Cash Flow Statement Analysis
1. Analyse the Cash Flow Statement and comment on the liquidity of the company for 2017. In analysing the cash flow, compare the situation to the previous year, and to a company in a similar industry.
2. What are the recognized dividends for the year? Why are some dividends unrecognized?
3. What has been declared in the Directors’ Declaration?
4. What is meant by “Other Comprehensive Income”? What are the “Other Comprehensive Income” items for the year?
5. What are the different reserves of the company? Where did you find this information?
6. What different items have been disclosed regarding Remuneration of Auditors?
7. What did the non-audit services consist of? What is the proportion of audit related fees compared to other consulting work fees. Do you think this is acceptable and why?
8. Has the company disclosed Expenses by Function, or by Nature? What is the ruling regarding which method can be chosen?
9. What are the different reasons for each taxable temporary difference which have collectively resulted in Deferred Tax Liabilities for JB HI-FI Limited? (Do not give a general theoretical explanation.)
10. What is the Current Income Tax Charge for the year? Why is this different from the Total Income Tax Expense reported in the Income Statement?
11. If the tax rate changed to 32%, what adjustments would need to be made? Quantify the amounts.
After analysing the annual report of 2017 of the Australian company of JB hi-fi it can be said about the cash flow statement that in the year of 2017 the company has a net cash flow from the operating activities of $190m and in the year of 2016 the company had $185.1m therefore it can be said that there has been more inflow of cash in the company, enhancing the ability of the company to pay off the short term obligations from the operating activities(Nizam & Hoshino, 2016).it can be said that the liquidity has been increased. In case of the financing activities the cash flow of 1017 is -$885.5m and in the year 2016 it was -$52 m, which is appositive outcome, hence the liquidity has been increased. Moreover when it comes to the cash out flow from financing activities is $715.9m and -$130.5m in the year 2016 the out flow has been increased representing a downfall in the liquidity. However, the cash and cash equivalents inflow has been increased that shows an increase in the liquidity, the amount rose from $51.9m in 2016 to $72.8m. The chosen company that is to be compared with JB hi-fi Wesfarmers dealing with similar products and lies in the same industry. The net cash inflow from operating activities is $4226m in 2017, from investing activities it is -$53m and from financing activities it is -$3771m. The net cash and cash equivalent in the company is $1013m in the same year. Therefore, after analysing it can be said that Wesfarmers is more liquid as it has more cash inflow and less outflow as compared with JB hi-fi.
Recognized and Unrecognized Dividends
In the annual report of JB Hi fi of the year 2017, the recognised dividend are the final dividend of the previous financial year with $36.7m and interim dividend of the current financial year of $82.4m. The unrecognised dividend is the final dividend of the current financial year. There are some dividends unrecognized in the annual statement as the date of declaration is decided by the board (Ijiri, 2018).
In the directors declaration in the annual report JB Hi fi of the year 2017 it has been declared by the directors of the company about their opinion regarding their assurance that the company will be able to pay off the debts in due date.in addition to that the directors declares that the financial statements are in compliance with the financial reporting standards and the corporation act of 2001.Moreover, it has been confirms that the financial statements and the positions are true and fair. The director’s declaration have been given declaration as per the requirement by 295A of the corporation act 2001.
The “Other comprehensive income” refers those revenues, expenses, gains, and losses under both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards that are excluded from net income on the income statement (Akbar & Ahsan, 2014). This means that they are instead listed after net income on the income statement. Following shows the items that may be classified in other comprehensive income:
- Unrealized holding gains or losses on investments that are classified as ready for sale
- Foreign currency translation gains or losses
- Pension plan gains or losses
- Pension before service costs or credits
In the annual report of C the comprehensive incomes are the net tax that values to -$1.1m in 2017 and Foreign currency translation gains or losses that values to -$0.1m.the total Other comprehensive income is-$1.2m and total comprehensive income for the year of 2017 that are attributable to the company owners is $171.2m.
Liquid assets held by a bank, company or government in order to meet expected future payments and/or emergency needs (Warren, & Jones, 2018). In the annual report of JB hi-fi for the year 2017, the reserves are equity settled benefits that amounts to $34.6 m in the year 2017, the common control reserve that amounts to -$6.1 m, the Hedging reserve that amounts to -$0.2m and the foreign currency translation reserve that amounts to $4.9 m in the current year. The information regarding the different reserves in the chosen company of JB Hi-Fi can be obtained from asset side of the balance sheet under the head equity, the details of the same can be seen in the notes to accounts of the financial statements that deals with the financial risk management.
In accordance with the policies of the company and the standards of the AASB, the salaries and other methods of remuneration of the internal auditors of the company are fixed by calling a general meeting of the company at periodic intervals as decided by the board of directors. The details of the remuneration of the auditors are fixed by the company officials of JB HI-FI, in their annual general meeting. This is done, only when the Board of Directors have fixed the auditor of the first auditor appointed by them (Jbhifi.com.au 2018). It has also been specifically mentioned that the remuneration payable to the auditors of the company, is the fees which is provided to them in lieu of their impartial and effective services towards the company. This fees includes all the expenses borne by the auditor in the execution of his or her duties.
