & dividend thereon. Cash flow from investing activities shall
cover the areas relating to investment whether in fixed asset or other investment and receipt of interest
or dividend thereon. Income Statement and Cash Flow Statement can be considered as major tools for
investors in making effective decision relating to investment or divestment in the organization. If the
investor considers that the performance of the organization is acceptable and adequate, the investor
may decide to plough money into the organization. On the other hand, if the investor deems that the
performance of the organization is lacking, the investor may decide to pull off the investment from the
organization. The investor critically examines the trends of the organization in the previous years from
these statements to ascertain the viability of the investment.
 Contents

 Introduction…………………………………………………………………………..1

 Detailed Study

 Contents of Income Statement and Cash Flow Statement..………………2

 Sources of cash for each firm…………………………………………………3

 Major uses of cash for each firm………………………………….................4

 Trend in cash flow from (continuing) operations for each firm…………….5

 Comparison of cash flow from operations with net profit after tax………..5

 Comparison of cash flow from operations with capital expenditure………6

 Comparison of cash flow from operations with dividend paid……………..7

 Investment of excess cash flow from operations…………………………...7

 Review of working capital……………………………………………………..8

 Other items affecting cash flows of each firm……..………………………..8

 Trend in capital expenditure for each firm…………………………………..9

 Trend in dividends for each firm……………………………………………...9

 Trend in net borrowings for each firm………………………………………10

 Trend in working capital accounts for each firm…………………………..10

 Evaluation of financial strength of each firm……………………………….10

 Summary & Conclusion…………………………………………………….……..13

 References………………………………………………………………………….13
Introduction

With the continuous evolution of business, there is a critical need for the evolution of accounting system
so that all the financial information can be disclosed to the stakeholders in fair and transparent manner.
Knowledge about the process of accounting and understanding the main purpose of accounting is
essential in order to improve the accounting system. Accounting refers to collection, analysis,
summarizing, recording and storage of financial information. Accounting starts from entry of journals
followed by posting in ledgers, preparing trial balance and finally preparing financial statements for the
use of general stakeholders. Stakeholders refer to everyone involved with the business of the
organization in any manner. Common stakeholders are owner or shareholders, management, suppliers
& customers, investors, government authorities and employees.

The uses of financial statements are many depending upon the user of such statements. Shareholders
or owners may need the financial statement in order to evaluate position and performance of the
business and to make fruitful decisions in order to improve performance in the future. Management
requires these statements to create strategies for the improvement of process and procedures.
Suppliers & Lenders need the statement in order to evaluate credit worthiness of the company.
Customer evaluates general consistency of the organization through these statements. Government
Authorities require the financial statements to collect taxes and other fees. Employees may evaluate the
reasonableness of salary & wages received by them on the basis of profitability of the organization.
Investors need financial statements to make better investment decisions.

Financial statements generally refer to Balance Sheet, Income Statement, Cash Flow Statement, Notes
& Disclosures to accounts. There are two types of financial statements i.e. general-purpose financial
statement and specific-purpose financial statement. General-purpose financial statement is prepared for
the general public or general users of financial statement. The annual accounts of the organization are
general-purpose as they are meant for all stakeholders. Specific-purpose financial statements are
prepared for the use of organization only and cannot be revealed outside to the public. Detailed project
reports indicating the viability of any project on which the organization wants to invest is confidential in
nature and thus, cannot be disclosed to all the stakeholders.

There are five elements or components of accounting i.e. asset, liability, equity, income and expense.
Balance Sheet shows the position of the organization i.e. asset, liability and equity existing on a specific
date. Income Statement shows the profitability or performance of the organization during certain period
i.e. generally one year. Income Statement shows the amount of income, expense and profit/loss
incurred during the period. Cash Flow Statement shows the flow of cash in the organization during
certain period i.e. origin of cash receipt and where such cash are paid during the period. Cash flow
statement allots the movement of cash flow to three different activities i.e. cash flow from operations,
finance & investment. Notes to accounts are also considered important as it helps us to understand the
financial statement in proper way and to make different decisions in this regard.

