Hi5020 Corporate Accounting: Income Tax Assessment Answers

Assessment task

Select a public limited company listed on the Australian Securities Exchange (ASX). Go to the website of your company. 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 firm’s annual reports and save to your computer your firm’s latest annual reports consecutively for last three years. For example, these may be dated 30 June 2016 or 31 March 2017. Do not use your firm’s 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 firm’s financial statements carefully and include information from these footnotes in your answer.

You need to do the following tasks:

CASH FLOWS STATEMENT

• From your firm’s financial statement, list each item of reported in the CASH FLOWS STATEMENT and write your understanding of each Discuss any changes in each item of CASH FLOWS STATEMENT for your firm over the past year articulating the reasons for the change.
• Provide a comparative analysis of your company’s three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three

OTHER COMPREHENSIVE INCOME STATEMENT

• What items have been reported in the other comprehensive income statement
• Explain your understanding of each item reported in the other comprehensive income statement
• Why these items have not been reported in Income Statement/Profit and Loss Statement 

ACCOUNTING FOR CROPORATE INCOME TAX 

• What is your firm’s tax expense in its latest financial statements?
• Is this figure the same as the company tax rate times your firm’s accounting income? Explain why this is, or is not, the case for your firm.
• Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been record.
• Is there any current tax assets or income tax payable recorded by your company? Why is the income tax payable not the same as income tax expense?
• Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If not why is the difference?
• What do you find interesting, confusing, surprising or difficult to understand about the treatment of tax in your firm’s financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firm’s tax expense in its accounts? 

Please remember some aspects of your firm’s treatment of its tax –can be a very complicated area, particularly for some firms.

Answer:

INTRODUCTION 

The title of the report – Analysis of Financial Statements suggests its purpose of preparation. The study has been done to analyze the different of different statements which are part of financial statements of company. The study has been prepared to assess the Cash Flow Statements and Other Comprehensive Income Statement of chosen company. The report has been prepared in major three parts. The first describes each item which has been reported in cash flow statement of reported company along with comparison of each item of cash flow over past three years for chosen company. The second part helps in understanding the components of Other Comprehensive Income Statement and their exclusion from Profit and Loss account for chosen company. The third part explains the concept f corporation tax and its treatment in accounting books by the company and its management. The report has been ended with proper recommendation and conclusion. For the purpose of report, Woolworths Limited has been selected, a company registered in Australia and listed in ASX. The study has been prepared using the Annual Reports available on the company’s website along with other information available through reliable sources.

CHOSEN COMPANY DETAIL 

Woolworths Limited has been selected, a company registered in Australia. The company has its operations from 1924 in Australia and enhances its operations in New Zealand as time passes. The company is second biggest company in terms of revenue in Australia in retail industry. It has supermarket chains across Australia and New Zealand dealing with millions of customer on daily basis. The company has been considered as full compliance company in relation to filings required by SEC and other laws. Company’s Annual Report for three years – 2015, 2016 and 2017 has been taken into account in preparation of the report. 

CASH FLOW STATEMENT AND ITS ANALYSIS 

Cash Flows statement shows the total inflow and total outflow of cash and cash equivalent for the reporting period. The cash flow statement has been prepared according to business activities which are bifurcated into Operating activities, Investing Activities and Financing Activities.

Item bifurcation

The following items are reported in the statement of cash flow of Woolworths Limited which are important for analysis:-

