Net Income

Discuss About The Financial Management Principles Applications.

The chosen company for the analysis is Rio Tinto. Rio Tinto is a public limited company. The chosen company has its operations across continents and is an enormous multinational mining and minerals and metals company. It is listed on the Australian Stock Exchange as well. It has profits of around 8851 USD as on 31st December 2017. The financial statements of Rio Tinto are analyzed below:

It is seen that the Net Income or NI is evaluated in the company’s Income statement. It is also noticed that the evaluated net income comprises of many notional expenses and income that are an item reflected in the company’s balance sheet. It is required for the company to either add back or deduct its noncash items depending on what the case is. After adjusting the NI, it is required for the management to identify and account for changes in asset accounts which can affect the financial position of the organization (Rio Tinto, 2017). The company adds back its non-cash items in the name of dividend from equity accounted unit to the Net Income so as to ascertain operational cash flows. Once it is done, the transactions impacting the cash position of operating assets are adjusted. Then, operating income is reduced by subtracting interest from it. The subsidiary portion of the company is ignored and excluded from the capital of the company while non-controlling assets form the equity portion of the capital of the company. Dividends that are paid to holders who have a non-controlling interest in subsidiaries should be deducted as it forms a part of operating income or expenses (Petty et. al, 2012). Further, it is seen that the tax paid for the year is also accounted for.

It is worth a thought that the rates of interest have fallen down in 2017 yet there is an increment in taxes. The sales have enormously risen and as a result of which there has been a considerate increment in the interest amount.

The operating activities yielded net cash worth $13884 million. The investing activities of the company that adjusted all the gains and losses from the cash flows were further adjusted from cash flow from such activities. The company makes a lot of investments by purchasing of plants and equipment, properties and intangible assets. For the year 2017, the company invested around $4482 million into purchasing of such assets. It was also seen in the same year that the company enormously sold its investments in joint ventures, subsidiaries, and associates. The company invested in financial assets that acted as the liquid fund for the company worth $723 million (Rio Tinto, 2017). The annual sales were around $2675 million. The company’s decisions are quite foolish as there have been enormous purchases and investments while the sales are fewer and weaker as there were only $40 million annual sales. $138 million was assembled from the sales proceeds of property, plants, and equipment and intangible assets (Rio Tinto, 2017).

Operating Activities

The company has made relatively fewer investments in the mutual funds. Approximately around $18 million is the reported figure accounted for the miscellaneous investments. The company did not make investments in acquiring joint ventures, associates or shares of subsidiaries. Around $2373 million of the net cash utilized in investing activities (Rio Tinto, 2017).

A company manages to arrange its funds through its financing activities so as to run its day to day operations. These activities are the source through which a fund is drawn primarily.

The dividend paid to shareholders is around $4250 million. This shows that the shareholders are informed about the high sales and high profits. The figures clearly reflect that the company almost had zero borrowings in the current year. This year the borrowing was of $18 million which is almost a negligible amount as compared to the borrowing in the last year that was for around $4413 million (Rio Tinto, 2017).

In order to form an understanding of how Rio Tinto is performing and where are its funds being utilized, it is required to compare the activities of the past 3 years. Non-cash and non-operating expenses, incomes, net income from the profit and loss statement, cash flows from operating income has accounted for cash flows from consolidated operations. The cash flows from operating income for the year 2015 were $12102 million, and $11368 million in 2016 and $16670 million in 2018. The net cash that was generated from operations in 2015 was $9383 million and $8465 million in 2016 while $13884 million in 2018. The expense associated with the interest was reduced this year on account of fewer borrowings this year. Mutual funds yielded more dividend. In comparison to the last 2 years, the profits encountered this year were enormous which resulted in huge net cash flows from operations in the present year.

To maximize the funds available and earn operating income companies opt for investing activities that are making investments in properties, assets, etc. Activities like investments and financials have a base of operating income. These 2 activities are in sync with one another.

Considering upon investing activities it is seen that the cash flow in 2017 is increased as compared to the last year but still is very low as compared to 2015. The company had cash outflows from investing activities of around $4600 million in 2015, $2104 million in 2016 and $2373 million in 2017. There has been the disposal of investments in subsidiaries and joint ventures and purchase of plant and machinery, property, intangible assets and equipment in the current year like other years (Rio Tinto, 2017).

Investing Activities

Considering the financing activities it is seen that in the current year there has been an enormous outflow of such activities as compared to last 2 years. The outflow of financing activities was around $7670 million in 2015, $7491 million in 2016 and $9141 million in 2017. The shareholders are reportedly paid higher dividends in the current year as what compared to past years. The additional borrowings were also negligible. The repayment of borrowings was less this year as compared to 2015 and 2016. The company has relatively controlled its short-term borrowings in the current year as compared to 2015 and 2016. The company purchased the non-controlling interests from its subsidiaries. The company has also purchased its own shares from the shareholders as disinvestment of shares is reflected in the statements.

