Owners’ Equity
In the current era, it has become popular among the shareholders to analyse the equity position, cash flows, other comprehensive income statement and accounting for corporate income tax in order to undertake suitable investment decisions. For meeting the purpose of this report, Woolworths Group Limited and Wesfarmers Limited have been taken into consideration, which are considered as the two giant retailers operating in the Australian supermarkets. The above-mentioned aspects would be discussed in the light of the two selected organisations for analysing the methods followed in disclosing the various items in their financial statements.
According to Hoskin, Fizzell and Cherry (2014), the balance sheet statement of a company comprises of three main items, out of which equity is taken into consideration for this section. Woolworths and Wesfarmers are not exceptions from equity as well. According to the balance sheet statements of Woolworths and Wesfarmers, the three main equity items include issued capital, reserves, retained earnings and reserved shares. The issued capital is treated as equity of the business organisations (Marshall 2016). This is calculated by multiplying the share par value with outstanding shares. For Woolworths, issued capital has increased from $5,252.20 million in 2016 to $5,615 million in 2017 (Woolworthsgroup.com.au 2018). The same for Wesfarmers has increased from $21,937 million in 2016 to $22,268 million in 2017 due to the fact that the management of both the organisation have minimised their reliance on debt funding.
The next item of item is reserves, which is a part of equity considered as excess amount apart from basic share capital. From the annual reports of Woolworths and Wesfarmers, it has been identified that Woolworths has experienced an increase in reserves from $93.9 million in 2016 to $113.8 million in 2017, while the same trend is apparent for Wesfarmers, as it has increased from $166 million in 2016 to $190 million in 2017 (Wesfarmers.com.au 2018).
Another equity item is reserved shares, which occur due to share repurchase and they do not need dividend payments and voting rights (Horngren and Harrison 2015). From the balance sheet statement of Wesfarmers, reserved shares has declined from ($28 million) in 2016 to ($26 million) in 2017, while no such shares are inherent in case of Woolworths. The final equity item for both the organisations is retained earnings, which indicates the profit or losses from the time of establishment after deduction of dividend paid to the shareholders. For both Woolworths and Wesfarmers, increase in retained earnings could be observed due to the rise in profit base over the year.
For analysing the debt and equity position of Woolworths and Wesfarmers, the following ratios are considered:
|
Total liabilities |
A |
$14,204.80 |
$14,720.30 |
$13,039.70 |
$15,621.00 |
$17,834.00 |
$16,174.00 |
|
Total equity |
B |
$11,132.00 |
$8,781.90 |
$9,876.10 |
$24,781.00 |
$23,941.00 |
$22,949.00 |
|
Total assets |
C |
$25,336.80 |
$23,502.20 |
$22,915.80 |
$40,402.00 |
$40,783.00 |
$40,115.00 |
According to the above table, it is clearly inherent that Woolworths is more leveraged compared to Wesfarmers, as evident from the three ratios. This is because even though Woolworths has minimised its dependence on debt funding in 2017, maximum portion of business funds is still acquired by obtaining bank loans. However, the situation is just the reverse for Wesfarmers, since it raises maximum portion of its funds by raising equity shares in the market. Hence, it is clearly apparent that in terms of solvency position, Wesfarmers is placed in a favourable position compared to Woolworths in the Australian retail sector.
Cash Flow Statement
Three significant items are listed in the cash flow statements of Woolworths and Wesfarmers, which are evaluated briefly as follows:
This part consists of four significant items, which include receipts from customers, payments to suppliers and employees, interest payments, borrowing costs and others. As commented by Collier (2015), the receipts from customers denote the amounts obtained, in which sales are made on credit in the past. For both Woolworths and Wesfarmers, the amount is deemed to increase over the years due to rise in credit sales. However, the supplier payments for both the organisations have increased in tandem as well due to extension of product lines along with fulfilling the changing preferences of the customers. On the other hand, interest payments signify those amounts that an organisation is required to incur for the bank loans taken to conduct its daily business operations (Gordon et al. 2017). For both organisations, interest payments have declined over the years, since they have reduced their dependence on raising funds through debt.
