Assessment of Cash Flow Statement Information - Essay Example

Running header: Downer EDI Limited Student’s name: Instructor’s name: Subject code: Date of submission: Downer EDI Limited Introduction and company background Downer EDI limited was founded in 1933 in New Zealand by engineer Arnold Fielder Downer with a focus on provision of engineering and construction services to public and private infrastructure. Although it was founded as a private company known as Downer& co, it has grown to become a public company listed on the stock exchange and its name has since changed to Downer EDI limited (Asx.com, 2013). Today, the company provides engineering and infrastructure management services to its clients based in the minerals and metals, oil, power, gas, telecommunications, property and water sectors. The company is currently led by Grant Anthony as its chief executive officer. The company’s group chairman is Richard Michael Harding while the joint company secretary is Peter Lyons. Products offered/divisions Downer EDI Limited operates three main service divisions.  They include; i. Downer infrastructure –the division provides engineering services ranging from design, planning operations and maintenance services in such sectors as transport, gas, petrochemicals, technology, telecommunications, water and environment. The division operates in Australia, New Zealand as well as the greater pacific region (Downer, EDI Limited 2013, p4). ii. Downer mining – the division provides mining as well as mine planning and management services. This division operates in Australia and selected areas globally. iii. Downer rail – the division provides passenger and freight rolling stock and related management services in Australia. The division mainly operates in Australia though its presence in Australia is greatly increasing. Operations The company has its global headquarters in New South Wales Australia. The company employs more than 20,000 employees across its divisions in Australia, New Zealand as well as the Asia Pacific region, South Africa and South America. Financial performance The company experienced improved financial performance during the year 2012/13. Its revenues improved by 7.1% to $9.1 billion from the previous year’s performance.  The improved revenue performance saw the company’s net profit after tax increase by 10.3% to $215.4 million while earnings before tax rose by 6.9% to $370.3 million during the year (Downer, EDI Limited 2013, p.9). As such, the company’s overall performance is noted to have improved during the year 2012/13. 2. ALS Limited includes the following in defining of cash for the purpose of preparation of cash flow statement. i. Cash flows from operating activities which is cash either received or paid in the normal course of the company’s operations (Donald, 2010).  These includes cash received from customers, distributions from equity accounted investments, dividends received from external entities, cash paid to employees and suppliers, interest receipts and payments as well as income tax payment. ii. Cash flow from investing activities which includes cash paid or received as the company undertakes investment activities (Annabel, 2005). This includes payments for plant, property and equipment, proceeds from sale and leaseback of plant and equipment, payment for intangible assets, repayment from joint ventures, advances to other entities, divestment cost paid on disposal of subsidiary, proceeds from sale of business and payment of business acquired. iii. Cash flow from financing activities- they include proceeds from borrowings, repayment of borrowings, proceeds from joint ventures as well as dividends paid (Kellen, 2007). 3. Cash flows from operating activities a)  The amount of net cash flows from operating activities for the year 2012/13 for the company is 452,370,000 dollars (Downer, EDI Limited 2013, p 48). b) The sources of cash inflows and outflows from operating activities include; i) Cash inflows – they include; - Cash receipts from customers for services offered to them by the company.  These amounted to $9,449,096,000 in 2013. -Distributions from equity accounted investments which amounted to $58,731,000 in 2013 -Dividends received from external entities which amounted to $7,000 in 2013 -Interest received which amounted to $8,581,000 in 2013 (Downer, EDI Limited 2013, p. 48) ii) Cash outflows – they include; -Cash paid to suppliers for services performed and supplies as well as cash payments to employees which amounted to 8,980,478,000 dollars in 2013. -interest and other costs of finance paid amounting to $69,240,000 in 2013. -income tax paid amounting to $14,327,000 in 2013 (Downer, EDI Limited 2013, p.48). c) How the above cash flows relate to the company’s business operations; In the course of operations, the business offers testing services to its customers who in turn pay for the services offered to the company. The company receives services and supplies from suppliers to enable it serve its customers hence the cash paid to suppliers. Similarly, the company uses its employees to render services to its customers and hence it has to pay them salaries and wages and other allowances. The company also receives interests from those who owe it while it pays interest to those it owes in the course of operations. Having operated at a profit, the company had to pay taxes to the government for the profits it made hence the income tax paid (Martin, 2011). The company also received dividends/earnings from its investments in other companies or subsidiaries. 4. Cash flows from investing activities a) The amount of net cash from investing activities for the year 2012/13 is 289,069,000 dollars (payments). b) The sources of cash inflows from investing activities include; -proceeds from sale of property, plant and equipment amounting to 66,879,000 dollars for the year 2013 (Downer, EDI Limited 2013, p .48). -Repayments from joint venture amounting to $4,028,000 in 2013. On the other hand, cash outflows from investing activities included; -payment for property, plant and equipment amounting to $350,340,000 in 2013 -Payments for intangible assets/softwares amounting to $5,344,000 Payment for investments amounting to $1,335,000 in 2013 -Advances to other entities amounting to $600,000 -divestment cash paid on disposal of subsidiary amounting to $2,357,000 in 2013 (Downer, EDI Limited 2013, p.48). 