Cash Flow Statement
Significant Items of the Cash Flow Statement
The cash flow statement is prepared by the company in order to show to the shareholders of the company various activities which results in cash inflows and cash outflows in a business. The main purpose of Cash flow statement is to determine the firm’s liquidity position and the cash and cash equivalent balance at the end of the year (Reid and Myddelton 2017). For the purpose of this assignment, Blackmores ltd has been selected and the financial statement of Blackmores ltd is to be analyzed which will be discussed in the coming paragraphs.
The cash flow statement of Blackmores ltd has been classified into three activities which are cash from operating activities, cash from investing activities and cash from financing activities. The important items which are included in cash from operating activities are revenue made from the customers, payments made to suppliers and income tax. The revenue which is collected from the people for the sales of goods generates cash which are recorded in the cash flow statement of the business. The revenue which is collected from the customers has slightly decreased from 2016.
The net revenue which the company has generated is $ 763,413,000 in 2017 and it was $ 766,436,000 for the year 2016. Then there is a payment which are made to the suppliers and employees of the business. The cash spent amounts to $ 668,103,000 for the year 2017 which has increased from previous years. This signifies that the expenses which are expenses of the company has increased. The income tax which is shown in the operating activities part of the cash flow statement reveals that the income tax which is shown is only part of the operating activities of the business which means that such is only the provision which the company expects the business will be incurring in as income tax during the year.
The investing activities of the business which is shown in the cash flow statement refers to the various investments which are undertaken by thee management of the company during the year. The significant items which are present in the investing activities of the business are payments made for property, plant, equipment and intangibles which relates to the business purchasing the particular asset or making additions to the existing asset. The additions which are made to the properties, plants and equipment have been the highest in 2017 which is shown as $ 14,567,000. Another significant item which is shown in the cash flow statement under investing activity is interest received which means the amount of money received as interest for any investment which has been undertaken by the company (Bhandari and Iyer 2013). The interest received in 2017 is shown to be $ 384000 which has fallen from the previous year.
The financing activities of the business shows certain significant items which are loan taken or loan repaid during a particular year and the dividend which is paid by the company. Loan refers to the borrowings which are undertaken by the business for financing the activities of the business and using the same as capital for the business. In 2015 as shown in the financial statements, the company repaid a significant amount of loan which is shown at $ 29,000,000. In 2016 and 2017 the company took loan for the amount $ 11,357,000 and $ 23,727,000.
The loan taken by the business is used for financing of the activities of the business. The dividends which are paid by the business refers to sharing of profits which is generated by the business and declared as dividends during a particular period (Farshadfar and Monem 2013). The dividend which is paid by the management has increased during 2016 and 2017 which suggest that the company has issued more equity shares during 2016 and 2017.
Comparative Analysis of Three Classification of Cash Flow Statement
As shown in the financial statements of Blackmores ltd, the cash flow statement is classified on the basis of operating, investing and financial activities. The analysis of the three classifications of the cash flow statement is shown in the table below with the help of charts:
|
Particular |
2015 |
2016 |
2017 |
|
Net cash flows from operating activities |
71127 |
83,676 |
45,634 |
|
Net cash flows used in investing activities |
-3191 |
39,939 |
14,212 |
|
Net cash flows used in financing activities |
-51703 |
41,546 |
33,741 |
As per the chart which is shown above, in 2015 the cash from operation is shown as $ 71,127,000 which of a significant amount as shown in the financial statements. The cash from investing activities and cash from financing activities are negative as shown in the chart above. The cash from investing activities is shown at a negative figure of $ 3191000 and the cash from financing activities of the business is shown as $ 51703000 which is also shown in negative. In 2016, the cash which is generated from all the activities of the business is favorable and is shown significantly higher than the amount results shown in the previous year.
