Analysis Of Cash Flows, Other Comprehensive Income Statement, And Tax Expenses Of Woolworths Limited

Background Information on Woolworths Limited

Each statement of the annual report has its own effect in enabling the users of the financial statements to have the meaningful and the relevant decision. In the given case, the title of the report deals with the analysis of the two major statements of the financial statements of the company. Although there are four statements that is embedded in the annual report of the company but for the purpose of this report two statements have been analyzed. One is statements showing the cash flows and statement showing the other comprehensive income. For the furtherance of this report, the company – Woolworths Limited from the list of top hundred companies listed in the stock exchange has been considered. The annual report for the last three financial years ending 2017, 2016 and 2015 have been obtained and discussed in detail under the appropriate headings. At first the statements of the cash flows have been analyzed with regard to the three different activities which is being considered namely – operating, financing and investing activities. The items contained in each of the activities have been discussed and analysed. Then the items as listed in the statement of the other comprehensive income have been detailed. The items have been discussed with regard to its meaning and the accounting treatment in the statement of the profit and loss. Then the income tax expense recorded by the company has been discussed in detail with regard to its accounting treatment. It has also detailed as to why the tax on the accounting income differs from the taxable income and how these differences if any is accounted for in the books of accounts. The report has then ended up with the appropriate conclusion and recommendation thereon.  

The company that has been selected for the purpose of the study is the Woolworths Limited. The company has been formed in the year of nineteen hundred and twenty four and is into the sector of retail in the industry. The company is registered in the country of Australia and has supermarket chains across Australia and New Zealand and is regarded as the largest company in the second number for supermarket chains. The company has been regular in all its compliances related to the SEC filings and other related statutes.  The annual report for the three years 2017, 2016 and 2015 has been considered.   

The cash flow statement details the total cash inflows and cash outflows of the company. The cash flows have been bifurcated under three major heads – operating activity, financing activity and the investing activity. Under this section the items in the cash flow statement has been described separately and then the comparison has been made of the major heads for over the past three years.

Analysis of Cash Flows

Following are the items present in the statement of the cash flow which is necessary for the discussion and reporting:

• Receipts from Customers – It is referred to as the amount which has been collected from the customers to whom the goods has been sold and that the amount has been received in cash or bank. The cash receipts from the customers have been increased from $65329 million in 2016 to $65498 millions in 2017.
• Payments to suppliers and employees – It is referred to an amount which has been paid to the persons from whom the goods have purchased and also the amount paid to the employees as salary and other benefits in cash. The amount of payment has been decreased from $61834 million in 2016 to $61474 millions in 2017.
• Income tax paid – It is referred to the amount of tax paid on the income earned by the company during the year and has been decreased invariably from $848 million in 2016 to $686 millions in 2017.
• Proceeds from the sale of property plant and equipment – Under this item all the proceeds which are received on selling the assets under the head of property plant and equipment like air conditioner, land and building appurtenant thereto and etc. These proceeds are the inflows of the company and have been grouped accordingly.
• Purchase of property plant and equipment – Similarly any amount which is paid to acquire an asset will be the cash outflow. The assets also include the intangible assets like the goodwill, patent, insurance, etc.
• Payments for the purchase of business – Purchase of business is referred to as the acquisition of the business of other company in order to have more synergies and more profits in the future. Any amount paid as consideration for the purchase of business shall be regarded as the cash outflow.  It occurs only when there is the proposal and the company agrees to it. It is not the operating activity and hence cannot be made on the regular basis.
• Dividend received – It determines the amount which is received on regular basis on the investment made in the other company. In other words, it is the return that the company receives on their investment made in another company.  
• Proceeds from issue of shares – It is the amount which is received from the issue of share of the company. These are generally issued to have the funds in the company so as to run the company. The company has made the issue of shares in the year ending 2017 amounting to $55.5 million. No proceeds have been received in the past year on issue of the shares.
• Proceeds from borrowings – It is the amount which the company receives from the banks or the financial institutions for carrying out the functions of the company (Fraser, Ormiston and Fraser, 2010. ). In the year ending 2016 the company has borrowed the amount of $628 million and in the year under consideration, the company has borrowed the amount of $184 million.  
• Repayment of borrowings – It is the amount which the company pays to clear the amount of the debts. The company has paid an amount of $1406 millions in the year 2017 as compared to $994 million in the year 2016.
• Dividend paid – It is just opposite to the dividend received. The amount is paid to the investors of the company as a return for the amount invested in the company. Higher the divided pay out more potential investors will be attracted. Dividends paid have been considerably decreased from $1184 million to $540 million.     
• Net decrease in cash or cash equivalents – It denotes the amount of the cash that has been either generated from the activities of the company or has been excessively used leading to the situation of surplus and deficit respectively (Woolworths Limited, 2016).

The cash flow statement of every company has three major broad heads – cash flow from:

• Operating activity
• Investing activity
• Financing Activity

Apart from this activity, one major head is the net increase or decrease in cash balance. The comparative analysis for the last three years ending 2017, 2016 and 2015 has been detailed below:

S. No.	Particulars	2017	2016	2015
1	Cash Flow from Operating Activities	3122	2357	3345
2	Cash Flow from Investing Activities	(1432)	(1266)	(1335)
3	Cash flow from Financing Activities	(1729)	(1475)	(1610)
4	Net Increase or (Decrease) in Cash	(39)	(384)	400

The cash flows from the operating activities have been fluctuating mainly because of the change in trend of receiving the payment from the customers of the company and the payment to the suppliers and employees of the company. Secondly, the amount of income tax has been declined annually.

