Analysis Of Cash Flows, Other Comprehensive Income, And Accounting For Corporate Income Tax For Gazal Corporation Limited

Task description

Analysis of cash flow statement:

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The cash flow of Gazal Corporation limited has been segmented into three parts that is cash flow from operating activities, cash flow from financing activities and cash flow from investing activities. Items reported under cash flow from operating activities include payment from customers, payment to suppliers, interest received, income tax paid and interest and other cost of finances paid. It can be seen that net cash flow from operating activities has reduced significantly from $ 5531000 in year 2016 compared to $ 14000 in year 2017. The reason attributable to this fall is that payment from customers has reduced drastically and there has been increment in income tax paid.

Items under cash flow from financing activities include proceed from share issue, proceed from borrowing, dividend paid and repayment from borrowing. The net cash used in financing activities reduced from $ 82485000 in year 2016 as against 2812 in year 2017. This is so because there has been reduction in amount that is repaid on borrowing in the current year.

Items reported under cash flow from investing activities include purchase of property, equipment and plant, purchase of intangibles, proceeds from sale of building, equipment and plant, proceeds from sale of discontinued operations, income tax paid non discontinued operations and dividend from joint ventures. Net cash flow generated from investing activities in year 2016 stood at $ 70090000 to ($7135000) in year 2017 indicating net cash used in investing activities. Total amount of cash and cash equivalent in year 2017 is recorded at $ 2610 compared to $ 12540 in year 2016 depicting a considerable decline.

Comparative analysis of three different categories of cash flow:

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Particular

2015

2016

2017

Net cash flows from operating activities

3288

    5,531

         14

Net cash flows used in investing activities

-5573

 70,090

    -7,135

Net cash flows used in financing activities

15468

  -82,485

    -2,812

The above table shows a comparative analysis of three different categories of cash flow. It can be seen that the net cash flows from operating activities has declined significantly since year 2016 from $ 5531000 to $ 14000 in year 2017. However, there was increment in cash flow from 3288000 in year 2015 to $ 5531000 in year 2016. Now, looking at the figures of net cash flow from investing activities, it can be seen that company used net cash from operating activities in year 2017 and 2017 respectively. However, in year 2016, there was net cash flow of amount $ 70090000. Net cash flow was used from financing activities in year 2017 and 2016 as against year 2015 when net cash flow was generated.  

The items that have been recorded in the comprehensive income statement involves profit reported after tax, items that are reclassified and items that are not reclassified subsequently to the profit and loss along with total income for the period. Items that are reclassified subsequently to profit and loss includes income tax on comprehensive income items, exchange differences on translation of foreign exchange, comprehensive income from joint venture, cash floe hedges and loan and gains taken on equity (Henderson et al. 2015).  Some of the items that are not reclassified are revaluation of land and building at fair value and income tax on items of other comprehensive income.

Analysis of cash flows statement

Revaluation of land and building at fair value means that such assets are reclassified at the fair value where the date of revaluation is less subsequent to accumulated depreciation impairment.

Exchange difference is the difference that occurs due to the translation of a given number of currencies in one unit to another currency at different exchange rates.

Income tax on the items of comprehensive income is the amount of tax that is paid by entity on items such as expenses, revenue, losses and gains that is mentioned after excluding the net income reported on income statement.  

The profit and loss statement of company depicts the performance in terms of net loss or gain realized at the end of any reporting period. However, the statement of comprehensive income includes the loss and gains that are unrealized. All the items of income and expenses are recorded in the profit and loss statement except those that are recognized in the statement of comprehensive income.

The income tax expense is reported in the income statement of Gazal Corporation limited and the amount of income tax expense recorded in the financial year 2017 and 2016 stood at $ 1501 and $ 1550. There is reduction in the income tax payment by reporting entity in year 2017. Income tax expense recorded in year 2015 stood at $ 914. It is suggested by figure that income tax expense has increased initially and it declined subsequently.

 The corporate tax rate that is applicable to company is at the rate of 30%. Total amount of accounting income reported by company in year 2017 and 2016 stood at $ 1223000 and $ 58789000 indicating a considerable decline in the amount of accounting profit generated. The taxation rate when applicable to the accounting profit reported comes to $ 3669 (30% of $ 1223000) and $ 17637 (30% of $ 58789000). It can be seen from the computation that the total amount of income tax paid as reported in the income statement is different from the accounting income times the applicable taxation rate of company. From the figures, it can be inferred that the amount if corporate tax paid by reporting entity in both the years is less than the accounting income times the tax rate. This is so because the amount of accounting profits and taxable profits are significantly different.

