Cash Flows Statement

Selected company – BCI or BC Iron Limited

• The cash flow extracts from financial statements of FY2017 are pasted as follows (BCI, 2017).

 

There are two main items as listed below.

• “Receipts from Customers” – This indicates the cash that the customers pay to the company for purchase of iron ore and other minerals. In FY2017, this has witnessed a significant drop upto 60% over FY2016.
• “Payments to suppliers and employees” – These are the cash outflows which arise on account of paying to the creditors and also salary to employees. In FY2017, this has witnessed a significant drop upto 70% over FY2016.

 

Based on the above cash flow extract, it is apparent that the company has not experienced any cash inflow on account of sale of any PPE or any business. In FY2017, the main cash outflow is on account of purchase of plant and equipment of about $ 1.6 million. On the other hand, in FY2016, about $ 8 million was spent on development expenditure and mine property (BCI, 2017).

 

While in FY2016, the company has not raised any equity capital, this is not true for FY2107 where a total of $ 24.2 million has been raised through equity route. For both the years, the company has made repayments and hence has reduced the debt on the books. Further, there is a significant amount of repayment of the royalty rebate in both the years under consideration (BCI, 2017).

• The three year cash flow trend is shown as follows (BCI, 2017).

 

The key trends observed on the basis of data indicated above as follows (Lasher, 2017)

• For FY2015 and FY2016, the operational cash flow was negative which may have arisen owing to the plummeting of price of iron ore which would have lowered the sales revenues. But in FY2017, the company has again posted positive cash flows at operational level which towards a brighter future.
• For FY2015, there is a net cash inflow which has arisen on account of subsidiary sale. However, for FY2016 and FY2017, the net cash outflow is negative since there is no cash inflow.
• The net cash outflow from financing indicates the intent of the company to deleverage the balance sheet. In this regards, the company has also raised equity capital in FY2017.

• The relevant extract of OCI statement is given below (BCI, 2017).

 

• The OCI element contains the cash flow hedge related changes. These would arise on account of some revenue received in a currency which is not the functional currency (AUD) and hence to hedge the same, cash flow hedge exists. It is a financial instrument whose value would change in real time and hence notional or real losses and gains have to be reflected in the OCI. For FY2016, a loss of $ 2.7 million has been recorded (Damodaran, 2015).

 

• The OCI statement needs to exist due to reasons outlined as follows (Northington, 2015).

• There are guidelines in relation of financial statements preparation along with presentation that the company needs to adhere to.

• The items that form part of the OCI tend to be different from those that find place in the traditional income statement. One of the reasons is that in OCI even the notional profits or losses can be recorded but the same is not carried out in the profit and loss statement.

• FY2017 tax expense = $ 0 (BCI, 2017).

• Considering the 30% tax rate applicable on the company and pre-tax income of $ 7.06, the income tax expense expected would be (30/100)*7.06 or $ 2.1 million. This clearly does not match with the tax expense in the income statement. This deviation can be explained using the screenshot of the relevant note to account.

Thus, income tax expense as reported in the income statement comprises of reconciliation done in taxes as per accounting income to determine the income tax payable as per tax provisions. Further, adjustments on account of temporary differences are also carried out coupled with previous tax losses that have not been adjusted till present (BCI, 2017).

• Deferred tax liability (June 30, 2016) =  $27.08 million

Deferred tax Asset (June 30, 2017) = $ 0.9 million

The above amounts have been quoted by referring to the note to account referred below.

It is apparent that in FY2017, deferred tax assets to the tune of $ 1million have been added owing to which there is a net deferred tax asset. In case of FY2016, there was a decrease in deferred tax assets to the tune of $ 18.5 million, leading to net deferred tax liability. Deferred tax assets are associated with future tax savings but deferred tax liabilities tend to lead to future tax expenses. Both arise due to present transactions (Damodaran, 2015).

• Current Tax Liability (June 30, 2017) = $ 0.24 million

This indicates that in FY2018, a tax outflow of $ 0.24 million would occur owing to tax payable for FY2017. The relevant extract is highlighted as follows (BCI, 2017).

It is imperative to understand the meaning of income tax payable and income tax expense to bring out the difference between the two. Income tax payable refers to the outstanding tax liability owing to the tax paid being lesser than the actual tax which should have been paid. As a result, payment of the remainder tax becomes a liability which the company has to fulfil by paying taxes. On the other hand, tax expense refers to the total cash that the company should expect to pay to the tax authority for a given period taking into consideration the taxable income computation. Only when no tax is paid during the year for the assessment year would the tax expense be equal to tax payable. However, since some tax is always paid by the company on ongoing basis, hence the two do not match (Parrino and Kidwell, 2014).

• In the case of the given company, both tax expense and tax paid tend to match. This is because even before the completion of the financial year the management of the company is aware than irrespective of the profits generated by the company, the tax expense would be zero owing to the existence of the previous losses and other aspects. However, usually this is not the case since the two do not match (Brealey, Myers and Allen, 2014).

• The computation of tax expense was quite interesting for me as I was initially quite shocked to see that despite the presence of sizable profits, the tax expense is zero. However, reconciliation needs to be carried out on the basis of the various parameters which is never an easy process as exhibited in this task also. Based on this, new insight has been provided to compute the outgoing tax in case of corporates using various adjustments. As a result, both practical and theoretical understanding is desired.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New York: McGraw-Hill Inc.

Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.

Lasher, W. R., (2017) Practical Financial Management 5th ed. London: South- Western College Publisher.

Northington, S. (2015) Finance, 4^th ed. New York: Ferguson

Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications

BCI (2017) Annual Report FY2017, [online] available at https://www.bciminerals.com.au/images/files/annual-report/BC_Iron_Annual_Report_2017.pdf (Accessed May 25, 2018)