The cash flow from the investing activities has been in negative because of the excessive purchase of the property plant and equipment for the running of business of the company.  

The cash flow from financing activities has been in negative because of the payment of the borrowings of the company (Taylor, 2010).

The last the net change in the cash or cash equivalents and it has been observed that there has been decrease in the year of 2016 due to the decreased cash flows from operating activities with the similar pace of other cash flows.  

The statement of other comprehensive income comes after the statement of the profit and loss account.

Following items have been reported in the statement of the other comprehensive income:

• Hedging Reserve
• Foreign Currency Translation Reserve
• Equity Instruments Reserves
• Retained Earnings

Following are the understanding of each and every item of the other comprehensive income.

• Hedging Reserve – Under this head the amount is debited on account of change in the fair value of the hedge instruments employed for cash flow and when the cash flow is realized then it is transferred to the statement of the profit and loss.  It is the reason as to why it has been grouped under the head of items that can be reclassified to profit or loss.
• Foreign Currency Translation Reserve – Similarly the value of the purchase of the assets gets changed with the change in values and the difference in that is realized in the statement of comprehensive income. It is transferred to the statement of profit and loss when it actually gets transferred. It is the reasons as to why it has been grouped under the head of items that can be reclassified to profit or loss (Bamber, Jiang, Petroni and Wang, 2010).    
• Equity Instruments Reserves – It has been classified in this statement under the head not to be reclassified to the statement of the profit and loss. Under this, if there has been any movement in the fair value of the investment of the company then the corresponding reserve is created.
• Retained Earnings – It has also been grouped under the head of non reclassification to the profit and loss. If there has been gain or loss on the actuarial valuation of superannuation plans then the same shall be grouped in the comprehensive income (Chambers, 2011).

These items have not been presented in the statement of the profit and loss because of the reason that the gains or losses arising from the events stated in the other comprehensive statement has not been generated from the main activities of the company rather these belongs to other activities which are permitted by the IFRS to be reported in the statement of the other comprehensive income.  

As the above four items have not been generated through the normal activity and hence has been reported in the statement of other comprehensive income.

Current Tax Expense

For the year ending 2017, the company has reported the income tax expense of $837.70 million. It comprises of the current tax expense, adjustment in relation to earlier years and deferred tax expense. The figure is as per the latest annual report of the company (Woolworths Limited, 2017).

Understanding of Each Item Reported in the Other Comprehensive Income Statement

Tax on Accounting Income

No, if the tax rate is multiplied with the accounting income then the tax expense will differ. The major difference is because of the timing difference that is considered while having the computation of the taxable income and the tax thereon.   

These differences comprise of the following tax effects on:

• Expenses which are not deductible in nature
• Impairment which is not deductible
• Tax Loss which have not been recognized and
• Differences in off shore tax rates.

Reasons for Deferred Tax Assets and Liabilities

As per the annual report of the company, amount of $372.30 million have been reported as deferred tax assets in the financial statements of the company. It has been recognized in accordance with the provisions of the accounting standards for consideration of the timing differences. Following has been the major factor for its creation:

• Cash flow hedges
• Provision accounted for and the accrued expenses booked
• Foreign exchange differences which have not been realized.
• Difference in Depreciation rates (Harrington, Smith and Trippeer, 2012).

Yes the company has reported the income tax payable of the company. Both of the amount are not same because the income tax payable is the amount to be paid to the authorities whereas the income tax expense includes the current tax and the deferred tax expense (Laux, 2013).

No, income tax expense is not same with income tax paid in cash flow statement as the paid amount is only current tax and the remaining is deferred tax expense (Manzon, G.B. and Plesko, 2012).

The treatment adopted by the company for tax is very transparent and will help the users in making the useful decision.

Conclusion And Recommendation

Financial statements as embedded in the annual report of the company have the major impact on the decision making power of not only the stakeholders of the company but also the potential shareholders of the company. Each of the statement of the financial report has its own meaning and treatment and the same has been discussed in detail with regard to the financial figures of the company – Woolworths Limited. Two statements have been analysed – cash flows and other comprehensive income. Also the current tax expense as recorded by the company in its financial statements has been discussed. To conclude the report, analysis has been made in detail and is necessary as per the current scenario of the market.

 It is recommended that all the statements which are required to be the part of the financial statement shall be prepared in the true and fair manner so as to equip the users with the required information which in turn will help them in taking the useful and meaningful decision.  

References

Bamber, L.S., Jiang, J., Petroni, K.R. and Wang, I.Y., 2010. Comprehensive income: Who’s afraid of performance reporting?. The Accounting Review, 85(1), pp.97-126

Chambers, D.J., 2011. Comprehensive income reporting: FASB decides location matters. The CPA Journal, 81(9), p.22.

Fraser, L.M., Ormiston, A. and Fraser, L.M., 2010. Understanding financial statements Pearson

Harrington, C., Smith, W. and Trippeer, D., 2012,Deferred tax assets and liabilities: tax benefits, obligations and corporate debt policy. Journal of Finance and Accountancy, 11, p.1

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

Manzon Jr, G.B. and Plesko, G.A., 2012. The relation between financial and tax reporting measures of income Tax L. Rev., 55, p.175

Taylor, M., 2010, Financial statement analysis, pp 13-20

Woolworths Limited (2016), Annual Report -2016 online available https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports at accessed on 12-05-2018.

Woolworths Limited (2017), Annual Report -2017 online available https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports at accessed on 12-05-2018.