Cash Flow Statement Analysis - Assignment Example

CASH FLOW STATEMENT ANALYSIS Name: Lecturer: Course Name: Course Code: Date: Question one; Company Name: ALS Limited Stock Code: ALQ Website: www.alsglobal.com Industry: Environmental & Facilities Services Introduction ALS Limited (ALQ) is an Australian based company trading under Australian Stock exchange whose headquarters is located in Brisbane (ALS Limited, 2013). The company is an international supplier vesting in testing and analytical laboratory services. ALS Limited operates four main testing service dissections such as Minerals, Energy, Life Sciences and Industrial across Australia, Africa, Asia, America, and Europe. The company’s hospitality sector majorly supplies business operating in Australia. ALS Company reveals its competitive advantage over the Laboratory Services division production line by adopting business models and establishing the geographical expansions in Europe, Asia and North America and diversifying into new market analytical skills. The ALS market division strategy has reveals its profitability performance over 2012 2013 financial years (ALS Limited, 2013). ALS reported net profit after tax up 32.5% to $135.5m for the half-year ended 30 September 2012. Revenues from ordinary activities were $813.6m, up 21.9% from the equivalent preceding year. All testing and inspection services divisions recorded resilient growths in revenues and profit contributions. Significant growth in demand for services in ALS Energy, ALS Life Sciences and ALS Minerals saw these divisions post revenue gains of 28% or more for the half. Basic and Diluted EPS was 37.4 cents compared to 29.5 cents last year. The Net operating cash flow was $107.3million unlike $83.0million for the preceding year (ALS Limited, 2013). The interim dividend declared was 21.0 cents as compared with 19.0 cents for the preceding year. Question two: the company define cash and cash equivalent in preparing the statement of cash flow by ascertaining the cash flow amount for the preceding year adding to the present year’s cash flow and determining the net cash and cash equivalent net of effects of inflation (Doug Mills, 2009). The resultant amount should reconcile with the closing cash amount in the statement of financial performance of the company. The company can also define cash flow by performing reconciliation of cash flow (Jamie & Barry Elliott, 2008). Reconciliation if cash flow is performed as follow; {Closing cash in hand or bank-opening cash in hand or bank}+ (Closing overdraft - Opening Bank overdraft) = Closing cash and cash equivalent Question three Cash Flows from operating activities: a) The net cash from operating activities for year 2013/12is $247.3 Million and $229.0 Million respectively b) The company’s sources of cash inflows and outflows from operating activity are: Cash receipts from customers 1,659.41 Million for the year ending 2013 and $488.8 Million for the year ending 2012 Cash paid to suppliers and employees (1,292.0 Million) for the year ending 2013 and (1,170.8 Million) for the year ending 2012 Interest paid for the year 2013 was (21.5 Million) and for 2012 was (17.4 Million) Interest received for the year ended 2013 was $ 1.9 and $ 1.8 for the year ended 2012 Cash receipts from customers as at 2013 is $1,659.4 million and $1,488.8 Million for year ending 2012 Cash paid to suppliers and employees as at 2013 is (1,292.0 Million)and (1,170.8 Million) for the year ending 2012. Cash generated from operations for the year ending 2013 is$367.4 Million and $318.0 Million as at 2012 Interest paid for the year ending 2013 is (21.5 Million) and (17.4Million) for the year ending 2012. Interest received for the year ending 2013$1.9Million and $1.8Million for the year ending 2012. Income taxes paid (100.5) (73.4) Income taxes paid by the company for the year ended 2013 was (100.5) and (73.4) For the year ended 2012. c. How the above cash flows relate to the company’s business operations. The cash relate to the business in that it acts as a form of working capital. The company paid its creditors from amount received from debtors and as well paid interest and tax expense (‎Johan Oberholste, 2009). Working capital helps the company to improve its liquidity position and avoid consequences of longtime time financing (Liquidity problem) Question four: Cash Flows from investing activities: a) Amount of net cash from investing activities for year 2012/13 is (176.8) and (274.4) respectively. b) The sources of cash inflows and outflows from investing activities are; Payments for property, plant and equipment worth (114.5) for the year ended 2013 and (83.0) as at 2012 Repayments of loans for joint venture entity for the year ended 2013 (0.2 Million) and (0.4 Million) for the year ending 2012 Payments for net assets on acquisition of businesses and subsidiaries (net of cash acquired) for the year ending 2013 (105.4)and (197.5) for the year ending 2012. The Proceeds from sale of business operations for the year ending 2013 was $39.4 and $4.5 for the year ending 2012. Dividend from associate is -$ 0.5 as at 2013. The Proceeds from sale of other non-current assets for the year ended year 2013 is $ 3.9 and $ 1.5 for the year ended 2012. Net cash from investing activities as at 2013 is (176.8) and(274.4) for the year ending 2012. Question five; Cash Flows from financing activities: a) The amount of net cash from financing activities for year 2012/13 is(85.9) and $ 95.4 respectively. b) The sources of cash inflows and outflows from financing activities are; The Proceeds from borrowings are$188.3 Million for the year 2013 and $376.5 Million for the year ended 2012. The Repayment of borrowings for the year ended 2013 is (169.2Million) and (162.9 Million) for the year ended 2012. Lease payments for the year ending 2013 is (2.9 Million) and (2.6Million) for the year ending 2012. The company paid a Dividends of (102.1Million) for the year ending 2013 and (115.6 Million) for the ending 2012. Question six; Free Cash Flow (FCF) a) Calculating the company’s Free Cash Flow for the year 2012/13 FCF = (net operating cash flow less capital expenditure less cash dividends). Year ended 2013 free cash flow = 247.3 Million – (169.2 Million+2.9Million+ 102.1 million) = -$-26.9 Million. Year ended 2012 free cash flow= $ 229 