This shows that the operation of the business has increased from the previous year and it also shows that the business has developed from the last year. In 2017, the cash from operating activities have decreased from previous year which is evident from the cash flow statement. The cash flow investing activities and financing activities also show favorable results, however the figures have decreased from previous year which shows that the business in 2017 has not engaged much in investing and financing activities which is the basic reason for the cash which is generated is lower than previous year’s results (Gupta et al. 2014).
Other Comprehensive Income Statement
The comprehensive income statement which is shown in the annual reports of the company deals with certain item which are not shown in the financial statement of the business. the comprehensive income statement shows revenues, finance cost, tax expenses, revenue from discontinued operations (Khan and Bradbury 2014). As per the financial statements of Blackmores ltd, the company has not prepared a separate statement for comprehensive income but have shown the components of the other comprehensive income in the statement of income itself.
Items reported as Other Comprehensive Income
As per the financial statements which is prepared for Blackmores ltd, the items which are reported in other comprehensive income head are exchange difference which may have arise due to translation difference of currencies of foreign entities and Cash which is generated from hedge contracts which are shown in the financial statements net of tax (Huang, Lin and Raghunandan 2015). The above mentioned two items are shown in the income statement of the company.
Understanding of Items shown under Comprehensive Income
The exchange difference which arises from the translation of foreign currencies from foreign entities reflects that the company is engaged in foreign trade and therefore in order to show any income or expenses to ascertain the accurate profit, the business needs to translate the money receive in terms of value used in home country. There are times when the translation value fluctuates and therefore it is uncertain and nay difference which arises in revenue generated and actual money received is shown in the comprehensive income statement.
The money which is generated from hedge contracts arises in a similar manner (Weil, Schipper and Francis 2013). Hedging is term where the investor involves in activities of buying and selling on the basis of market price of stocks in order to generate profits. The generation of profits depends on the fluctuation of prices. Hence it is shown in the statement of income as an item of comprehensive income which is added to net profit after tax to reveal the actual profit made by the business from all activities.
Reporting of Comprehensive Income
The items of comprehensive income are recorded separate below the income statement or all together separately because such items are of extra ordinary nature and does not related to day to day business activity of the company. Comprehensive income is the mixture of other comprehensive income and standard net income (Zhang and Andrew 2014). The items which are reported in the comprehensive income statement is to disclose to the users of the financial statements all the business activities from which the business has generated revenues or incurred expenses as the case may be and also because such items cannot be displayed in the income statement of the company.
Accounting for Income Tax
Current Tax Expenses
The current tax expenses of Blackmores ltd which is shown in the financial statement of the company for the year 2017 is shown to be $ 24,023,000 which has decreased from previous year’s tax expenses which was shown as $ 43,391,000. The main reason for this reduction in tax expenses can be attributed to the fall in the profit before taxes during the year 2017.
Tax rate Charged by the business
The net profit which is generated by the business for the year 2017 and 2016 respectively as shown in the financial statements of the company is $ 58,208,000 and $ 100,020,000 respectively. The tax expenses which are charged by the company for 2017 and 2016 as shown in the financial statement of the company is $ 24,023,000 and $ 43,391,000 respectively. The tax rate which is applicable in Australia and which is complied by Blackmores ltd in the preparation of the financial statement of the company is 30% (Robinson, Stomberg and Towery 2015). The tax rate which if charged on the net profit of the company gives different results of tax expenses which are lower than what is being paid by the business (Dhaliwal et al. 2013).
This suggest that there are certain deferred tax assets and deferred tax liabilities which are present in the financial statement of the company. The financial statements of the company also show certain items which are of comprehensive nature on which tax rate is also applicable as per the Australian tax laws. Another reason for the difference between the tax expense applicable and the amount which is incurred in the financial statement is due to different tax rate which is charged on extraordinary items which are present in the financial statements.
