Importance of Cash Flows Statement
Discussion on Cash Flow Statements:
The importance of the statement which shows the financial performance of the company by providing comprehensive information of all the cash activities of the company cannot be undermined. It gives information about the most important element of any business organisation, which is known as cash in hand at the end of the year. It is a report card of the cash related activities of any company. Cash, being the most important asset of any company is very necessary for any business entity’s sustenance. It is the foundation on which the whole business is set up and on which it actually functions. Therefore as a result of this very reason, its importance to the company or its group of stakeholders cannot be ignored (Call, Chen and Tong., 2013). It helps the investors in assessing the credit worthiness and the overall soundness of its financial planning’s and structure. It is on the basis of this cash, that the investors decide, whether to invest in this particular business or not. In this report, as a result of which, the cash flow statement of the famous packaging company Amcor Limited which is listed in the Australian Securities exchange has been provided and analysed (Pavlovi? and Bogdanovi?., 2013.). The company of Amcor develops and produces packaging containers, specialty cartoons and along with this focuses on the pharmaceutical, medical devices and personal health care.
Catalogue of cash objects:
The cash flow of any company can be viewed with the help of a series of cash items such as cash from investing, financing and operating activities, each one having a separate catalogue of objects and items of their own. From the operating activities, cash dividend has been received by the company from its vested interests in and around the world, interests has also been received in the same way. Some interest expense has also been incurred and consequently been paid by the company (Günther, 2015). There are also some tax expenses which have been incurred and paid by the company. In the arena of investing activities of the company, some purchase of plants, properties and equipment’s has been made. In association with this, payments have also been made to all the subsidiaries and joint ventures. The sale of the plants and machineries from the previous years has also been done, which has brought in some fresh cash for the company. Amcor has also received several amounts of cash as proceeds from the disposal of associates and controlled businesses (Hales & Orpurt, S2013). There have also been some repayments of borrowings which were initially borrowed by the company. In the financing activities arena, the packaging company has also seen some activities.
Changes:
There has been a good amount of changes in each of the main three activities of the cash flow statement for the year 2017 from the previous years. In the case of the operating activities, there has been a decrease in the payment of dividends which the Amcor used to receive from its associates and joint venture operations. It has come down from $20 million to $7 million in the year 2017. The amount of interests received by the company has also decreased from $23 million in 2015 to a paltry $11 million in the year 2017. The amount of taxes paid by the company has also increased from $155 in 2015, to 4170 in 2016 and it had a slight fall in the year 2017 to $160 million. The amount of interest expense has also remained mostly consistent in the range of $180 million in the three year period. In the case of the investing activities of the company, the purchase of plant and equipment’s have been made and has consequently increased from $323 million to $348 million to $379 million in the year 2017. The payment for subsidiaries and joint ventures have also increased considerably from $98 million to $498 million in the year 2017. Sale of plants has also taken a downfall from $84 million to $30 million. In the case of the financing activities, the repayments of borrowings have decreased from $5699 in 2015, to $5036 in 2016 to $3745 in the year 2017. Payment for treasury shares have also taken a downfall from $78 million in the year 2015 to $40 in the year 2017. In the same manner, proceeds from the borrowings taken earlier has also decreased considerably from $6084 to $3940 in the year 2017. Thus as it can be seen that a major amount of changes had been seen in the cash items of the year 2017 from the previous years, some have increased and on the other hand, some have decreased.
- A fair and good amount of qualitative comparison analysis has been done with the assistance provided by the diagram given below:
Categories of Cash Flows
(Source: Amcor.com, 2018)
In the context of the comparative analysis of the three year performance of the packaging company, some important observations have some out. In the arena of cash flow from operating activities, the performance has been more or less remained the same with an average of $1500 throughout the three year period. On the cash flow in the arena of the investing activities of the company, the performance has been on an excessively fluctuating state, with the cash flow generating from $386 in the year 2015 to $1001 in the year 2016 till $632 in the year 2017. In the case of the financing activities, the performance has been very rewarding as the average has remained consistently high throughout the year. The amount of cash flow generating from the cash flow from financing activities has been very high, when compared to the cash flow from other activities. Only it has decreased form the year 2015 where it had $6084 to $ 3960 in the year 2017.
