The report would concentrate on assessing the various financial statements of three ASX listed organisations functioning in the identical sector. For meeting this purpose, the organisations include Woolworths Group Limited, Wesfarmers Limited and JB Hi-Fi Limited that are operating in the Australian retail sector. The analysis of the annual reports of the last three years of these organisations is evaluated, in which the main aspects covered include cash flow statement, equity and liability, accounting for corporate income tax and other comprehensive income statement.
Woolworths Group Limited has been established in 1924 in Australia and it is involved in operating retail stores via Australian Food, Endeavour Drinks, New Zealand Food, Big W Hotels and other drinks. Moreover, it has liquor stores and hotels as well with an employee base of around 201,522 (Woolworthsgroup.com.au 2019).
Wesfarmers Limited is the leading Australian retail organisation and its operations mainly include retail, distribution of industrial and safety products, coal mining and production, chemical and fertiliser production and investment businesses in Australia, UK, New Zealand and others. The company has been established in 1914 and at present, it has staff base of 217,000 (Wesfarmers.com.au 2019).
JB Hi-Fi Limited is mainly involved in retailing home consumer products operating through JB Hi-Fi Australia, The Good Guys and JB H-Fi New Zealand. The main products of the organisation include audio equipment, cameras, computers, DVD products, musical instruments and others. The company has been founded in 1974 with a staff base of around 12,229 in 2018 (Jbhifi.com.au 2019).
Part (i):
From the annual reports of Woolworths Group Limited, the equity section contains contributed equity, reserves and retained earnings. It has been identified that contributed equity would increase from $5,252.2 million in 2016 to $6,055 million in 2018, as additional equity shares are issued in the market. However, reserves have increased from $93.9 million in 2016 to $353 million in 2018, as there is presence of foreign currency translation reserve, hedge reserve and others (Van Mourik 2014). Finally, there has been increase in retained earnings as well from $3,124.5 million in 2016 to $4,073 million in 2018 (Woolworthsgroup.com.au 2019).
In case of Wesfarmers Limited, all items are same as Woolworths; the only addition is reserved shares. The issued capital has increased from $21,937 million in 2016 to $22,277 million in 2018 owing to the increase in the issuance of equity shares in the market. However, retained earnings have fallen significantly in 2018 due to the decline in overall net income earned by the organisation. In addition, reserves have increased from $166 million in 2016 to $344 million in 2018, as hedge reserve and foreign currency translation reserve have increased over time. Finally, no significant change could be observed in reserved shares of the organisation from 2016 to 2018 (Wesfarmers.com.au 2019).
For JB Hi-Fi Limited, the equity items are contributed equity, retained earnings and reserves. Significant increase in contributed equity could be observed from 2016 to 2018, as the firm has raised its issuance of equity shares in the market for meeting capital needs (Bauman and Shaw 2016). After this, retained earnings are observed to increase during this period as well owing to significant rise in profit margin. Finally, reserves are seen to be increased over the years (Investors.jbhifi.com.au 2019).
Part (ii):
From the annual reports of Woolworths Limited, the main current liabilities disclosed are trade payables, borrowings, current tax payable, provisions and other financial liabilities, which are observed to increase from 2016 to 2018. The non-current liabilities are borrowings, provisions, other financial liabilities and other non-current liabilities, which have fallen over the three-year period (Woolworthsgroup.com.au 2019).
As per the annual reports of Wesfarmers Limited, the line items in current liabilities comprise of trade and other payables, interest-bearing loans and borrowings, income tax payable, derivatives, provisions and others, which have fallen slightly from $10,424 million in 2016 to $10,025 million in 2018. The non-current liabilities after registering increase in 2017 has declined in 2018 that constitute of interest-bearing loans and borrowings, derivatives, provisions and others (Wesfarmers.com.au 2019).
The annual reports of JB Hi-Fi Limited contain certain line items in its current liabilities, which include trade and other payables, provisions, deferred revenue, current tax liabilities and others. The amount is witnessed to increase significantly from 2016 to 2018. On the contrary, the non-current liabilities include borrowings, deferred tax liabilities, deferred revenue, provisions and others, which after experiencing significant increase in 2017 has fallen in 2018 (Investors.jbhifi.com.au 2019).
Part (iii):
In accordance with the above figure, it could be stated that Woolworths and JB Hi-Fi use more portion of debt capital than equity capital for funding their business assets. The only exception could be observed in case of Wesfarmers, as it has relied on raising funds from the equity shareholders so that its financial risk could be minimised (Kulikova, Garyntsev and Gafieva 2015). Thus, the financial leverage is high for JB H-Fi Limited followed by Woolworths and Wesfarmers.
