Corporate Accountability Assignment

This Corporate Accountability Assignment is a financial analysis report on one of the listed Australian companies on the Australian Stock Exchange (ASX). The report analysis and comments on the overall financial performance of the company for the last 2 years through cash flow analysis and liquidity analysis. It also discussed extensively on the topics of dividend, the director’s declaration in the annual financial statements, why the statement of “other comprehensive income” is being prepared and what are the different types of reserves which have been created by the company.

Corporate
Accountability
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Answer to Part A..........................................................................................................................................3
Answer to Part B..........................................................................................................................................4
Answer to Part F..........................................................................................................................................5
Answer to Part H.........................................................................................................................................5
Answer to Part I...........................................................................................................................................6
Answer to Part J...........................................................................................................................................6
Answer to Part K..........................................................................................................................................7
References...................................................................................................................................................7
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Background and Abstract
A financial analysis report has been prepared on one of the listed Australian companies on the
Australian Stock Exchange (ASX). The coampnay is the producer, marketer and seller of honey
in Australian region and has been one of the pioneer companies since long. The report analysis
and comments on the overall financial performance of the company for the last 2 years through
cash flow analysis and liquidity analysis. It also discussed extensively on the topics of dividend,
the director’s declaration in the annual financial statements, why the statement of “other
comprehensive income” is being prepared and what are the different types of reserves which
have been created by the company. The report also highlights aspects such as remuneration of
auditors, the disclosure on different types of expenses, effective tax rate, cash tax rate and what
are the different reasons for creation of deferred tax liabilities.
Answer to Part A
The company Capilano Honey is one of the largest supplier of Honey in Australia. It has been in
existence since 1953, is clinically tested, and trusted brand in Australian. It is listed on the
Australian Stock Exchange (Arnott, Lizama, & Song, 2017). The annual report of 2017 has been
considered for analysis. The cash flow statement of the company has been attached below.
As per the cash flow statement, both the receipts from customers as well as payment to vendors
has decreased as compared to last year but overall there has been a favourable impact in terms of
operating cash flows. The same has increased from $ 8.38 Mn (outflow in 2016) to $2.63 Mn
(inflow in 2017). In terms of the investing cash flow, the company invested more in 2017 in
investments ($ 0.1 Mn in 2016 and $ 2.6 Mn in 2017) and less in intangible assets ($2.7 Mn in
2016; $ 0.2 Mn in 2017). Furthermore, the investment in plant, property and equipment has also
come down from $6.87 Mn in 2016 to $ 1.37 Mn in 2017. The company also had inflows in the
form of proceeds from sale of PPE ($ 7.6 mn in 2017). All this cumulatively helped the company
to have positive cash inflow from investing activity in 2017 (Choy, 2018). Amongst financing
activity, the company raised capital both through shares issues ($ 16.78 Mn) and borrowings ($
12.92 Mn) in 2016 whereas the payment for borrowings was made in 2017 ($ 9.33 Mn). All this
cumulatively led to the cash outflow of $ 13.19 Mn in 2017 as compared to the inflow of $ 25.87
Mn in 2016. Overall, the company had a net cash inflow in 2016 of $7.96 Mn and an outflow of
$7.5 Mn. Overall the liquidity of the company has gone down but in terms of ratio of current
assets to current liabilities, the company has improved as compared to the last year (Goldmann,
2016). All this can be understood from the trend of the current ratio. The company had current
assest worth $ 77.94 Mn in 2016 and $ 69.84 MN in 2017, whereas the balance of the current
liabilities was $ 33.41 Mn in 2016 and $ 26.62 Mn in 2017, which shows that the ratio of current
assets to current liabilities (current ratio) has increased from 2.33 times in 2016 to 2.62 times in
2017. Thus, it can be said that the liquidity of the company has improved off late but it is way
ahead than the industry trend of 2 times of current ratio. One of the other company in the
Bidfood Australia Limited, which is again a listed company and a leading distributor in food
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products in Australia. The company has a comparatively lower liquidity than Capilano Honey
Limited and has been below the industry trend. Overall, the given company has a better liquidity
in terms of cash flows and thus would be able to meet the cash flow requirements to pay off short
term liabilities.
Answer to Part B
The dividend is the share of the profit that is being shared amongst the shareholders of the
company by the way of distribution of profit. It is proposed by directors of the company and
declared and confirmed by the members of the company in the annual general meeting. It can be
in the form of the interim or final dividend. The statement of changes in equity has been shown
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below as per which the company has recognised the dividend of $ 3782992 during the year 2017
(2016: $ 3782992). As per the cash flow statement, the company has paid the entire dividend
during the year. The company declared the same dividend in both the years. There has been no
such dividend, which is unrecognized in 2017 (Jefferson, 2017). The company has declared
dividend at the rate of 40% in both the years. Besides the regular dividend declaration and the
payment, the company has also made the franking credits available for the subsequent years to
follow. The same amounted to $ 5,323,208 in the year 2016 and $ 7,020,538 in the year 2017.
