Understanding Cash Flows And Financial Position Of Enterprises

1. Cash flow statement is prepared to witness the movement of the cash within the organization and to manage the cash in a systematic way in the enterprise to prevent the mis utilisation of the resources and to manage the hard earned resources efficiently and effectively. Cash Flow statement includes three activities to organize the cash namely Operating Activities, Investing Activities and Financing Activities. Operating activities deals with the inflow and outflow of day to day activities of the business of the enterprise which includes the receipts from customers, payment to suppliers and vendors, manufacturing related expenses, office related expenses and any other incomes or expenses of operating nature. It specifically excludes non-cash items like depreciation. It shall also include interest and dividend if the organization is engaged in such business and which forms a primary part of the enterprise’s income.

Second comes the Investing Activities which deals with the investments and properties acquired and invested by the enterprise. Here assets include both tangible and intangible assets and the tangible assets include both movable and immovable assets. On the other hand, Investments include both short term and long term and further investment in a subsidiary and associates shall also be considered for the purpose. Investment activity further includes both acquisition and disposal of assets and investments and the net of the two is done to arrive at the net cash flow from investing activities.

Lastly, comes the Financing activities which engages the finance related issues of the enterprise which specifically deals in issue and redemption of shares and debentures, dividend payable and other financing activities which affect the financial position of the enterprise in monetary terms (Jones 2015)

In context of the Wesfarmers, the operating activities of the company include all that items as described above including taxes paid and borrowing were specifically excluded from the activity. The operating activity showed a net cash flow of $4226m which is 25 percent more than the previous year. The reason for such increment is the increase in realization from the customers and a diminution in the borrowing cost of the enterprise. Similarly, the investing activity of the Wesfarmers is mainly comprised of sale and acquisition of the business of associates and enterprises. It is reflecting a net cash outflow of $53m which represents a huge difference compared to last year due to proceeds of sale of business of the associate and redemption of loan notes. Finally, comes the financing activities which includes proceeds and repayment of the borrowings and dividends paid to equity shareholders of the company. There’s a drastic change in the cash flow from financing activity of the Wes farmer for the year ended 30^th June, 2017 from the negative flow of $1333 to 3771 due to the major change in proceeds from borrowings and excess repayment of the borrowings.

Thus, from the above views it is clarified that the company is in a better position as compared to previous year and more stable in monetary terms (WesFarmers 2017)

1. The comparative analysis of the Wesfarmers of 2015, 2016 and 2017 respectively gives a holistic view of the financial position of the enterprise. It has been observed that the interest and the dividend under the operating activity is unpredictable in nature as they vary unevenly every year. However the receipts vary at an equal pace of approximately five percent upwards every year. Further the observation under the investing activity gives a view that the company has sold its holding from its associates company and redeemed the loan notes to generate cash flows to the enterprise which helped the enterprise to manage and maintain the liquidity of the cash in the organization and to use the same for repaying the external borrowings to reduce its liability of finance cost and cost of capital. Other items in this activity does not have a major impact on the changes in the cash flow in the last three years of comparison and thus are more or less constant in nature. Lastly, major variations are being observed in financing activities of the three years . The proceeds and repayment of borrowings are having an uneven distribution by the enterprise and the dividends paid to equity holders depend upon the profits of the enterprise which is obvious to vary each year which ultimately affects the cash flow from the financing activities. These variations are thus observed in these three activities of the cash flow for the three different years and the analysis of the same is being analyzed above in an understandable and simple language. Thus through the above analysis it can be said that the company is in a stable position in the current year and is taking step towards improvement every year (WesFarmers 2017)(WestFarmers 2016)

• Comprehensive Income statement records all the transactions that does not impact the profitability of the company and are treated as notional in nature. It means that incomes and losses that have not been actually received or incurred is the part of comprehensive income statement and in the context of Wesfarmers the statement includes foreign exchange difference on translation, share of reserves of associates and subsidiaries and joint ventures , loss/gain from defined benefit obligations and gains and losses from non-financial assets. These are the items which have been recorded in the comprehensive income statement of the company which hardly puts an impact in the actual reserves of the company and the returns to the shareholders of the company.

