Analysis of Financial Statements and Cash Flow

The assignment requires an in-depth analysis of financial statements from two companies, presented in their annual reports. The analysis includes debt equity position and cash flow statements, as well as a discussion on other comprehensive income statements. The document also provides references to relevant books, journals, and online sources.

CORPORATE
ACCOUNTING

Executive Summary
This report presents comparison of Financial Accounts of two Banks National Bank of
Australia and Commonwealth Bank Limited. These both Banks are involved in banking
activities which includes lending of funds, Fixed Deposits etc. This report will present items of
Balance sheets with comparison of debt funds with equity funds, benefits and uses of cash flow
statements, comparison of effective cash tax rate with effective book tax rate.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Owners’ Equity................................................................................................................................1
(i)The Items that are listed in financial statements of Equity are...............................................1
(ii)Comparative Analysis of Debt and Equity Positions of Both Companies.............................3
Cash Flow Statements......................................................................................................................3
(iii)Items that are reported in Cash Flow Statements..................................................................3
(iv)Comparative of three activities of Cash Flow Statements....................................................5
(v)Comparative Analysis of Statement of Cash Flow of both companies..................................6
Other Comprehensive Income Statements.......................................................................................6
(vii)the reasons of comprehensive income statements not recorded in Profit and loss accounst
.....................................................................................................................................................6
Accounting For Corporate Income Tax...........................................................................................8
(x)Current tax expense of both companies..................................................................................8
(xi )Calcuation of Effective Tax rates of both companies..........................................................8
(xii)Stating reasons why Deferred Tax assets and Deferred Tax Liabilities Occurs..................9
(xiii)Increase in Deferred tax reported from previous years for both companies.....................10
(xiv)Calculation of Cash tax amount using Book Tax amounts of both companies ................10
(xv)Calculation of effective Cash tax rates of both companies................................................11
(xvi)Reasons stating why there is difference in book and cash tax rates..................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Corporate accounting is a branch that deals with preparation and presentation of financial
statements that includes Income statements, Balance Sheet, Statements of Equity and Cash Flow
statements with notes to accounts attached with it (Suzuki, 2015). The companies that had been
taken for analysis are National Australia Bank(NAB) Commonwealth Bank(CB).
Commonwealth Banks are leading provider of financial services which included retail
business institutional banking and wealth management. They are listed on Australian Stock
Exchange on 12/09/1991 having market capital of $124.6 Billion and had issued 1.76 billion
shares.
National Australian Bank Limited are involved in banking business and are spread across
two geographic divisions that are Australia and New Zealand. They are listed on Australian
Stock Exchange on 1/01/1974 and are having market share of $75.46 Billion. The equity shares
that are issued in market are 2.73 Billion.
This report is a comparative study of two companies which are in accordance with annual
reports. The analysis of Cash Flow statements, comparison of effective tax rates and items of
balance sheet re defined in this report.
Owners’ Equity
(i)The Items that are listed in financial statements of Equity are
1. Capital- The capital is investment made by shareholders of company to earn high return
in any company (Barua, 2015). The Capital can be said as an economic resource that are
measured in monetary terms.
2. Reserves- They are created for specific purpose for an expenditure than can occur in near
future.
1. General Reserves-: They are profits which are accumulated and which are yet to be
divided to shareholders.
2. Capital Reserves-: They are reserves which are created for Long Term project. They
belong to shareholders but are distributed only at time of winding up.
3. Share Premium Reserves-: Where any amount which is taken in excess of face value,
then any difference arises is known as Share Premium Reserves.
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3. Surplus- These are shown as credit balance in Income statement in accounting of finance.
The surplus reserves are made after distributing to bonus, general reserves etc.
4. Retained Profits-: These are excess profits which are retained from past years and are
carried forward and not distributed to shareholders.
5. Convertible Equity-: These are equity shares that when issued, there was a condition that
in future they can convert their holdings into different securities that can be preference
shares, debentures etc.