Other comprehensive income is an item accounted for net income in the profit and loss statement. It comprises of revenues, gains, and expenses that are not yet been realized. These are realized after the completion of underlying transactions. Revenues, expenses, profits, and losses that are not included in the net income derived from the profit and loss statement under IFRS are known as other comprehensive income (Vaitilingam, 2014). For the basis of preparation of financial statements, companies prefer accrual basis of accounting. This further means that the basis of recording transactions in the financial statements is the occurrence of the transaction. When the cash pertaining to the transaction is received or paid the effects are differently treated and recorded. Take, for instance, a company took the contract of selling furniture and will account for the proceeds from sales as revenue when the consumer has got the delivery of the product. The consumer becomes the owner of the risks associated with the product and it is a valid sales contract (Porter & Norton, 2014). The sale will be accounted as receivable in the statement of financial position and will also be accounted in the statement of comprehensive income for the year.

Pension payment can be made in a way which has a gap between the paid amount and the amount thought of by the receiver. The company suffers a loss if the thought of amount is lower than the received amount (Rio Tinto, 2017). Expectations are common because the rate of the pension depends on the employee’s span of working, position in the company which is taken into account during the evaluations. There can be either profit/loss if alterations are made. It was seen that according to the record, Rio Tinto actuarial gain/loss in postretirement benefit plan was about USD 619 million as in the year 2015 which decreased to USD 90 million in 2016 to USD 6 million in the year 2017 (Rio Tinto, 2017). It was also seen that the pension provided was way higher than thought off. But this change could not be due to the alteration in the post-retirement benefit but has happened due to the alterations in the actuarial assumptions.

Financing Activities

The upcoming writing is about the tax payment in which some of the reimbursement can happen but this cannot be put into the profit/ loss section of a company. This amount was reported to be USD 175 million in the year which had a collapse to about USD 12 million in the year 2016. There are some new additions in the form of postretirement benefit plans which were made by the government of US and France in the corporate tax section.  

It is seen that some adjustments in the financial statements are made so that it can be shown that the subsidiary transactions and foreign equity investments in the form of functional currency which is valid for a specific period. It is seen that the equity foreign currency changes its place from the financial statements to the reporting presenting statements when it is seen to be similar to foreign currency which also includes gain/loss on foreign currency as forwarding exchange contracts (Deegan, 2011). A type of capturing can be seen of the foreign currency transactions in the form of foreign entity invested along with intercompany foreign transactions which have an extended span of time which can only happen if the equity methods evaluate the transactions in the financial statements of the company to be stiff and well structured. Indulgence of gain/loss on a copied instrument or no unoriginal financial instrument that can take the form of a foreign currency transaction gain and that has been designated and has qualified as prevarication instruments for evasion of the foreign currency exposure of a net investment in a foreign operation (Needles & Powers, 2013).

According to the records it is seen that the tax expenses that were collected during the year were about USD 3965 million which can be calculated to be two and a half times more than the preceding year. 

The above figure does not show the percentage of tax collected. It is seen that the company has to pay 19 percent of income as the tax but there are some other areas were some reimbursement can happen which decreases the amount a little bit.

It was in the year 2017 that the deferred tax liability was about USD 233 million. There has been a bridge between the accounting and the taxing of timing related issue but this amount cannot build up the bridge. USD 233 million of deferred tax liability was accumulated by Rio Tinto. The deferred tax arises when there are certain expenses that are charged to profit and loss account for a certain amount in the current year but are disallowed or allowed for a different value or are based on different calculations in the taxation rules that are applicable to the company.

For Rio Tinto, the current tax is the deferred tax that is taken into consideration. In addition, the tax expense that was noted was the liability of tax that stands at USD 3965 million. However, it needs to be considered that the payment of income tax does not mean the same as income tax expense. This is considering the fact that deferred tax, arrears, as well as advances, need to be adjusted from the payment of tax to come at the income tax figure (Choi & Meek, 2011).

The profit and loss account projects the tax that is concerned with the company for the year. On the contrary, the tax item is projected as an outflow from the cash flow statement. The tax value that is accrued is reduced in the profit and loss statement (Rio Tinto, 2017). The final payment is considered by considering all the payment of TDS, advance taxation, interest, penalty, etc (Davies & Crawford, 2012). Therefore, a difference appears between the two statements.

The general disclosure of taxation differs from the one that is shown in the financial of Rio Tinto. The component of tax is projected in the parent and subsidiary and even a combination exists. Such a presentation is difficult for a normal investor to ponder. There is a difference when it comes to reconciliation.

References

Choi, R.D. and Meek, G.K. (2011)  International accounting. Pearson .

Davies, T. and Crawford, I. (2012)  Financial accounting. Harlow, England: Pearson.

Deegan, C. M. (2011)  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.

Needles, B.E. and Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.

Parrino, R, Kidwell, D. & Bates, T. (2012) Fundamentals of corporate finance. Hoboken,

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Porter, G. and  Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning

Rio Tinto. (2017)  Rio Tinto Annual Report and accounts 2017 [online]. Available from: https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed 19 May 2018]

Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.