Corporate Accounting Study Of Woolworths | Cash Flow Analysis

Cash Flow Statement Analysis of Woolworths

The present report provides an overview on the study of corporate accounting. The organization that is selected for this study is Woolworths, which is one of the ASX (Australian Stock Exchange) listed company (Woolworthsgroup.com.au. 2018). Woolworths is one of the biggest Australian supermarket store chain that is owned by Woolworths Limited. This enterprise mainly concentrates in selling grocery products but also sell households products and other stationary products. It presently operates near about 1000 stores across Australia. The goal of this enterprise is having customers put them first across its brands.

Cash flow statement mainly forms one of the integral parts of the entity’s financial statement analysis. The activities relating to cash are generally given in the enterprise cash flow statement. It has been regarded as one of the crucial financial part of the company since cash is considered as the vital aspects of its success (Chen and Chen 2012). The organizations cash flow statement helps to gain proper understanding of its outflows and inflows. In this section, each item of Woolworth’s cash flow statement has been analyzed. There are three sections that are included in cash flow statement of the Woolworths Company, which involves cash flow from the financing activities, operating activities, investing activities and net cash and cash equivalents. The operating activities of Woolworths includes few items namely- income adjustments, account receivables changes, liability as well as inventory changes, depreciation. It can be seen from these items that the cash flow from the operating activities in the year 2015 was $ 3,345,100 which declined in the year 2016 to $2,357,500. But in the year 2017, it again increased to $3,122,000.

In the Woolworths cash flow statement, the financing activities involves few items that are- dividends which are paid, net borrowings, sales as well as purchase of stock and other cash flow from the financing activities. The total cash used in financing activities in the year 2015 was $-1,610,800 that decreased to $-1,474,900 in the year 2016 and again increased to near about $-1,729,300.

The cash flow from the Woolworths investment activities generally consist of – different investments, capital expenditure and other cash used in investment activities (Hoyle, Schaefer, & Doupnik 2015). It can be seen that the total cash flow from the investment activities in the year 2015 was -$13, 33,900 , which then decreased to about $-12,66,700 in the year 2016. Again in the year 2017 it increased to near about –$14, 31,400.

Other Comprehensive Income Statement Analysis

The cash flow statement of Woolworths ends with the change in cash and cash equivalents (Brealey et al. 2012). It has been seen that the net change in cash and cash equivalents in the year 2015 was $-4,10,800, -$3,77,400 in the year 2016 and -$39,300 in the year 2017. The amount of cash and cash equivalents was more in the year 2015 as compared to the year 2016 and 2017. The cash flow statement of Woolworths has been shown in the table below-

Cash flow(All numbers in thousands)	2017 ($)	2016($)	2015($)
Net income	15,33,500	-12,34,800	21,46,000
Cash used in operating activities
Depreciation	10,37,600	9,85,300	9,74,800
Adjustments to net income	4,41,300	10,85,600	1,81,100
Changes in accounts receivable	2,400	29,100	-28,000
Changes in liabilities	3,82,500	-5,34,100	3,14,200
Changes in inventory	3,67,600	2,04,100	-1,61,000
Changes in other operating activities	-6,87,500	18,81,800	-23,200
Total cash flow from the operating activities	31,22,000	23,57,500	33,45,100
Investment activities, cash flow provided by or used in
Capital expenditure	-18,86,800	-19,38,300	-21,31,000
Investments	–	-1,300	-2,500
Other cash flow from investment activities	3,500	3,200	4,600
Total cash flow from the investment activities	-14,31,400	-12,66,700	-13,33,900
Cash used in the financing activities
Dividends paid	-5,40,900	-11,84,800	-17,53,400
Sale purchase of stock	55,500	55,500	2,14,800
Net borrowings	-12,22,400	-3,65,600	-2,05,900
Other cash flow from financing activities	-21,500	75,500	1,33,700
Total cash flow from financing activities	-17,29,300	-14,74,900	-16,10,800
Effect of exchange rate changes	-600	6,700	10,400
Change in cash and cash equivalents	-39,300	-3,77,400	4,10,800

Particular	2017 in $m	2016 in $m	2015 in $m
Net cash flow from operating activities	31,22,000	23,57,500	33,45,100
Net cash flow from investing activities	-14,31,400	-12,66,700	-13,33,900
Net cash flow from financing activities	-17,29,300	-14,74,900	-16,10,800

The graph shown above reflects on the segment wise comparative analysis of cash flow from investment, financing and operating activities. The cash flow from operating activities in the year 2015 was $33, 45,100 which declined to $23, 57,500 in the year 2016 and again increased in the year 2017 to $31, 22,000 (Carnegie 2012). The net cash used in the investing activities increased to around $-14, 31,400 in the year 2017 as against $-12, 66,700 in the year 2016 and $-13, 33,900 in the year 2015. The cash flow from the financing activities in the year 2015 was $-16, 10,800 which declined in the year 2016 to -$14, 74,900 and again increased to -$17, 29,300.

The other comprehensive income statement of Woolworths shows that the net profit in the year 2016 was $2347.9m which then decreased to $1593.4m in the year 2017. The total items that are listed under other comprehensive income statement includes hedging reserve, FCTR(Foreign Currency Translation Reserve), equity instrument reserve and retailed earnings. In fact, the items of net income tax is also included in this statement (Bratten, Causholli and Khan 2016).

