Net cash flows from operations

The cash flow statement is a significant financial statement of an organisation, which depicts the way the changes in the accounts of the balance sheet statement and income statement influence cash and cash equivalents. The assignment aims to provide critical overview of the main items listed in the cash flow statement of Retail Food Group. There are three major items listed in the cash flow statement of Retail Food Group (RFG) listed in ASX, which are discussed as follows:

Net cash flows from operations:

This section contains four major items for RFG, which are customer receipts, supplier and staff payments, interest payment and others (Rfg.com.au 2018). The customer receipts indicate those amounts received where sales are made previously on credit (Armitage, Webb and Glynn 2016). In case of RFG, this amount is observed to increase significantly for the year. This is because the organisation has made more credit sales. Similarly, supplier payments denote the amounts settled for the products, which were bought on credit. It has increased for RFG over the years due to additional purchases for meeting the rising consumer demand. Interest payments are those amounts that RFG needs to pay on the short-term loans undertaken. This has increased in 2017, since it has raised loans for buying additional inventories (Beekes, Brown and Zhang 2015).

Net cash flows used in investing activities:

RFG records certain items under this head in the cash flow statement of the organisation and they are described effectively. Payment for plant and equipment is the money incurred for buying and acquiring these items. Increase in this item could be observed in 2017, since RFG has laid stress on increasing its asset base. Due to this, lower proceeds from this item have been generated in 2017. The intangible asset payment signifies the money that RFG has incurred in order to acquire intangible assets (Benson et al. 2015). This amount has decreased slightly in 2017. Finally, interest payment is the sum received as interest from investments made. Since RFG has realised adequate cash flows from the capital invested in various projects, this item has increased considerably over the year.

Net cash flows used in financing activities:

There are various items that are disclosed under this section of the cash flow statement for RFG and the most significant items constitute of the following:

• Share issue
• Amount gained from borrowings
• Amount paid for borrowings (Ali 2016)
• Payment related to issue of debt and share

The share issue signifies the amount earned by the organisation by accumulating funds from the equity shareholders (Ball et al. 2016). $35,600,000 has been earned by issuing shares in 2017; however, nothing was earned in 2016 as proceeds from this issuance. The borrowing proceeds have increased in 2017 due to increased investment. This is because it has adopted the strategy of repaying its borrowings from 2015. Finally, increase in dividend payments could be identified over the years with the rise in net earnings of the organisation. 

From the above figure, it could be evaluated that there is significant rise in net cash flows from operations from 2015 to 2016. However, a marginal decline could be observed in the year 2017. This is because of the rise in customer receipts coupled with rise in supplier payments. As RFG has made additional payments for acquiring new assets like equipment and other intangibles, additional cash flows from investments are observed to increase in 2017. However, decline is inherent in 2017 due to higher proceeds earned from these assets. Along with this, decline in net cash flows from financing activities is evident; however positive increase is found in the later year. This is because RFG has experienced raised proceeds from share issuance, borrowings and others. Therefore, it could be inferred that both increase and decrease could be observed in the various categories of cash flow statement of the organisation.  

Net cash flows used in investing activities

The 2017 annual report of RFG states that there are three major items reported under the comprehensive income statement and they include the following:

• Income tax
• Cash flow hedge reserve
• Foreign currency translation reserve

It is noteworthy to mention that the business entities make utilisation of foreign currency translation reserve with the intent of converting the foreign subsidiary outcomes of the parent entity to that currency, in which the financial reporting is carried out (Carnegie 2014). Due to this, it is considered as a significant portion of the consolidation procedure for the organisations, in which ascertainment of the functional currency of the foreign entity is made initially. When this process is over, the organisations again gauge the foreign currency in the current reporting date of the financial reporting process. Finally, the disclosure of profit or loss is made on the real reporting currency (Du Plessis, Hargovan and Harris 2018). 

The cash flow hedge reserve is arranged for handling change risk sin cash flows related to a realised asset or liability or a possible estimate transaction. This is conducted, as certain risks are subject to change like debt interest, interest rate and others.

Both these items could be observed to be present in the other comprehensive income statement of RFG. Therefore, it is noteworthy to mention that the business organisations are obliged to charge tax on financial transactions in accordance with the taxation law. Since the above items are not reported in the income statement, the income tax payments related to these items are not reported in the income statement of RFG as well (Gray, Harymawan and Nowland 2016).