The items under this section include payment for and proceed from property, plant and equipment, payments for intangible assets and others. The payments made for property, plant and equipment is termed as the amount spent for purchasing and acquiring the same that is necessary in carrying out the business (Harris 2016). Conversely, such assets generate economic advantages for companies those are considered as property, plant and equipment proceedings. It has also been gathered that Wesfarmers Limited company has decreased its investment within its assets for the year 2017 and such proceeds has increased with the growing years because of sales portion of such assets (Miao, Teoh and Zhu 2016). At the time such long-term assets are sold or purchased these are considered as investments and proceeds accordingly. In the situation of Woolworths Limited, considerable amount of proceedings is observed to be generated from the joint arrangement and associates in the year 2017 and conversely, the amount of investment has remained same in the selected two years. Wesfarmers have made considerable investment $47 million within the 2016 loan notes, conversely, it has attained redemption of within loan notes of $54 million (Miao, Teoh and Zhu 2016).
The important items within the financing activities include certain repayments and proceeds of equity dividends and borrowings offered to the Wesfarmers Limited’s shareholders. Borrowings indicates the net amount that is offered by lender to its borrowers under relevant terms of loan agreement. Considering the situation of Woolworths Limited, there is a considerable drop in certain borrowings proceeds because of loan term extension to debtors. In contrast, an increased amount is offered to the banks for the loan repayment (Collins, Hribar and Tian 2014). Equity dividend indicates the annual cash flows that is offered to equity shareholders of the company. Considering case of Wesfarmers, payment of equity dividend is decreased in the year 2017 as it has centred on increasing the base of retained earnings.
It is gathered from the annual report of Wesfarmers Limited and Woolworths Company that there are three segments of cash flow statement of the company that includes investing, operating and financing activities (Miao, Teoh and Zhu 2016). Such comparative analysis of all these identified categories within the cash flow statement over the previous three years are explained below:
(Source: Wesfarmers.com.au., 2018)
From carrying out comparative analysis of the cash flow activities of Wesfarmers Limited and Woolworths Limited it has been gathered that for Wesfarmers, cash flow from its operating activities have increased gradually over the years from 2015 to 2017 considerably by $ 3791 million in the year 2015, $ 3365 million in 2016 and $ 4226 million in the year 2017 (Wesfarmers.com.au. 2018). Moreover, cash flow from the investing activities has been observed to in crease in the year 2016 to $ 2132 million and then gradually decrease in the year 2017 to $ 53 million. Such decrease was observed because of the reason that it has decreased its acquisition associated with plant, property and equipment. Moreover, cash flow from the financing activities for Wesfarmers is observed to decrease to $ 1333 million in the year 2016 and increase to $ 3771 million in the year 2017.
In contrast, in case of Woolworths, it is observed that the cash flow from operating activities has decreased from $ 3345 million in the year 2015 to $ 2357 million in the year 2016. Then this is also observed to increase to $ 3122 million in the year 2017 (Woolworthsgroup.com.au. 2018). Moreover, cash flow from the investing activities of the company is observed to decrease from $ 2011 million in the year 2015 to $ 1090 million in the year 2016. This is because of the reason that the company had to experience clearing all its bank loans in the year 2016 because of its investing activities. Moreover, this is also observed to increase to $ 1690 million in the year 2017. Cash flow from the financial activities is observed to increase gradually from the year 2015 to 2017 in comparison to Wesfarmers Limited.
The major aspects those are reported within certain other comprehensive income statement of Wesfarmers and Woolworths Limited includes cash flow hedge reserve, retained earnings and foreign currency translation reserve.
The foreign currency is employed in order to convert the results of certain foreign subsidiaries of the parent company to certain reporting currency. This is a major part of consolidation process of the financial statement of Wesfarmers in which the functional currency of cross-border company is initially ascertained (Du, McEnroe and Stevens 2016). In addition, the foreign company’s financial statements are remeasured within the reporting currency within the parent organization and finally retained income indicate the part of retained net income after carrying out dividend payments for shareholders in order to invest within the capital projects for future years. In contrast, in case of Woolworths Limited, the cash flow hedge reserve is used at the time a company is planning to decrease or get rid of exposure taking place from cash flow changes in financial asset or liability. This is because of changes within a particular risk such as interest rate on floating rate debt instrument.
