Cash Flow Statement Analysis

The present report is undertaken in order to analyze the financial statements of a public listed company listed on the Australian Securities Exchange (ASX). The financial statements evaluation is carried out to gain an insight into the present and potential future growth prospects of a company. The major financial statements developed by a company to provide disclosure of its financial position are cash flow statement, balance sheet, profit and loss statement and statement of equity. In this context, the report is developed to present an evaluation of the cash flow statement and income statement of the selected company. The cash flow statement analysis has specifically emphasized on providing an in-depth understanding of each item reported in the statement and depicting a comparative analysis of the three major categories of cash flows. The income statement evaluation is undertaken for depicting the major items reported in the statement and explaining the reason of the financial items that are not reported in the income statement. In addition to this, the report also evaluates the accounting for corporate income tax in the financial statement of the selected company. In this context, the report has carried out an analysis of the tax expenses, deferred tax assets or liabilities, income tax payable reported in the financial statement. The public listed company selected for the analysis purpose is Woolworths Ltd, a leading retail company in Australia. Woolworths is known to be a major supermarket company that has occupied a prominent position in the retail sector of the country owing to its unique portfolio of products and services. The company specializes mainly in providing groceries, magazines health and beauty products, household products, baby supplies and stationery items.

1.1: Items listed in the cash flow statement and understanding of each item

Cash Flow (Financial Items listed for year 2016 and 2017)
Woolworth Group
Amount in $ million Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Particulars	2017	2016	Change
			Amount	in %
Cash  flows items from the operating activity
Cash collected from the customers	$   65,498.90	$   65,329.80	$         169.10	0.26%
Payments made to suppliers and employees in cash	$ (61,474.80)	$ (61,834.50)	$         359.70	0.58%
Cash used for payment of interest charge	$       (234.00)	$       (289.30)	$            55.30	19.12%
Income tax paid in cash to tax authorities	$       (668.10)	$       (848.50)	$         180.40	21.26%
Cash  flows items from the investing activity
Cash used to purchase property, plant and equipment (It excludes any payments for property development)	$   (1,633.60)	$   (1,465.00)	$       (168.60)	-11.51%
Cash used to purchase property, plant and equipment -Property Development	$       (253.20)	$       (473.30)	$         220.10	46.50%
Cash received from the sale of property, plant and equipment	$         279.80	$         722.00	$       (442.20)	-61.25%
Cash collected from the sale of subsidiaries and other investments	$         200.70	$            15.00	$         185.70	1238.00%
Cash  flows items from the financing activity
Cash Collected through issue of common shares	$            55.50	$                   –	$            55.50
Cash gain through issue of equity shares in subsidiaries	$                   –	$         120.00	$       (120.00)
Cash received through increase in borrowings	$         184.10	$         628.50	$       (444.40)	-70.71%
Cash used to the repayment of borrowings	$   (1,406.50)	$       (994.10)	$       (412.40)	41.48%
Cash used to pay the cash dividends to the equity shareholders	$       (540.90)	$   (1,184.80)	$         643.90	-54.35%

(Annual Report, 2017, Woolworth Group)

• Cash Collection from Customers: The cash received from the customers when goods and services are provided to them. It is clearly depicted from the above table that there is a percentage increase in the cash collected from customers. It can be due to improved sales realization from the customers or due to high level of management efficiency for collecting the debts.
• Cash Payment to Suppliers: There is a net cash outflow due to the payment made to suppliers that can be due to increase in sale of its products and services from the year 2016 and 2017.
• Interest Expenses: There is an increase in the cash outflow incurred due to expenses made in relation to the interest paid on its debt.
• Payment for Tax: The Company is paying tax on a regular basis and it has increased over the period 2016-2017 (Ramachandran and Kakani, 2010).

• Cash outflow due to investment incurred in purchase of PPE: The Company is continually involved in acquiring of PPE for realizing profitability through its use (Klammer, 2018).
• Cash received from sale of PPE: The Company has realized less sales in the year 2017 as compared to the year 2016 from the use of its property, plant and equipment asset base.
• Cash Inflow due to Subsidiaries Sale: It has improved in the year 2017 over the year 2016 depicting that its cash realization from selling of its business unit has increased to a large extent.