Part (iv):
From the cash flow statements of Woolworths Group Limited, the cash flows from operations include receipts from customers, payments to employees and suppliers, payment of net financing costs and income tax payment. This area after experiencing considerable rise in 2017 has declined in 2018. The cash flows from investing activities include proceeds from sales of PPE, payments for PPE and intangible assets, payments for business purchase, Home Consortium Trust and dividends obtained. These cash flows are observed to increase steadily over the years. Finally, the cash flows from financing activities comprise of proceeds from share issuance and borrowings, repayment of borrowings and payment of dividends. These cash flows are observed to increase considerably in 2017; however, decline could be observed in 2018. However, the increased operating cash flows have resulted in increased cash balance of the organisation in 2018 (Woolworthsgroup.com.au 2019).
As per the cash flow statements of Wesfarmers Limited, increase and fall in operating cash flows are witnessed from 2016 to 2017 and from 2017 to 2018 respectively. The significant items under this head include all the items mentioned for Woolworths with the additions as interest received and borrowing costs. The investing cash flows have declined massively in 2017 compared to the last year after which increase could be observed in 2018. The items falling under this head comprise of payments for PPE and intangibles, proceeds from sale of PPE, proceeds from business sale, investments in joint ventures, subsidiary acquisition and net redemption of loan notes. On the other hand, the financing cash flows comprise of proceeds from and repayment of borrowings, payment of equity dividends and demerger transaction costs. This head after witnessing considerable increase in 2017 has fallen slightly in 2018. However, the ending cash balance has fallen in 2018 compared to 2017 for Wesfarmers (Wesfarmers.com.au 2019).
For JB Hi-Fi Limited, the main operating cash flow items include receipts from customers, payments to staffs and suppliers, payment of income tax, interest and finance costs and receipts of interest. This head has experienced considerably from $185.1 million in 2016 to $292.1 million in 2018. After this, the main investing cash flows comprise of payments for business combinations and PPE and proceeds from sale of PPE. This head after experiencing remarkable increase in 2017 has fallen significantly in 2018. Finally, the financing cash flows comprise of proceeds from share issue, proceeds or repayment of borrowings, share issue costs, payments for share issue costs and dividend payments. The trend is similar to that of the investing cash flows owing to which ending cash balance has remained almost identical in 2018 compared to 2017 (Investors.jbhifi.com.au 2019).
Part (v):
It is evident from the above table that the net operating cash flows of Woolworths after increasing in 2017 have declined in 2018, which signifies the fluctuating income of the organisation from operating activities (Frank and James 2014). After this, the organisation has invested heavily in purchasing PPE and investing in business and it has made considerable to the shareholders in the form of dividend (Woolworthsgroup.com.au 2019).
Wesfarmers Limited:
In accordance with the above table, it could be observed that although the net operating cash flows of the organisation after experiencing massive rise in 2017 have experienced a slight decline in 2018 owing to increased payment of income tax. Besides, it has made considerable investment in purchasing PPE in 2018. Finally, the payment of equity dividend has resulted in increasing cash outflows from financing activities (Wesfarmers.com.au 2019).
JB Hi-Fi Limited:
From the above figure, it is evident that the operating cash flows have risen over the years because of increased receipts from the customers. However, there has been decline in financing cash flows owing to the reduction in payments for business combination (Investors.jbhifi.com.au 2019).
After the conduction of comparative analysis of the three selected organisations, it could be stated that the cash flows from operations are highest for Wesfarmers Limited followed by Woolworths Group Limited and JB Hi-Fi Limited. This is because of increased customer receipts and dividends obtained (Mohanram 2014). Along with this, it could be witnessed that all these organisations have focused on investing their PPE base and other intangible assets leading to increase in their overall investments. Finally, the increased dividend payments, finance costs and interests have resulted in rise in cash outflow of these organisations (Lee 2014).
Part (vii):
In case of Woolworths Limited, the items disclosed in its other comprehensive income statement include hedge reserve, cash flow hedge, foreign currency translation reserve and equity instrument reserve (Woolworthsgroup.com.au 2019).
From the annual reports of Wesfarmers Limited, the disclosed items include cash flow hedge reserve, foreign currency translation reserve and a portion of retained earnings that could not be included in the other financial statements (Wesfarmers.com.au 2019).
JB Hi-Fi Limited has disclosed a number of items in comprehensive income statement, which include cash flow hedges and translation of foreign operations (Investors.jbhifi.com.au 2019).
Part (viii):
The three organisations have not reported the aforementioned items in their profit and statements owing to the fact that they have extraordinary nature and they are not used to run day-to-day operations. Moreover, the organisations use these items for reporting the business operations in the period and as a result, it is not possible to include these items in other comprehensive income statement (Bratten, Causholli and Khan 2016).
Part (ix):
As evident from the annual reports of the three organisations, cash flow hedges are incorporated in their other comprehensive income statements. From these statements, it could be observed that Woolworths has registered highest other comprehensive income followed by Wesfarmers Limited and JB Hi-Fi Limited. Moreover, foreign currency translation reserve is another item that is reported by all three organisations in their other comprehensive income statements. These incomes are attributed to the shareholders and non-controlling interests (Kim 2016). Hence, if the above-mentioned items are included in their income statement, the impact would be direct on net profit, since they could be either understated or overstated. This would impact the decision-making process of the shareholders in terms of investment decisions (Hodgson and Russell 2014).
