Analysis Of Cash Flow Statement, Balance Sheet And Other Comprehensive Income Statement Of XERO Limited

Overview of XERO Limited and Its Accounting Software

The ASX listed company XERO Limited offers the platform for the online accounting and the business services for the small scale business entities. The company provides XERO software that is service software and it can be accessed from internet cloud through the standard browser (Xero Accounting Software 2018.). The objective of this report is to analyse the company’s cash flow statement, balance sheet and other comprehensive income statement for last 3 years that covers 2015, 2016 and 2017.

Looking into the annual report of XERO Limited it is recognised that the company’s cash flow statement is divided into 3 parts – cash flows from operating activities, cash flow from investing activities and cash flow from financing activities.

• Net cash flow or cash used in operating activities – this includes all the cash flows or the cash used in the operational activities of the company like payment of tax, receipt of interest and payment made to suppliers. Generally the operating activities of the company includes the non-cash expenses like depreciation, net income and changes in the working capital (Chang et al. 2014). There is significant decrease in the cash flows from operating activities of the company over the years from 2016 to 2017. The reason of decrease was that the receipts from the customers in the year 2017 were significantly high if it is compared with the receipts of the year 2016.
• Net cash used in or provided by the investing activities – cash flow from investing activities records the cash generated from or cash used in the investing activities of the company (Sarfaty 2015). Financing activities of XERO Limited includes capitalised cost for development, cost of rental bonds and amount spend for purchasing plant, equipment and property.
• Net cash provided by or used in the financing activities – cash flow from financing activities records the cash generated from or cash used in the financing activities of the company. Financing activities of XERO Limited includes proceeds from and payments towards short-term deposits and repayment of the management loan.

• Operating activities – operating cash usage of the company over the past 3 years are in decreasing trend. It can be observed from the above presented graph and table that the cash used for the operating activities of the company reduced from $ 38,623 thousand to $ 34,770 thousand over the years from 2015 to 2016. However, it significantly reduced to $ 4,401 thousand in the year 2017 as the company received $ 288,448 thousand from the customer during the year (Xero Accounting Software 2018).
• Investing activities – investing cash usage of the company over the past 3 years are in increasing trend. It can be observed from the above presented graph and table that the cash used for the investing activities of the company increased from $ 49,758 thousand to $ 53,820 thousand over the years from 2015 to 2016 and  it further increased to $ 66,430 thousands in the year 2017 (Xero Accounting Software 2018.)
• Financing activities – cash generated from financing activities of the company over the past 3 years are in decreasing trend. It can be observed from the above presented graph and table that the cash generated from the financing activities of the company significantly reduced from $ 132,154 thousand to $ 66,241 thousand over the years from 2015 to 2016 and it further increased to $ 60,057 thousands in the year 2017. Reason of significant reduction over the years from 205 to 2016 is that the company did not issue any shares in 2016 and proceeds from the short-term deposits were significantly reduced from $ 403,000 thousands to $ 210,000 thousands over the years from 2017 to 2016 (Xero Accounting Software 2018).

Other comprehensive loss of XERO Limited for the year ended 2017 amounted to $ 68,442,000 as compared to $ 86,185,000 for the year 2016. Various items recognized by the company under its comprehensive income statement are movement in the cash flow hedges that amounted to $ 20,29,000, translation of the international subsidiaries amounted to $ 14,15,000 and other comprehensive income amounted to $ 615,000.

The cash flow hedges that is included in the comprehensive income statement of the company is the derivative in FECs (Forward exchange contracts) for reducing risks in such a way that the changes in the exchange rates will have an impact on the cash flows of the company. The hedges are recognized as highly probable under the forecasting of the transactions. Further the difference in exchange rates arises from the translation of international subsidiaries is recorded as the separate component of equity. Amount of differences are recognized under the statement of comprehensive statement only when the foreign operations are disposed-off (Titman, Keown and Martin 2017).

Items of expenses and incomes those are not recognized under the income statement or comprehensive income statement of the company are recorded under the statement of comprehensive statement (Sethi 2016). The statement helps the user to get better and clear picture of the company’s profitability position. The amount of losses or incomes those are already been recognized are recorded in the income statement. However, the unrealized items of investments are included in the other comprehensive income statement (Warren and Jones 2018). It helps the investors and financial analysts to measure the fair value of the investment of the company.

The net income remains with the company after paying off the expenses and adjusting for various non-assessable and disallowed items are considered as the amount chargeable to tax. The tax is applicable at the rate enacted or substantially enacted by the jurisdiction (Weygandt, Kimmel and Kieso 2015). Further the amount of tax expenses is adjusted for deferred tax assets or deferred tax liabilities that arise due to temporary differences. Income tax expenses for XERO Limited as per the latest financial report is $ 19,87,000 as compared to $ 15,12,000 for the previous year. 