6. Outside Equity-: These are invested by investors which may not be repaid to them in
normal course of business. Equity can also be known as risk capital as invested knowing
about repayment that it will only be received only at time of winding up. Non-Controlling
Interest also known as Minority Interest-: It is an ownership position where a shareholder
owns less than 50% of shares which are outstanding but having no control over decisions
(Miao, 2016). For ex-: the shares which are owned by outside investors of a subsidiary of
any holding company are known as they are minority interest.
Statement of changes in Equity
National Australia Bank Limited
Amount in $ millions
Particulars 2015 2016 2017
Opening 0 34651 34285
Closing 34651 34285 34627
Changes In Equity 34651 -366 342
Statement of changes in Equity
Common Wealth Bank Ltd.
Amount in $ millions
Particulars 2015 2016 2017
Opening 0 27619 33845
Closing 27619 33845 34971
Changes In Equity 27619 6226 1126
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Interpretation
The Statement of changes in equity states that National Australia Bank Limited had issued shares
of $342 million in year 2017 which they had issued for managing there working capital.
Whereas Commonwealth Bank Ltd had issued a share capital of $1126 million for expansion
purposes in building their infrastructures.
(ii)Comparative Analysis of Debt and Equity Positions of Both Companies
1. Debt-: These funds can be said as they are an arrangement wherein borrowing party
agrees to borrow money under any conditions that is to paid back at a later date (Black,
2016.).
2. Equity-: Equity capital is defined as difference in value of assets and liabilities that are
owned by any company.
Statement of calculation of Debt Equity Ratio
Amount in $ millions
Particulars National Bank Of Australia Commonwealth Bank Limited
Debt 2017 129401 505314
Equity 2017 34971 34627
Total 164372 539941
Debt Equity Ratio Debt/Equity 3.70 14.59
Interpretation
The Debt equity ratio states that how much equity capital has been issued in respect of
borrowings. The National Bank of Australia is having 3.70 times of debt than equity and
Commonwealth Bank Limited is having 14.59 times of equity capital.
This states that Commonwealth Bank limited takes more risk for repayments of interest and
borrowings as they are having higher debt equity ratio.
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Cash Flow Statements
(iii)Items that are reported in Cash Flow Statements
These statements show change in inflows and outflows of cash and its equivalents
(Graham, 2018). There are three section or activities that are stated in cash flow statements these
are-:
Cash Flow from Operations- These cash flows are related for day to day business operations
(Cash Flow Statements 2018). The following are examples-:
1. Interest Received
2. Interest Paid
3. Dividends Received
4. Expenses Paid
2. Cash Flow from Investing Activities- These includes all investments that are done for
capital expenditure like to purchase a building etc.(Miao, 2016). These type of activities
are-:
1. Proceeds from sale of Property Plant and Equipment
2. Purchase of Building
3. Payments for purchasing subsidiary
4. Purchase of Intangible Assets
5. Acquisitions of Joint Ventures
3. Cash Flow from Financing Activities-: This cash activity of inflow and outflow includes
investment that are done by investors which are used for providing finance and managing
working capital of organization (Minnis, 2017). These types of cash flows that are
generated from these activities are-:
1. Redemption of Preference Shares
2. Proceeds from issue of debentures
3. Purchase of Treasury Shares
4. Issue of Loan
5. Redemption of Debt Securities.
Statements of Changes in Cash Flow Statement during Previous Years
National Australian Bank limited
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Particulars 2016 2017
Opening 0 27960
Closing 27960 39800
Changes in Cash and Cash Equivalents 27960 11840
Common Wealth Bank Limited
Particulars 2016 2017
Opening 0 14447
Closing 14447 23117
Changes in Cash and Cash Equivalents 14447 8670
Interpretation
It states that from last year cash had been decreased of National Australian Bank Limited by
$16120 million (27960-11840), because they had redeemed their bonds, promissory notes, loans
etc.
Common Wealth Bank Limited cash and its equivalents had decreased from $5807 million
(14447-8670) because they had done huge amounts of investments in shares of other companies.