Other Comprehensive Income Statement:
- There is some important informational items which have been a part and have remained a part of the other comprehensive income statement of the year 2017.These are the subsidiary items or the ancillary items of items which help the company in one ways or the other and are a significant. The items are Cash flow hedges, amount of retained earnings, share based payments and exchange differences on translating foreign differences. These items form the most important part of the ancillary information units of the company, which helps the main operations of the company.
- The explanation of each of these items mentioned in the other comprehensive income statement are present below:
Cash flow hedges: The cash flow hedge is a different kind of a cash fund which has its own use and significance. It is more often used for the purpose of reducing the impact of any kind of frequent fluctuations in the amount of cash from changes in any of the financial assets or liabilities. There are various reasons behind this phenomenon, and it primarily takes place because of the presence of various kinds of risks, such as interest’s rate risks, or risks associated with floating debt instruments. The various instruments associated with cash flow hedging are measured at their fair values which is obtained from the prevalent market trends (Hoyle, Schaefer, and Doupnik, 2015).
Retained earnings: They are that part of the income and profits of the company which are not distributed as dividends to the equity shareholders or the preference shareholders of the company. They are kept in the cash coffers of the company in order to save them and use them for any future users for in case of any contingency. The usage of this varies from buying any new properties for expansion purposes or for the purpose of reinvesting the amount for better returns (Cimini, 2013). These retained earnings are withheld for these purposes only and they find a place in the other income statements of the company.
Foreign translations and transactions: The parent company of any business entity has some branches and holding companies in foreign locations and they conduct transactions with their foreign markets on the behalf of their parent companies. In this way, the money which is derived from this is generally in the foreign currency of that particular foreign country (Lombrano and Zanin , 2013). In these regard, the transactions and the amount of foreign money is translated in the currency of the native country of the parent company. For this purpose, this item is recorded in the other income statement of the parent company.
Analysis of Other Comprehensive Income Statement
v.) Cash flow hedge funds and the foreign translation reserves for foreign items transactions and the retained earnings are not incorporated in the comprehensive income statement of the company. Only the items which have been actually realised by the company find a place in the comprehensive income statement of the company. Another reason for this is the fact that the foreign exchange transactions do not form a part of the main activities of the company which is the parent one. It is an ancillary part of the main frame, as a result of which they have a place in the other income statement of the parent company (Mechelli & Cimini, 2014). Another reason for this is the fact that there are some adjustments which are to be made, with regards to the retained earnings of the company which cannot be shown in the comprehensive income statement of the company.
Accounting for Corporate Income:
vi.) Amcor is a very successful Australian packaging company and has always maintained their lawfulness in terms of their regular tax payment practices. Whichever country they have established their offices or have traded in, they have duly filed with all the income tax laws and regulations This is what has made them a pioneer in the Australian as well as international market. As per the cash flow statements of the company, the income tax paid for the year 2017 was $160, which was $170 in the year 2016 3 (Amcor.com, 2018).
Vii) On doing a comprehensive analysis of the income tax paid by the company, certain important factors and revelations about the same have come out. The tax rate currently prevailing in the Australian corporate sector is 30%. The income from the trading operations of packaging company Amcor in the year 2017 was$ 614 million and for the year 2016 was$ 217 million. Thus a significant amount of rise has been seen in this arena, this might be as a result of the expansion policies and the increased operations in the Australian economy in the case of increased demand for housing and other commercial interests of the government (Andrews, 2012).The calculated income tax for the year 2016 is (273*30%= $819) and for the year 2017 was (614$*30%= $1842). There exists a significant amount of difference between the two because of the presence of various important factors such as depreciation methods chosen, presence of deferred tax assets or liabilities etc.
Significance of Tax Expenses and Liabilities
viii) Deferred tax assets and liabilities are the most important aspects of any company’s financial statement and on close analysis it could be seen that it holds true for Amcor too. As is evident from the analysis of the financial statements of the company, it has been seen that the company has indeed recorded the deferred tax assets and liabilities. The deferred tax assets of the packaging giant Amcor for the year 2017 are $68 million and it was $48 million in 2016 (Amcor.com, 2018). Similarly, for the year 2016, the deferred tax assets amounted to $216 million and it was $215 million.