Components of XERO Limited’s Cash Flow Statement

The income tax rate applicable to the company by the appropriate authority is 28%. Net loss of the company before tax payment for the year ended 2017 amounted to $ 67,070,000. However, Income tax expenses for XERO Limited for the same period amounted to $ 19,87,000. However, the tax expenses do not match with the applicable rate on the income of the company as the company had loss for the period (Narotzki 2017). The reason of difference is that the expenses of income tax includes the adjustments for prior period, effect of the prior period’s development and research credit, utilisation of tax loss, deferred tax and impact of changes in the foreign currency.

The company recognizes the deferred tax with regard to the temporary differences among the asset’s and liability’s carrying amount determined for the purpose of recording in the financial statement and the amount determined for the purpose of taxation. Further, the deferred tax amount is determined on the basis of expected method in which the carrying amount of the liabilities and assets are realised at the end of the period through the applicable tax rate on the company (Laux 2013). The amount for deferred tax is recorded in the financial statement up to the amount that is apparent to be available from future taxable profit against of which the asset is usable. Amount of deferred tax assets recorded by the company under the non-current section of balance sheet for the year ended 2017 was $ 20,65,000.

Income tax or current tax payable by the company for the year ended 2017 by XERO Limited was amounted to $ 11,05,000. On the other hand, the income tax expenses for the company as per the latest financial report is $ 19,87,000. Expense of income tax is the amount the company is liable to pay as per the applicable taxation rules. However, the payable amount of income tax is computed through applying the applicable tax rates on the company (Melloni, Lai and Stacchezzini 2018). The income tax expense is recorded in the income statement of the company whereas the current tax is recorded in the cash flow statement of the company. Owing to all these differences the amount of current tax does not match with the amount of income tax expenses.

The income tax expenses for the company as per the latest financial report is $ 19,87,000. On the other hand, the income tax paid as recorded in the cash flow statement of the company was $ 20,93,000. The amount of tax expenses under the income statement of the company varies from the amount recorded as income tax paid in the cash flow statement as the income tax paid is the amount of tax on the operating activities of the company. On the other hand the income tax expenses is the amount of tax applicable on the revenue of the company left after paying off all the expenses like operating expenses, investing expenses, selling and administration expenses and financing expenses (Maaloul and Zéghal 2015).

XERO Limited’s Other Comprehensive Income Statement

Difficult and confusing part – the most confusing and difficult pat was the treatment of deferred tax. The deferred tax is recognised for the temporary difference. However, no particular indication is mentioned that can be considered as the benchmark for temporary differences. Whether the difference will be temporary or permanent that will be determined on the basis of the knowledge, experience and judgement of the user. Therefore, someone mat treat the particular difference as temporary whereas the same may be treated by someone else as permanent. Therefore, the treatment of permanent as well as temporary difference is not easy and confusing.  

New insights – one new insight obtained from analysing the financial statement of the company is that the income tax expenses and income tax paid by the company is not same and not calculated or treated in the same way. The income tax paid is the amount of tax on the operating activities of the company whereas the income tax expenses is the amount of tax applicable on the revenue of the company left after paying off all the expenses like operating expenses, investing expenses, selling and administration expenses and financing expenses.

Reference

Chang, X., Dasgupta, S., Wong, G., and Yao, J. 2014. Cash-flow sensitivities and the allocation of internal cash flow. The Review of Financial Studies, 27(12), 3628-3657.

Laux, R. C. 2013. The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.

Maaloul, A. and Zéghal, D., 2015. Financial statement informativeness and intellectual capital disclosure: An empirical analysis. Journal of Financial Reporting and Accounting, 13(1), pp.66-90.

Melloni, G., Lai, A. and Stacchezzini, R., 2018. Integrated reporting and narrative accountability: The role of preparers. Accounting, Auditing and Accountability Journal, p.1.

Narotzki, D., 2017. Corporate Social Responsibility and Taxation: A Chance to Develop the Theory.

Sarfaty, G.A., 2015. Measuring corporate accountability through global indicators. The Quiet Power of Indicators: Measuring Governance, Corruption, and Rule of Law, p.103.

Sethi, S., 2016. Globalization and self-regulation: The crucial role that corporate codes of conduct play in global business. Springer.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, pp.1-16.

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

Xero Accounting Software. 2018. Online Accounting Software – Free Trial, Free Support | Xero. [online] Available at: https://www.xero.com/ [Accessed 21 May 2018].