(iv)Comparative analysis of three activities of Cash Flow Statements
National Bank of Australia
Activities 2016 2017
Amount in $ in millions
Cash Flow from Operating Activities 14460 13217
Cash Flow from Investing Activities -9970 -313
Cash Flow from Financing Activities 9496 -331
Interpretation
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1. Cash Flow from Operating activities of National bank of Australia has decreased in
previous year because the interest paid on borrowings was higher in comparison with last
2016
2. Cash Flow from Investing Activities had increased from last year as there was a sale of
investments which was purchased earlier.
3. Cash flow from financing activities had gone down from previous years as there was
repayments of Bonds.,
Common Wealth Bank
Ltd
Activities 2016 2017
Amount in $ in millions
Cash Flow from Operating Activities 5904 13724
Cash Flow from Investing Activities 2125 6006
Cash Flow from Financing Activities -1990 3509
Interpretation
1. Cash flow from operating activities of Commonwealth Bank had increased from 2016
because interest received on investments was much higher than last year.
2. Cash flow from Investing Activities had gone up from last year as there was sale of
subsidiary that was purchased in previous years.
3. Cash Flow from Financing Activities had also risen up as there was issue of debentures in
current year.
(v)Comparative Analysis of Statement of Cash Flow of both companies
The Comparative analysis of both companies states that National Bank of Australia
Limited had taken heavy borrowings and are paying interests on that. National Bank of Australia
had sold their investments in current which they have purchased earlier. It is looking like bank is
on saturation phase.
Whereas Commonwealth Bank Limited looks like that they are in expansion phase as bank had
sold out their subsidiary which was there loss making concern and investments had given higher
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returns as compared to last years. Commonwealth Bank Limited had taken some borrowings to
purchase some of property plant and equipment’s as bank want to expand their branches.
OTHER COMPREHENSIVE INCOME STATEMENTS
(vi) Items of Other Comprehensive Statements
Comprehensive income statements are addition of net income in which some particulars
that has not been recorded in income statement because these items had not been realised
physically (Graham, 2018). For ex- Investments that are available for sale but profit and loss had
not been realised.
Items that are reported in each company;
1. Gains and losses from foreign currency
2. Profit and loss from investments that are available for sale
3. Actuarial gains from defined benefit superannuation
4. Revaluation of properties
5. Gains and (losses) on cash flow hedging instruments
6. Impairment profit and loss
(vii)The reasons of comprehensive income statements not recorded in Profit and loss account
These items are not reported in profit and loss account because in preparation of financial
accounts company has to use concept of accrual basis which means that effect of transactions
which are recorded when they occur not when it actually happens. The items that are included in
comprehensive income statements are not recorded in profit and loss accounts, as profit and loss
accounts are prepared on concept of accrual basis (Other Comprehensive Income Statements,
2018). There may be some differences when recorded on cash basis. These statements include
those losses and revenues which have not been recorded for calculating net income in profits
and loss accounts. In this statement transaction are recorded even when they are not realised. The
accrual concept of accounting states that incomes should be recorded when they have actually
earned but not when they are received in monetary terms and it goes same with losses or
expenses, these are also entered into books of accounts when they actually occurs not when they
are paid in monetary terms.
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(viii) Comparison of Other Comprehensive income statements of both companies
These statements are used for measuring interest of owners. The comprehensive income
statements includes that revenues and losses which are recorded are not taken into consideration
in profit and loss accounts as they had not been according to accrual concept of accounting
(Other Comprehensive Income Statements, 2018). The items which are not included in Profit and
loss account are recorded here-:
1. Currency adjustments on translation of other contributed equity
2. Revaluation of land and buildings
3. Losses / gains on cash flow hedging instruments
4. Gains and losses from securities that are available of sale
5. Impairment Losses
6. Profits and losses from derivatives
Comparison of Other Comprehensive Statements
Particulars National Bank of Australia Common wealth Bank
Limited
Profit of Current Period 5288 9928
Comprehensive Incomes 4975 9233
Total income 10263 19161
Profits of owners will have nil effect as these profits or loss that had been shown in other
comprehensive statements which will be realized in near future and they will get there shares
whenever these types of items will be realised according to accrual concept.