5. Cash Flows from financing activities a) The amount of net cash from financing activities for year 2012/13 was 9,106,000 dollars. b) The sources of cash inflows from financing activities include; - Proceeds from borrowings amounting to $3,798,391,000 in 2013 On the other hand, cash outflows from financing activities include; -Repayment of borrowings which amounted to $ 3,759,584,000 in 2013 Dividend paid to non controlling interests amounting to $7,000 in 2013 -Dividend paid amounting to 29,694,000 dollars in 2013 (Downer, EDI Limited 2013, p.48) 6. Free Cash Flow (FCF) a) FCF = Net operating cash flow –capital expenditure – cash dividends Net operating cash flow = $ 452,370,000 Capital expenditure = payment for property, plant and equipment ($350,340,000), payments for intangible assets (softwares) amounting to $5,344,000, Payment for investments amounting to $1,335,000 Cash dividends paid to non controlling interest = $7,000 and cash dividend paid amounting to $29,694,000 (Downer, EDI Limited 2013, p. 48) Hence, FCF = (452,370,000 – (350,340,000+5,344,000+1,355,000+7,000+29,694,000) = $65,630,000 The company has free cash flows of $ 65,630,000. This implies that the company has some free cash flows totaling to $65,630,000 which it can use in making future investments before it can sought for finances from other sources other than that from operations. In addition, this amount can be used as a collateral in acquiring finances from other sources since it is a free cash flow and hence it can be used by the management in enhancing shareholders value. 7. Cash and cash equivalents a) The amount of net decrease in cash and cash equivalents for the year 2012/13 amounted to $ 177,044,000. b) The amount of cash and cash equivalents for the company increased from $ 296,689,000 in 2012 to $ 473,733,000 in 2013 (Downer, EDI Limited 2013, p.48) c) This increase was mainly as a result of increased receipts from customers, borrowings and other receipts which were not matched with corresponding increases in the level of payments. This is healthy for the company as it implies that the company can have extra cash for investing and hence maximizing shareholders value. 8. Investors prefer to examine cash flow reports rather than income statements and balance sheets because cash flow information removes the impact of arbitrary allocations that occur under accrual accounting (Johansen, 2010). This is because using cash flow statements allows them  to know the exact amount of cash they have at their  disposal and hence be able to do proper financial planning and budgeting for the company. However, the income statement and the balance sheet in many times include cash that has not yet been received despite having been earned, cash that has not been paid although expenses have been incurred. Income statements and the balance sheet may also include non cash items (Franklin, 2008).  Although they show the exact financial position the company is in as well as its profitability, investors prefer the cash flow statements since it provides the best tool for the company’s financial planning as they would not want to plan for cash that they don’t have at hand. 9.  Efficiency of cash flows from operations of ALS Limited The company saw its receipts from customers significantly improve from 8,584,764,000 dollars in 2012 to 9,449,096,000 dollars in 2013. There was an increase in cash payments to suppliers and employees from $ 8,158,966,000 in 2012 to $ 8,980,478,000 in 2013. However, there was an overall increase in cash from operations from 364,471,000 dollars in 2012 to 452,370,000 dollars in 2013 (Downer, EDI Limited 2013, p. 48).The increase in cash flows from operations as well as improved free cash flows can be attributed to increased efficiency in operations during 2013. As such, the efficiency of operating cash flows improved in 2013 as compared to 2012 (Pamela, 2002). References: Donald, E2010, Financial ac counting text book, London, Rutledge. Asx.com, 2013, Downer EDI Limited (DOW), Retrieved on 10th December 2013, From; http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=DOW Annabel, R2005, Cash flow analysis and forecasting, New York, John Willey & Sons. Downer, EDI Limited 2013, Annual report 2013, Retrieved on 10th December 2013, From; http://www.downergroup.com/ Kellen, B2007, Financial accounting: Essentials of company accounting, International journal . of financial studies, vol.56.no.2, pp. 102-105. Johansen, B2010, Advanced financial accounting, London, Rutledge. Franklin, J2008, Understanding cash flow, Sydney, Prentice Hall. Plewa, J2005, Finance fundamentals for non financial managers, New York, John Willey & . . Sons. Pamela, P2002, Analysis of financial statements, Oxford, Oxford University Press. Martin, S2011, Financial statements analysis: A practitioners’ guide, New York, John Willey & . Sons. Peer evaluation Member 1 The member’s contribution was very helpful in writing the report. He acted as the group coordinator and was very helpful in guiding us through the discussions we had. His input into our discussions was really helpful. He was always punctual and did his tasks on time to allow the group to have adequate time in writing the report. He also gave timely feedback on other group members’ tasks hence contributing to timely compiling of the report. He really behaved in a manner that one would expect in a group task Member 2 The member served as our group secretary and also contributed to the discussions that we had. . He was always punctual and did his tasks on time to allow the group to have adequate time in writing the report. He also gave timely feedback on other group members’ tasks hence contributing to timely compiling of the report As such; he has contributed significantly in writing this report. Member 3 As a group member, I offered valuable contribution to the group in that I completed his tasks in a timely manner and therefore allowed us compile the report on time. He also provided constructive feedback on other member’s tasks and was supportive of the group as a whole. He appeared to have adequately researched the topic and was therefore highly valuable to the group. Self management reflection 1. Self assessment My contribution to the group was valuable since I completed my assigned tasks in a timely manner thus allowing the other group members to provide feedback on time. In addition, I provided timely constructive feedback on the other group members’ work. Furthermore, I always availed myself for group discussions on time and made sure I had adequately researched for the work which made me helpful to the group in writing the report. I believe that I behaved in a professional manner and I can be considered to have been a valuable group member. Read More