1Cash flow statement:
Requirement (i):
The statement that represents the overall cash inflows and outflows of a business organisation is termed as the cash flow statement. For this assignment, Retail Food Group (RFG) is chosen; which has three cash flow categories, namely, cash flows from operations, cash flows from financing activities and cash flows from investing activities, as could be identified from its annual report in 2017.
Cash flows from operations:
Various items are listed under this head; the most significant are cash receipts from customers, cash payments to suppliers, interest payment, income tax payment and finance cost (Miao, Teoh and Zhu 2016). The amounts that are recovered from the customers due to credit sales are called as cash receipts from customers. This item is observed to increase to $456,000,000 in 2017, the value of which was $332,754,000 in 2016 (Rfg.com.au 2018), as more cash is recovered from credit sales in the year. Secondly, RFG has incurred certain amounts for purchasing materials, which are termed as payments to the suppliers. As the demand for the products of RFG rises in the market, rise could be seen in this item as well from $239,623,000 in 2016 to $361,329,000 in 2017.
Moreover, RFG is accountable to make interest payments on the borrowed amounts raised from different sources. Since it has undertaken additional loans, interest payment is observed to increase from $9,036,000 in 2016 to $9,416,000 in 2017. The final item is the income tax payment, which RFG has to pay to adhere to the taxation rules of Australia. As the profit level of the organisation has risen, there is increase in this payment from $19,298,000 in 2016 to $21,460,000 in 2017.
Cash flows from financing activities:
The proceeds from share issuance, proceeds from and repayment of borrowings, cash dividends paid, share issue cost payment and debt issue cost payments are the significant items disclosed under this head (Ayers, Call and Schwab 2018). The share issue proceeds signify the earnings that RFG has made on investments. RFG has made proceeds from shares of $35,600,000 in 2017; however, nothing has been earned in 2016. Moreover, rise could be observed in case of borrowing proceeds from $148,500,000 in 2016 to $189,500,000 in 2017 due to additional investments made. On the other hand, RFG has managed to reduce its borrowings payment to $148,372,000 in 2017 from $149,500,000 in 2016. It denotes that no mature borrowings are present in 2017.
The dividend payment is the distribution of a portion of net earnings made in the reporting year, which is observed to increase to $42,888,000 in 2017 as compared to $31,456,000 in 2016 due to increased net income in 2017 (Kent 2017). Moreover, it has to incur a particular cost at the time of share issuance (Banker, Basu and Byzalov 2016). As RFG has issued additional shares, the cost of issuing them has increased from $47,000 in 2016 to $543,000 in 2017. However, it has not issued much debt due to which debt issue cost has declined to $223,000 in 2017 from $802,000 in 2016.
Cash flows used in investing activities:
In this section, the significant items reported include payments for and proceeds from plant and equipment, payment of intangible assets and interest received. The payments for plant and equipment are the amounts incurred to purchase as well as acquire these items. This item has increased in 2017, since additional emphasis has been placed to raise its asset base. As a result, the proceeds generated from these assets have declined in the year 2017 as opposed to 2016. The payment of intangible assets denotes the monetary amount, which RFG has paid for acquiring intangible assets (Chen et al. 2018). Decline in this item could be observed slightly in 2017. Lastly, interest payment could be defined as the sum of money incurred due to loans undertaken from the banks. This item is observed to increase for the company, since additional cash flows are recognised from capital projects.
Requirement (ii):
From the above figure, it is found that the net cash flows from operations have risen to $64,797,000 in 2016 from $34,700,000 in 2015; however, slight decline is observed in 2017 to $63,795,000. The increase is due to the rise in supplier payments and the fall is due to the increase in payments of the suppliers. Along with this, it could be stated that the cash flows used in investing activities have fallen over the years because the payments for plant, equipment and intangible assets have increased. Furthermore, the cash flows used in financing activities have declined massively to ($32,177,000) in 2016 in comparison to $31,946,000 in 2015; however, they have increased to $31,946,000 in 2017. The reason is that additional proceeds are earned from issuance of shares and borrowings. Hence, the above analysis clearly lays out the fact there are both increases and declines in the different cash flow statement categories of RFG.