Part A

Income Statement and Cash Flow Statement

Income Statement shows the profit earned by the organization during the period. It mainly consists of
sources of income/revenue and all expenses related to the business. Income Statement shows gross
profit, net profit before tax, net profit after tax and earnings attributable to the equity shareholders. To
arrive at the gross profit, direct expenses are deducted from total revenue (from operations and other
income not operational in nature). After deducting administrative expenses from gross profit, we get net
profit before interest, depreciation and tax. After deducting interest, depreciation and tax we get net
profit after tax. Preference Dividend is then deducted from net profit after tax to obtain earnings
attributable to the equity shareholders.

Cash flow statement shows the movement of cash among different activities during the year. There are
three types of activities i.e. operating activities, investing activities and financial activities. Cash flow
from operating activities shows transactions from all operational activities. There are two methods to
calculate cash flow from operating activities, direct method and indirect method. In direct method, cash
flow is calculated directly i.e. payment to suppliers and employees is deducted from receipt / proceeds
from sales. In indirect method, cash flow from operations is calculated by adjusting net profit after tax
with non-cash transactions, non-operational transactions and change in working capital. Cash flow from
investing activities consists of payment for investment, proceeds from sale of investment, acquisition of
plant & equipment, disposal of non-current assets, dividend & interest earned on investments,

1
acquisition of subsidiary and disposal of subsidiary. Cash flow from financing activities consists of
proceeds from borrowings, proceeds from issue of share, payment of interest and dividend thereon.

Income statement is used by the investors to understand the detail information on sources of revenue
and different types of expenditure of the organization. Income Statement also provides details on net
income of the organization and dividend paid to ordinary shareholders. Income Statement is also the
basis for forecasting the future performance of the business. It also allows the investor to identify
possible competitors which further helps the investor to identify other possible opportunities. Income
statement is crucial for investors and lenders to assess the health of the business. Similarly, Cash flow
statement helps the investor to understand the liquidity strength / actual cash position of the company. It
helps analysts and investors to use information of historical cash flows to derive projections for future
cash flows of the organization. It also helps the investor to study the trends of capital expenditure,
dividends, borrowings and working capital. Analytical review (study of past trends) helps the investor to
predict future trends of the company.

Part B

1. Sources of cash for each firm

BHP LIMITED
Sources of cash Amount (US$ million)
2017 2018 2019
Proceeds from operating activities 18,612 22,949 23,428
Operating cash flow from discontinuing operations 928 900 474
Dividend received 636 709 516
Interest received 164 290 443
Proceeds of cash related management instrument - - 296
Income tax and royalty-related taxation refunded 337 17 59
Investment & funding of equity investments - 204 -
Proceeds from sale of Assets 529 89 145
Proceeds from divestment of subsidiaries 187 - 4
Net Proceeds from divestment of Onshore US - - 10,427
Proceeds from interest bearing liabilities 1577 528 250
Proceeds of debt related instruments 36 - -

SANTOS LIMITED
Sources of cash Amount (US$ million)
2017 2018 2019
Receipts from customers 3,217 3,740 4,266
Dividend received 12 6 15
Interest received - 30 37
Pipeline tariffs and other receipts 66 106 146
Insurance Proceeds - 3 28
Other Operating activities 26 4 -
Proceeds from disposal of non-current assets 145 26 10
Proceeds from disposal of subsidiaries - 126 18
Other investing activities 10 - -
Drawdown of borrowings 783 1,193 592
Net proceeds from issue of ordinary shares 149 - -
Net foreign exchange difference gain 9 - -

FUNTASTIC LIMITED
Sources of cash Amount (US$ million)
2017 2018 2019
Receipts from customers 61,731 46,463 31,119
Income Tax refunded - 49 29
Interest and other investment income received 439 2 1
Proceeds from sale of subsidiary - 126
Proceeds from borrowings 3,647 2,630 5,666
Proceeds from share issue - 8,355 8,232

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a. Major uses of cash for each firm

BHP LIMITED
Major Uses of cash Amount (US$ million)
2017 2018 2019
Interest Paid 1,148 1,177 1,346
Settlements of cash management investments 140 292 -
Net Income Tax and royalty-related taxation paid 2,585 4,935 5,999
Purchases of property, plant and equipment 3,697 4,979 6,250
Exploration Expenditure 966 874 873
Net Investment and funding of equity investments 234 - 630
Other investing 153 141 289
Investing cashflow from discontinuing operations 437 861 443
Settlement of debt related instruments - 218 160
Repayment of interest-bearing liabilities 7,114 4,188 2,604
Purchase of shares by ESOP trusts 108 171 188
Share buy-back- BHP Group Limited 5,220
Dividends paid 2,921 5,220 11,395
Dividend paid to non-controlling interests 575 1,582 1,198
Financing cash flow from discontinuing operations 28 40 13

