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Bega Cheese and Wesfarmers: Evaluation of Item of Cash Flow Statement

HI5020 Corporate Accounting

Assessment task 

Select two public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name. In this section, go to your companies’ annual reports and save to your computer your firms’ latest annual reports consecutively for last three years. Do not use your companies’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your companies’ financial statements carefully and include information from these footnotes in your answer. You need to do the following tasks: 

OWNERS EQUITY (5 Marks)

(i) From your companies’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past year articulating the reasons for the change. (ii) Provide a comparative analysis of the debt and equity position of the two firms that you have selected. 

CASH FLOWS STATEMENT (5 Marks) 

(iii) From the financial statement of your chosen companies, list each item reported in the cash flows statement and write your understanding of each item. Discuss any changes in each item of cash flows statement for your companies over the past years articulating the reasons for the change. (iv) Provide a comparative analysis of your companies’ three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years. (v) Also provide a comparative analysis of the two companies that you have selected explaining the insights that you can get from the comparative analysis. 

OTHER COMPREHENSIVE INCOME STATEMENT (5 Marks) 

(vi) What items have been reported in the other comprehensive income statement for each company? (vii) Why have these items not been reported in Income Statement/Profit and Loss Statements? (viii) Provide a comparative analysis of the items shown in the other comprehensive income statement section for the two companies. If these items were included in the income statement / profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected? (ix) Should other comprehensive income be included in evaluating the performance of managers of the company? 

ACCOUNTING FOR CORPORATE INCOME TAX (15 Marks) 

What are the tax expenses shown in the latest financial statements of the two companies that you have selected? (xi) Calculate the effective tax rate for both companies that you have selected. Effective tax rate is calculated as (income tax expense / earnings before tax). Which one of the companies has the higher effective tax rate? (xii) Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded. (xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies? (xiv) Please calculate the cash tax amount for both companies using the book tax amount, changes in the deferred tax assets and deferred tax liability (please do your own research for your better understanding of these concepts and the method of calculating the cash tax amount the book tax amount.) (xv) Calculate the cash tax rate for both companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate). (xvi) Why is the cash tax rate different from the book tax rate? Please remember some aspects of your companies’ treatment of tax can be a very complicated area, particularly for some companies. For a better understanding of the concepts included in the assignment that has not been introduced in the class, please do your own research.

Answer

Corporate Accounting

Executive summary 

This report has provided the analysis and evaluation of each item of cash flow statement, owner’s equity, other comprehensive income statement and accounting of corporate tax. The report has provided the meaning of comprehensive income statement which is not realized or transacted yet but demonstrated in the other part of the comprehensive income statement for giving information to shareholders on their better economic decisions. The book tax and cash tax is different due to the calculation of book-tax on the basis of accounting standards and cash tax is paid on the basis of income tax provisions and adjustment of deferred tax assets and liabilities.

 Introduction 

Bega Cheese is an Australian dairy firm public listed Company having headquartered in Bega, Australia. The company was founded as an agriculture cooperative which was owned by dairy suppliers and currently considered as leading and largest dairy Companies in Australia with a valuation of around $775 million. The company earned revenue of $1195967000 and $1112630000 in the year 2016 and 2015. 

Wesfarmers Limited is an Australian conglomerate Company having headquartered in Perth, Australia. The company is indulged in providing chemicals, fertilizers, industry, and coal mining products. The company is currently working with more than 200000 employees and serving areas such as New Zealand, Ireland, Bangladesh, and the United Kingdom.  In the year 2017, Company earned the revenue of AS $68.44 million. 

The report is going to provide the insight of the annual report of the Bega Cheese limited and Wesfarmers for the last three years. The report will analyse the owner's equity, cash flows statement, other comprehensive income statement and accounting for corporate tax and the reasons for any change from the past years. The report will also provide some calculation on the effective tax rate, cash tax rate and cash tax amount of both Companies.

