Analysis Of Cashflow Statement, Income Statement And Tax Implications For Woolworth

Analysis of Cashflow Statement

This report emphasises the tax implication on the company. With the changes in time, the government has been amending the rules and regulations for the tax implication on the companies. In this report, Woolworth Company has been taken into consideration.

This company has been running its business in the retail business with a view to satisfying clients’ needs and demand.

Answer to question-1

The cash flow statement shows the inflow and outflow of cash in the present year irrespective of the fact whether it belongs to the present year or future year. After analysing the cash flow statement of Woolworth, it is observed that there are several changes which impact the operating, financial and investing activities of the company (Stoianoff, and Kaidonis, 2005).

The non-cash items which have been added to the operating flow of cash are zero as the company does not have any amount of cash flow in its operating activities. All the expenses and inflow from its operating activities are non-cash transactions (Badenhorst, and Ferreira, 2016).

Woolworth has reduced its depreciation and provision for taxes in the previous year.

The flow of cash in the investing activities has shown the outflow of cash AUD $ 1202 million which is too high. It may decrease the liquidity position of the company.  The outflow of cash in its investing activities has occurred due to the investment in buying shares, intangible assets and investment.

The cash outflow for the dividend has also shown the payment of AUD $ 1417 million which is too high and will negatively impact the flow of cash in its free cash flow.

The outflow of cash in its financial activities has also increased to AUD $ 1520 million (Stoianoff, and Kaidonis, 2005).

The free cash flow has still had positive free cash flow of AUD $ 121 2 million (Badenhorst, and Ferreira, 2016). 

Free Cash Flow	2013	2014	2015	2016	2017	TTM
Capital expenditure	-1970	-1883	-2173	-1983	-1910	-2031
Free cash flow	750	1590	1172	375	1212	870

The amount of capital expenditure shown in the above table reflects that company has a high amount of cash outflow which may negatively impact the liquidity position of the company, however, the company has a high outflow of cash in its investing activities in 2017 which was done to acquire new shares.

WOOLWORTHS GROUP LTD  (WOLWF) Statement of  CASH FLOW
Fiscal year ends in June. AUD in millions except per share data.	2013-06	2014-06	2015-06	2016-06	2017-06
Net cash provided by operating activities	0	0	0	0	0
Net cash used for investing activities	-1202	-2031	-1334	-1267	-1431
Net cash provided by (used for) financing activities	-1520	-1372	-1611	-1475	-1729
Free cash flow	750	1590	1172	375	1212

The free cash flow of company has AUD $ 750 million. However, the total capital expenditure is AUD $ 1910 million which is way too high as compared to last year. Woolworth has to face the high cost of capital in its business due to the high flow of cash (Stoianoff, and Kaidonis, 2005). 

In the income statement of Woolworths, there are several items are recorded in the books of accounts of a company such as revenue, expenses, operating income, gross income, interest, provisions charged and other items which are revenue in nature.

WOOLWORTHS GROUP LTD  (WOLWF) Cash Flow Flag INCOME STATEMENT
Fiscal year ends in June. AUD in millions except per share data.	2013-06	2014-06	2015-06	2016-06	2017-06	TTM
Revenue	58674	60952	60868	58276	55669	56430
Cost of revenue	42913	44475	44345	42677	39740	40096
Gross profit	15762	16478	16524	15599	15929	16334
Operating expenses
Sales, General and administrative	11380	11962	5511	12964	13134	13217
Other operating expenses	10765	11172	18567	12033	11686	11916
Total operating expenses	22146	23134	24078	24997	24820	25132
Operating income	-6384	-6656	-7555	-9398	-8891	-8799
Interest Expense	410	278	255	246	194	162
Other income (expense)	10009	10449	10877	11004	11217	11253
Income before income taxes	3215	3515	3068	1360	2132	2293
Provision for income taxes	960	1057	930	520	650	686
Minority interest	5	7	-9	-1113	60	89
Other income	5	7	-9	-1113	60	89
Net income from continuing operations	2255	2458	2137	840	1482	1606
Net income from discontinuing ops	10			-3188	111	260
Other	-5	-7	9	1113	-60	-89
Net income	2259	2452	2146	-1235	1534	1777

(Yahoo Finance, 2017)

The cash flow of the operating activities have been showing zero has company does not have any flow of cash in this activities.

As per my understanding, only those items which have a direct or indirect impact on the net profit of company in monetary terms will be recorded in the income statement. Provided that, those transactions are revenue in nature.