(ix)These Items should be included in evaluation of performance of company
The other comprehensive income transactions must not be included in performance evaluation of
company by managers because this revenues and expenses includes-:
1. Forex Transactions
2. Profit and loss form post-retirement benefits that re pension gratuity etc.
3. unrealised Profit and loss from hedging of derivatives
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These profits and losses doesn't have any role in performance evaluation of company as
these gains and revenues are of abnormal natures which doesn't occur regularly(Lewellen, 2016).
These surplus and deficits are not from regular business operations that is why these items of
comprehensive income statements must not be included in performance evaluation of company
by managers.
ACCOUNTING FOR CORPORATE INCOME TAX
(x)Current tax expense of both companies
Particulars Tax amount in $ (in millions) For2018
National Bank of Australia 2480
Commonwealth Bank Limited 3884
Interpretation-:
Current tax expense of National Bank of Australia is 2480 million and of Commonwealth Bank
Limited is $3884 million.
(xi )Calculation of Effective Tax rates of both companies
Particulars National Bank of Australia Commonwealth Bank
Limited
Income tax expense (a) 2480 3884
Earnings Before Tax (b) 8661 13944
Effective Tax Rates c=a/b 28.63% 27.85%
Interpretation-:
The effective tax rate of National Bank of Australia is higher than that of common wealth bank
limited and difference in tax rate is .78% (28.63-27.85).
(xii)Stating reasons why Deferred Tax assets and Deferred Tax Liabilities Occurs
This chat explains there was increase in Deferred tax from previous years
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Particulars Amount in $ Amount in $
National Bank of Australia 2016 2017
Deferred Tax Asset 1711 1988
Change in deferred tax asset 277
Particulars Amount in $ Amount in $
Commonwealth Bank Limited 2016 2017
Deferred Tax Asset 389 962
Change in Deferred Tax Asset 573
The reasons why the changes occur in Deferred Tax Assets and Deferred tax Liabilities.
1. Timing Difference-: The books profits are calculated according to applicable Accounting
Standards and Companies Act. So for calculation of tax as per provisions defined under
income tax, the differences which arises between taxable profit and profits of books are
known as timing differences(Badenhorst, 2016). The timing difference can be of two
types-:
1. Temporary Difference-: These type of differences is capable for reversing in near
future. For ex-: Any Outstanding expenses which had to be paid has been subtracted
in profit and loss account as per accrual concept in current year will be allowable for
deduction in next year as per taxation purposes.
2. Permanent Differences-: The differences that arises because of taxable income and
profits of P&L account that cannot be reversed in subsequent periods(Yaari, 2016).
For ex- Donation given to any political parties that are not allowable for deduction for
tax purpose but are debited to income statements.
Examples why differences arises-:
1. Expenses that are deducted in income statements should not be debited to
calculate taxable income.
2. There is Difference in Depreciation method provided in income statement and
taxation law.
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3. The provisioning that are made in income statements and that are not allowed for
taxation purposes provided by act.
4. Impairment of assets that has been charged as per provisions of income tax may
be differ as per Australian Accounting Standard Board.
5. Any Donation paid to charitable institution that are debited for calculation of
income in books are not allowable for deduction in tax laws.
(xiii)Increase in Deferred tax reported from previous years for both companies
Particulars Amount in $ Amount in $
National Bank of Australia 2016 2017
Deferred Tax Asset 1711 1988
Change in deferred tax asset 277
Particulars Amount in $ Amount in $
Commonwealth Bank Limited 2016 2017
Deferred Tax Asset 389 962
Change in Deferred Tax Asset 573
Interpretation
In National Bank of Australia there was increase in Deferred Tax Assets of $277 million from
last year because of permanent differences that arises in tax laws and companies act
In Common wealth bank Limited the Deferred Tax assets was increased by $573 million from
previous year as because of timing differences in book profits and tax profits.
