Background Information on Wesfarmers Ltd and Woolworths Ltd

Wesfarmers Limited is the Australian conglomerate that has it’s headquarter in Perth and they carry on their business mainly in Australia and New Zealand. Their main products and services are coal mining, fertilizers, chemicals, retails and safety products. It is grown into the biggest listed companies of Australia. Each of their diverse businesses is responsible for daily operations and each business has their own team for human resource (Wesfarmers.com.au, 2018). On the other hand, Woolworth supermarket is the Australian grocery or supermarket store chain that is owned by the Woolworths Limited. After Wesfarmers they are the 2^nd biggest company in terms of revenue (Woolworths.com.au, 2018).

Under financial accounting, the cash flow statement is the financial statement that states the changes in the cash balance and generation of cash from various activities like operating activities, financing activities and investing activities. Cash flow statement can be prepared using direct method or indirect method (Bhandari & Iyer, 2013). The cash flow has three sections for three activities that are the operating activities, investing activities and financing activities. Under the direct method, cash flows are listed under the operating activities. The cash flows from the operating activities are generated from collection from customers and payment made to employees, suppliers and others. This section also includes the payment made towards interest and income tax. On the other hand, under the indirect method, net incomes are adjusted to convert it to the cash basis from the accrual basis (Pavlovi? & Bogdanovi?, 2013). It requires adding back the  non-cash expenses like amortization, depreciation, provision of loss for accounts receivables and the losses selling of fixed assets. The net income is also adjusted for the changes in the account balances in the current assts where the cash and current liabilities are excluded for that period between the starting account balance and ending account balance.

Looking into the cash flow statement of Wesfarmers it has been identified that the company uses direct method for preparing their cash flow statement. The company reported appropriate reconciliation under the Note 4 – Cash and cash equivalents. Further, under the reconciliation the company stated the reconciliation of the net profit after tax with the net cash flows from the operations (Wesfarmers.com.au, 2018). As per the reconciliation, non-cash items like impairment, depreciation, gain on disposal has been adjusted to the amount of the net profit and thereafter the increase or decrease in assets and liabilities has been adjusted to arrive at the amount of net cash flows from the operating activities (Farshadfar & Monem, 2013). Further, it stated the details regarding the net cash flow from capital expenditure. Wesfarmers classifies the short-term deposits and cash under the balance sheet that includes the cash on hand and at bank that has the maturity of 3 months or less than that as financial assets that is held at the amortised cost.   

Method of Presenting the Statement of Cash Flows

Looking into the cash flow statement of Woolworths Limited it has been identified that the company uses direct method for preparing their cash flow statement (Woolworths.com.au, 2018). The company reported appropriate reconciliation under the Note 4.5 – Net cash provided by operating activities. Further, under the reconciliation the company stated the reconciliation of the net profit after tax with the net cash flows from the operations (Brooks, 2015). As per the reconciliation, non-cash items like impairment, depreciation, gain or loss on disposal, interest capitalised and dividend received has been adjusted to the amount of profit or loss after the expenses of income tax and thereafter the increase or decrease in assets and liabilities has been adjusted to arrive at the amount of net cash flows provided by the operating activities. Further, it stated the details regarding the net cash flow from capital expenditure (Collins, Hribar & Tian, 2014).

Operating activities – for Wesfarmers the net cash flow from the operating activities for the year ended 30^thJune 2017 amounted to $ 4,226 million as compared to $ 3,365 million for the previous year (Deegan, 2012). The company spend large amount that is $ 68,713 million towards payment to the employees and suppliers. Further, its total receipt from the customers amounted to $ 74,042 million. On the other hand, for Woolworths, net cash flow provided by the operating activities for the year ended 30^th June 2017 amounted to $ 3,122 million as compared to $ 2,357.5 million for the previous year. The company spend large amount that is $ 61,474.8 million towards payment to the employees and suppliers. Further, its total receipt from the customers amounted to $ 65,498 million.

Investing activities – Wesfarmers total cash flows that are used for the investing activities for the year ended 30^thJune 2017 amounted to $ 53 million as compared to $ 2,132 for the previous year. Large amount that is $ 1,681 million was used by the company towards the payment of intangibles and plant, property and equipment. On the contrary, Woolworths total cash flows that are used in the investing activities for the year ended 30^th June 2017 amounted to $ 1,431.4 million as compared to $ 1,266.7 for the previous year. Large amount that is $ 1,633.6 million was used by the company towards the payment of intangibles and plant, property and equipment.