• Issue of Shares: The Company in the year 2017 has also realized cash inflows due to issue of its shares as depicted from its cash flow statement.
• Cash Flow due to Borrowings: There is also less cash inflow in the year 2017 as compared to the year 2017 by the use of debt sources. It means that the company is adopting less use of debt in its capital structure at present.
• Cash flow due to repayment of borrowings: There is increase in the cash outflow due to repaying the borrowings it means that the company is effectively meeting its debt obligations.
• Divided payment: The cash outflow due to payment of dividend has decreased in the year 2017 as compared to the year 2016 which means less return to shareholders.

Comparative analysis of the three main activities of statement of cash flow over three years

Three board activities of the cash flow statement
Woolworth Group
Analysis of last three years (2015,2016 and 2017)
Amount in $ million
Particulars	2017	2016	2015
Cash generated or used in the activities performed during business operations	$      3,122.00	$      2,357.50	$      3,345.10
Cash generated or used in the activities performed during investing operations	$   (1,431.40)	$   (1,266.70)	$   (1,333.90)
Cash generated or used in the activities performed during financing operations	$   (1,729.30)	$   (1,474.90)	$   (1,610.80)
Net increase or decrease in cash and cash equivalents from all the three activities	$         (38.70)	$       (384.10)	$         400.40

(Annual Report, 2017, Woolworth Group) and (Annual Report, 2016, Woolworth Group)

There is increase in the cash inflow realized from the operational activities over the period 2015-2017 for AGL Energy Limited. This depicts the increase in the ability of the company to realize sales from its business operations. The cash outflow due to investment in the business operations has also increased depicting that it is investing more in its asset base for improving its sales revenue. There is also a net increase in the cash outflow resulting from the financing operations depicting that the company is utilizing greater cash resources in financing its business operations. The company’s overall cash position has been worst in the year 2016 as there is highest cash outflow of $384.10 million in this year. The cash outflow made by the company is significantly less in the year 2017 as compared to the year 2016 that is clearly depicted in the above table (Klammer, 2018).

Income Statement Evaluation

Financial items that are reported in the other comprehensive income statement of the Woolworth Group

Financial Items presented in the other comprehensive income statement of Woolworth Group
Important Financial items of last two years	2017	2016
	Amount in $ m
Profit or loss for the year as mentioned in the income statement	$  1,593.40	$ (2,347.90)
Items of the other comprehensive income statement
Items of other comprehensive income statement that will reclassified in income statement subsequently
Hedging reserve
Fair value change of cash flow hedges	$          3.80	$         (2.70)
Impact of income tax	$          1.00	$         (1.70)
Impact of foreign operations (FCTR)
Movement in foreign currency due to foreign operations	$        (3.90)	$       207.90
Impact of income tax	$        (3.00)	$       (24.50)
Sub Total	$        (2.10)	$       179.00
Items of other comprehensive income statement that will not reclassified in income statement subsequently
Equity instrument reserve
Fair value movement of the investments in securities (Equity)	2.2	13.5
Impact of Retained Earnings
Loss or gain computed on actuarial basis on defined benefit superannuation plan	3.2	-5.6
Impact of income tax	-1	1.7
Sub Total	$          4.40	$            9.60
Total change in other comprehensive income financial items	$          2.30	$       188.60
Total profit and loss after including the items of other comprehensive income statement	$  1,595.70	$ (2,159.30)

(Annual Report, 2017, Woolworth Group)

There are mainly two items that are presented in the other comprehensive income statement. They are financial items that can be classified in income statement in any subsequent period and financial items that cannot be classified in income statement. Items that can be classified in income statement in any subsequent period includes those items that are in nature of income and expenses but are not related to period for which income statement related to. Examples of such items are hedging reserve and foreign currency translation reserve (FCTR). The tax impact of these changes is also included into the other comprehensive income statement (Wahlen, Baginski and Bradshaw, 2010).

Reason why items of other comprehensive income statement are not reported in income statement

The main reason why the items of the other comprehensive income statement are not reported in the income statement is because they do not satisfy the criteria of income and expenses to be reported in the income statement and also some items that satisfy the criteria but does not belong to the same period as income statement shows (Gibson, 2012).