Owners Equity

Changes in equity items

Items of equity include mainly the share capital, reserved shares, retained earnings, and reserves. 

The share capital is the part of the capital of a firm which arises from the issue of shares in the market. Share capital can be segregated as issued capital, subscribed or paid up capital. Paid up capital can be fully or partially paid up. 

Reserved shares are the common stock for an administrative reason such as giving to the employees and directors as a part of performance or gift (Brigham and Houston, 2012). The reserved shares are issued as preferred stock can be converted into equity shares later on.

Retained earnings can be considered as profits which are set aside after deduction of the amount of dividend and paying of distribution to investors. Retained earnings are kept for various reasons such as use for the working capital expenditures, capital expenditures, research and development activities, acquisition and merger and marketing activities.

Reserves are set mainly for some particular reason and can be set for the purchase of assets, expected settlement of legal, payment of bonus, repairs, and maintenance and are not used for other purposes such as dividend and buyback of shares (Chandra, 2011).


Bega Cheese Limited  

Items of Equity, Bega cheese limited Annual report 2015

Figure 1: items of Equity

Source: Annual report, 2015

Items of Equity, Bega Cheese limited annual report 2017

Figure 2: Items of Equity

Source: Annual report, 2017

As per the annual report of Bega Cheese Limited, 2015 and 2017, the share capital was same in the year 2015 and 2016 but increased in the year 2017 as Company issued shares in the year 2016. The company issued shares 103942 as ordinary shares and 122464 as institutional placement and the transaction cost for performing this transaction occurred amounted to $1714. The reserves also increased from past three years due to increase in hedging reserve, share-based payment reserve, and fair value reserve (Higgins, 2012). The retained earnings have been continuously increased from the last three years due to an increase in revenue of Company from the last three years. The company is setting profits for expansion plans and other material operation of the business.

Wesfarmers Limited


Wesfarmers Limited, annual report 2016

Figure 3: items of Equity

Source: Annual report, 2016

Items of Equity, annual report of wesfarmers limited 2017

Figure 4: Items of Equity

Source: Annual report, 2017

 From the above table, it can be said that the issued capital of the Company is increased over the past three years. The company issued fully paid up shares. The company issued shares amounted to $236 million as dividend investment plan and the issue of ordinary shares amounted to $92 million which falls under the employee share acquisition plan and also includes transfer from the shares reserved (Wesfarmers, 2016). There is a decrease in retained earnings from the year 2015 to 2016 due to a decrease in profits but increased in the year 2017 which is due to some extra profits remaining with Company after the distribution of dividend and other debts. The reserves of Company decreased from the year 2015 but increased in the year 2017 which less than 2015 is due to increase in foreign translation reserves in a negative value. 

Comparative analysis

As per the annual report of Bega cheese and Wesfarmers limited, the debts of both Companies are in different directions. Debt position of Wesfarmers seems to be favourable as Company has no big amount of non- current liabilities in past three years 2015, 16 and 17 which can be a risk to the financial position of the Company in future. Bega Cheese took debt amounted to $11.6 million in the year 2017 which was less in the year 2015 and 2016. The equity position of Wesfarmers has been favourable and issued a slightly high amount of shares in the past three years. Bega Cheese limited issued some new shares in the year 2017 due to some requirement of new investment (Bega Cheese Limited, 2017). Wesfarmers have been sound in the management of debt and also does not required any frequent debt to manage its operations.

Cash Flows Statement

Items in the cash flow statement and Comparative analysis

The cash flow statement of both the Companies includes mainly the following items as discussed below:-

Cash flow from operating activities

Receipts from customers are the amount received for the sale of goods and services to customers

Payment to suppliers is the amount which is owned by the Company to suppliers and paid for the purchase of raw materials, goods, and services (Brealey, et. al., 2012)

Interest and other costs of finances paid is the cost which is paid on obtaining of borrowings from the bank, financial institution and any other body for the purpose of building or purchasing assets and other investment.