Financing activities – net cash used by Wesfarmers towards financing activities for the year ended 30^thJune 2017 amounted to $ 3,771 million as compared to $ 1,333 million for the previous year. Bigger amount spend by the company towards the payment of equity dividend and it was amounted to $ 1,999 million and repayment of the borrowings amounted to $ 1,994 million. On the other hand, net cash used by Woolworths towards financing activities for the year ended 30^th June 2017 amounted to $ 1,729.3 million as compared to $ 1,474.9 million for the previous year. Bigger amount spend by the company towards the payment of equity dividend and it was amounted to $ 540.9 million and repayment of the borrowings amounted to $ 1,406.5 million.

Analysis of Cash Flow Information

Ratio	Formula	Wesfarmers	Woolworths
Cash adequacy ratio	Cash flow from operations / (Long term debt payment + purchase of fixed asset + payment of cash dividend)	0.745	0.872
Cash flow liquidity ratio	Operating cash flow / Current liabilities	0.406	0.354
Debt coverage ratio	Net operating income / Debt service	16.674	12.014
Cash flow to sales ratio	Operating cash flow / Net sales*100	6.174%	5.628%

Cash flow adequacy ratio – it is used for determining the cash flow generated from operations are sufficient for paying other expenses or not (Hoskin, Fizzell & Cherry, 2014). Generally, the cash adequacy ratio of more than 1 is considered as sufficient for maintaining the business without additional requirement of equity or debt funding. From the above table it can be seen that cash adequacy ratio of both the firms are less than 1. However, the ratio of Woolworths at 0.872 is better as compared to 0.745 of Wesfarmers.

Cash flow liquidity ratio – cash flow liquidity term refers to the ability of the company for repaying the debts from the operating cash funds (Call, Chen & Tong, 2013). From the above calculation it is identified that with regard to cash flow liquidity Wesfarmers is in better position as compared to Woolworths as the ratio of Wesfarmers is 0.406 as compared to 0.354 of Woolworths.

Debt coverage ratio – this ratio is used for determining the ability of the company to generate sufficient operating income for covering the debt expenses. It is recognized from the above table that the debt coverage ratio of Wesfarmers is 16.674 as compared to 12.014 of Woolworths. Therefore, Wesfarmers is in better position to cover up its debt expenses with the available income from operation as compared to that of Woolworths.

Cash flow to sales ratio – this is calculated in percentage form and compares the operating cash flow of the company to the net revenue from sales (Brown, 2012). It also gives an idea to the investor regarding the ability of the company to turn their sales into cash. It can be identified from the above table that Wesfarmers ability to turn their sales into cash is better as compared to that of Woolworths.

Conclusion

It can be concluded from the above analysis that Wesfarmers is in better position and will be considered better with regard to the short-term credit risk as compared to Woolworths as the cash flow liquidity ratio of Wesfarmers is better as compared to Woolworths. However, if the cash resources are considered, it can be identified that both the companies do not have adequate cash resources to cover up their ongoing expenses but Woolworths is in better position as compared to Wesfarmers. Among the two, Wesfarmers can be expected to survive for long term if compared with Woolworths as the debt coverage ratio of Wesfarmers is better than Woolworths. Finally, Wesfarmers ability to generate cash from sales and turn their sales into cash is better as compared to that of Woolworths. Therefore, it is suggested that Woolworth shall minimise their operating expenses and other expenses to have more cash from operation which in turn, increase the ability of the company to sustain over long term and increase their solvency.

Reference 

Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), 667-676.

Brooks, R. (2015). Financial management: core concepts. Pearson.

Brown, R. (2012). Analysis of investments & management of portfolios.

Call, A.C., Chen, S. & Tong, Y.H. (2013). Are analysts’ cash flow forecasts naïve extensions of their own earnings forecasts?. Contemporary Accounting Research, 30(2), pp.438-465.

Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2), 173-200.

Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.

Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), 111-133.

Hoskin, R.E., Fizzell, M.R. & Cherry, D.C. (2014). Financial Accounting: a user perspective. Wiley Global Education.

Kirkham, R. (2012). Liquidity analysis using cash flow ratios & traditional ratios: The telecommunications sector in Australia. The Journal of New Business Ideas & Trends, 10(1), p.1.

Pavlovi?, M. & Bogdanovi?, J. (2013). Cash flow statement. Škola biznisa, (3-4), pp.129-147.

Wesfarmers.com.au. (2018). Wesfarmers.com.au. Retrieved 8 January 2018, from https://www.wesfarmers.com.au/

Woolworths.com.au. (2018). Woolworths.com.au. Retrieved 8 January 2018, from https://www.woolworths.com.au/