Corporate Accounting: Comparative Analysis Of Wesfarmers Limited And Woolworths Group Limited

Definition of Corporate Accounting

Corporate accounting is the part of accounting which mainly focuses on the accounting process of the business. It evaluates the identification, reporting and the presentation of all the financial transactions in the financial report of the business. The process of corporate accounting makes sure that each of the company follows the proper accounting guidelines and the accounting standards to manage the performance of the business and offer the transparent and correct information to the related parties and stakeholders of the company (Lee and Lee, 2006).

The main objective behind preparing this report is to be aware about the final financial statement of the business, their items, their recording process etc. In the report, Wesfarmers limited and Woolworth’s group has been taken into the concern to conduct the study of corporate accounting.

Wesfarmers limited is a public company which is situated in the Australian market. The company is running under the retail industry. It has been founded in 1914. Since 1914, various strategies and policies have been changed by the company. The company is operating its business through various subsidiaries in Australia, Asia and Europe region. The company mainly offers the chemicals, fertilizers, safety products; coal mining etc. the company was the highest revenue generating company in the year of 2016 in Australian market. It is also largest private employer in the Australian market (Home, 2018). It employees around 2,20,000 people.  

Woolworths limited is a public company which is situated in the Australian market. The company is running under the retail industry. It has been founded in 1924. Since 1914, various changes have been seen and done by the company. The company is operating its business through various divisions in Australia, New Zealand and India (Home, 2018). The company mainly offers the supermarket services in the market where huge number of products and liquors are supplied.

Owner’s equity:

Owner’s equity represent about the total contribution of shareholders in the company. It is the major component of balance sheet of the company. The equity amount is calculated through deducting the drawings from the total investment and adding the net profit amount from the beginning of the business.

1. Equity items:

The annual report (2018) of Wesfarmers and Woolworths has been studied and it has been found that following are the main equity items of the business:

Equity Items
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
	2018-06	2018-06
Stockholders’ equity
Common stock	22234000	6055000
Other Equity	344000	278000
Retained earnings	176000	4073000
Accumulated other comprehensive income	75000

(Annual report, 2017)

The owner’s equity of the company is the combination of common stock, other equity, retained earnings and accumulated other comprehensive income. Common stock is the main equity of the business which has been raised through issuing the shares of the company in the market. Further, the other equity comprises the additional amount from issuing the shares which has not been recorded in the common stock head. Retained earnings describe about the profit which has not been divided among the shareholders and has been kept by the company for future investment (Lumby and Jones, 2007). The accumulated other comprehensive income contains the unrealized gain and loss on those items which has been classified in the other comprehensive income of the business.

1. comparative analysis:

Introduction to Wesfarmers Limited and Woolworths Group Limited

Debt and equity are the main capital sources of a business to raise the funds. The debt and equity position of a business describe about the total cost of capital and the associated risk of the business. the debt and equity position of both the companies are as follows:

Equity Items
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2018-06
Debt	4154000	3881000
Equity	22754000	10481000
Debt / Equity	18.26%	37.03%

(annual report, 2017)

The table represent that the debt level of Wesfarmers is 18.26% against the total equity of the business. On the other hand, the debt equity position of Woolworths limited is also 37.03%. the debt level of Both the companies are quite lower than the equity position of the company. It explains that the cost of the companies are higher while the associated risk with the capital position of both the companies are lower.

Cash flow statement represents about the total cash outflows and cash inflows in the company in a particular time period. It is the major part of final financial statements. The amount from operating activities, investing activities and the financing activities is calculated through evaluating all the cash inflows and outflows of the business along with their nature.

1. Cash flow items:

The annual report (2018) of Wesfarmers and Woolworths has been studied and it has been found that following are the main cash flow items of the business:

On the basis of the above images, it has been found that the main cash flow items of both the companies are related to three broad categories of the company. Mainly, the receipts from customers, payment to suppliers, income tax paid, net financing cost (paid) are the part of the operating cash flows of the business. These are related to daily operations of the company and brief about the total cash flows which would generally take place in an organization.

Further, the cash flows from investing activities are payment for PPE, proceeds from the sale of PPE, proceeds from sale of subsidiaries, payment for the purchase of the business, repayment of the acquisition etc which are related to the investment position of the company and it affects the operations of the company for a longer period (Morris, 2017).  

In addition, the cash flows from financing activities are proceeds from share issues, repayment of borrowing and proceed of borrowings, dividend payment etc which are related to the financial position of the business. After it, there are few other items as well in the cash flow statement which are not related to the normal activities of the business but still the cash position of the company has been affected because of it. The items include effects of exchange rate on the foreign currency.

