Cash Flow Statement
Requirement [i]
The cash flow statements is considered as a major financial statements that depicts the major changes in the accounts of balance sheet and income that affect the cash and cash equivalent of the companies.
Cash Flow from Operating Activities: In Wesfarmers, the major items under Operating Activities are receipts from the customers, payment to the suppliers, interest received, borrowing cost and many others. Receipts from the customers refer to the sales proceeds that Wesfarmers receives from credit sales (Reid and Myddelton 2017).
There is an increase in these receipts in Wesfarmers that is from $74,042 million to $71,157 million in 2017. Payment to the suppliers refer to the amount that Wesfarmers is required to pay for their credit purchase; and it has also increased from $66.671 million to $68,713 million due to increase in purchase (wesfarmers.com.au 2018). Interest received refers to the amount that Wesfarmers receives from various investments in their company and others. As a result of the write off of a certain bad debt, there is a decrease in the interest received in Wesfarmers in 2017 that is $83 million as compared to $131 million in 2016. Borrowing costs refers to the charges that Wesfarmers has to pay for debt covenant, finance fees and the payment of interests. There is a decrease in this expense in 2017 from $288 million to $234 million (wesfarmers.com.au 2018).
Cash Flow from Investing Activities: The most crucial items under Financing Activities of Wesfarmers are both the payments and proceeds from property, plant, equipment and intangibles; proceeds from sales of businesses and associates; investment in associates and joint ventures; acquisition of subsidiaries and redemption of loan notes.
The payment for property, plant, equipment and intangible assets refers to the amount that Wesfarmers is required to pay for the acquisition and purchase of these items. At the same time, proceeds from these items refer to the monetary benefits received by Wesfarmers by using these items. As per the cash flow statement, Wesfarmers has reduced their investment in these items from $1,899 in 2016 to $1,681 in 2017. On the other hand, there is an increase in the proceeds from $563 million in 2016 to $653 million in 2017 due to sales of these assets. Wesfarmers realizes the sold or purchased long-term assets as proceeds and investment respectively (wesfarmers.com.au 2018). In the year 2017, Wesfarmers has gained major proceeds from sales of businesses. However, the investment remains stagnant in both 2017 and 2016. In Wesfarmers, loan notes refers to a specific financial instrument that puts the obligation on Wesfarmers to repay the loan along with the interests. Wesfarmers has become able to redeem $54 milling of loan in the year 2017 (wesfarmers.com.au 2018).
Cash Flow from Financing Activities: The crucial items under Financing Activities of Wesfarmers are proceeds from borrowing, payment from borrowing and the payment of equity dividend (Miloš and Jovan 2013).
Borrowing refers to the total disbursed amount that the lenders provide to the borrower under a specific loan covenant. Due to the extension of the loan terms to the debtors, Wesfarmers has registers a massive fall in the proceeds from borrowings that is $220 million in 2017 from $2,360 million in 2016. Moreover, Wesfarmers had to pay large amount to the banks for the repayment of loans. Equity dividend refers to the yearly cash flow that is provided to the shareholders of Wesfarmers. Due to the focus on the increase in retained earnings, Wesfarmers has paid less dividend in 2017 as compared to 2016 (wesfarmers.com.au 2018).
Requirement [ii]
The above discussion sheds light on the major aspects of the cash flows of Wesfarmers from operating activities, investing activities and financing activities. The following discussion shows the comparative analysis of three categories of cash flow of Wesfarmers:
Figure 1: Comparative Analysis of Cash Flow Categories
(Source: wesfarmers.com.au 2018)
The above figure indicates towards the decline in the cash flows from operating activities of Wesfarmers that is $3,791 million in 2015 and $3,365 million in 2016; however, increase can be seen in 2017 that is $4,226. The main reasons behind this are the cash recovered from the customers and the payment of the income tax for the last three years. Moreover, there is an increase in the cash flow from investing activities in 2017 that is $2,132 million as compared to $1,898 million in 2016 (wesfarmers.com.au 2018). The main reason behind this is the reduction in the purchase and acquisition of property, plant, equipment and subsidiaries in Wesfarmers. Lastly, there is a significant fall in the cash flow from financing activities in 2016 that is 1,333 million as compared to $3,249 million; but, there is a major increase in the year 2017 that is $3,771 million. The main reason is the clearance of loans. For all these reasons, there is an increase in the cash and cash equivalent in 2017 that is $1,013 million as compared to $611 million in 2016 (wesfarmers.com.au 2018).
Other Comprehensive Income Statement
Requirement [iii]
It can be seen that Wesfarmers has reported three major items in their comprehensive income statements. They are Foreign currency translation reserve, Cash flow hedge reserve and Retained earnings (wesfarmers.com.au 2018).
Requirement [iv]
Business organizations use the foreign currency translation reserve in order to convert the results of the foreign subsidiaries of the parent companies to the reporting currency. This is considered as a major portion of the process of consolidation of the financial statements and it helps in the ascertainment of functional currency of cross-border business entity. With the help of this aspect, companies use to re-measure the foreign business entity into the reporting currency of the parent company. The last stage includes the currency translation of recorded profit and losses (Eaton, Easterday and Rhodes 2013).
Business organizations use to use the cash flow hedge at the time of the planning of the removal or minimization of the exposures that rose from the change in cash flow of specific assets or liabilities due to the change in the risk rate of the interest on any dent instrument based on the floating rate of interests (Bratten, Causholli and Khan 2016).