Directors’ Declaration
The non-audit services of the company mainly consists of all those activities which does not involve the jobs related to the audit and analysis of the financial statements of the company. The main constituents of the non-audit services includes comprehensive tax planning and preparation of the income tax reports and suggestions. It also includes consulting as well as systems integration.
The proportion of the audit fees and the consultation fees which is followed in the policy of JB HI-FI is not very good or healthy. It currently stands at the ratio of 10:1, in terms of audit fees and consulting fees. The auditors work substantially hard for conducting the audit of the companies and along with this, they also engage in providing various kinds of non-audit services like consulting. The auditors are required to provide various kinds of non-audit services as mentioned above, therefore the proportion should be improved.
In case of various companies, there are mainly two ways which are widely used for the presentation of the income statements specially the expenses part. They are of two types, expenses disclosed by function or by nature. In the disclosure by function, the expenses are disclosed in accordance with the function for which they are undertaken, like administrative expense, research expenses, whereas in case of expense of nature, the expenses are shown on the basis of the categories, on which they are spent on.
The general rule is that if the costs or the expenses involved are classified into the nature, then the expense classification on the basis of nature should be adopted, whereas, if the expenses are classified on the basis of the different varieties which are undertaken by them, then it is advisable to undertake the process of classification on the basis of function.
There are various reasons for the creation of the Deferred Tax Liability, some of which are very prominent from JB HI-FI’s point of view. It is created as a provision for the risk or emergency of facing future taxation. It mainly arises because of the difference between the income which is shown in the income statement and the taxable income of the company. Mainly, the cost of depreciation is the primary cause of the difference in the profits as per the income tax statement of the company’s management and the income tax statement which is taxed upon (Aasb.gov.au. 2018). There are various kinds of theories which are related to the causes of the deferred tax liabilities. Some of the prominent ones are as follows:
- Bad debt and other allied expenses.
- Depreciation of fixed assets.
- Amortisation of financial assets.
- The revenue recognition policy employed by the business organisation.
Other Comprehensive Income
The income tax for the year 2017, was 33.50 % and the current income tax charge for the company stands at 78.3 million dollars for the fiscal year 2017 and the deferred tax liability of the company stands at 5.5 million dollars. The cause of the difference between the current income tax charge and the total income and tax expense, which is mentioned in the balance sheet of the company is because of the principles of the accounting. It is mainly governed by the principles of GAAP, where the realisation principle is generally used for this purpose. The company generally follows the principle of realisation and the accrual concept, whereby the current tax charge is payable by the company and the tax expense is the expenses incurred in the payment of the taxes. Both of them are different, one is the expense for paying tax, while the other is the tax itself, therefore the difference is bound to arise.
In the case of any change in the tax rate from 33.5 to 32%, a general fall in the income tax rate could be seen. If the tax rate goes through a change, then under the in accordance with the asset-liability or balance sheet method, all the deferred tax assets and liabilities must be revaluated using the new tax rate that is expected to be in place in place of the previous rate (Heider and Ljungqvist, 2015) The changes in accordance with the new tax rate of 32% have been highlighted below:
Profit before tax: 259.2
Less: Tax rate @ 32%= 83
Profit after tax: 177.2
Deferred tax liability: 8.2
New tax rate = 32%
Change in deferred tax liability= (8.2-2.6=5.6 million dollars)
References:
Aasb.gov.au. (2018). Australian Accounting Standards Board (AASB) – Home. [online]
Available at: https://www.aasb.gov.au/ [Accessed 11 May 2018].
Akbar, S., & Ahsan, K. (2014). Analysis of corporate social disclosure practices of Australian retail firms. International Journal of Managerial and Financial Accounting, 6(4), 375-396.
Asx.com.au. (2018). Home – Australian Securities Exchange – ASX. [online]
Available at: https://www.asx.com.au/ [Accessed 11 May 2018].
Heider, F. and Ljungqvist, A., 2015. As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes. Journal of Financial Economics, 118(3), pp.684-712.
Ijiri, Y. (2018). An Introduction to Corporate Accounting Standards: A Review. Accounting, Economics, and Law: A Convivium, 8(1).
Jbhifi.com.au. (2018). [online] Available at: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed 11 May 2018].
Nizam, N. Z., & Hoshino, Y. (2016). Corporate Characteristics of Retail Industry among 11 Asian and American Countries. Journal of Management Research, 8(1), 224-247.
TRENDS, A., 2014. und 2015. Empiriche Unter suchung mit den Top-1.000 Unternehmen aus Deutschland sowie den Top-300 Unter nehmen aus den Branchen Health Care, IT, Finanzdienstleistungen und Maschinenbau.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
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