The investors often analyse the income statement of an organisation so that adequate understanding could be obtained regarding the net earnings. Previously, the net earnings variation is a consideration of the external factors of the core business operations and significant volatility was encountered on the part of the shareholders for their investments. However, RFG provides all the minute details of all the items listed in the comprehensive income statement. Hence, this statement is a mix of standard net earnings and other comprehensive income. In other words, this statement supplies a holistic and detailed account of all those items, which could not be reported in the income statement of the organisation. Thus, by combining all these reasons, the three stated items are not disclosed in the consolidated income statement of RFG.

It needs to be mentioned that RFG needs to make tax payments in accordance with the Australian taxation law. As per its annual report in 2017, the earnings before tax have been $87,613,000 as opposed to $76,583,000 in 2016. Thus, RFG needs to apply the corporate tax rate of 30% prevalent in Australia on the above-stated amounts. This would help the organisation to obtain the net income of the organisation in both the years. However, the taxation expense, as disclosed in the annual report of RFG, has been $25,686,000 in 2017 as opposed to $23,620,000 in 2016.

The above evaluation makes it evident that difference could be observed between the reported taxation expense and the tax expense, which would be actually charged by applying 30% tax rate. Certain reasons could be there that the tax expense reported does not resemble the actual tax expense. In order to determine taxable income, it is necessary to take into consideration the non-deductible expenses. This is because they are added with the taxable amount as $879,000 in 2017 and $638,000 in 2016. The varying tax rate is another reason (Henderson et al. 2015). In Australia, the tax rate is 28%; however, for the business subsidiaries are 28% and 34% respectively. Since deferred tax assets are realised in the reporting year, it is obvious that the actual tax amount would vary from the reported one, as the organisation aims to obtain tax advantages. When this aspect is present, $177,000 is deducted from the tax expense of the organisation. All these factors have led to difference between reported tax expense and actual tax expense (Kenny and Larson 2018).

Net cash flows used in financing activities

RFG discloses all the necessary details about its items as financial notes in its annual report. Deferred tax assets and deferred tax liabilities are considered as a part of these items in its published annual report. Deferred tax assets have been $13,657,000 in 2017, which were $7,394,000 in 2016. The deferred tax liabilities have been $119,433,000 in 2017 as opposed to $115,908,000 in 2016.

The role of deferred tax assets and deferred tax liabilities is immense in the context of the business organisation and RFG records them for a number of causes. Deferred tax assets are recorded due to excess payment of depreciation because of the variation in rate of tax depreciation and actual rate of depreciation. The primary reason behind recording deferred tax liabilities is the variation in the profit of RFG, as lower tax payments are made (Newberry 2015).

Income tax payable could not be found in the annual report of 2017 for RFG; however, this item is present in 2016 amounting to $4,455,000. No similarity could be found in income tax expense and income tax payable due to a wide variety of reasons. Out of them, deferred tax assets are one reason (Rao and Tilt 2016). It is observed that the organisations incur additional tax as opposed to the actual tax expense. Since, the organisation has paid excess amount as tax, it has lead to formation of deferred tax assets. Moreover, the regulations in Australia are not same for tax accounting and financial accounting. For instance, difference in depreciation expense could be observed because of the variations in accounting rules (Sultana 2015). 

RFG has reported taxation expense of $25,686,000 in 2017 and $23,620,000 in 2016 in the income statement, while in the cash flow statement, the tax expenses are $21,460,000 in 2017 as opposed to $19,298,000 in 2016. There are particular reasons that have resulted in such difference. For computing the income tax expense; initially, RFG has applied the standard tax rate of 30% on the operating income before tax. However, it is treated in the operating cash flows as income tax payable. This signifies the income tax payment as the satisfaction of the existing obligations of the organisation (Tucker and Schaltegger 2016). The total amount of income tax paid in the year 2017 is reported in the income statement of RFG. However, for taxation expenses in the cash flow statement, the previous year tax payment or future year tax payment is considered. Due to all these reasons, the main variation could be viewed under the taxation expenses.

Based on the above evaluation, it could be evaluated that no confusing or surprising elements could be found out in the taxation treatment of RFG, as it has conducted its tax operations with full adherence to the taxation law of Australia. However, it could be an interesting factor in observing the way where RFG has conducted its taxation expense. The availability of deferred tax assets is a primary reason for the variations, as RFG could enjoy tax benefits. Therefore, after careful observation of tax-related accounting of RFG, an in-depth knowledge could be obtained regarding the ways of performing the tax-related operations of the organisations.

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