Comparative analysis of the three main cash flow activities

The profit and loss account of Woolworths will include all the transactions which are revenue in nature. For instance, interest expenses and provision for the tax will be recorded in the income statement of the company (Stoianoff, and Kaidonis, 2005). The profit and loss account is prepared to identify the true and fair view of the profit earned by the company in the present year. It includes only those transactions which are related to the present year

The income statement of the company is records all the revenue and expenses of the company. It is analysed that the income statement of Woolworths following items are recorded in the books of accounts of a company such as revenue, expenses, operating income, gross income, interest, provisions charged and other items which are revenue in nature (Watson, 2017). 

Reason for differences

The main reason for differences between the transactions recorded in the cash flow statement and income statement is based on the nature of books and transactions recording system.
Cash flow statements record only those transactions which have a direct and indirect impact on the flow of cash in the business in the present year irrespective of its relation with other years.

The income statement is prepared with a view to identifying the true and fair view of profit and loss of the company in the present year (Towery, 2017).

Tax is the amount of legal payment which every company needs to make to the government on their earning. Woolworths has been paying a tax of AUD $ 650 million in 2017 which is AUD $ 130 million higher as compared to last year data (Watson, 2017).

Particular(AUD $ in million)	2016	2017
Income tax expenses	520	650

The annual report of Woolworth Company has reflected that company has a difference in the tax recording in two books named profit and loss and cash flow statement (Woolworth, 2017). 

It is company’s tax rate time’s expenses are the amount of tax computed by using the formula tax rate charged on the profit earned by the company. It is computed on the basis of 30% * AU # 1534 million= AUD $ 459.25 million (Vogel, 2014).

It is observed that as per the computed tax rate time’s expenses, the tax amount should be AUD $ 459.25 million.

The reason for changes in the tax recorded in the books of accounts and computed tax rate time’s expenses.

• The tax payment shown in the income statement of the company is done on the basis of taxation rules and regulation in AASB 112. On the other hand, computed tax rate time’s expenses are done by using the % of tax rate used on the accounting income.
• Other reasons.

1. There are differences in the recording of the transactions in the books of accounts of the company as per the taxation rules and standards are given under AASB 112 and accounting rules such as bad debts recording, depreciation allowance, donations and charities (Weygandt, Kimmel, and Kieso, 2015).
2. The recording of the transactions in the books of accounts differs as per the accounting and income tax rules. It is the main reason which will result to change in the profit computed under the accounting rules and taxation rules under AASB 112.

The deferred tax liabilities shown in the balance sheet of Woolworth is AUD $ 40 million. It is evaluated that the deferred tax liabilities are recognized or carried forward to the next year to the extent to which it is sufficient to charge with its future taxable income.

Recording of the deferred tax assets and liabilities in the balance sheet

It arises due to the differences between the accounting rules and taxation rules and regulation given under the AASB 112 (Watson, 2017).

If the tax payment is less as per the taxation rules AASB 112 then the remaining tax (tax computed as per the Accounting rules- Tax computed under AASB 112) will be recorded as deferred tax liabilities (White, Sondh, and Fried, 2015).

Items Reported in the Other Comprehensive Income Statement

If the tax payment is higher in the same case, then the higher tax payment will be deferred tax assets for Woolworth (Woolworth, 2017).

Particular (AUD $ million)	2017	2016
Deferred tax liabilities	40	81

Current tax payment and recording of income tax payable

The current tax payment is shown in the profit and loss account as charged on the profit for the present year (Zainudin, and Hashim, 2016). The current tax payment is AUD $ 650 million (Woolworths, 2017).

The income tax payable is the amount of tax-related to past present and future tax liabilities of the company as per the AASB 112 (Watson, 2017).

Particular(AUD $ in million)	2016	2017
Income tax payable	0	0

          In this case, Woolworth does not have any income tax payable.

There are several differences for the recording of the income tax payment and income tax payable   (Wang, Butterfield, and Campbell, 2016.).

• The income tax shown in the profit and loss account is the tax liabilities of the company as charged on the present year profit.
• The income tax payable is the total amount of tax liabilities which company needs to pay to the government, irrespective of its relationship with the years it belongs (Tearney,., 2015).

The cash flow statement shows the income tax payment of Woolworth i.e. AUD $ 668 million. It is the total amount of tax payment made by Woolworth in the present year. The profit and loss accounts reflect the tax liabilities of the company in the present year (Rathke, 2016).