Tax expenses as reported in financial statements of Woolworth Group

Income tax expense refers to the amount of tax that has been computed using the accounting standards and it is shown in the profit and loss of the company. The income tax expense reported by the Woolworth Group for year 2016 was $ 414.4 million dollars while it was $ 837.7 million dollars in year 2017.

Analysis of income tax expenses reported in income statement and income tax computed using the fixed tax rate

The income tax has to be computed using the tax rate provided by the tax authorities and tax authorities have provided the tax rate of flat 30% on net income computed after giving effect to all the expenses and other important items. On evaluation it has been found that tax computed using the tax rate of 30% and tax expense shown in the income statement are not same. It is because of the adjustment that is required to be made to the computed income tax @ 30%. Tax computed using the flat tax rate of 30% was $ (580.0) million for year 2016 and $ 729.3 million for year 2017. Adjustments to taxes that have made in last two years are tax effect of expenses that are not deductible, tax impact on expenses of impairment that are not deductible, tax losses due to termination or end of limit of deferred tax assets, tax losses that are unrecognized in current year and other differences as shown in tax reconciliation statement (Epstein and Jermakowicz, 2008).

Accounting for Corporate Income Tax

Deferred tax assets and deferred tax liabilities as reported in balance sheet of Woolworth Group

Deferred tax assets and deferred tax liabilities are recognised in the balance sheet duet to the timing difference of treatment of tax expense under accounting provisions and income tax laws. For example, depreciation on motor vehicles is provided at flat rate of 20% under income tax laws while it is depreciated at 5% under accounting provisions. This creates changes to the income statement and also impacts the tax expenses of the particular period. Timing differences can be permanent or temporary depending upon their reversal or non reversal in the subsequent year. Deferred tax assets are recognised in balance sheet as it surety that  in any subsequent year company can realize the income tax relief and deferred tax liabilities are created because it represent the liabilities due for current year but not paid to the account of tax authorities (Mills, 2017).

Following screenshot from the annual report of Woolworth shows the deferred tax assets and deferred tax liabilities:

Income tax payable for current year and income tax expense reported in the income statement

The current tax payable by Woolworth Group as reported in liabilities section of balance was $80.9 million for year 2017 and it is not same as the income tax expenses reported in the income statement. The reason of this difference is that income tax expense reported in the income statement reflects the total tax expense for the particular period while current tax payable shows the amount that has was remained as unpaid in the current year (ICAA (The Institute of Chartered Accountants in Australia), 2012).

Income tax paid shown in cash flow statement and income tax expenses shown in income tax statement

The income tax expense shown in income statement and income tax paid reported in the cash flow statement are not same and it is because tax expense merely a tax liability of the given time period while income tax paid shows the amount that has already been deposited with the tax authorities for that particular year (Henderson, Peirson, Herbohn and Howieson, 2015).

Self learning from the accounting of income tax

On the basis of treatment of income tax by the Woolworth Group, I find it very interesting the way they have presented the tax reconciliation and deferred tax assets/liabilities. It is little confusion regarding the creation of some of deferred tax liabilities.

Conclusion

Financial reporting is the complex part while preparing the annual report and it is very important to understand its important aspects such as accounting of income tax, treatment of various income statement items and other important financial items.

References

Annual Report, 2016. Woolworth Group. [Online]. Available at: https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-full.pdf [Accessed on: 24 May, 2018].

Annual Report, 2017. Woolworth Group. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed on: 24 May, 2018].

Epstein, B.J., and Jermakowicz, E.K. 2008. Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. John Wiley & Sons.

Gibson, C.H. 2012. Financial Reporting and Analysis. Cengage Learning.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B. 2015. Issues in Financial Accounting. Pearson Higher Education AU.

ICAA (The Institute of Chartered Accountants in Australia). 2012. Chartered Accountants Financial Reporting Handbook 2012, Google eBook. John Wiley & Sons. Pearson Higher Education AU.

Klammer, T. 2018. Statement of Cash Flows: Preparation, Presentation, and Use. John Wiley & Sons.

Mills, A.D. 2017. Company Accounting – Prepare Financial Reports for Corporate Entities. Cengage AU.

Ramachandran, N. and Kakani, R.K. 2010. How to Read a Cash Flow Statement. McGraw-Hill Education.

Wahlen, J.M., Baginski, S.P. and Bradshaw, M. 2010. Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective. Cengage Learning.