Analysis Of Financial Statements: Wesfarmers Company

Cash Flow Statement Analysis

Understanding the financial statements of the company is an important aspect in management of business organization. Financial statements of any company reflect the true picture of the financial strength and financial performance of that company. The three major financial statements used to show the financial performance of company are statement of profit and loss, statement of financial position and cash flow statement. In Australia all entities are required to prepare the financial statement and present them in their annual report together with notes to accounts. There are specific set of accounting standards prescribed by the Australian Accounting Standard Board that need to followed while preparing financial report of an entity. AASB 101 prescribed presentation of financial statements and notes accounts and other accounting standards provides disclosure of various financial matters in notes to accounts.

In order to understand and answer the questions given in assignment it has been decided to choose Wesfarmers Company as it has been most famous retail sector organization in Australia and also it is listed on the Australian Stock Exchange. In this report there will detail discussion on each item of cash flow statement and how cash flow has been occurred from all three activities during last three years. The financial items present in other comprehensive income statement are being discussed together with disclosure on why these items are not been provided in income statement. Lastly few questions related to corporate income tax and its disclosure in notes to accounts has been answered in detail to provide clear understanding of the accounting of corporate income tax.

Brief Description of Wesfarmers Company

Wesfarmers Company has been established in year 1914 and it has grown as largest Australian retail company embarking a new sense of shopping to their customers. Wesfarmers has its headquarter in western Australia and it is involved in diverse business operations such as supermarkets, liquor, hotels, home improvement, department stores, industrial division, office supplies and other retail goods. Wesfarmers has been regarded as the largest private sector employer that has given employment to more than 220000 employees and there has been shareholders base of approximately 530000. Wesfarmers has solid management base to achieve its aim and objectives. Wesfarmers achieve its aim through satisfying the needs of the customer by supplying the required goods and services on competitive and professional basis. Wesfarmers aim to provide safe and environment friendly working environment for their employees, rewards on their good performance and also provides the opportunity for advancement (Annual Report 2017, Wesfarmers).

Operating Activity Analysis

On looking at the annual report of Wesfarmers it has been found that Wesfarmers give proper consideration to the accounting standards while preparing its annual report. In order to examine the different set of question on financial statement, the annual report of year 2017, 2016 and 2015 has been taken into consideration. Annual report has been extracted from the investor relation segment on company website. While preparing the annual report Wesfarmers strictly follows AASB 101 and other accounting standard so that presentation of financial statements can be made correctly.

Part A: Analysis of Cash flow Statement

(i): Detailed analysis of cash flow items during the last three years

(Annual Report 2017: Wesfarmers and Annual Report 2016: Wesfarmers)

The detailed analysis of the cash flow items from the operating activity has revealed that its cash inflows from the customer’s receipts are increasing from the year 2015-2017 reflecting the increase in the cash inflows. On the other hand, there is cash outflow due to payment to suppliers, income tax paid and borrowing costs. The cash outflow has increased from the year 2015-2017 however the cash outflows has decreased due to income tax paid from the year 2015-2017. The cash outflow due to borrowing cost has decreased from the year 2015-2017. Thus, it can be stated from the overall analysis of cash flow position from investing activities that its cash position from operations has significantly improved over the time-period of 2015-2017 (Brigham and Michael, 2013).

The analysis of the financing activity has depicted that cash outflows have occurred due to payment from property, plant and equipment and intangibles. The cash inflows from the sale of fixed assets and intangibles have improved over the year 2015-2017. The cash outflow due to acquisition of subsidiaries has also decreased considerably while cash inflow due to sale of associated have improved to a large extent. The analysis of the investing activities have revealed that the cash inflows is occurring due borrowings realization while outflow has also increased due to the amount paid due to borrowings over the year 2015-2017. Also, the cash outflow due to dividend paid has decreased over the year 2015-2017 which means that it is providing less divided to the shareholders (Damodaran, 2011).

(ii): Comparative analysis of cash flow statement for last three years

(Annual Report 2017: Wesfarmers and Annual Report 2016: Wesfarmers)

Part B: Analysis of other comprehensive income statement

(iii): Items that are reported in other comprehensive income statement

Comparative Analysis

(Annual Report 2017: Wesfarmers and Annual Report 2016: Wesfarmers)

(iv): Explanation of each item that are reported in other comprehensive income statement

Other comprehensive income contains those items that impact the balance sheet amounts but effect cannot be reported in the income statement. The income, expenses, gains or losses are being shown in other comprehensive income statement because these items are not been realised till the income statement has been prepared (Davies and Crawford, 2011).

Foreign currency translation reserves refers to exchanges differences that is created when foreign operation that is the part of operations has been reclassified as non integral foreign operations. The items related to Cash flow hedge reserve is presented in the other comprehensive to make an adjustment on acquired non financial assets (Krantz, 2016).