Income tax paid is the amount paid to government authorities on the income earned every year.

Dividend and distribution received is the amount which is received for the investment made in the associates.

Interest received is the amount which is received on the fixed deposits or any other deposits made in banks and financial institutions.

Cash flow from investing activities

Payments on property, plants, intangibles, and equipment are the amount which is invested in the purchase of capital and fixed assets.

Proceeds from the sale of property, plant, intangibles, and equipment are the amount which is received from the selling of disposable assets or assets which has no value remaining (Higgins, 2012).

Net proceeds from the sale of business and associates are the amount which is received from selling off any unit, subsidiaries or any other associates.

The investment made in joint arrangements and associates is the amount invested in the joint ventures, acquisitions and mergers

Cash flow from financing activities

Proceeds from borrowings are the amount which is received from the issue of bonds, debentures, and short-term borrowings.

Repayments of borrowings are the amount which is paid back to the debenture and bondholder and any other borrowings (Chandra, 2011).

Proceeds from issue of shares are the amount received from the issue of shares to public. 

Payment of dividend to members is the distribution of profits to equity holders for holding shares in Company.

Bega Cheese Limited

Cash flow operating activities, Bega Cheese Limited annual report, 2015

 Figure 5: Cash flow operating activities

Source: (Annual report, 2015)

Cash flow operating activities, Bega Cheese Limited annual report 2017

Figure 6: Cash flow operating activities

Source: (Annual report, 2017)


As per the cash flow statement of Bega Cheese limited 2017 and 2015, the receipts increased continuously from the past years and thus the payment to suppliers due to increase in sales. The interest and another cost of finance are paid less in the year 2017 than the year 2015 and 2016 (Bega Cheese Limited, 2017). The payment for income tax was payment has been increased in the year 2017 but decreased in the year 2016 from the year 2015 due to changes in tax rates and also increase in the profits. 

Cash flow investing activities Bega Cheese annual report 2015

Figure 7: Cash flow investing activities

            Source: (Annual report, 2015)


Cash flow investing activities, annual report of Bega cheese limited, 2017

Figure 8: Cash flow investing activities

Source: (Annual report, 2017)

As per the above table, the interest received has increased in the year 2017 but decreased in the year 2016 due to the increase in the deposits of Company in banks and other financial institution. The company invested fewer amounts in the purchase of property, plant, and equipment and sell off more the disposable assets which have no useful life in the year 2017 (Bega Cheese Limited, 2017). But high investment and less disposing of assets took place by Company in the year 2015 and 2016. The company also invested the high amount in joint ventures in the year 2017 which was less in the year 2015 and 2016. 

Cash flow from financing activities

Cash flow from financing activities, Bega Cheese Limited annual report 2015

Figure 9: Cash flow financing activities

            Source: (Annual report, 2015)

Cash Flow financing Activities, annual report of Bega Cheese 2017


Figure 10: Cash flow financing activities

Source: (Annual report, 2017)

As per the above table, the cash flow from financing activities includes proceeding from borrowings which are increased in the year 2017 from the last two years due to the raising of borrowings by Company from the bank and financial institution. The company also repaid the number of borrowings in the year 2017 (Bega Cheese Limited, 2017). The company received an amount from the issue of shares in the year 2017 which was not there in 2016 and 2015. The amount of dividend paid to shareholders also increased in the year 2017.

Wesfarmers limited

Cash flow operating activities, Wesfarmers limited cash flow operating activites

Figure 11: Cash flow operating activities

Source: (Annual report, 2016)

Cash flow operating activities, Wesfarmers limited annual report, 2017

Figure 12: Cash flow operating activities

Source: (Annual report, 2017)

As per the above table, the customer receipts increased slightly from the year 2015 and 2016 but there is an increase in the payment to suppliers (Wesfarmers, 2017). There is a decrease in the distributions received from associates in the year 2017 and also decrease in the interest received. There is a decrease in the cost of borrowing due to redemption of amount dues. The income tax paid is also reduced in the year 2017 due to adjustment of the deferred tax amount.