1. Each item in the comprehensive income statement have separate significance and each have their own relevance in the financial statements of the company. The foreign exchange fluctuations arises on account of transaction with entities located in a different country and the currency and the value of the currency of  both the countries are different. For example a supplier in country A supplies 500 units of a certain item to its customer in country B and the supplier bills the amount in currency of country B when the rate of currency of country B is 54 against the currency of country A. Now at the year end the rate of the currency of country B increases to 57 and the actual payment has still not paid by the customer. Now the supplier of country A recognizes  an foreign currency exchange gain of [(57-54)*500] = 1500/- which is not actually gained by the supplier but as per the requirement of the law it is recorded in the books of account in comprehensive income statement since it has no impact on the profitability of the company. Secondly the company has recorded the reserves of its associates and joint ventures which puts a negligible impact on the individual profitability of the company. Similarly, other items like hedging of unrealized losses, losses or gains of defined benefit plans, and corresponding tax effect due to these extraordinary items does not affect the financial position and stability of the enterprise and are occurred on special circumstances and thus reported under the comprehensive income statement and not in the income statement of the financial statements of the company (WesFarmers 2017)

1. These items which are recorded under the comprehensive income statement does not form part of income statement since these items does not acquire finality and are hypothetical in nature. In other words, these items are not actually received or earned or incurred by the company which would affect the stability and the financial position of the company but are just a requirement of the law to recognize in the books of account to have a true and fair view of the financial statements to the shareholders and the readers of the financial statements of the company. However, items that have an impact on the profitability of the company are recognized under the income statement of the financial statements. Thus one can say that the items recorded under the comprehensive income statement just affects the accumulated losses and gains of the comprehensive income and not the overall financial position of the company.

1. Tax expense of the firm in the latest financial statements stands to be $1265m as per the income statement of the wesfarmers for the year ended 30^thJune, 2017. The income before the tax expense is said to be profit before tax and profit  after the tax expense form the part of the reserves of the company and out of that reserves only the company distributes dividend to its equity share holders.

• Generally the rate of the income tax is prescribed @30% of the income but however the same may differ from one country to another based on their income tax laws. In case of Wesfarmers the income tax rate is approximately 30% of its profit before taxes and the same is paid by the company as shown in the financial statements of the company for the year ended on 30^thof June, 2017 (WesFarmers 2017)

• Deferred tax asset is defined as a temporary timing difference between the tax laws and the company laws. This timing difference include items of depreciation, derivatives, accrued income, intangible assets and other significant balances an all these items are included in the deferred tax asset of Wesfarmers as these items impact the income tax expense of the entity from the view point of the Income Tax Laws against the point of view of the company. Finally, at one point of time the balances of all these items shall become equal. Thus, it is proved that deferred tax is the temporary differences of these items and permanent differences of any items are not recorded under the deferred tax and does not form part of deferred tax asset or liability to be recorded in the balance sheet of the company.

1. Wesfarmers had recorded the income tax payable in its balance sheet as the same is due to be paid by the company to the government. The income tax payable by the company amounts to $292m. The company had also recorded the income tax expense in its income statement amounting to $1265m which is different from the income tax payable in the balance sheet. The reason of such difference is that the income tax expense recorded is inclusive of the adjustments of deferred tax  and prior period taxes recorded in income statement while the income tax payable does not include such effects and is the pure liability of the company to be paid to the Government(WesFarmers 2017)

1. The income tax expense shown in the income statement amounts to $1265m while the income tax paid in the cash flow statement amounts to $951 which is not same. The major reason of the difference is the adjustment of deferred tax and tax refund and taxes of earlier periods in both the statements. The taxes shown in the cash flow statement does not have effect of deferred tax while the income tax expense does not deal with the tax refund which ultimately gave rise to the difference between the two figures of tax in the cash flow statement and the income statement respectively (WesFarmers 2017)

1. The figures relating to taxation in the balance sheet, cash flow statement, Income statement and the comprehensive income statement are all different from each other in the same financial statement is all interesting, confusing, surprising and difficult to understand. Only a competent person with a specified qualification in finance is eligible to understand such differences and the reason behind such variations. Thus, it is not very easy to understand the income tax for a layman and its subsequent calculations and variations.

References

Jones, S (2015). An Evaluation of the Decision Usefulness of Cash Flow Statements by Australian Reporting Entities. Retrieved from https://www.tandfonline.com/doi/abs/10.1080/00014788.1995.9729934

WesFarmers (2017), Annual Report, <https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0>.

WesFarmers. (2016). Annual Report. Retrieved from https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4