Deferred Tax Assets and Liabilities
Deferred tax asset arises when the company has paid taxes in excess amount than what was required. On the other hand, deferred tax liabilities are completely opposite of deferred tax assets. This happens when the tax liability paid by the company is less as compared to what is to be paid as per accounting income (Laux 2013). As per the financial statement of Blackmores ltd, the deferred tax assets of the company are shown as $ 29,461,000 for the year 2017 which has increased from the previous year’s figure slightly. The deferred tax liability which is shown in the financial statement of the company amounts to $ 10,224,000. The deferred tax assets of the business arise due to temporary differences between the items which are recorded between two different reporting period. Another reason for the deferred tax assets and liabilities is due to the expense which are recurring in the financial statements of previous years which have been carried forward from previous year.
Deferred tax assets and liabilities are considerations in financial statements only if they can be used to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same business and for the same accounting period under same tax laws (Kasipillai and Mahenthiran 2013). The amount which is shown in the financial statement of the company relates to the tax carried forward in previous year and also the tax expenses which are related to the current year.
Current Tax Assets and Liabilities
There are no current tax assets as per the financial statement of Blackmores ltd and the current tax liabilities of the business is shown as $ 1,811,000 for the year. The Current tax liabilities which are shown in the financial statements accrue to the current year. Accounting always recognizes transactions on accrual basis which is a fundamental concept of accounting an therefore the income tax payable amount will be shown in the financial statement of the company. The figure of income tax payable is not same as income tax expenses because income tax payable also contains taxes which are carried forward from previous year and also due to deferred tax assets and liabilities which are recorded in the financial statements of the business.
Difference in Income tax expenses and Income Tax paid.
The income tax expenses which is shown in the statement of profit and loss account for Blackmores ltd is $ 24,023,000 and the actual tax which is paid by the business as per the cash flow statement of the company shows that the business has incurred $ 43,779,000 for the year. The difference between the two amounts is because of sets off with deferred tax assets and deferred tax liabilities of the business. The difference in the timing of charging the tax for the business might be another reason for the difference between income tax expenses recorded and income tax paid as per the financial statements of the business.
Review of the Tax policy of the business.
The analysis of the financial statements of the company revealed that the annual accounts are prepared as per the relevant provisions and standards which are applicable to the business. The financial statement. The company has a current tax liability and a deferred tax liability which is shown in the notes to accounts and the combined figures comes under the statement of profit and loss of the company. The company follows all the relevant standards which are applicable in Australia and has efficiently shown the treatment of tax in the financial statement of the company.
Reference
Bhandari, S.B. and Iyer, R., 2013. Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), pp.667-676.
Dhaliwal, D.S., Kaplan, S.E., Laux, R.C. and Weisbrod, E., 2013. The information content of tax expense for firms reporting losses. Journal of Accounting Research, 51(1), pp.135-164.
Farshadfar, S. and Monem, R., 2013. Further evidence on the usefulness of direct method cash flow components for forecasting future cash flows. The international journal of accounting, 48(1), pp.111-133.
Gupta, J., Wilson, N., Gregoriou, A. and Healy, J., 2014. The value of operating cash flow in modelling credit risk for SMEs. Applied Financial Economics, 24(9), pp.649-660.
Huang, H.W., Lin, S. and Raghunandan, K., 2015. The volatility of other comprehensive income and audit fees. Accounting Horizons, 30(2), pp.195-210.
Kasipillai, J. and Mahenthiran, S., 2013. Deferred taxes, earnings management, and corporate governance: Malaysian evidence. Journal of Contemporary Accounting & Economics, 9(1), pp.1-18.
Khan, S. and Bradbury, M.E., 2014. Volatility and risk relevance of comprehensive income. Journal of Contemporary Accounting & Economics, 10(1), pp.76-85.
Laux, R.C., 2013. The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), pp.1357-1383
Reid, W. and Myddelton, D.R., 2017. Cash flow statement. In The Meaning of Company Accounts (pp. 16-16). Routledge.
Robinson, L.A., Stomberg, B. and Towery, E.M., 2015. One size does not fit all: How the uniform rules of FIN 48 affect the relevance of income tax accounting. The Accounting Review, 91(4), pp.1195-1217.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
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