Cashflow investing activities, 2017


Figure 13: Cash flow investing activities

Source: (Annual report, 2017)


Cash flow investment activities, annual report 2016

Figure 14: Cash flow investment activities

Source: (Annual report, 2016)

As per the above table, the payment from property, plant, intangibles, and equipment reduced from the last year 2016 and 2015 but the proceeds from selling off assets increased in the year 2017. The company also sold some of its associates and business in the year 2017. There is no change in the investment made in associates and joint arrangements(Wesfarmers, 2017). Company redeemed its loan notes in the year 2017 and did less investment in the acquisition of subsidiaries in the year 2017 from the year 2015 and 2016. 


Cash flow financing activities, annual report 2017

Figure 15: Cash flow financing activities

Source: (Annual report, 2017)


Cash flow financing activities, annual report 2016

Figure 16: Cash flow financing activities

Source: (Annual report, 2016)

 The above table is presenting a decrease in the borrowings in the year 2017 and increase in the repayment of borrowings in the year 2017 which was still in the year 2015 and 2016. There is a decrease in the payment of a dividend in the year 2017. 

Insights from comparative analysis

There is an improvement in the overall net cash flow of Wesfarmers in the year 2017 which was less in the year 2015 and 2016. There is an immense increment in the net cash flow of Bega cheese limited in the year 2017 from the past 2015 and 2016. The major increment in cash flow is due to an increase in the number of borrowings in Bega Cheese which is a risk for Company in the long run as Company is largely dependent on debts. The increase in cash flow of Wesfarmers is due to the increase in revenue and proceeds from the sale of business and associates (Wesfarmers, 2017).  The cash flow from financing and investment activity has increased due to the sale of property, plant and equipment and borrowings and net proceeds from the issue of shares in Bega Cheese limited. Moreover, the cash flow from operating activities in case of Wesfarmers improved but cash flow from investment and financing activity turned negative due to increase in investment in property, plant, and equipment and repayment of borrowings. 

Other Comprehensive Income Statement

 Items reported in other comprehensive income statements

The other comprehensive income statement in both Bega Cheese and Wesfarmers includes change in fair value of financial assets, exchange differences on translation of foreign operations, items under cash flow hedges such as unrealised losses on cash flow hedges, realised loss transferred to net profit, realised profits transferred to non financial assets and share of association and joint venture reserves. 

Reason other comprehensive income statements as not a part of profit and loss statement

Other comprehensive income statements act as additional information for users of financial statements to have a comprehensive view of the financial position and status of Company (Chandra, 2011). Profit and loss statement includes only those items which are accrued, earned, or incurred but items in the comprehensive income statement are not realized yet and immediately set off in net income and expense with the realized performance of transactions. Other Comprehensive income statement includes the items which are not realized yet but recorded in terms of number as per the market value.

Comparative analysis

There is a positive increase in the value of financial assets in Bega Cheese limited. Furthermore, there are no foreign translation reserves due to the limited size of the business of Bega Cheese and which are negative in case of Wesfarmers. There is an increase in cash flow hedges in a positive manner which is negative in the case of Wesfarmers (Brealey, et. al., 2012). If the items of comprehensive income statement were included in income statement then the profits of the firm will either increase or decrease which will ultimately affect the payment of dividend to shareholders.

Other comprehensive income statements should also be included in the evaluation of the performance of management as this will present the right decision of Company towards the investment made in the financial assets (Faulkender, et. al., 2012). Right investment is necessary for the growth of Company and wrong investment can turn the business into financial distress.

Accounting for Corporate Income Tax

Tax expenses

 In the case of Wesfarmers limited the tax expenses have amounted to $1265 in the year 2017 which was $631 and $1004 in the year 2016 and 2015. In the case of Bega Cheese limited the tax expenses amount to $59290, $11121 and $4026 in the year 2017, 16 and 15.