It can be stated that other comprehensive income is observed to be a diversified view of a net profit. Over the previous years, certain changes in the company’s profits is observed to be external of its major operations or increasingly volatile were transferred within the shareholder’s equity (Kim 2016). Conversely, Wesfarmers employs certain other comprehensive income statement to offer considerable details on numerical associated with above-mentioned items. In case of Woolworths Limited comprehensive income is observed to be mixture of certain other comprehensive income along with standard net income. Such items for the company are observed to be reported within comprehensive income statement to offer comprehensive along with holistic perception of the business operations and activities drivers that might not be reported within the income statement (Khan and Bradbury 2014).
Through observing the other comprehensive income statement, it is likely to recognise potentially important items. This is due to the reason that it might facilitate in explaining the manner in which the companies are dealing with their investments and whether there is any likability of increased losses in future (Khan and Bradbury 2014). For this reason, with the support of such statement, an analyst can suitably attain a better measure regarding fair value of investment of a company. Through combining all such aspects, the inclusion of certain inclusion of comprehensive income statement might be deemed useful for analysing the managerial performance in the companies (Suzuki and Kochiyama 2017).
It is necessary for an entity to spend different kinds of expenses that include research and development expense, selling and administration expense and others, out of which tax expense is an important item (Richardson, Taylor and Lanis 2016). In addition, it is considered as an important liability of the company because of the federal, municipal and state governments of the nation. The calculation of tax expense is calculated by multiplying earnings before tax with the applicable tax rate after factoring some important items like tax assets and tax liabilities coupled with non-deductible items. Both Woolworths and Wesfarmers are not exempted from taxation as well (Taylor and Richardson 2014). From the annual reports of both the organisations, it could be found that Wesfarmers has incurred tax expense of $1,265 million in 2017, while Woolworths has incurred $650.4 million as tax expense in the same year. The corporate tax rate applicable in Australia is 30%. In that case, the tax expense for Wesfarmers would be $1,241 million and that for Woolworths would have been $640 million in the year 2017. Therefore, it could be stated that the tax expenses of both the organisations have been above the normal tax rate figures due to rise in income of both (Kawano and Slemrod 2016).
|
Income tax expense |
A |
$650.40 |
$1,265.00 |
|
Profit before tax |
B |
$2,132.40 |
$4,138.00 |
The effective tax rate denotes the average tax rate, in which the business profits are taxed (Taylor and Richardson 2014). According to the above table, it could be observed that the effective tax rate of Woolworths is obtained as 30.50%, while the same is computed as 30.57% for Woolworths. Hence, it is highly inherent that the effective tax rate of Wesfarmers is higher in contrast to that of Woolworths.
Deferred tax assets refer to the condition where the firms either pay advance taxes on financial assets or higher taxes (Richardson, Taylor and Lanis 2015). On the other hand, deferred tax liabilities arise where variation is deemed to be found between tax and profit carrying amounts. The reason to recognise deferred tax assets is due to excess payment of depreciation because of change in taxable depreciation rate and amount of depreciation (Dyreng, Hoopes and Wilde 2016). On the other hand, the reason of recognising deferred tax liabilities is due to temporary variations in organisational profits, where lower taxes are incurred in 2017.
In case of Wesfarmers, the deferred tax assets have been $971 million in 2017 compared to $1,042 million in 2016 and the deferred tax liabilities have been $722 million in 2017 in contrast to $611 million in 2016. For Woolworths, the deferred tax assets have been $372.3 million in 2017 compared to $497.7 million in 2016 and the deferred tax liabilities have been $625.7 million in 2017 in contrast to $626.4 million in 2016.
|
Income tax provision |
A |
$650.40 |
$1,265.00 |
|
Add: Increase in deferred tax liabilities |
B |
-$0.70 |
$111.00 |
|
Less: Decrease in deferred tax assets |
C |
-$125.40 |
-$71.00 |
|
Add: Taxes on finance costs |
D |
$58.08 |
$79.20 |
From analysis of the table above, it is gathered that Woolworths Limited has recorded cash tax amount of $ 582.38 in the year 2017 and Wesfarmers have recorded $ 1387 for the same year. Considering the same data, it is observed that the cash tax amount for Woolworths Limited is observed to be decreased in the year 2017 in comparison to Wesfarmers Limited for the year.
|
Cash tax amount |
A |
$582.38 |
$1,384.20 |
|
Operating profit |
B |
$2,326.00 |
$4,402.00 |
Based on the analysis of the table above it has been gathered that the cash rate for Woolworths Limited has considerably decreased to 25.04% in the year 2017 in comparison to Wesfarmers limited that has recorded cash tax rate of 31.44% in the year 2017. Such increase indicates that Wesfarmer Limited’s has an increased percent of pre-tax operating profits that can be paid by the company in cash taxes to the concerned government anticipating that it was 10% equity financed (Lanis, Richardson and Taylor 2017).