(xiv)Calculation of Cash tax amount using Book Tax amounts of both companies
Particulars Amount in $ Amount in $
National Bank of Australia 2016 2017
Deferred Tax Asset 1711 1988
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Particulars Amount in $ Amount in $
Change in deferred tax asset 277
Particulars Amount in $ Amount in $
Commonwealth Bank Limited 2016 2017
Deferred Tax Asset 389 962
Change in Deferred Tax Asset 573
The change in Deferred tax assets of National bank of Australia is $277 million and of
Commonwealth Bank limited is $573 million.
Amount in $ in millions
Particulars National bank of Australia Commonwealth bank Limited
Earnings Before taxes 8661 9952
Book Tax (a) 2480 3884
Less Deferred Tax amount (b) 277 962
Cash Tax Amount c=a-b 2203 2922
Interpretation
The cash tax amount of National bank of Australia after adjustments of Deferred tax assets are
$2203 million and that of Commonwealth bank limited is $2922.
(xv)Calculation of effective Cash tax rates of both companies
Particulars Amount in $ Amount in $
National Bank of Australia 2016 2017
Deferred Tax Asset 1711 1988
Change in deferred tax asset 277
Particulars Amount in $ Amount in $
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Particulars Amount in $ Amount in $
Commonwealth Bank Limited 2016 2017
Deferred Tax Asset 389 962
Change in Deferred Tax Asset 573
Amount in $ in millions
Particulars National bank of Australia Commonwealth bank Limited
Earnings Before taxes (d) 8661 9952
Book Tax (a) 2480 3884
Less Deferred Tax amount (b) 3.58 9.62
Cash Tax Amount c=a-b 2476.42 3874.38
Effective Tax Rates e=c/d 28.59% 38.93%
Interpretation-:
The effective cash tax rates of National bank of Australia is 28.59% and that of Commonwealth
Bank limited is 38.93%. These calculations are done after adjusting change in Deferred tax of
both companies.
(xvi)Reasons stating why there is difference in book and cash tax rates
Differences in tax rates of book and cash arises because there is timing difference that had
been occurred as there may be change in provisions of income tax with company’s act
(Corporate Income Tax, 2018). Timing differences are of two types-:
1. Permanent Differences-:Permanent difference occurs because there is change in income
of which is calculated as per income tax and book profits. Nature of revenue and expense
that creates permanent differences are of non-reversible nature (Suzuki, 2015). Following
can be permanent differences -:
1. Penalty for non-payment of income tax which is recorded in account books as
expense may not be allowable in income tax.
2. Contributions to Charitable institutions.
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2. Temporary Differences-: These types of differences arise because of incomes or
expenditures that are entered in account books will be not affecting gains and losses in
current period(Wild, 2018). Nature of temporary differences is that it can be reversed in
subsequent period. Following can be temporary differences-:
1. Warranties given on products- it may be expenditures for current periods but they are
debited in subsequent periods.
2. Rent paid in Advance- these are expenses for subsequent periods but will be recorded
in current year where it had been paid.
The table presents difference in cash tax and book tax rates for current year-:
Particulars National Bank of Australia Commonwealth Bank limited
Book tax Rates (a) 28.63% 27.85%
Cash tax Rates (b) 28.59% 38.93%
Differences c=a-b 0.04% -11.08%
Interpretation-:
The difference in effective cash tax rates and book tax rates of National bank of Australia
is .04% and of Commonwealth Bank limited is -11.08% which means that commonwealth bank
has much higher cash tax rate.
CONCLUSION
This reports which is presented deals with different analysis of financial accounts that are
given in Annual reports of both companies. There is analysis of debt equity position and Cash
flow statements where all the inflow or outflow activities of cash are measured and explained.
The items of other comprehensive statements are described and there is analysis of why the
particulars of these statements are not taken in income statements. This project guides how
deferred tax assets, liabilities are created with calculations of difference in cash tax profits and
book tax profits are also provided in this report.
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