SANTOS LIMITED
Major Uses of cash Amount (US$ million)
2017 2018 2019
Payment to Supplier and Employees 1,611 1,816 1,892
Restoration Expenditure 37 36 24
Exploration and evaluation seismic and studies 71 98 83
Royalty and excise paid 57 85 90
Borrowing costs paid 254 194 227
Income taxes paid 28 69 30
Royalty related taxes paid 15 13 97
Other operating activities - - 3
Payment for exploration and evaluation assets 146 66 222
Payment for oil and gas assets 483 490 619
Payment for land, buildings, plant & equipment 5 10 18
Acquisition of exploration and evaluation assets 49 10 18
Acquisition of subsidiary, net of cash acquired - 1,933 177
Cost associated with acquisition of subsidiaries - 10 5
Borrowing costs paid 6 6 15
Dividends paid - 73 251
Repayment of borrowings 2,442 220 1474
Repayment of lease liabilities - - 87
Purchase of share on market 8 10 31
Loss on foreign exchange difference - 10 11

FUNTASTIC LIMITED
Major Uses of cash Amount (US$ million)
2017 2018 2019
Payment to suppliers and employees 60,897 54,777 38,616
Income tax paid 25 - -
Interest and other cost of finance paid 3,559 1,917 562
Payment for plant and equipment 888 145 5
Payment for other tangible assets 540 281 147
Repayment of commercial bills - - 5,136
Security deposit paid - - 50
Costs from share issue - 438 784
Loss on foreign exchange difference 8 13 -

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b. Trend in cash flow from (continuing) operations for each firm
Amount (US$ million)
Cash flow from (continuing) operations 2017 2018 2019
BHP Limited 15,876 17,561 17,397
Change in cashflow – BHP Ltd. + 10.61% - 0.93%
Santos Limited 1,248 1,578 2,046
Change in cashflow – Santos Ltd. + 26.44% + 29.66%
Funtastic Limited -2,750 -10,182 -8,030
Change in cashflow – Funtastic Ltd. -270.25% + 21.14%

From the above table, we can observe that:

 The cash flow from (continuing) operations of BHP Limited showed upward trend in 2018 as
compared to that of 2017 by 10.61%. However, in 2019, the cash flow from operations
declined by 0.93% as compared to that of 2018 showing downward trend.
 Santos Limited showed upward trend in both year 2018 & 2019 as the cash flow from
operations increased by 26.44% and 29.66% respectively.
 Funtastic Limited showed extreme downward trend in 2018 as the cash flow from operations
declined by 270.25% as compared to the cash flow of 2017. In 2019, it showed slight upward
trend showing increment in cash flow by 21.14%.

c. Comparison of cash flow from operations with net profit after tax
BHP LIMITED
Amount (US$ million)
Particulars 2017 2018 2019
Cash flow from (continuing) operations 15,876 17,561 17,397
(+/-) Adjustments for non-cash and - 7,716 - 8,316 - 8,011
non-operating activities
(+/-) Change in working capital + 241 + 118 - 368
(+/-) Adjustments for investing and + 488 + 470 + 91
financing activities
(-) Net income tax refund - 337 - 17 - 59
(+) Net Income tax paid + 2,585 + 4,935 + 5,999
Net Profit after tax + 11,137 + 14,751 + 15,049

From the above table, we can observe that the difference between cash flow from operating activities
and net profit after tax is due to:
 Non-cash transactions: Cash Flow Statement does not consider non-cash transactions such
as depreciation and amortization of assets, impairment of assets and impairment of equity
accounted statements as expenses as these expenses are not paid for in cash. These
activities are just accounting entry for booking expenses. Thus, we adjust these transactions
from profit after tax.
 Non-operating expenses: Expenses of non-operative nature such as receipt or payment of
dividend& interest are also adjusted from profit after tax as these are investing & financing
activities respectively.
 Working capital changes: The changes in working capital from the previous year is to be
adjusted with profit after tax as these may result in inflow or outflow of cash. Increase in
amount of account receivable implies that more cash is being tied up in the market. Similarly,
decline in account receivable implies that cash is being collected from the market.