1. Comparative analysis of broad categories:

Equity Position of Wesfarmers Limited and Woolworths Group Limited

The comparative analysis has been done on the major broad categories of cash flows which are cash flow from operating activities, investing activities and the financing activities. The details of the major categories of Wesfarmers limited are as follows:

	WESFARMERS LTD
AUD in ‘000	2018-06	2017-06	2016-06
Net cash used for operating activities	4158000	4226000	3365000
Net cash used for investing activities	-658000	-53000	-2132000
Net cash provided by (used for) financing activities	-3752000	-3771000	-1333000

  (Morningstar, 2018)

The table describes that the net cash flow from operating activities of the company has been improved from 2016 in 2017 but in the year of 2018, a decrement has been seen in the position because of the lower receipts from the customers. Further, the investing cash flow position of the company explains that the company has controlled on the investing expenses. Due to which the cash position from investment activities have been improved. Lastly, the cash flow position from financing activities has been studied and it has been evaluated that the total cash flows of the company has been lowered. The overall cash flow position of the company is depicting about the decrement in the cash flow position of the company.

Further, the details of the major categories of Woolworths limited are as follows:

	WOOLWORTHS GROUP LTD
AUD in ‘000	2018-06	2017-06	2016-06
Net cash used for operating activities	2690000	3122000	2930000
Net cash used for investing activities	-1510000	-1431400	-1266700
Net cash provided by (used for) financing activities	-1060000	-1729300	-1474900

The table describes that the net cash flow from operating activities of the company has been lowered from 2016 in 2017 but in the year of 2018, a decrement has been seen in the position because of the higher payments to the suppliers. Further, the investing cash flow position of the company explains that the company has improved the investment level in the business. Due to which the cash position from investment activities have been lowered. Lastly, the cash flow position from financing activities has been studied and it has been evaluated that the total cash flows of the company has been improved. The overall cash flow position of the company is depicting about the decrement in the cash flow position of the company.

1. Comparative analysis of companies:

Further, the comparison has been done among both the companies to identify the changes in the cash flow level from last year. In case of Wesfarmer’s limited, it has been found that the operating cash flows have been reduced by -1.61%, investing activities brief about improvement in the cash outflow of the business by 1141.51% and the financing activities explain -0.50% reduction in the cash outflows. It further explains that the total cash outflow position of the company has been lowered (Annual report, 2018).

In addition, according to the cash flow statement of Woolworths limited, it has been found that the operating cash flows have been reduced by -6.15%, investing activities brief about improvement in the cash outflow of the business by 5.49% and the financing activities explain 38.70% reduction in the cash outflows. It further explains that the total cash outflow position of the company has been lowered.

	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in ‘000	2018-06	2017-06	Changes	2018-06	2017-06	Changes
Net cash used for operating activities	4158000	4226000	-1.61%	2930000	3122000	-6.15%
Net cash used for investing activities	-658000	-53000	1141.51%	-1510000	-1431400	5.49%
Net cash provided by (used for) financing activities	-3752000	-3771000	-0.50%	-1060000	-1729300	-38.70%

Debt and Equity Position of Wesfarmers Limited and Woolworths Group Limited

(Morningstar, 2018)

In context with both the companies, it has been found that the cash flow position of Woolworths limited is still better in the industry. The cash position of Wesfarmers has been hampered at great level.

Comprehensive income statement represents about the items which has not been realized in the income statement of a business.

1. Items in comprehensive income statement:

The annual report (2018) of Wesfarmers and Woolworths has been studied and it has been found that following are the main comprehensive income statement items of the business:

1. Reasons behind not adding it into profit and loss statement:

The above items have not been represented in the profit and loss account because of their un-realization and thus a new statement has been prepared by the business by the name of the comprehensive income statement. Comprehensive income statement represents about the items which has not been realized in the income statement of a business. These items do not affect the operations of the company but it has affected the profitability level of the business because of it, these items are presented in the comprehensive income statement of the business.

1. Comparative analysis:

The comparison has been done among both the company’s comprehensive income statement further to measure the differences in both the companies. Below table describe the changes among both the companies:

Comprehensive income statement  Items
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2017-06	Change	2018-06	2017-06	Change
Exchange differences on the transactions of the foreign operations	-2	15	-113.33%	34	4	750.00%
Unrealized losses on cash flow hedges	-136	-34	300.00%	-11	1	-1200.00%
Realized losses transferred to net profit	92	147	-37.41%	-92	-4	2200.00%
Realized losses transferred to non financial assets	84	-257	-132.68%	11	-3	-466.67%
Share of associates and joint venture reserve	–	8		17	2	750.00%
Tax effect	-17	46	-136.96%	-1	3	-133.33%
Remeasurement loss on defined benefit plan	-5	-5	0.00%	0	-1	-100.00%
Tax effect	2	2	0.00%	0

(Annual report, 2018)

On the basis of the study, it has been realized that the position of Wesfarmers limited is better than the Woolworths limited. Both the companies are following the same policies to manage the performance of the business.