• Revenue from customers: - This item describes the inflow of cash which is generated from amount collected from customers of the company to whom goods and services have been sold. The amount collected from customers of the company has been by $169 millions in 2017 from 2016.
• Amount paid to Creditors and Employees – This item relates to outflow of cash which are required for operations of the company. It shows that cash paid to suppliers from whom goods and services are purchased along with payments to be made to employees for their services in form of salary and other perquisites. The amount paid by company has been decreased by $ 360 million in 2017 from 2016.
• Payment of Income Tax: - This item describes the tax paid by the company on the income earned as per Australian Taxation Laws. The income tax paid by company has been decreased by $162 million in 2017 from 2016.
• Receipts from property, plant and equipment sale: - This item shows the inflow of cash from the sale of noncurrent assets which includes Property, Plant and Equipment. It shows disposal of assets by company for cash or cash equivalents to convert the investment in liquid assets.
• Payment made for purchase of Non Current Asset: - This item consists of outflow of cash or cash equivalent to procure and invest the funds of the company in noncurrent assets such as Property, Plant and Equipments.
• Amount paid for Business Acquisition: - To have more profits and to form synergies in performances, business of other companies will acquired by paying the amount to the owners of other business. This item in cash flow describes the outflow of cash or cash equivalents in order to have net assets of the other company.
• Amount received as dividend: - This item shows inflow of cash into the company which is received by the company on the investment made in form of shares of other companies.
• Issue of Shares: - This item shows major inflow of cash or cash equivalent that is received by the company by issuing shares in stock market. It is the major sources of funds for generating funds for doing investment and operates business. In the cash flow of Woolworths $ 55.5 million worth shares have been issued in 2017 and no such inflow of cash in past year under consideration.
• Receipts from loans: - This item shows the inflow of cash in form of liability creation by having borrowings from Banks and financial institutions in order to have smooth business function (Fraser, Ormiston and Fraser, 2010). The company has taken loans in both years 2016 and 2017 but in 2017 the amount borrowed is $ 184 million in comparison to $ 628 million.
• Settlement of Loans: - This item is an outflow of cash which shows the amount repaid for loans taken earlier to in order to have reduced liability for the company. The company has paid more amounts in 2017 towards repayment of loan as compared to in 2016 which was $ 994 million.
• Amount paid as dividend: - This item shows outflow of cash and cash equivalent which has been paid to the real owners of the company in return of the amount invested by them in the company. The company has paid fewer dividends in 2017 of $540 million as compared to $ 1184 million in 2016 which shows the distrust of owners in company (Woolworths Limited, 2016).

Comparison of board categories

Cash flows statement has been prepared on the basis of business activities which are divided in Operating Activities, Investing Activities and Financing Activities. Any inflow or outflow of cash and cash equivalent has been recorded in Cash flow statement after identifying the same into these three board categories. The cash flow statements the net result from these categories in the form of net increase or decreased in cash. The Woolworths comparison of three board categories has been listed below:

• Operating Activities: - The cash flow from Operating Activities shows the increased from 2016 to 2017 but in three years comparison it has been decreased from 2015 which was $ 3345 million. The main reason for reduction of the amount received from customers and fluctuation in payment for purchases and payment to employees. Also, the income taxes paid have decrease from past year showing lower revenue for the company.
• Investing Activities: - The cash has been used in investing activities for all the past three years showing that company is involved in procurement of new assets every year so that more profits can be earned in future. On the other hand, the company is blocking up more liquid funds into non liquid assets like Property, Plant and Equipment.
• Financing Activities: - The company has negative funds from financing activities showing more repayment of borrowings which was taken in past years. The company is in the process of reducing the outside long term liabilities (Taylor, 2010).

OTHER COMPREHENSIVE INCOME STATEMENT AND ITS ANALYSIS 

It is the statement which has been prepared after ascertaining the profit or loss for the period detailed in statement of profit or loss.

ITEMS DESCRIBE IN STATEMENT

In statement of comprehensive income below are the items which have been describe and mentioned in annual report:-

a. Reclassified Items

Hedging Reserve

Foreign Currency Translation Reserve

b. Non reclassified Items

Equity Instruments Reserve

Retained Earnings

Detailed description of every item 

The items reported in company’s Statement of Other Comprehensive Income have been described as follows:

• Hedging Reserve: - It has been details under reclassified item in statement showing that this item will find place in profit or loss statement after actual realization of the cash flows. In this amount has been reduced due to change in fair value of Hedge instruments taken by the company and cash flows has not been realized from these instruments.
• Foreign Currency Translation Reserve: - This amount reflects change in fair value of assets acquired in foreign operations which has been converted into equity. The profit from the same will be realized in future and then it will recorded as real income in statement of profit or loss (Bamber, Jiang, Petroni and Wang, 2010).
• Equity Instrument Reserve: - This item of statement is considered as non reclassified as it will not be recorded in Statement of profit or loss but the corresponding reserve has been created in future under the head Reserve and Surplus. It shows the change in fair value of equity assets owned by the company.
• Retained Earnings: - It shows the gain or loss on actuarial valuation of superannuation funds by the company. It will be recorded as no reclassified item in statement showing gain or loss with effect the reserves of the company not the profit or loss (Chambers, 2011).

Reasons for not reporting in Statement of Profit or Loss

The items will not be reported in Statement of Profit or Loss as there is no actual gain or loss from operating activities of the company rather the gain or loss have been generated in unusual event happened in the company during reported period. Also, cash flows from or to be paid are not fully certain to record the same under profit or loss statement. The reclassified and non reclassified items has been reported by Woolworths Limited in compliance with AASB 101 and other applicable accounting rules which suggest to report the item in Comprehensive Income statement so that correct and full information can be communicated to different stakeholders of the company for effective and efficient decision making.

CORPORATE INCOME TAX AND ITS ANALYSIS

Tax Expense for Current Year

The firm’s current tax expense as reported in its latest financial statement for the period ending on 30^th June 2017 was $ 837.50 million which shows the current tax expense of the company is $729.9 million and other is adjustment and deferred tax (Woolworths Limited, 2017).

Accounting Income and tax effect 

The actual tax expense reported and the amount calculated by multiplying the tax rate with accounting profits disclosed are different. The two values are different because of the fact of timing difference tax calculation which has been done in order to find the actual liability to be payable by company. The differences in two values are also depends on followings:

• Non deductible Expenses
• Non deductible Impairment
• Non recognition of tax loss
• Tax rate differences in Off shore transactions

Deferred Tax – Assets and Liabilities

Every company is required to account for the timing differences appear during the year in order to book the tax effect on that and accordingly the amount of dollar three hundred and seventy two million have been disclosed as the deferred tax assets. The temporary differences includes the difference in the depreciation, hedges occurred through cash flows, expenses booked as accrual and the inadmissible expenditures, etc (Harrington, Smith and Trippeer, 2012).

Income tax – Payable and Expense

It is evident from the financial statements that the company has disclosed the amount of income tax which is payable at the end of the year. Both the figures are not same with the reason thereof that the payable includes the amount to be paid to the income tax office and expense includes the tax and deferred tax amount. (Laux, 2013). 

Income Tax – Expense and Paid

Difference has been observed in the income tax expense and the income tax paid because of the fact that expense includes two components deferred and current. Paid part is only current and not deferred. (Manzon, G.B. and Plesko, 2012). 

Tax Treatment - Rating

On the basis of aforesaid discussion, the company has made the correct accounting treatment and hence the rating will be good.

CONCLUSION AND RECOMMENDATION

Annual report of the company provides the statutory reports which in turn will help the users of the financial to have an informed and meaningful decision. In the annual report of any company four statements are majorly prepared but for the purpose of this report, cash flow statement and the statement of other comprehensive income have been discussed. The annual report of Woolworths Limited has been considered and accordingly its statements have been analysed in detail. The cash flow statement has been discussed and then the reason for mentioning items under the statement of other comprehensive income had been detailed and then the treatment of tax expense has been made understood. The report is concluded with the end note that the Woolworths limited are preparing all the statements in the true and fair manner.

Through the means of this report, the recommendation is being made to prepare the financial statements with full transparency in order to provide the users of the financial statements with all the details as required by them for decision making. 

REFERENCES

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

Chambers, D.J., 2011. Comprehensive income reporting: FASB decides location matters. The CPA Journal, 81(9), p.22.

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 online available https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports at accessed on 12-05-2018.

Woolworths Limited (2017), Annual Report -2017 online available https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports at accessed on 12-05-2018.