Other comprehensive income statement:
Requirement (iii):
The other comprehensive income statement of RFG consists of three significant items, which include cash flow hedge reserve, foreign currency translation reserve and cash flow hedge reserve, as per the annual report of 2017.
Requirement (iv):
The business organisations use the foreign currency translation reserve with a motive of transferring the outcomes of the foreign unit to the currency of the domestic unit based on which the financial reporting could be conducted (Lin et al. 2017). As a result, this could be taken into account in the form of considerable portion of the consolidation process for the entities where the currency of the foreign currency is determined initially. After the end of this process, the foreign currency is measured at the present reporting date of the process of financial reporting. Lastly, the profit or loss disclosure is carried out on the domestic currency (Black 2016).
The cash flow hedge reserve is important for the planning process in order to minimise exposures taking place because of considerable change in cash flows pertaining to financial assets or liabilities. It is significant due to change in debt interest, interest rate and others, which might increase the overall business risk.
Since cash flow hedge reserve and foreign currency translation reserve are not reported in the income statement of RFG, it is the obligation of the business organisation to impose tax on these financial transactions in compliance with the taxation law of Australia. Due to the non-reporting of the two items in the income statement, the income tax expense associated with these items is not recorded in the statement of income of RFG as well.
Requirement (v):
A diversified view of the net income of an organisation is the income statement. In the past, the variation of net earnings is a portion of the external influential dynamics of the significant business operations and volatility that the shareholders have faced in relation to their investments. However, a detailed account of all the items listed in the other comprehensive income statement is provided in the annual report of RFG. Thus, this statement is a combination of net income and other comprehensive income. Moreover, a detailed and holistic view of all such items is disclosed in this statement and they could be disclosed in the income statement of RFG (Hodgson and Russell 2014). All these reasons have restricted the disclosure of the three items in the income statement of the organisation.
Accounting for corporate income tax:
Requirement (vi):
RFG is needed to conduct tax payments by complying with the taxation law of Australia. In accordance with the annual report of RFG in 2017, the profit before tax has been $87,613,000 in 2017 compared to $76,583,000 in 2016. The standard corporate tax rate prevalent in Australia is 30%. Therefore, a tax rate of 30% is to be expensed on the two disclosed net profit figures. However, the reported tax income has been $25,686,000 in 2017 and $23,620,000 in 2016.
Requirement (vii):
The above analysis clearly highlights the fact that variations could be observed between the disclosed tax expense and the tax amount, which would be applicable, if the standard tax rate of 30% is followed. There are a number of reasons due to which no resemblance could be found between the reported tax expense and the real tax expense. The initial factor includes the non-deductible expenses to determine taxable income, since additional amount of $638,000 in 2016 and $879,000 in 2017 have been included. The differing tax rate could be identified as another reason (Klassen, Lisowsky and Mescall 2015). The corporate tax rate in Australia is 30%, while its subsidiaries have varying tax rates of 29% and 34% respectively. As deferred tax assets are present, this has contributed to the variations in tax expense as well and as a result, tax benefits could be reaped. In the presence of this aspect, the deduction of $177,000 is made from the tax expense of RFG. These factors collectively have resulted in the variation between the actual tax expense and disclosed tax expense (Goh et al. 2016).
Requirement (viii):
It has been observed from the annual report of RFG in 2017 that deferred tax assets as well as deferred tax liabilities are reported in the form of notes to the financial statements. Increase in deferred tax assets could be observed from $7,394,000 in 2016 to $13,657,000 in 2017, while the deferred tax liabilities have increased as well from $115,908,000 in 2016 to $119,433,000 in 2017.
It is significant to record deferred tax assets as well as deferred tax liabilities. The additional depreciation payment due to difference in taxable depreciation rate and actual depreciation rate is the primary reason behind recording deferred tax assets. Deferred tax liabilities are recorded because the profit of RFG differs due to the minimised tax payments (Donohoe 2015).