The primary difference between cash tax rate and book tax rate is that the cash tax rate is projected based on current year, while book tax rate is considered for both current year and future year (Lanis, Richardson and Taylor 2017). Certain income tax benefit because of the loss from operations has led to such identified difference. One more reason can be recognised for such difference is in rules associated with financial and tax accounting. In such scenario, it is important to consider the depreciation expense for the selected companies.
Conclusion:
For attaining the objective of this report, Woolworths Group Limited and Wesfarmers Limited was taken into consideration, which are considered as the two giant retailers operating in the Australian supermarkets. It was gathered from the report that it is necessary for an entity to spend different kinds of expenses that include research and development expense, selling and administration expense and others, out of which tax expense is an important item. From the balance sheet statement of Wesfarmers, it is also gathered that reserved shares have declined while no such shares are inherent in case of Woolworths. Considering that both Woolworths and Wesfarmers are not exempted from taxation as well. It is also concluded that through combining all the aspects the inclusion of certain inclusion of comprehensive income statement might be deemed useful for analysing the managerial performance in the companies.
References:
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Collins, D.W., Hribar, P. and Tian, X.S., 2014. Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), pp.173-200.
Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.
Du, N., McEnroe, J.E. and Stevens, K., 2016. Why isn’t comprehensive income comprehensible? The FASB and the IASB have made headway in dealing with OCI issues, but it’s time to establish conceptual definitions. Strategic Finance, 98(5), pp.46-54.
Dyreng, S.D., Hoopes, J.L. and Wilde, J.H., 2016. Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), pp.147-186.
Gordon, E.A., Henry, E., Jorgensen, B.N. and Linthicum, C.L., 2017. Flexibility in cash-flow classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2), pp.839-872.
Harris, P., 2016. A Case Study Of The Cash Flow Statement: US GAAP Conversion To IFRS. Journal of Business Case Studies (Online), 12(1), pp.1-8.
Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.
Kawano, L. and Slemrod, J., 2016. How do corporate tax bases change when corporate tax rates change? With implications for the tax rate elasticity of corporate tax revenues. International Tax and Public Finance, 23(3), pp.401-433.
Khan, S. and Bradbury, M.E., 2014. Volatility and risk relevance of comprehensive income. Journal of Contemporary Accounting & Economics, 10(1), pp.76-85.
Kim, J.H., 2016. Presentation formats of other comprehensive income after accounting standards update 2011-05. Research in Accounting Regulation, 28(2), pp.118-122.
Lanis, R., Richardson, G. and Taylor, G., 2017. Board of director gender and corporate tax aggressiveness: an empirical analysis. Journal of Business Ethics, 144(3), pp.577-596.
Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education.
Miao, B., Teoh, S.H. and Zhu, Z., 2016. Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), pp.473-515.
Mintz, S., 2016. Accounting for the public interest. Springer.
Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.
Richardson, G., Taylor, G. and Lanis, R., 2016. Women on the board of directors and corporate tax aggressiveness in Australia: An empirical analysis. Accounting Research Journal, 29(3), pp.313-331.
Suzuki, T. and Kochiyama, T., 2017. Impact Of Fair Value Measurement On Corporate Investment: Other Comprehensive Income. Hitotsubashi Journal of commerce and management, pp.17-37.
Taylor, G. and Richardson, G., 2014. Incentives for corporate tax planning and reporting: Empirical evidence from Australia. Journal of Contemporary Accounting & Economics, 10(1), pp.1-15.
Wesfarmers.com.au., 2018. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 15 Sep. 2018].
Woolworthsgroup.com.au., 2018. [online] Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 15 Sep. 2018].
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
