Financial Analysis For Cash Flow Statement

Reporting of each of the items of the cash flow statement

Discuss about the Financial Analysis for Cash Flow Statement.

Below is the cash flow statement of the company Galaxy Resources Limited for the year ended 30^th June 2017 and 2016.

The notes to accounts for the reconciliation of the cash flow from operating activities has been shown below with the help of the workings

The changes in the major elements of the cash flow in 2017 as compared to the last year 2016 has been discussed below.

1. Cash flow from operating activities: We can see that the profit amount in 2016 is too high as compared to 2017(Belton, 2017). On the other hand, the receipts from customer has been on the higher end in 2017 as compared to the last year. Similarly, the company has paid more in 2017 to the suppliers, contractors and employees put together implying the company wants to improve its cash conversion cycle and also improve its current ratio. From note 1, which is on reconciliation of the operating cash flow from the net profit, it can be seen that there was huge impairment reversal in the last year amounting to nearly $ 75.6 Mn which was the main reason for increase in profitability. The other non cash items which have undergone major change is share based payment (increase in 2017), depreciation and amortization (increase in 2017), Funds received on settlement with Tianqi (only in 2017), tramsaction cost incurred on GMM acquisition in 2016. Besides all these transactions, the adjustement has also been made for deferred tax on the sale of the assets, deferred income on investing activities and adjustment to rehabilitation reserve. Another reason for the increase in the cash flow from operating activities is the decrease in trade receivables owing to huge receipts during the year, change in payables, inventories, pre payments, provision and deferred tax assets (Alexander, 2016).
2. Cash Flow from investing activities: The net cash outflow from the investing activities increased by more than $ 20 Mn, which was primarily due to increase in the investment made in property, plant and equipmemt purchased during the year. It increased by around $ 14 Mn. Furthermore, the payment for the available for sale assets amounted to nearly $ 3 Mn. There was also a substantial increase in the payment for exploration and evaluation of the assets during the year(Bromwich & Scapens, 2016). The other cash flows relating to the investing activities were sale proceeds from the pre – production assets in 2017. In the year 2016, there was also cash inflow from the acquisition which was not the case in 2017.
3. Cash Flow from financing activities: In case the financing activities are being analysed, we can see that the net cash inflow has increased from $ 17 Mn in 2016 to $ 29 Mn in 2017. This is primarily on account of substantial increase in the inflow from the issue of the shares(Bae, 2017). The company also made a huge repayment of the earlier loan and also raised less loan in 2017 as compared to what was being raised in 2016. The bank charges, interest paid and the withholding tax was less than the last year.

Due to the cumulative increase in the net cash inflow for the year 2017 to the tune of $ 51.74 Mn ($ 4.64 Mn in 2016), the end cash balance was $ 59.74 Mn in 2017. All this shows that the company has had good cash flow during the year which is helping the company to have good liquidity and hence resulting in strong operational position for the company. 

The main items which have been reported in the other comprehensive statement of the company are enlisted below:

1. Items which are subsequently being reclassified to the profit and loss account including foreign exchange translation differences or the reserve – foreign operations
2. Revaluation on the assets – those available for sale
3. Income tax pertaining to the available for sale assets(Choy, 2018)
4. Change in the fair value of any item
5. Retirement benefits
6. Revaluation of the financial instruments
7. Revaluation of the fixed assets
8. Actuarial gain and losses
9. Pension and prior period service cost or credit on account of the same
10. Other non operating incomes and expenses 

The statement showing the other comprehensive income gives the overall view of the financial status of the company besides the profit and loss account and the balance sheet. It includes many other significant items other than regular sales and cost of goods sold which may have a significant bearing on the financial status of the company. It also proves to be very critical in terms of the investment decision making (Werner, 2017). Items which are generally being reclassified during the year are reported here as this is not part of the normal Profit and loss account but a continuation of the same. Reporting of these line items in OCI is as per the norms of the International Financial Reporting Standards (IFRS). All the above mentioned line items which are being adjusted in the other comprehensive income have been provided by the IFRS. Reclassification of the change in fair value of any item from other comprehensive income to fair value through profit and loss account is not as per the directions in IFRS standards. There are 3 ways in which the change in fair value can be accounted for in the books which are fair value change through profit and loss account, fair value change through other comprehensive income and fair value change adjusted through the amortization method which is generally being done in the case of financial instruments (Sithole, et al., 2017). Besides this, since all the retirement benefits like gratuity and pension are being based on the actuarial caclulations, all the gains and losses on account of the same is being shown through OCI.