The most prominent reason for the recording of the deferred assets and liabilities is the fact that the companies most often overpay their tax liabilities or pay them in advance. This reverts back to the company in the form of various incentives and tax reliefs. Similarly, in the case of the deferred tax assets, some of them are received in advance for which accounts are to be maintained, as a result of which, their recording becomes important.
- ix) On the analysis of the annual report it was seen that that the company had not recorded any kind of current tax assets. It is because of this, that the whole act of starting a comparison between the income tax expenses of any kind and the current amount of tax assets could not be done. It also has been observed that there has been a significant amount of difference which exists between the income tax expenses and payments. The aggregate amount of income tax expense in the year 2017 was $9.4 and it was $26 million for 2016. The income tax paid for the year 2017 was $160 and for the year 2017 was$ 170. The disparity exists because of many different factors such as method of depreciation used, deferred tax assets and liabilities, amount of income tax actually paid etc. Each of these factors exercise a fair degree of influence on the disparity.
- x) It was also seen and observed that the total amount of income taxes which had been paid by Amcor for the 2016 was $160 and it was $170 million during 2017. On the other hand, the income tax expense as per the income statement of the company was 4151.7 for the year 2017 and for the year 2016 was $135.3 (com, 2018).
The differences between the two amount takes place because of the adjustments which are to be made because of the differences between the income tax which is shown and which is actually paid. Moreover, the presence of the special items of the company such as the different kinds of depreciation procedures adopted by the accountants of the company. The advance payments and the late payments of certain expenses which have been incurred, cause such kind of rift in such cases. This causes a wide range of differences in the two items.
- xi) On careful analysis of the different aspects of the annual report of the packaging company, Amcor, such as the cash flow statement, income statement, other comprehensive income statement and the balance sheet of the company, many important factors have been found out. A specific observation had been made about the applications of the relevant accounting standards and practices. It has been seen that the company has mandatorily followed all the relevant provisions of all the accounting associations like ASIC and AASB, while performing the recording of the financial statements. Being a market leader in the sector of packaging and allied sectors, it has served an exemplary behaviour by performing exceptionally well in the financial recording of statements.
References:
Amcor.com. (2018). [online] Available at: https://www.amcor.com/ [Accessed 25 May 2018].
Andrews, W.D., 2012 A consumption-type or cash flow personal income tax. Harvard Law Review, pp.1113-1188.
Bertoni, M., & De Rosa, B. (2013). Comprehensive income, fair value, and conservatism: A conceptual framework for reporting financial performance.
Cimini, R. (2013). Reporting Comprehensive income issues: empirical evidence from France, Germany and Italy. Economia Aziendale Online, 4(1), 1-17.
Farshadfar, S., & Monem, R. (2013). The usefulness of operating cash flow and accrual components in improving the predictive ability of earnings: a re?examination and extension. Accounting & Finance, 53(4), 1061-1082.
Günther, R. (2015). Value-Relevance of Other Comprehensive Income under IFRS. University of St. Gallen, St. Gallen.
Hales, J., & Orpurt, S. F. (2013). A review of academic research on the reporting of cash flows from operations. Accounting Horizons, 27(3), 539-578.
Kuzmenko, V. V., Glotova, I. I., Tomilina, E. P., Kuzmenko, I. P., & Fedorenko, I. V. (2015). Assessment Instruments of Economic Feasibility of Tax Transformations. Asian Social Science, 11(19), 298.
Lombrano, A. and Zanin, L., 2013. IPSAS and local government consolidated financial statements—proposal for a territorial consolidation method. Public Money & Management, 33(6), pp.429-436
Mechelli, A., & Cimini, R. (2014). Is comprehensive income value relevant and does location matter? A European study. Accounting in Europe, 11(1), 59-87.
Pavlovi?, M. and Bogdanovi?, J., 2013. Cash flow statement. Školabiznisa, (3-4), pp.129-14
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