Answer to Part F
The different items which have been mentioned regarding remuneration of Auditors is that it
complies with Section 300A of Corporation Act, 2001 (Alexander, 2016). It is also mentioned
that apart from the audit services the company has also received the non-audit services from the
auditors. The auditors independence has not been compromised in this area and the non-audit
services were reviewed and approved by audit committee and the nature of the services provided
do not compromise with Auditor’s Independence as stated in APES 110 (Chron, 2017). The total
fees paid for the same was $ 18282 for the year 2017. The auditor in the given case is William
Buck. The auditor remuneration for the given year for the main consultancy and the audit was
$106600 in 2017 and $ 106155 in the year 2016. Thus, it can be said that there has not been
much increase in the auditors’ remuneration and it has fairly been constant.
Answer to Part H
As per the accounting standards, companies are required to split or bifurcate the expenses, which
have been shown in the profit and loss, account and thereby show the bifurcation in the
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disclosures or notes to accounts (Heminway, 2017). In the given case, the company has shown
the expenses nature wise in the form of raw material expenses, exchange loss or gain, loss on
sales of property, depreciation and amortization, employee benefit expenses, transportation and
marketing and promotional expenses, etc. as can be seen from the below extract of annual report.
As per the rule, it should be disclosed based on the different nature of the expenses (Trieu, 2017).
This split up of the overall expenses into the different parts and heads is very critical for
understanding and analysis of the user of financial statement as it helps to know if the direct or
indirect costs has increased or decreased and what is its impact on the gross and the net margin
of the company.
Answer to Part I
The deferred tax liabilities generally emerge when the taxable profit is less as per taxation rules
when compared with the accounting profit. This is generally due to the temporary and permanent
differences arising to the varied treatment of various expenses and income (Lessambo, 2018).
The deferred tax assets or liabilities arise of account of payment of extra or less tax in the given
year and the same can be set off or utilised or have to be paid in the upcoming years. It has been
discussd extensively in IAS 12. The balance of the deferred tax asset and the deferred tax
liability can either be shown in net or separately in the assets and liabilities side of balance sheet
respectively. Some of the reason for the taxable temporary difference, which has resulted in the
deferred tax liabilities for the company, are mentioned below:
1. Tax allowance which is being allowed on the property, plant and equipment
2. Difference in the depreciation as per accounting and as per taxation
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3. Revaluation adjustments which are being directly transferred to equity (Linden &
Freeman, 2017)
4. Provisions
5. Intangible assets
Answer to Part J
The current income tax charge for the year is $3318592 in 2017 (2016: - $3898377) and the
income tax expense as recorded in the income statement is $ 3,478,166 for the year 2017 and $
3,959,199 for the year 2016. The difference in both the figures is because of deferred tax
adjustments, amortization of intangibles, entertainment and legal expenses, adjustment of over
provisioning in past years and capital losses being utilised (Bae, 2017).
Answer to Part K
In case the tax rate, which is applicable, is being increased to 32%, following would be the
changes in the tax liabilities. The tax liability would increase to $3754425 instead of $ 3478166
(Bumgarner & Vasarhelyi, 2018).
Capilano Honey Limited
Calculation of income tax expense if the tax rate is increased to 32%
Particulars Amount ($) Amount ($)
Profit before income tax expense 13,812,976 13,442,662
Tax at the Australian tax rate of 32% (2016: 32%) 4,420,152 4,301,652
Tax effect of amounts which are not deductible (taxable) in
calculating taxable income:
Amortization of intangibles (35,132) (43,058)
Entertainment 15,576 7,466
Legal Expenses 31,262 13,772
Over provision of prior years (71,822) (51,780)
Capital Losses utilized (605,611) -
Income tax expense 3,754,425 4,228,052
Conclusion
From the above discussion and analysis of the financial statements of the company Capialno
Hoeny Limited, we have had a fair idea on how the reporting has been done in the financial
statements. As per the cash flow and liquidity position of the company assessed through cuurent
ratio, it can be concluded that the company is performing exceptionally well in terms of cash
flow and liquidity and has ability to make short term payments. The company has also adhered to
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all the disclosure requirement, be it on auditors remuneration pertaining to audit and non audit
services or the dividend declared and paid by the company. The company has also adhered to the
accounting standards pertaining to the deferred tax treatment and has calculated the tax to be
paid basis the same. The expense break up or bifurcation has also been shown in line with the
accounting standards and guidance.
References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in organizations.
Decision Support Systems, 97, 58-68.
Bae, S. (2017). The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), 153-172.
Bumgarner, N., & Vasarhelyi, M. (2018). Continuous auditing—a new view. Continuous Auditing: Theory
and Application, 20(1), 7-51.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07, 2017,
from http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), 103-112.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, 1-35.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Lessambo, F. (2018). Audit Risks: Identification and Procedures. Auditing, Assurance Services, and
Forensics, 3(1), 183-202.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93(1), 111-124.
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