Comparative analysis of the cash flow statement of Galaxy Resources Limited

Other comprehensive income statement mainly includes such items of revenue, incomes, profit and losses which are being classified under both the IFRS as well as the local Generally Accepted Accounting Principles. Normal income has a different classification from those appearing in the OCI that’s why they are being shown exclusively in the Profit and loss account. The main idea of classifying those items in OCI other than the P&L account is that these incomes and expenses, profits and losses have not been realised as of now or it has been partically recognised and booked (Dichev, 2017). For example, in case the company purchases the bonds and the market value of the bonds increase, then the differential gain is recognised in the OCI. Once these bonds are bineg sold in the future and the final gain or loss on account of the same has been actually realized, then the same can be shifted to income statement from the OCI as the same is a part of the other income. This treatment of the real income in in line with the IFRS standards. 

The income tax expense for the company Galaxy Resources Limited as per the latest financial statements is $ 5999000. Furthermore, the income tax on account of revaluation of the available for sale assets amounts to $ 5070000 (Knechel & Salterio, 2016). 

In case the income tax expenses of the company and the rate of income tax applied on the net income are reconciled, both of them are not same. A reconciliation of the income tax as per the accounting books and that as per the income tax rules has been shown below in the table where the effective tax rate for the group is being applied on the consolidated income for the group. The reconciliation has been given for both the years 2016 as well as 2017 (Sithole, et al., 2017).

The statutory tax rate being applied to the company as per the taxation rules in Australia is 30% for both the years 2016 as well as 2017 as can be seen from the above table. The main reason of the difference in between the two amounts were non deductible expenses, temporary differences, the utilisation of the prior years’ deferred tax asset balance, etc as can be seen from the above table (Gooley, 2016). 

The deferred tax asset balance for the company is $ 64686000 and $ 53619000 for the years 2017 and 2016 respectively. The deferred tax asset is regarded as an asset of the company which may be used to reduce the taxable income in the future years. The same is created when tax is paid in earlier years against the same and later on as per the accounting books, the benefit can be taken in the future years (Knechel & Salterio, 2016). These are mainly on account of the timing differences. Deferred tax assets and liabilities can either be off set against each other or can be shown separately under the head current assets and current liabilities respectively. The deferred tax asset can be created on account of the following reasons:

1. Revenues being recognised in one period for taxation purposes and in the other period for accounting books.
2. Assets having different base for accounting and that for the different government agencies.
3. Losses and expenses being recognised in the accounting books but not in the income tax books.

Other comprehensive income statement of the company

Furthermore, the deferred tax assets and liabilities are being reported in the balance sheet to comply with the requirements of the local GAAP and the IFRS.

The income tax payable and recorded by the company stands at $ 17406000 and $ 1849000 for the years 2016 and 2017 respoectively. The rise in the tax payable in 2017 is on account of the greater net profit base in 2017 (Goldmann, 2016). However, it does not matches with the income tax expenses of the company as income tax payable is calculated as income tax rate being applied on the profit on the company whereas the actual payment made to the tax authorities are after considering the deferred tax adjustments. After taking into effect the past year’s deferred tax asset/liability balance, the actual tax to be paid is being calculated and this is the reason why two of them don’t match.

The income tax being shown in the income statement and that is being paid or being shown in the cash flow statement will not be  the same. This is because of the reason that the income statement shows the actual tax expense of the company on the profit earned whereas the cash flow statement reflects the actual tax being paid by the company which might be more or less than the actual income tax expense (Jefferson, 2017). Cash flow indicates only the outflow of cash on account of tax and not the actual tax expenses. It might also be the case that the company has made the provision of the tax expenses and might not have paid it in the current period. The difference is also on account of different methods of tax calculation as per the accounting base and as per the taxation base post the adjustment of the deferred taxes. 

There have been many aspects in the annual report with respect to the calculation of the tax which were interesting as well as confusing but the most interesting aspect has been the calculation of tax using the statutory tax rate and how it differs from the actual tax amount being paid to the government authority (Vieira, et al., 2017). Income tax treatment for revaluation of the available for sale assets was a bit surprising as in common parlance, the same is not the case. Overall, the entire exercise, analysis and discussion on the tax and its reconciliation mentioned above was insightful and interesting as well. 

References 

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea. Journal of Applied Business Research, 33(1), pp. 153-172.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).

Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.

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