Million – (162.9 Million+$2.6 Million+115.6 Million) = $-52.1 Million. b) The result of Free Cash Flow in terms of the enhancement of the shareholder value is that, The Company paid some of its cash as dividend and retained a portion for capital expenditure in order to increase and maximize the shareholders wealth. It can be depicted that the company incurred capital expenditure worth 2.9 Million in the year 2013 and 2.6 million in the year ending 2013 implying an increase in capital expenditure by 0.3 Million. Question Seven; Cash and Cash Equivalents a) The amount of net increase or decrease in cash and cash equivalents for the year 2012/13 is $ -15.4 Million and $ 50 Million respectively. b) Compare the amount of cash equivalents for the year 2012/13 with the year 2011/12.The Cash and cash equivalents for the year ending 2012/13 is $-15.4 Million and $ 50Million respectively and for the year ending 2012/11 was $132.2Million and $84.0 Million correspondingly (ALS Limited, 2013). The difference for the net cash equivalent is majorly brought about by increase in capital expenditure leading to an increase in cash outflow. Cash outflow reduce the amount of cash equivalent and increases cash flow from investing activities. Question eight Shareholders of the company prefer using statement of cash flows in assessing the financial performance of the company since, statement of cash flow provide a simpler understanding of how the cash flows were generated and used in the company. The benefits of ‘cash method of accounting as compared with ‘accrual method of accounting is that, with cash basis approach, you can record the transaction in the books of accounts when cash is actually received from debtors and cash customers or when cash is paid out to suppliers for procurements or supplementary service (Loren & Markenzie, 2011). Cash accounting method is not effective when goods are sold on credit since there is no transfer of cash, the method is importantsince it tracks cash flows unlike the accrual accounting method which does not track cash flows implying that an up to date transaction is kept that clearly reflects the true and fair view of the company state of financial position. With accrual accounting approach, it signifies that revenue is reported after it has been earned and consequently, the business will provide goods and services but not until payment is received and that expense will be recorded in the day the expense is incurred. It indicates therefore that accrual approach commands too many bookkeeping as compared to cash accounting approach (Peter J, 2006). Cash accounting approach therefore provide an easier method of Maintaining and record the books of account because the only relevant transaction required is the recording of cash receipts and expenditure. Cash accounting method considers that tax on business earnings provide for deduction on expenses in the year in which expense are incurred and paid instead of waiting until the revenue is realized and accounted for. Question nine: The efficiency of cash flows from operations for the year 2012/13 and 2011/12. Is that, there is a decline in value of cash flow from $132.2 Million in the year ending 2012 to $112.9 Million in the year ending 2013.This decline is brought about by increase in capital expenditure and payment of lease. The company is having huge amount of cash outflow in relation to cash in flows and as results cash flow is not consistent (Spencer Meredith, 2008). This lead to decrease in amount of dividend paid in the current year. It therefore signifies that shareholders wealth maximization is enhanced because the management is giving investment in capital expenditure the first priority in order to earn return in the near future Part C: Self-management reflection: individual task Cash flow for the company is thus categorized in to three parts: cash flow from operating activities. These are the working capital for the company and comprise of cash flow received from customers, cash paid to suppliers and operating expense paid. Cash flow from investing activities entails the capital expenditure of the company i.e. the disposal and acquisition of assets for the company. The Last category of cash flow is from financing activities. This cash flow enables the company to run smoothly, it is cash from the shareholders of the company, the debt loan and dividend paid and received. The net cash and cash equivalent determine net cash available for the company and it can be depicted whether the company is having liquidity problem or its cash flow is enough to finance the working capital of the company and its investments. It is advisable for a company to record its books of accounts on a cash accounting method since with the approach you can record the transaction in the books of accounts when cash is actually received from debtors and cash customers or when cash is paid out to suppliers for procurements or supplementary service (Doug Mills, 2009). Cash accounting approach also provide an easier method of Maintaining and record the books of account since the only appropriate transaction required is the recording of cash receipts and expenditure, the method therefore considers tax allowable on business earnings and the expense is deducted in the year in which expense are incurred and paid instead of waiting until the revenue is realized and accounted for. Reference List ALS Limited, 2013. ALS Limited Annual report. [Online] ALS Company Available at: http://www.alsglobal.com/~/media/Files/ASX%20Announcements/2013%2006%2028%202013%20Annual%20Report.pdf [Accessed 8 December 2013]. Doug Mills, W., 2009. Introductory Accounting: Incorporating Accounting Principles and Practice in financial analysis. Cengage Learning. Jamie & Barry Elliott, 2008. Financial Accounting Disclosures. Financial Times Prentice Hall. ‎Johan Oberholste, M., 2009. Analysis and Interpretation of Financial Statements. p.23. Loren & Markenzie, 2011. International Accounting Information for Business Decisions. Cengage Learning. pp.287-98. Peter J, 2006. Global Financial Accounting And Reporting: Principles And Analysis. Cengage Learning. p.146. Spencer Meredith, 2008. The Interpretation of Financial Statements: The Classic 1937 Editio. HarperCollins. pp.119-208. Appendix One Appendix Two Appendix Three Read More