Lastly, retained earnings refers to the portion of the net earnings of the companies that the businesses do not distribute as dividend to the shareholders as the intention of the companies is to retain this portion for the payment of debt or reinvestment in the core business activities (Bertoni and De Rosa 2013).
Requirement [v]
Business organizations use to consider the other comprehensive income as a diversified of their net profit. In the previous times, business entities use to consider the variations in the profit as the external factors of their core business operations; and the shareholders use to get highly volatile equities (Jordan and Clark 2014). However, Wesfarmers uses the other comprehensive income statement as a tool to provide significant information about the above-mentioned factors. Comprehensive income is considered as a mixture of standard new income and other comprehensive income. The main reason behind the reporting of these activities in the other comprehensive income is to provide the users with the comprehensive and holistic overview of the major drivers of the business activities and operations as they cannot be reported in the income statement.
Accounting for Corporate Income Tax
Requirement [vi]
It needs to be mentioned that Wesfarmers is subjected to taxation under Australian taxation law. According to the annual report of Wesfarmers, the reported taxation expenses for the company for the years 2017 and 2016 are $1,265 million and $631 million respectively. In order to carry out the taxation operations, Wesfarmers uses a tax rate of 30%. With the application of this tax rate, Wesfarmers would have taxation expenses worth $1,241.40 million ($4,138 million*30%) for the year 2017 and $311.40 million ($1,038*30%) for the year 2016. Hence, in the presence of increased income of the company, the above mentioned figures are the major taxation related expenses of Wesfarmers (wesfarmers.com.au 2018).
Requirement [vii]
According to the 2017 Annual Report of Wesfarmers, the recorded profit before income tax for the company for the years 2017 and 2016 are $4,138 million and $1,038 million respectively; and the taxation rate for these years are 30%. By applying this taxation rate on the reported profit, the taxation expenses of Wesfarmers would be $1,241.40 million ($4,138 million x 30%) for the year 2017 and $311.40 million ($1,038 million x 30%) for the year 2016. However, in the financial statements, the company has reported $1,265 million and $631 million as the taxation expense for the year 2017 and 2016 respectively (wesfarmers.com.au 2018). Thus, there is not any resemblance in the reported and standards taxation expenses of Wesfarmers. The main reason of this differences in the inclusion or exclusion of some taxation related items in the taxation expenses. Non-deductible expenses required for arriving to the taxable profit can be considered as one of these items. Change in the rate of taxation for the taxation operations of subsidiaries of Wesfarmers is considered as another reason; like the tax rates of Australian and New Zealand are 30% and 208% respectively. Deferred tax is another crucial item for this difference as Wesfarmers can enjoy tax benefits out of this. Lastly, non-assessable income can also be held responsible for this difference (Woellner et al. 2016).
Requirement [viii]
Deferred tax assets indicate towards the situation when the company pays advance tax or high amount of tax. Deferred tax liabilities indicate towards the difference between tax carrying amount and profit of the companies (Laux 2013). As per the 2017 Annual Report of Wesfarmers, the amount of deferred tax assets for the year 2017 and 2016 are $971 million and $1,042 million respectively; and the amount of deferred tax liabilities for 2017 and 2016 are $722 million and $611 million respectively. The main reason for recording deferred tax assets is the variation in taxable rate of depreciation and depreciable amount. The reason for deferred tax liabilities is the difference in profit and the lower payment of taxes in 2017 (wesfarmers.com.au 2018).
Requirement [ix]
Income tax payable is considered as a crucial aspect for the business organizations. According to the 2017 Annual Report of Wesfarmers, the amounts of income tax payable for 2017 and 2016 are $292 million and $29 million respectively (wesfarmers.com.au 2018). However, there is difference between the amounts of income tax expenses and income tax payable and differed tax assets can be considered as the prime reason for this. There are instances where Wesfarmers has paid additional taxes apart from the actual amount. Thus, the additional tax payment is the reason for this difference. After that, different regulation for financial accounting and tax accounting is another major reason and depreciation can be considered as an example. Due to the difference in the rate of depreciation, variation can be seen under the taxation accounting and financial accounting and it leads to the increase or decrease in depreciation expenses (Saad 2014).
Requirement [x]
In Wesfarmers, $1,261 million and $631 million are the recorded taxation expenses for 2017 and 2016 in the income statement; and, $951 million and $1,009 million are the taxation expenses for 2017 and 2016 in the cash flow statement (wesfarmers.com.au 2018). Thus, clear difference can be seen in the amount. The calculation of tax expenses is done after considering the tax expenses and other aspects. However, the taxation expenses are recorded under operating expenses in the cash flow statement. It implies that the company has made large income tax payment for the year and it has been considered as the cash outflow for operations. In the cash flow statement, reduction in the tax expense implies that use of cash. It implies towards the elimination of some of the taxation expenses by Wesfarmers before considering them in the statement of cash flows (Woellner et al. 2016).
Requirement [xi]
The above discussion indicates towards the fact that there is not an surprising or confusing factors in the taxation treatment of Wesfarmers as the company has complied with the Australian Taxation Law for carrying out their taxation treatment. In addition, Wesfarmers has also provided the necessary notes to the financial statements to support their taxation treatment as they provide the necessary justification and explanation of the taxation treatment. By observing the taxation treatment of Wesfarmers, one can gain the insight about the taxation treatment for differed tax, current tax payable and others. These are helpful to gain knowledge to conduct the taxation treatment of the companies.
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