Reason

Cash flow statement records all the tax payment in the present year irrespective of its relationship with the years.

Tax charged on the profit and loss accounts is done as per the taxation rules and regulation of AASB 112 (Johnston, and Kutcher, 2015).

Treatment of the Tax

Woolworths Company has been complying with the international financial accounting standard rules and regulation to establish the harmonization in its recording frameworks with the domestic and international compliance. It has also followed AASB 112 to maintain the effective recording of the taxation amount in its books of accounts (Badenhorst, and Ferreira, 2016). 

Interesting thing

• The high blockage of tax as deferred tax liabilities due to the consistent changes in the taxation rules.
• It is hard to manage the flow of cash due to changing taxations rules.
• The accountant has to prepare the profit and loss account as per the accounting and taxation rules. In case of conflict, taxation rules and regulation will override the accounting rules (Watson, 2017).

Surprising thing

The deferred tax liabilities and deferred tax assets cannot be recorded at the same time on the balance sheet of the company (Yahoo finance, 2017). The main reason for the same is based on the IFRS rules and matching concept for the recording of the transactions in the books of accounts (Chytis, Koumanakos, and Goumas, 2015). The difference between the accounting rules and regulations and income tax rules may result in conflict and legal liabilities of the company. It may take the Woolworths in a loss if the proper legal compliance procedure is not followed.

Difficulty in recorded the entire tax amount

The main difficulty in the recording of the entire tax amount arises due to the difference between the accounting rule and standards with the taxation rules given under AASB 112 (Stoianoff, and Kaidonis, 2015).

Conclusion 

After analysing the annual report of Woolworth, it could be inferred that it does not have any negative tax implication. The company has been paying tax consistently for very long time. However, complying with the taxation rules and AASB 112 increases the blockage of the high amount of cash in the business which may negatively increase the overall cost of capital. It is observed that Accountants needs to prepare the profit and loss account as per the accounting and taxation rules. In case of conflict, taxation rules and regulation will override the accounting rules.  Now, in the end, it could be inferred that proper compliance with the taxation rules and standards may decrease the penalties and eventually increase the overall outcomes of the organization. 

References

Badenhorst, W.M. and Ferreira, P.H., 2016. The Financial Crisis and the Value?relevance of Recognised Deferred Tax Assets. Australian Accounting Review, 26(3), pp.291-300.

Chytis, E., Koumanakos, E. and Goumas, S., 2015. Deferred Tax Positions under the prism of financial crisis and the effects of a corporate tax reform. International Journal of Corporate Finance and Accounting (IJCFA), 2(2), pp.21-58.

Johnston, D. and Kutcher, L., 2015. Do stock-based compensation deferred tax assets provide incremental information about future tax payments?. The Journal of the American Taxation Association, 38(1), pp.79-102.

Rathke, A., 2016, December. The Effects of Inter-temporal Tax Allocation on Current Tax Expenses. In III Workshop de Contabilidade e Tributação (Vol. 1, No. 1).

Stoianoff, N. and Kaidonis, M., 2005. TAX TEACHERS ASSOCIATION. JOURNAL OF THE AUSTRALASIAN TAX TEACHERS ASSOCIATION, 1(1).

Tearney, M.G., 2015. Discounting deferred tax liabilities–review and analysis. Journal of business, finance and accounting.

Towery, E.M., 2017. Unintended consequences of linking tax return disclosures to financial reporting for income taxes: Evidence from Schedule UTP. The Accounting Review, 92(5), pp.201-226.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wang, Y., Butterfield, S. and Campbell, M., 2016. Deferred tax items as earnings management indicators. International Management Review, 12(2), p.37.

Watson, L. (2017). Discussion of’Does the Deferred Tax Asset Valuation Allowance Signal Firm Creditworthiness?’.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis.

Woolworths Company 2017., Annual report., [Online]., Available from https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_JBH_2016.pdf  [Accessed 14th May, 2018].

Yahoo Finance. 2017., Balance Sheet., [Online]., Available from https://financials.morningstar.com/income-statement/is.html?t=WHL&region=zaf.,  [Accessed 14th May, 2018].

Yahoo Finance., 2017., Income statement., [Online]., Available from https://financials.morningstar.com/income-statement/is.html?t=WHL&region=zaf.,   [Accessed 14th May, 2018].

Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.