Financial Analysis Of Woolworths Limited – Cash Flows, Other Comprehensive Income And Tax Expense

Introduction and Selected Company Details

The mandatory preparation of the books of accounts and the financial statements thereon has not been casted by the statute only rather it is the basic need of every investor of the company to have the full details of the results of the company and the same shall be monitored by the company on the regular intervals. The statement which provides the results of the company to the users of its financial statements shall present the true and fair view otherwise the decision of the users of the financial statements shall become meaningless.

As the title of the report suggests the analysis of the cash flow statement, the statement showing the other comprehensive income and the tax expense incurred by the company have been detailed. The company that has been selected for the purpose of the report is Woolworths limited and the annual report for the year ending 2017 has been considered. At first the statement of the cash flows has been discussed and how the same have represented the operations of the company and details whether the company is generating the cash inflows or incurring the cash outflows.

Each major as well as minor had been discussed in detail. Secondly the statement of the other comprehensive income had been analysed as to how the statement is different from the normal income and expenditure statement and the reason as to why it is being prepared and why the some items of it has the effect of reversing in the future for and gets transferred to the statement of the profit and loss account. Thirdly the major head has been considered for the company which is the tax expense which is mostly remains understood by the shareholders and the stakeholders of the company.  

With these views the report has then included the concluding paragraph and the set of the reference from where the data for report has been obtained.

DETAILS OF SELECTED COMPANY

The company that has been selected for the purpose of the report is the Woolworths Limited. The company that has been selected is from Australia and is registered in the stock exchange of Australia. The company is into the retail industry since its inception which is hundred plus years ago. The company has been into the activities of having the departmental store and the market chains and provides all the home products and other related products and services at one place and has provided the customers with the facility of getting all the things at once place. It has been operating across Australia and New Zealand and most importantly it is the number two company in the retail sector. Its major competitor is Wesfarmers Limited. Its main focus is to increase the customer base by providing the best services to the customers. With the retail sector, the report has been started and accordingly the annual report of the company as obtained from website has been considered for this report.

ACTIVITIES OF CASH FLOWS – STATEMENT ANALYSIS 

Activities of Cash Flows – Statement Analysis

The incoming and outgoing of cash has been detailed in the statement which is known as the statement showing the cash flows. The incoming and outgoing has been identified and detailed under the three major heads namely the activities relating to operating function, activities relating to investment function and the activities relating to the financing function. The minor heads under each of the above major head has been discussed below.

Item Reported

Although many items are reported in the statement of cash flows, but for the purpose of the report the main items under the heads have been considered and detailed below:

• The item that comes first under the operating activity is the cash that has been received from the persons to whom the payment has been made. Over the past two years the increasing trend has been observed in case of the cash which is received from the customers of the company. Increase has been observed to the tune of $169 millions.
• The item that comes after the debtors is the creditors to whom the company makes the payment for the purchase of the goods and services. It is clear that it is outflow of the cash and decreasing trend has been observed to the tune of $360 millions.
• The item which is of utmost importance is the income tax. Income tax is considered as the part of the operating activities and accordingly it is the outflow for the company. Income tax is the amount calculated on the taxable income of the company and not the accounting income of the company.  
• Whenever the company sells its goods and that too only capital goods then the cash inflows will be there and accordingly cash inflows will be considered in the statement.
• In case the company purchases its goods and that too only capital goods then the cash outflows will be there and accordingly the cash outflows will be considered in the statement.
• The other major part in the cash flow statement is the case when the company purchases the other businesses and accordingly the cash outflows will be there. It is the one time activity and not the running activity.  
• The other major item is the dividend. It is that item which is considered as the cash inflows as well as the cash outflows. Cash inflow occurs when the company receives the dividend on the investment if any made by the company and cash inflow occurs when the company pays the dividend.
• Whenever the company issues the share to the public the amount comes and that amount is regarded as the cash inflow for the company.
• Whenever the company borrows the amount from the banks and the financial institutions then the amount received is considered as the inflows of cash. The company will repay the same and accordingly the amount which repaid by the company to the banks will be considered as the repayment of borrowings and hence is the cash outflow. The total of approximately $1400 million has been the cash outflow for the company. (Fraser, Ormiston and Fraser, 2010)
• The last and the major item to with each of shareholders and the stakeholders of the company is concerned is with the status of the cash flows of the company and accordingly when there is excess of the cash then it will be said that there is increase in the cash and cash equivalents and otherwise there will be decrease in the same (Woolworths Limited, 2016).

Comparative Evaluation

The statement of the cash flows consists of the three major activities. One is the activity of operations, second is the activity of investment and the third activity is the activity of financing. All these activities plays a major contribution in understanding of not only the movement of cash but also the major instance which has resulted either in the cash inflows for the company or the cash outflows for the company. These three activities have been considered for the purpose of the evaluation and also the net increase or decrease in the cash or cash equivalents have been considered.