The balance sheet of Gazal Corporation limited depicts the total amount of deferred tax liabilities under the heading noncurrent liabilities. It can be seen that there is no deferred assets recorded in the balance sheet at the reporting date. Total amount of deferred tax liabilities recorded in year 2017 and 2016 stood at $ 10932 and $ 8525. It is indicated by the figure that there is increase in amount of deferred tax liabilities in year 2017 (Gazal.com.au 2018).

Recognition of deferred tax liabilities are done when such income tax liability arises from goodwill recognition or from any liabilities and assets that are not affecting either the taxable profit or accounting profit. Measurement of deferred tax liabilities are done at the tax rate after the liability is settled or assets are realized. The reason why it is recorded under the balance sheet is that it accounts for the temporary differences between tax that is paid today and tax that will be paid in future and this forms a part of liability and hence recorded there.

Comparative analysis of three different categories of cash flow

The amount of deferred tax liabilities and deferred tax assets recorded in the balance sheet are subject to change with the change in the rate of income tax. Amount of deferred tax assets and deferred tax liabilities are readjusted for reflecting the tax that is incurred when the reversal occurs due to the change in tax rate. Such change in taxation rate helps in depicting the timing differences and adjustments to previous balance are disclosed as reduction or addition in the component of deferred tax of the income tax expenses.

Yes, there is an income tax payable recorded by Gazal Corporation limited in the recent financial years. The amount of income tax payable recorded by company stood at $ 835 in year 2017 compared to $ 13880 in year 2016 (Gazal.com.au 2018). It can be seen that there is considerable fall in amount of income tax payable in recent year. There is difference between the income tax payable and income tax expense reported.

The reason is attributable to the fact that income tax expense is calculated and treated using the accounting rules and it is reported in the income statement. On other hand, computation of income tax payable is based on rules and taxation standard and hence it appears on the liability side of balance sheet until the amount of tax is paid (Meade and Li 2015).

 The total amount of income tax paid comprise of income tax paid on investing activities and income tax paid on operating activities. Total amount of income tax paid in year 2017 is recorded at $ 14965 compared to $ 2441 in year 2016. On other hand, the amount of income tax expense in the financial year 2017 and 2016 stood at $ 1501 and $ 1550 (Gazal.com.au 2018). From the figures, it is suggested that total amount of income tax paid in both the years is less than the amount of income tax expense. The amount of income tax expense is usually higher than the amount of income tax paid and this is attributable to the fact that the two systems of accounting eventually depreciate the same value with only timing factor creating such difference. The difference in amount of income tax paid and income tax expenses are attributable to the difference in accounting treatment of accounting rules and taxation rules (Powers et al. 2016).

The treatment of tax in the financial statements of Gazal Corporation limited seems to be quite interesting as there is proper and segregated disclosure of the accounting treatment relating to income tax. Treatment and adjustment of the income tax such as income tax expense, income tax payable, deferred income tax liabilities and income tax payable on comprehensive income are presented in different financial statements according to the rules of accounting (Auerbach and Hassett 2015). It has been ascertained from the analysis of the annual report of company that all the Australia capital gain tax losses have been utilized by the group. The statement of comprehensive income depicts the amount of income tax that is paid on items of other comprehensive income. Amount of income tax payable is presented under the liability side of balance sheet. Cash flow statement on other hand depicts the amount of income tax that is paid on operating and investing activities (Dyreng et al. 2017). Therefore, it can be seen that there is proper segregation of all the items relating to income tax that is quite an interesting fact.

Other Comprehensive Income Statement

  Moreover, a tax consolidated group has been formed by Gazal Corporation limited that was effective from 1st July, 2003 and the group is head entity of the tax consolidated group. In order to allocate the income tax liabilities to the wholly owned subsidiaries, members of the group have entered into an arrangement of tax sharing. The allocation of income tax liabilities are done based on the formula that is set out in the agreement. Agreements that is providing for the allocation of the liabilities pertaining to income tax between entities should the entity default on its obligations of income tax payment (Gazal.com.au 2018). The possibility of default is remote at the balance date. Furthermore, the members of tax consolidated group accounts for the effect of tax. As per the agreement, the current tax is allocated to the members of tax consolidated group along with allocating the deferred tax to the members of tax consolidated group (Gazal.com.au 2018). Such allocations are on done in accordance with the principles of AASB 112 Income taxes. Under the tax funding agreement, allocation of taxes is recognized as a decrease or increase in the accounts of inter company subsidiaries with the tax consolidated company of Gazal corporation limited. In addition to this, the tax treatment of hedging transactions has been observed with changes with the legislation in place.

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