d. Comparison of cash flow from operations with capital expenditure

Amount (US$ million)
Particulars 2017 2018 2019
BHP Limited
- Cash flow from operations (total) 16,804 18,461 17,871
- Capital Expenditure 3,931 4,979 6,880
- Coverage Ratio 4.28 3.71 2.60
Santos Limited
- Cash flow from operations (total) 1,248 1,578 2,046
- Capital Expenditure 49 1,953 200
- Coverage Ratio 25.47 0.81 10.23

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 Funtastic Limited
- Cash flow from operations (total) -2,750 -10,182 -8,030
- Capital Expenditure 1,428 426 152
- Coverage Ratio -1.93 -23.90 -52.82

From the above table, we can observe that:

 In case of BHP Limited, net cash flow from operations is sufficient to meet capital expenditure
as shown by coverage ratio of 4.28, 3.71 and 2.60. This implies that cash flow from operations
can meet 4.28 times the capital expenditure of the year 2017.
 In case of Santos Limited, net cash flow from operations can meet capital expenditure in year
2017 & 2019. However, in 2018, cash flow from operations can only cover 0.81 times of
capital expenditure.
 As cash flow from operations of Funtastic Limited is negative for all three years, hence, it is
not able to cover capital expenditure as shown by negative coverage ratio.

e. Comparison of cash flow from operations with dividend paid

Amount (US$ million)
Particulars 2017 2018 2019
BHP Limited
- Cash flow from operations (total) 16,804 18,461 17,871
- Dividend 2,921 5,220 11,395
- Coverage Ratio 5.75 3.54 1.57
Santos Limited
- Cash flow from operations (total) 1,248 1,578 2,046
- Dividend - 73 251
- Coverage Ratio - 21.62 8.15
Funtastic Limited
- Cash flow from operations (total) -2,750 -10,182 -8,030
- Dividend - - -
- Coverage Ratio - - -

From the above table, we can observe that:

 In case of BHP Limited, net cash flow from operations is sufficient to meet dividend payment
as shown by coverage ratio of 5.75, 3.54 and 1.57. This implies that cash flow from operations
can meet 5.75 times the dividend payment of the year 2017.
 In case of Santos Limited, net cash flow from operations can meet dividend payment in year
2018 & 2019. In 2017, dividend was not paid.
 As cash flow from operations of Funtastic Limited is negative for all three years, hence, there
was no payment of dividend.

f. Investment of excess cash flow from operations

Amount (US$ million)
Particulars 2017 2018 2019
BHP Limited
- Cash flow from operations (total) 16,804 18,461 17,871
- Investment in property, plant & 3,697 4,979 6,250
equipment
- Investment & funding of equity 234 - 630
accounted investments
- Share buy-back- BHP Group Ltd. - - 5,220
- Total Investment 3,931 4,979 12,100
Santos Limited
- Cash flow from operations (total) 1,248 1,578 2,046
- Acquisition of oil and gas assets 49 10 18
- Acquisition of subsidiary - 1,943 182
- Purchase of treasury shares 8 10 31
- Total Investment 57 1963 231
Funtastic Limited
- Cash flow from operations (total) -2,750 -10,182 -8,030
- Acquisition of property, plant & 888 145 5
equipment
- Acquisition of other intangible 540 281 147

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 assets
- Total Investment 1,428 426 152

From the above table, we can observe that:

 In case of BHP Limited, excess cash flow from operations is used to investing property, plant
& equipment, equity accounted investments and for share buy-back of BHL Group Limited.
 In case of Santos Limited, excess cash flow from operations is used to invest in acquisition of
oil and gas assets, acquisition of subsidiary and purchase of treasury shares. However, in
2018 the excess cash flow from operations was not sufficient to meet the investment and the
shortage has been covered by disposal of non-current assets, disposal of subsidiary and
drawdown of borrowings.
 As cash flow from operations of Funtastic Limited is negative for all three years, hence, the
funds required for investment were obtained from proceeds of borrowings and proceeds of
share issue.