Effective tax rates

The effective tax rate is calculated as income tax expense divided by earnings before tax. Effective tax rate of both Companies are presented below:-

Bega Cheese Limited

Earnings before tax =$198038000

Income tax expense = $59290000

$ 59290000

  $ 198038000


   $= 0.29

Wesfarmers

Earnings before tax =$4138 million

Income tax expense = $1265 million

$ 1265m

   $4138m

= 0.30

Wesfarmers limited has a high effective tax rate from Bega Cheese limited.

Deferred tax assets and liabilities

The deferred tax assets as per the annual report of Wesfarmers, 2017 amount to $1693 and deferred tax liabilities amount to $722 so net deferred tax assets amounted to $971. Deferred tax assets are as per the annual report of Bega Cheese limited, 2017 amount to $16172 and deferred tax liabilities amount to $1816 (Bega Cheese Limited 2017). Deferred tax assets and liabilities have been recorded in the balance sheet of Companies due to adjustment of the income tax paid on the applicable rate of income tax. Income tax expense is the amount which is payable on the current period income which is taxable by computing the tax as per the applicable rate. Deferred tax assets will have set off the temporary differences and unused tax losses. Deferred tax assets and liabilities are only recognized by Company when they have legal rights on offsetting current tax assets and liabilities (Hanlon and Heitzman, 2010). Deferred tax assets will only be presented in the balance sheet when there is the probability that future tax amount will be received for using the temporary differences. 

Deferred tax liabilities are not recognized in case there is the reverse timing of temporary differences can be controlled and will not reverse in future. They are also not recognized when there is recognition of goodwill.

Increase and decrease in deferred tax assets and liabilities

Deferred tax assets in the balance sheet of Bega Cheese limited have increased from the previous year amounted to $10329000 to $16172000 from the year 2017 to 2016 and deferred tax liabilities increased from $991000 to $1816000 (Bega Cheese Limited, 2017). Deferred tax assets in the balance sheet of Wesfarmers have slightly increased from $1653 to $1693. Deferred tax liabilities increased from $722 to $611. 

Calculation of cash tax amount

Cash tax amount can be calculated as following:-

Cash Tax = Book Tax+ Increase in deferred tax liabilities – Increase in deferred tax assets

Bega Cheese Limited

Book tax = $59290000

Increase in deferred tax liabilities= $825000

Increase in deferred tax assets= $5843000

= $59290000+$825000 - $5843000 = $ 54272000

Wesfarmers Limited

Book tax = $1265m

Increase in deferred tax liabilities= $111m

Increase in deferred tax assets= $40m

= $1265m+$111m - $40m = $1336m

Cash tax rate

Cash tax rate is calculated by dividing the cash tax from the earnings before tax. So the calculation of both the Companies is here presented below:-

Earnings before tax =$198038000

Cash tax amount = $54272000

$ 54272000

  $ 198038000

   $= 0.27

Wesfarmers

Earnings before tax =$4138 million

Cash tax amount = $1336 million

$ 1336m

   $4138m

= 0.32

Difference between cash tax rate and book tax rate

The difference between the cash tax rate and book tax rate is due to the difference in the treatment of tax as per income tax provision and accounting standards. Cash tax means the amount which is paid government authorities based upon tax laws and is reported in the tax return (Hanlon, et al., 2012). Book-tax refers to the taxes which are demonstrated in the financial statements of Company as per the generally accepted accounting principles which are basically framed for providing pictures to the current financial results and performance of Company to shareholders. The company will represent the cash tax liability even if the portion is to be paid in a later year. 

Conclusion 

It can be concluded that financial statements of both Bega Cheese and Wesfarmers have shown the significance of the change in the amount of income statement, balance sheet, and other comprehensive income statements. The report has also clarified on the treatment of deferred tax assets and liabilities and provided the reason for the difference between the cash tax and book tax rate. 

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