Requirement (ix):
No current tax assets or income tax payable could be identified from the annual report of RFG in 2017 in the same year; however, income tax payable has been $4,455,000 in 2016. The income tax expense and current tax assets differ from each other due to a variety of reasons. One of these reasons is the availability of deferred tax assets (Christensen et al. 2015). It has already been assessed that RFG has made additional tax payments in contrast to the actual tax expense incurred. Such excess payment is considered as deferred tax liable for the difference. The other reason includes the norms associated with financial accounting and tax accounting. For example, the depreciation expense would vary due to the changes in the accounting policies (Balakrishnan, Blouin and Guay 2018).
Requirement (x):
The taxation expense disclosed in the income statement of RFG has been $25,686,000 in 2017 and $23,620,000 in 2016, while the amount disclosed in the cash flow statement is $21,460,000 in 2017 and $19,298,000 in 2016. Initial calculation of income tax expense is conducted by applying the tax rate of 30% on profit before income tax. However, the income tax payable is reported in the cash flow statement under cash flows from operating activities. Hence, income tax payment meets the current obligations of the organisation (Cen et al. 2017). The income tax payment of the current year is reflected in the income statement, while the income tax payment disclosed in the cash flow statement includes tax payments of the past and future years. All these factors have resulted in the differing tax expenses in the two financial statements (Best and Schafer 2017).
Requirement (xi):
In accordance with the above analysis, it could be analysed that there is absence of any confusing or surprising element in tax treatment of RFG, since the tax operations are carried out with full compliance with the Australian taxation law. However, the interesting factor is the observation of the techniques that RFG has adopted in carrying out its treatment related to income tax. The presence of deferred tax assets is a significant reason for the variations, since tax benefits could be reaped. Henceforth, careful observation of the tax treatment of RFG would enable the stakeholders of the organisation to gather adequate knowledge of how to calculate tax expense and the items to be taken into consideration for such calculation.
References:
Ayers, B.C., Call, A.C. and Schwab, C.M., 2018. Do Analysts’ Cash Flow Forecasts Encourage Managers to Improve the Firm’s Cash Flows? Evidence from Tax Planning. Contemporary Accounting Research.
Balakrishnan, K., Blouin, J. and Guay, W., 2018. Tax Aggressiveness and Corporate Transparency. The Accounting Review.
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research. The Accounting Review, 92(2), pp.41-67.
Best, E.E. and Schafer, J.K., 2017. A Corporate Tax Return Simulation: Utilizing Electronic Work Papers and Resolving Ambiguous Issues. Issues in Accounting Education, 32(4), pp.61-80.
Black, D.E., 2016. Other comprehensive income: a review and directions for future research. Accounting & Finance, 56(1), pp.9-45.
Cen, L., Maydew, E.L., Zhang, L. and Zuo, L., 2017. Customer–supplier relationships and corporate tax avoidance. Journal of Financial Economics, 123(2), pp.377-394.
Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.
Christensen, D.M., Dhaliwal, D.S., Boivie, S. and Graffin, S.D., 2015. Top management conservatism and corporate risk strategies: Evidence from managers’ personal political orientation and corporate tax avoidance. Strategic Management Journal, 36(12), pp.1918-1938.
Donohoe, M.P., 2015. The economic effects of financial derivatives on corporate tax avoidance. Journal of Accounting and Economics, 59(1), pp.1-24.
Goh, B.W., Lee, J., Lim, C.Y. and Shevlin, T., 2016. The effect of corporate tax avoidance on the cost of equity. The Accounting Review, 91(6), pp.1647-1670.
Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income. Australian Accounting Review, 24(2), pp.100-110.
Kent, R.A., 2017. The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure.
Klassen, K.J., Lisowsky, P. and Mescall, D., 2015. The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review, 91(1), pp.179-205.
Lin, S., Martinez, D., Wang, C. and Yang, Y.W., 2017. Is other comprehensive income reported in the income statement more value relevant? The role of financial statement presentation. Journal of Accounting, Auditing & Finance, p.0148558X16670779.
Miao, B., Teoh, S.H. and Zhu, Z., 2016. Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), pp.473-515.
Rfg.com.au., 2018. [online] Available at: https://rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf [Accessed 22 May 2018].
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