g. Review of Working Capital

BHP LIMITED
Amount (US$ million)
Particulars 2017 2018 2019
Changes in Trade & other receivables 319 - 260 - 366
(+/-) Changes in Inventory - 262 - 91 - 76
(+/-) Changes in Trade & other payables 162 426 740
Changes in cash flow of Working Capital + 219 + 75 + 298
Source/use of cash Source Source Source

From the above table, we can observe that BHP Limited used working capital accounts as the
source of cash as the net changes in cash flow due to working capital changes is positive for all 3
years.

h. Other item affecting cash flows of each firm

BHP LIMITED
In case of BHP Limited, other major items that affected the cash flows of the firm are exploration
expenditures, interest payment, dividend payment, capital expenditures such as purchase of
property, plant and equipment, settlement and repayment of interest-bearing liabilities, credit policy
of the company, inventory holding period and other investing & financial activities.

SANTOS LIMITED
In case of Santos Limited, major items that affected the cash flows of the firm are payment for
exploration and evaluation assets, payment for oil and gas assets, payment for land, buildings, plant
and equipment, acquisition of assets &subsidiary, dividend payment, repayment of borrowing costs,
repayment of lease liabilities and income tax and royalty tax payment.

FUNTASTIC LIMITED
In case of Funtastic Limited, major items that affected the cash flows of the firm are repayment of
commercial bills, payment of security deposit, proceeds from issue of shares, proceeds from sale of
subsidiary, payment for plant and equipment and payment for other intangible assets.

i. Trend in capital expenditure for each firm

Amount (US$ million)
Capital Expenditure 2017 2018 2019
BHP Limited 3,931 4,979 6,880
Change in capital expenditure– BHP Ltd. + 26.66% + 38.18%
Santos Limited 49 1,953 200
Change in capital expenditure – Santos Ltd. + 3885% - 89.75%
Funtastic Limited 1,428 426 152
Change in capital expenditure – Funtastic - 70.17% - 64.32%
Ltd.

From the above table, we can observe that:

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  The capital expenditure of BHP Limited showed upward trend in 2018& 2019 as compared to
that of 2017& 2018 by 26.66% and 38.18% respectively.
 Santos Limited showed extreme upward trend in 2018 as the capital expenditure increased by
3885% as compared to that of 2017. In 2019, it showed downward trend as it decreased by
89.75%.
 Funtastic Limited showed downward trend in 2018 & 2019 as compared to that of 2017& 2018
as the capital expenditure decreased by 70.17% and 64.32%.

j. Trend in dividends for each firm

Amount (US$ million)
Dividend paid 2017 2018 2019
BHP Limited 2,921 5,220 11,395
Change in dividend paid– BHP Ltd. + 78.70% +118.30%
Santos Limited - 73 251
Change in dividend paid– Santos Ltd. + 73% +243.84%
Funtastic Limited - - -
Change in dividend paid– Funtastic Ltd. - - -

From the above table, we can observe that:

 The dividend paid of BHP Limited showed upward trend in both 2018 and 2019 as compared
to that of 2017& 2018 by 78.70% and 118.30% respectively.
 Santos Limited showed upward trend in both year 2018 & 2019 as the dividend paid
increased by 73% and 243.84% respectively.
 There were no dividend payments of Funtastic Limited in 2017, 2018 & 2019.

k. Trend in net borrowings for each firm

Amount (US$ million)
Net borrowings 2017 2018 2019
BHP Limited - 5,501 - 3,878 - 2,514
Change in net borrowings– BHP Ltd. + 29.50% + 35.17%
Santos Limited - 1,659 + 973 - 882
Change in net borrowings– Santos Ltd. +158.6% -190.6%
Funtastic Limited + 3,647 +2,630 + 530
Change in net borrowings– Funtastic Ltd. - 27.89% - 79.85%

From the above table, we can observe that:

 The net borrowings of BHP Limited showed upward trend in 2018 and 2019 as compared to
that of 2017 and 2018 by 29.50% and 35.17% respectively.
 Santos Limited showed extreme upward trend in 2018 as the net borrowings increased by
158.6%. However, in 2019 it showed downwards trend as net borrowings declined by 190.6%
as compared to that of 2018.
 Funtastic Limited showed downward trend in both 2018 and 2019 as the net borrowings
declined by 27.89% and79.85% compared to that of 2017& 2018 respectively.