(v): Reason why items that are reported in other comprehensive income statement is not present in the income statement

The items that presented in the other comprehensive income statement have not been presented in the income statement because they have not been actually realized.

Part 3: Accounting for Corporate Income Tax

(vi): Income tax expenses as reported in the lasted financial statements

Income tax expense refers to the liability that has been payable to the federal or state government. Generally income tax is calculated by multiplying net income before tax with appropriate income tax rate. Appropriate tax rate means rate of tax which is applicable on entity i.e. public company in this case. Income tax expense is reported in the income statement and has been subjected to various adjustments such as tax expenses of prior years, any effect due some differences and change in tax rates, and impact of non deductible items and tax of associates and joint ventures. So the tax expenses reported in latest three financial years are as under:

(Annual Report 2017: Wesfarmers and Annual Report 2016: Wesfarmers)

(vii): Difference in tax on accounting income and income calculated using income tax provisions

The tax expense reported in the income statement is not same as it has been calculated on accounting income using the company tax rate. It is because accounting standard AASB 112: Income Taxes, has provided various provisions to adjust the current tax in order to incorporate tax adjustment arising due to deferred tax assets and deferred tax liabilities. The difference mainly arises due to occurrence of deferred tax assets and deferred tax liabilities. Deferred tax assets and deferred tax liabilities arise due to timing differences of some of items of items in profit and loss such as depreciation. For example as per accounting standard the tax of any assets is calculated on straight line method while as per tax rules it has been calculated on written down value method @ 30%, it create a difference in depreciation amount that has to recognised according to accounting method and as per income tax method. It leads to create the deferred tax assets and deferred tax liabilities. The difference of accounting tax and income tax has been presented in below picture for last two years (Madura, 2014).(viii): Deferred tax assets and deferred tax liabilities

Other Comprehensive Income Statement Analysis

The difference in accounting income and taxable income arises due to calculation of net income is different while preparing the book of accounts as companies act and while calculating it through provisions of income tax. The difference between the book profit and taxable profit due to some items give rise to timing differences that can be temporary or permanent. Temporary timing differences are capable of reversing in same period or subsequent period. While permanent timing differences cannot be reversed either in same or subsequent period. The tax impact on the difference of book profit and taxable profit give rise to either deferred tax asset or deferred tax liabilities (Moles and Kidwekk, 2011).

Deferred tax assets refer to an asset that is created to reduce the future tax liabilities that will arise on taxable income. On the other hand deferred tax liability refers to tax liability that has been assessed or due to be paid in the current year but it has not been paid.

Deferred tax assets and deferred tax liability that has been reported by Wesfarmers in their balance sheet is presented in below image:Wesfarmers has recognised deferred tax liabilities for all taxable temporary differences and deferred tax assets for all the deductible temporary differences, unused tax losses and carried forward unused tax assets. The possible reason why deferred tax liabilities are recorded in balance sheet is to offset the tax differences that have been created due to excess depreciation that has been reported for tax purpose, tax liabilities on accrued income and to give effect to tax expenses due to changes made in intangible assets other than goodwill. On the other hand deferred tax assets are created to recognize the taxes that are paid in the current period but there is assurance that it will be recovered in future period. For example, Wesfarmers has recognised the deferred tax asset of the tax expenses that has been paid on employee benefits as there is assurance that company will receive tax benefits when expenses related to employee benefits taken to the profit and loss account (Ross, Jaffe and Kakani, 2008).

(ix): Income tax expenses and income tax payable

Yes, Wesfarmers has reported income tax payable in current liability section of the balance sheet. The amount of income tax payable for year 2016 was 29 million dollar whereas it was 292 million dollar for year 2017. Income tax expense reflects the taxes that company owes as calculated on standard business accounting rules. It is why this is reported in the income statement. On the other hand, income tax payable reflects the actual amount that has to be paid by the company to the tax authorities. It is why is appeared in the balance sheet as liability until it has been paid by the company.

(x): Difference between income tax expense and income tax paid as shown in cash flow statement

No, the income tax expense shown in income statement and income tax paid as shown as cash flow statement are not same. The income tax paid as shown in cash flow statement represents the actual tax that has been paid by the company to tax authorities where as income tax expense reflects tax that has been calculated in accordance with accounting rules (Arnold, 2013).

(xi): Learning from the accounting of taxes

I found it very interesting how companies calculate it tax amount for every period. It was too much confused on the treatment of deferred tax assets and deferred tax liabilities as it is very hard to recognize tax expenses that can be treated as deferred tax assets and deferred tax liabilities.

Conclusion

Financial statements provides detailed information on how companies treat their tax expenses and what tax assets & liabilities has been created to calculate tax payable for each period. Cash flow statement reflects the cash flow position that has been provided by operating activity, financial activity and investing activity. While preparing income statement there are some items that are being presented in other comprehensive income statement.

References

Annual Report 2016. Wesfarmers.

Annual Report 2017. Wesfarmers. 

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.

Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.

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