S. No.	Detail	IST YEAR – 2017	IIND YEAR – 2016	IIIRD YEAR – 2015
1	Operations	3122	2357	3345
2	Investment	(1432)	(1266)	(1335)
3	Financing	(1729)	(1475)	(1610)
4	Increase or Decrease	(39)	(384)	400

 The above table depicts that the company has been utilizing the cash and cash equivalents more in the investment and financing activities. The company has been facing the net decrease on the cash for the last so many years. It exhibits that the company has not managing the cash efficiently and effectively (Taylor, 2010).

ANALYSIS OF OCI 

Reported Details 

Two items have been shown in the statement of the other comprehensive income which are:

• Hedging and
• Translation of Foreign Currency 

Description of Each head

The hedging is mainly related to the hedge that is meant for the cash flows only. It is reclassified as to be transferred to the profit and loss account and is transferred once it gets realized. (Chambers, 2011).

Other item is the foreign currency translation which checks for the change in value of the foreign currency and books the unrealized part in the statement and reclassifies the same into the statement of the profit and loss (Bamber, Jiang, Petroni and Wang, 2010).  

Different from Profit and Loss Account

The statement of the profit and loss is different from the statement of the comprehensive income in the sense that the former considers the operating activities only and in case any non recurring activity occurs then the same shall be disclosed in the statement of the other comprehensive income.

The major part to consider is that the above items so reported in the statement of the other comprehensive income is liable to be reclassified for transferring to the statement of the profit and loss in the future when the same is realized.

COMPANY’S INCOME TAX

Tax Expense for Current Period 

Income tax expense of $ 837.70 million has been reported by the company for the year ended on 30^th June 2017 in its annual report. The company has reported in statement of profit or loss and it includes tax expense for current year, tax expense which has been deferred and adjustments for tax expense related to past years (Woolworths Limited, 2017).

Other Comprehensive Income Statement Analysis

Accounting Income and Tax Rate 

The reported income tax expense and the tax rate multiply by accounting income value are different from each other. The both value reported or can be calculated value are not same for Woolworths Limited for the period ended on June 2017. The reason for difference in two values is because of timing differences which consists of tax effect on the below items:-

1. Off Shore tax rate differences reported in operations of the company
2. Amount of impairment not allowed as deduction
3. Not recognized tax loss
4. Non deductible expenses

Reporting of Deferred Tax Assets/Liabilities

As per AASB 112, every company has report deferred tax asset/liabilities created due to timing difference in transactions having tax impact. In Woolworths Limited, $ 372.30 million has been disclosed as deferred tax asset in the annual report for the period ending on 30^th June, 2017. The deferred tax asset has been created to report the timing difference which occurred due to following transactions:-

1. Timing difference occurred due to difference in depreciation rates under different laws which need to be followed while presenting financial statements
2. Cash flow Hedges
3. Accrued expenses considered in books of accounts
4. Provisions recorded in financial statements
5. Unrealized differences in foreign exchange as the company is operating in more than one country (Harrington, Smith and Trippeer, 2012) 

Tax expense and Tax Payable 

Woolworths Limited has reported the tax expense amount and tax payable amount. Both the values are not same as the tax expense includes current tax expense and deferred tax expense and on the other hand tax payable is actual amount which the company has to pay to tax authorities of the country. In the annual report, the tax expense is $ 837.70 million where as tax payable is $ 80.9 million for the year ended on 30^th June 2017 (Laux, 2013). 

Tax Expense and Actual Tax Paid 

The amount of income tax expense is the combination of current tax and deferred tax. Tax paid is the amount or outflow of cash and cash equivalents to discharge the liability which has been arose on account of tax payable. The two values are different and can’t be same. Woolworths Limited report $ 837.70 million has tax expense whereas the company has $ 668.1 million as tax during the year ended on 30^th June 2017 (Manzon, G.B. and Plesko, 2012).

Tax- Accounting Treatment Rating 

Accounting treatment of tax adopted by the company in line with applicable rules and regulations and is according to accounting principles governing the same. The policies adopted by the company are very useful, easy and transparent so that effective and efficient decision making can be done by different stakeholders of the company.

CONCLUSION AND RECOMMENDATION 

Annual Reports of the company is the basis for providing information to different users of accounting which serves the primary objectives of general purpose financial reporting. The company which has been chosen for the study – Woolworths Limited has been analyzed in details. The components of the financial statements have been describe in detail so that users can understand the purpose for providing information in specific statement format by the company. The cash flow statement has been analyzed which provide the information about the performance of liquidity of the company.

Also, statement of comprehensive income has explains what will be the future prospective incomes of the company which are assesses in the current year. The treatment and account of corporation tax has also been analyzed which shows that the company is complying with all the relevant provisions of the accounting laws in relation to tax. In order to conclude, it can be said Woolworths financial statements and their components so transparent that can helps the users to provide effective information.

To recommend, the financial statements and all sub statements of financial statements should be prepared by following the rules and regulations set by AASB and Corporation Act, 2001 so that true and fair view of accounting information can be obtained and appropriate decision making can happen. 

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

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

Woolworths Limited (2017), Annual Report -2017