1. Evaluation of performance of managers:

The other comprehensive income statement briefs the additional losses or gain which has not been recorded in the income statement of the company. A company must not use the figures if comprehensive income statement while measuring and evaluating the performance of the managers. As the losses and gain are nowhere related to the operations of the company and these take place because of the additional factors.

Recording and presenting the financial accounting items is one of crucial part of the corporate accounting. The corporate income tax recording has been focused in the report.

1. Tax expenses:

The total tax expenses of the company are as follows:

Tax expenses
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2018-06
Income tax expenses	1246000	718000

(Annual report, 2018)

1. Effective tax rate:

Effective tax rate of WES and WOW are as follows:

Effective tax rate
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2018-06
Income tax expenses	1246000	718000
EBT	3850000	2394000
Effective rate (tax expenses / EBT)	32.36%	29.99%

(Morris, 2017)

The table explains 32.36% and 29.99% effective tax rate of WWES and WOW respectively in 2018.

1. Deferred tax assets and liabilities:

Deferred tax assets and the liabilities of the business are as follows:

Deferred tax assets and liabilities
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2018-06
Deferred  tax assets	971	271

These items have been recorded in the balance sheet of the company because of the additional payment to tax amount to the government and it will be adjusted in next year (Gorry, Hassett, Hubbard and Mathur, 2017).

1. Changes in the deferred tax amount:

Cash Flow Position of Wesfarmers Limited and Woolworths Group Limited

Further, the changes in the deferred tax amount of both the companies have been studied and the below outcome has been got:

	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands	2018-06	2017-06	Change	2018-06	2017-06	Change
Deferred  tax assets	971	1042	-6.81%	271	372	-27.15%

It express that the Woolworths’s tax assets have been lowered by 27.15% and the Wesfarmers position has been reduced by 6.81%.  

1. Cash tax amount:

Further, the cash tax amount of both the companies has been calculated, Cash tax amount is the total amount which has been paid by the company to the Australian government in cash (Ho, 2017). The calculation of cash tax amount is done through adding the increment of the deferred tax assets and reduction in the deferred tax liabilities in the income tax expenses of the business. The below table describe about the total cash tax amount of the company:

Calculation of cash tax amount
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands.	2018-06	2018-06
Book Income tax expenses	1246000	718000
ADD: Increment in the deferred  tax assets	-71	-101
unleveraged cash taxes	1245929	717899

The book tax amount of Wes is $ 12,46,000. However, the paid amount by the company is $ 12,45,929 which has taken place due to the deferred tax assets of the company. Further, the book amount of WOW is $ 7,18,000. However, the paid amount by the company is $ 7,17,8999 which has taken place due to the deferred tax assets of the company.

1. Cash tax rate:

The cash tax rate of the companies has been calculated further to identify the total cash amount which has been paid by the company (Bradley, 2017). The cash tax rate calculations of WOW and WES are as follows:

Calculation of cash tax amount
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands.	2018-06	2018-06
Book Income tax expenses	1246000	718000
ADD: Increment in the deferred  tax assets	-71	-101
unleveraged cash taxes	1245929	717899
EBT	3850000	2394000
Effective rate (tax expenses / EBT)	32.36%	29.99%

(annual report, 2018)

It explains that the paid amount of the company is very lower. WES and Wow has paid 32.36% and 29.99% tax respectively in the current year. The cash tax rate of WES is higher.

1. Cash tax rate and book tax rate:

Further, the below table describe about the differences in the cash tax rae and book tax rate.

Calculation of book and cash tax rate
	WESFARMERS LTD	WOOLWORTHS GROUP LTD
AUD in thousands.	2018-06	2018-06
Book tax rate	32.36%	29.99%
Cash tax rate	32.36%	29.99%

It expresses that in case of both the companies, the book tax rate is quite similar with the cash tax rate of the company.

Conclusion:

To conclude, the corporate accounting plays an important role in a business as well as among the stakeholders of the business because of its wider concept and easier accessibility. The process of corporate accounting makes sure that each of the company follows the proper accounting guidelines and the accounting standards to manage the performance of the business and offer the transparent and correct information to the related parties and stakeholders of the company. Thus, each of the company is required to follow the proper standards and the policies to manage the position of the business.

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Morris, J.L., 2017. Classification of Deferred Tax Assets and Deferred Tax Liabilities: An Evaluation of FASB’s Attempt at Standards Simplication. Journal of Accounting and Finance, 17(8), pp.198-208.