l. Trend in working capital accounts for each firm

BHP LIMITED

Amount (US$ million)

Particulars 2017 2018 2019
Trade & other receivables 2,836 3,096 3,462
(+) Inventory 3,673 3,764 3,840
(-) Trade & other payables 5,551 5,977 6,717
Working Capital 958 883 585
Change in working capital - 7.82% - 33.74%

From the above table, we can observe that the working capital account of BHP limited is showing
downward trend in 2018 & 2019. The working capital of 2018 decreased by 7.82% and working
capital of 2019 decreased by 33.74%. Decrease in working capital results in more cash flow to the
organization.

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2. Evaluation of financial strength of each firm

BHP LIMITED
On the basis of above study, the financial strength of BHP Limited can be determined as:

 Cash & cash equivalents of the company during 2017, 2018 and 2019 were $6,613 million,
$10,276 million and $14,108 million. It can be seen that overall cash of the company is
increasing every year and increase in cash can be used for investments whether in fixed
assets or in securities providing more returns to the company.
 From the above study it can be observed that, there is significant increase in investment of
BHP Limited i.e. $3,931 million in 2017, $4,979 million in 2018 and $12,100 million in 2019.
The company is increasing investments every year which will provide revenue from
investments either in the form of dividend or interest.
 BHP Limited can be said to be highly liquid company as the cash flow from operations can
cover capital expenditure and dividend while increasing the amount of investments. Thus, the
liquidity situation of the company can be considered good. Trend analysis of the company
shows upward trend in case of investment, capital expenditure and dividend paid.
 The major sources of cash flows of the company are proceeds from operations, receipt of
dividend and receipt of interest. Proceeds from operations were $18,612 million in 2017,
$22,949 million in 2018 and $23,428 million in 2019. The proceeds from the operations are
increasing every year from 2017 to 2019 which further implies that the position of the
company is improving every year.

Considering the above factors, it can be said that the financial strength of BHP Limited is good and
stable for 2017, 2018 and 2019 and the financial position of the company is improving and
strengthening every year.

SANTOS LIMITED
The financial strength of Santos Limited is analyzed as follows:
 Cash & cash equivalents of the company during 2017, 2018 and 2019 were $1,231 million,
$1,316 million and $1,067 million. There is upward as well as downward trend of cash & cash
equivalents in Santos Limited as it increased in 2018 but decreased in 2019.
 The investment of Santos Limited during 2017, 2018 and 2019 were $57 million, $1,963
million and $231 million. The amount of investment increased in 2018 while decreasing in
2019.
 The coverage ratio of Santos Limited was showing similar trends i.e. upward trend in 2018
and downward trend in 2019.
 Proceeds from operation of Santos Limited were $1,248 million, $1,578 million and $2,046
million respectively. Increasing operational proceeds indicate that there is sound financial
strength of the company.

Considering the above factors, it can be said that the financial strength of Santos Limited is sound
(neither good nor bad in comparison to BHP Limited).

FUNTASTIC LIMITED
In case of Funtastic Limited, the financial strength is analyzed as:
 Cash & cash equivalents of the company during 2017, 2018 and 2019 were $664 million,
$718 million and $465 million. There is upward as well as downward trend of cash & cash
equivalents in Funtastic Limited as it increased in 2018 but decreased in 2019.
 The investment of Funtastic Limited during 2017, 2018 and 2019 were $1,428 million, $426
million and $152 million. We can observe sharp downfall in the amount of investment which
shows that the financial strength of the company is deteriorating every year.
 The coverage ratio of Funtastic Limited were showing downwards trend. There was no
payment of dividend during 2017, 2018 and 2019. Further capital expenditures are also
decreasing which shows decline in the financial performance of Funtastic Limited.
 Proceeds from operation of Funtastic Limited were -$2,750 million, -$10,182 million and -
$8,030 million respectively. Negative operational proceeds indicate that financial strength of
the company is adverse and declining year after year.

Considering the above factors, it can be said that the financial strength of Funtastic Limited is worse
in comparison with the financial strength of BHP Limited and Santos Limited.