Part (x):
It is noteworthy to mention that the performance of the firms should not depend on the comprehensive business items because they are depicted characteristically in their annual reports. Moreover, it could be observed that such items have extraordinary features and they are non-periodic in nature. Along with this, the incorporated items under these statements are generally extraordinary in nature. Therefore, when all these aspects are evident, the management of the organisation need not take into account these items for undertaking business decisions (Huang, Lin and Raghunandan 2015).
Part (xi):
According to the latest annual report of Woolworths Group Limited, income tax expense incurred has been $718 million in 2018 compared to $651 million in 2017. For Wesfarmers, the tax expense incurred has been $1,246 million in 2018 in contrast to $1,169 million in 2017. In case of JB Hi-Fi Limited, the organisation has incurred $101.3 million in 2018 compared to $86.8 million in 2017 as income tax expense.
Part (xii):
In order to compute the effective tax rate, the profit before tax is divided by income tax expense (Taylor and Richardson 2014). The above table makes it clear that Wesfarmers has incurred the highest effective tax rate followed by JB Hi-Fi Limited and Woolworths.
Part (xiii):
It is necessary for the firms to disclose the amounts related to deferred tax assets and deferred tax liabilities in their annual reports published at the end of a period (Dowling 2014). From the annual reports of the three organisations, it could be observed that they have made adequate disclosures of their deferred tax assets and liabilities supported by financial footnotes. The main reason that these items have to be reported in the balance sheet is because of the provisional difference between taxable profit and accounting profit. Moreover, the tax liabilities and tax assets are carried forward in the existing year from the past year (Rimmer, Smith and Wende 2014).
Part (xiv):
From the latest annual report of Woolworths Group Limited, the organisation has realised deferred tax assets amounting to $908 million in 2018 compared to $998 million in 2017. On the other hand, deferred tax liabilities have been $637 million in 2018 compared to $626 million in 2017 (Woolworthsgroup.com.au 2019).
In case of Wesfarmers Limited, deferred tax assets have amounted to $1,365 million in 2018 in comparison to $1,693 million in 2017. On the other hand, deferred tax liabilities have declined to $673 million in 2018 from $722 million in 2017 (Wesfarmers.com.au 2019).
Finally, JB Hi-Fi Limited has experienced an increase in its deferred tax assets from $89.5 million in 2017 to $99.4 million in 2018. On the contrary, slight decline in deferred tax liabilities could be observed from $105.6 million in 2017 to $105.1 million in 2018 (Investors.jbhifi.com.au 2019).
Part (xv):
Cash tax rate does not resemble book tax rate due to the fact that the former is projected by keeping in mind the existing year (Kawano and Slemrod 2016). On the contrary, both existing year and upcoming year are considered for computing the book tax rate. In order to compute the cash tax rate, there has been consideration of a number of aspects that include deferred tax assets, deferred tax liabilities and interest weights, which result in minimisation of tax (Mohanram 2014). In case of book tax rate calculation, the aforementioned items are not taken into consideration.
Conclusion:
By taking into account the above-discussed aspects, it could be inferred that Woolworths and JB Hi-Fi raises funds mostly from bank loans for financing its assets, while Wesfarmers uses equity financing for raising funds from the market. Moreover, it has been analysed that these organisations have invested largely in PPE; however, the positive cash flows generated from operations are adequate to cover these outflows. Along with this, they do not consider the other comprehensive income items to be included in their income statements owing to their extraordinary nature. Finally, from the taxation part, it has been assessed that the companies take into account certain items like income tax expense, deferred tax assets, deferred tax liabilities and finance cost for appropriate calculation of their cash tax rates.
References:
Bauman, M.P. and Shaw, K.W., 2016. Balance sheet classification and the valuation of deferred taxes. Research in Accounting Regulation, 28(2), pp.77-85.
Bratten, B., Causholli, M. and Khan, U., 2016. Usefulness of fair values for predicting banks’ future earnings: evidence from other comprehensive income and its components. Review of Accounting Studies, 21(1), pp.280-315.
Dowling, G.R., 2014. The curious case of corporate tax avoidance: Is it socially irresponsible?. Journal of Business Ethics, 124(1), pp.173-184.
Frank, B.P. and James, O.K., 2014. Cash Flow and Corporate Performance: A Study of Selected Food and Beverages Companies in Nigeria. European Journal of Accounting Auditing and Finance Research, 2(2), pp.77-87.
Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income. Australian Accounting Review, 24(2), pp.100-110.
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.
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Kim, J.H., 2016. Presentation formats of other comprehensive income after accounting standards update 2011-05. Research in Accounting Regulation, 28(2), pp.118-122.
Kulikova, L.I., Garyntsev, A.G. and Gafieva, G.M., 2015. The Balance sheet as information model. Procedia Economics and Finance, 24, pp.339-343.
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