After analyzing each items of the other comprehensive income, it has been seen that the change in fair value of the cash flow hedges increased to $3.8m in the year 2017 from $2.7 m in the year 2016. The change in foreign currency translation taken to equity decreased to $3.9 m in the year 2017 from $207.9m in the year 2016. Also, there has been decrease in change of fair value of investment in equity securities to $2.2 m in the year 2017 from $13.5m in the year 2016. Overall, it has been found out that the total other comprehensive income or profit decreased to $2.3m in the year 2017 from $188.6m in the year 2016 (Carraher and Van Auken 2013).

Comprehensive income statement is utilized for measuring any variation in owner’s interest in the enterprise. It incorporates income and expenditure that is still not yet realized. The items that are involved in the other comprehensive income generally consists of- debt security on the unrealized gains or loss, retirement plans or pension loss, foreign currency transaction adjustments and profit or loss from the derivative instruments.

Income Tax Expense Analysis

The income tax expenditure has been obtained in the profit or loss statement of the Woolworths organization (Brealey et al. 2012). By analyzing it has been seen that the income tax expenses decreased to $650.4m in the year 2017 from $486.4m in the year 2016. The income tax was estimated as tax expenditure divided by the profit before tax expenditure from continuing as well as discontinuing operations.

In this particular discussion, the verification is to be done whether the tax rate that has been enacted by company’s financial position statement is equal to current tax expense of 2017. During the past two financial years, this enterprise has generated total income tax of amount $486.4m in the year 2016 and $650.4m in the year 2017. This figure highlights that the total amount of income tax increased significantly in the year 2017 from the year 2016.

The deferred tax is generally accounted by utilizing method of balance sheet liability that outcome from primary divergence between tax base of the liabilities as well as assets and its carrying amount in financial statements (Gallemore et al. 2012). The initial identification of the assets as well as liabilities does not lead to identification of the deferred income tax, which in turn have no effect on the accounting or taxable profit or loss. It mainly relates to that situation where the specific business has overpaid taxes which have been given in advance. Identification of deferred tax asset is done based on the availability of future taxable profit, which has been probable against basic differences (Harrington, Smith and Trippeer 2012). From the statement of financial position of Woolworths, it has been observed that the deferred tax asset decreased to about $372.3m in the year 2017 from $497.7m in the year 2016.

The balance sheet of Woolworths reflects that the current tax assets recorded to the $497.4m in the financial year 2016 and $372.3m in the year 2017. This organization also recorded income tax payable of the amount $80.9m in the financial year 2017 and $39.5m in the financial year 2016. The amount owed by the organization in terms of tax that is based on rules of tax code is known as income tax payable. However, the total amount of the income tax payable appears as liability in the entity’s balance sheet statement unless it makes tax payment (Weil, Schipper and Francis 2013)

The  income tax expenditure that is highlighted in the company’s income statement is not the same as that of the income tax paid as reflected in the company’s cash flow statement (Scott 2015). The cash flow statement of Woolworths reflects that the income tax paid decreased to about $668.1m in the year 2017 from $848.5m in the year 2016. On the other hand, the income tax expenditure highlighted in the Woolworths income statement shows that it amounted to $486.4m in the year 2016 and $650.4m in the year 2017. Outlays for income tax takes in influence of taxation of loss/profit linked to funding or else investing acts. This scheme can help in reflecting flow of cash for tax under subtotals f overall stream of cash.  Contrarily, expends for taxation indicates towards the specific amount that replicates documentation of cost incurred for taxation. Moreover, it represents the total amount which is generally attained irrespective of being paid.

Comparison between Income Tax Expense and Paid Tax

The basic reason between these two sets of the income taxes is total amount of income tax payable and the income tax that is paid as there are specific accounting transactions which has been basically initiated in regular day to day business, which in turn the total amount of the tax determination remains totally uncertain.

After the analysis of financial statement of the enterprise has been done, some specific amount of the income taxes has been examined in detail. No abnormality has been seen in the estimation of income taxes or other types of error calculation. After analyzing annual report of Woolworths, it can be seen that current income tax charge is based on adjusted profits, which attributable for non- assessable items (Graham, Raedy and Shackelford 2012). Woolworths are being one of the reputed retail companies has forever led this market by instance. In context to this, the enterprise has been highly industrious in terms of total payment of different types of tax or expenses for providing a commendable behavior for other enterprise to follow (Park and Jang, 2013). Owing to this, no kinds of frauds has been observed from the organization’s statement of financial position. In addition to this, Woolworths being highly reputed organization has maintained all the accounting standard of Australia while evaluating various taxes which is involved in its financial statement (Rahman, 2013). These accounting standards involve- principle of variability, principle of timeliness, principle of relevance and principle of comparability.

References

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Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.

Chen, H.J. and Chen, S.J., 2012. Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series. Journal of Financial Economics, 103(2), pp.393-410.

Gallemore, J., Maydew, E., Schipper, K., Shackelford, D. and Wang, S., 2012. Deferred Tax Assets and Bank Regulatory Capital. EBC Discussion Paper, 2012.

Graham, J.R., Raedy, J.S. and Shackelford, D.A., 2012. Research in accounting for income taxes. Journal of Accounting and Economics, 53(1-2), pp.412-434.

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.

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.

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Rahman, A.R., 2013. The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of Its Participative Review Process. Routledge.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

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Woolworthsgroup.com.au. (2018). [online] Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 27 May 2018].