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 3. Evaluation of each firm for Lending Purpose
After considering all the above studies, the financial strength of the three companies can be ranked
as:
BHP Limited – Rank I
Santos Limited – Rank II
Funtastic Limited – Rank III
For lending purposes, we would choose BHP Limited as:
 Interest coverage ratio of BHP Limited is better than that of Santos Limited and Funtastic
Limited. Net borrowings of BHP Limited is negative in 2017, 2018 and 2019 which shows that
repayment of funds is greater than borrowings during the period.
 Cash & cash equivalent of BHP Limited is higher in comparison to other two. Higher cash &
cash equivalent indicates high solvency or liquidity position. Every investor considers higher
solvency as advantage while investing in the organization.
 Cash flow from operations of BHP Limited is better as compared to Santos Limited and
Funtastic Limited. Funtastic Limited showed negative cash from operations during all three
years. While, Santos Limited had positive cash flows, the increase in cash flows was not
higher than that of BHP Limited.
 Investment of BHP Limited during the year was high enough. More investment indicates
better returns for the organization. While, Santos Limited had some investments, Funtastic
Limited was also backwards in this prospect.

Summary & Conclusion

Cash & cash equivalent of BHP Limited, Santos Limited and Funtastic Limited at the year end of 2019
were $14,108 million, $1,067 million and $465 million. Coverage ratio of dividend of BHP Limited,
Santos Limited and Funtastic Limited at year 2019 was 1.57, 8.15 and 0. Further, investment of BHP
Limited, Santos Limited and Funtastic Limited at year 2019 was $12,100 million, $231 million and $152
million. Cash flow from operations of BHP Limited, Santos Limited and Funtastic Limited at year 2019
was $23,428 million, $2,046 million and -$8030 million. Moreover, the sources of cash flow to the
organization are better in case of BHP Limited than the other two.

After considering all the factors such as balance of cash & cash equivalent at the year end, proceeds
from operations during the year, coverage ratios for dividend, capital expenditure, working capital and
net borrowings, it is concluded that the financial strength of BHP Limited is better in comparison to
Santos Limited and Funtastic Limited. Also, the net borrowings of BHP Limited are lower than that of
other two, thus it is better to consider BHP Ltd. for lending purposes.

The financial strength of Santos Limited can be said as sound i.e. neither good nor bad but the financial
strength of Funtastic Limited is worse showing negative cash flow from operations, downward trend of
working capital, investment & capital expenditure, no payment of dividend during 3 years.
Thus, we would choose BHP Ltd. for any purpose whether lending or investing in shares.

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 References

BHP, 2017. Annual Report. [Online] BHP Available at: https://www.bhp.com/-/media/documents/investors/annual-

reports/2017/bhpannualreport2017.pdf [Accessed 17 September 2020].

BHP, 2018. Annual Reports. [Online] BHP Available at: https://www.bhp.com/-/media/documents/investors/annual-

reports/2018/bhpannualreport2018.pdf [Accessed 18 September 2020].

BHP, 2019. Annual Report. [Online] Available at: https://www.bhp.com/-/media/documents/investors/annual-

reports/2019/bhpannualreport2019.pdf [Accessed 17 September 2020].

Funtastic, 2017. 2017 Annual Report. [Online] Available at:

https://www.annualreports.com/HostedData/AnnualReportArchive/f/ASX_FUN_2017.pdf [Accessed 18 September 2020].

Jury, T., 2012. Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding andUsing Published Cash Flow
Data. 1st ed. John Wiley & Sons Ltd.

Santos, 2017. Annual Report 2017. [Online] Available at: https://www.santos.com/wp-content/uploads/2020/02/2017-

annual-report.pdf [Accessed 17 September 2020].

Santos, 2018. Annual Report 2018. [Online] Available at: https://www.santos.com/wp-content/uploads/2020/02/2018-

annual-report.pdf [Accessed 18 September 2020].

Santos, 2019. Annual Report 2019. [Online] Available at: https://www.santos.com/wp-content/uploads/2020/02/2019-

annual-report.pdf [Accessed 18 September 2020].

Skonieczny, M., 2012. The Basics of Understanding Financial Statements. 1st ed. Investment Publishing Ltd.

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