HI5020 Corporate Accounting: Analysis of Inghams and Woolworths

This report provides a comparative financial analysis of Inghams Ltd and Woolworths Ltd, both listed on the Australian Securities Exchange (ASX). The analysis examines key aspects of their financial statements, including cash flow statements, comprehensive income statements, owners' equity, ...Read More

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HI5020 Corporate Accounting
Assessment item 2 — Assignment

Inghams Ltd and Woolworths Ltd
Executive summary
Evaluation on different aspects between two organizations can play a major role in shedding
light betwixt their approaches and performance. Thus, with the help of this report, the annual
reports of Inghams Ltd and Woolworths Ltd will be selected and a comparative analysis will
be conducted betwixt their cash flow statements, comprehensive statement of income, equity,
and income tax. With such comparative analysis, any changes in these segments when
compared to the last year can be obtained. Furthermore, this report also intends to consider
the notes and footnotes of financials of these companies for more efficiency in evaluation.
Overall, the comparison betwixt these companies can assist in reflecting which company has
been performing better on a whole.
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Inghams Ltd and Woolworths Ltd
Contents
Introduction...........................................................................................................................................3
Owners’ equity......................................................................................................................................3
Cash flow statement..............................................................................................................................4
Comparative evaluation........................................................................................................................7
Comprehensive income statements......................................................................................................8
Accounting for corporate income related tax......................................................................................11
Calculation of effective tax rate:..........................................................................................................12
Deferred assets....................................................................................................................................12
Cash Tax Rate......................................................................................................................................14
References...........................................................................................................................................16
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Inghams Ltd and Woolworths Ltd
Introduction
The main aim of the report is to assess the financial information of Inghams Group Limited
and Woolworths. Woolworths is a major player when it comes to retail business and has its
business scattered immensely. On the other hand, Ingham Group Limited is a poultry
producer and has its business located in Australia and New Zealand. Both the companies are
significant player and the report aims to shed light on their performance through a detailed
analysis.
Owners’ equity
i. From the annual report of the companies, it can be noted that the net equity of
Woolworths stood at $10,849 million in comparison to $9876 that was in the year
2017. In relation to this, the primary cause is that the company has various
components (equity) in its financials and the following tables has reflected such
information in a more proper way for better understanding. Moreover, the
contributed equity of Woolworths has also increased because it had issued new
shares under the scheme of reinvestment and long-term incentives of employees.
However, the reserves of the company have deteriorated due to the company’s
share-based program expenses (Damodaran, 2012). In addition, changes in
retained earnings and non-controlling interests can be due to increment in the total
profits despite payment of dividend in such year (Woolworths limited, 2017).
The Total Equity capital of Inghams Group Limited for the year ending 2018 was $261m and
was $ 216.50m in the year ending 2017. The reasons for increase in total equity capital were:
There was increase in contributed equity due to issue of shares under escrow by the company.
The profits for the year were added to the heavy accumulated losses and thereafter dividend
was also paid, the net result being reduction in accumulated losses. Other Reserves have
decreased due to share based payment expenses and other comprehensive losses.
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Inghams Ltd and Woolworths Ltd
ii. It can be noted from the previously mentioned evaluation that Woolworths Ltd is
in a better situation when compared to the latter specially when it comes to their
debt and equity position. The reason behind this can be attributed to the fact that
Woolworths has more equity funds in comparison to Inghams and it has relied less
on debt financing to undertake its operations. Furthermore, the company’s overall
investments have also witnessed an increment when compared to the previous
year. However, when it comes to Inghams, it can be seen that the company has
relied more on debt finances instead of relying more upon equity-based finances.
This is the reason why it has encountered a major decline in its ownership when
compared to the previous year. Furthermore, the debt or liabilities of the company
have also enhanced because of such major reliance and that can generate extreme
complications for it to thrive in the environment. Thus, Woolworths can be
observed to be in a better situation in comparison to Inghams Ltd. The company
Inghams Group Limited is more funded by debts and interest bearing liabilities
and lesser by owned funds or equity (Woolworths limited, 2017). This can be seen
from the Consolidated Statement of Financial Position. The total long term
borrowings of the company are $419.10 m, whereas the total equity component of
the company is $261m. The company should try to raise more equity funds to
have a sound financial position in future
Cash flow statement
iii. From the annual report of Woolworths, it can be noted that the company has
various cash flow components in its statement of cash flow disclosure. The first
component is that its cash flow from operating activities consists of routine and
other income expenses during the year. Besides, such component has deteriorated
in comparison to the last year because of enormous payments being made by the
company to its suppliers and employees in the current year (Woolworths limited,
2017). The second component is cash flow from investing activities and that has
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Inghams Ltd and Woolworths Ltd
increased when compared to the past year. This is because the company had
conducted huge purchases and had attained fewer returns from its sale of Property,
Plant, and Equipments. The third and last component is cash flow from financing
activities that have also deteriorated in comparison to the past year. Despite proper
payments of dividend in the present year, there has been inadequate payment of
outstanding debt obligations in the year when compared to the last tenure
(Woolworths limited, 2017).
The company Inghams Group Limited has the following components in its cash
flow statement:
Cash flow from operating activities consists of the recurring expenses and
incomes of the company during the year. The net cash from operating activities
has increased in comparison to last year as a net effect of receipts from customers,
receipt from interest income and payments to suppliers and employees & income
taxes paid (Ingham, 2017).
Net cash used in Investing Activities has decreased considerably since last year.
The reasons are that there have been higher receipts from sale of some assets sold
this year. Moreover lesser amount has been paid for purchase of property, plant
and equipment, etc as compared to the last year (Banbura, Giannone & Lenza,
2015).
There has been no cash inflow from financing activities. No borrowings have been
done for the year ending 2018. There has been only outflow during year 2018
which includes repayment of borrowings, dividends paid and interest and finance
charges paid.
The net result of all these three activities is increase in cash and cash equivalents
at the end of the year which shows a good liquidity position of the company at the
year end.
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Inghams Ltd and Woolworths Ltd
Actual Receipts from the customers or debtors during the year. The same has decreased in
comparison to last year which may be due to lenient collection policy of the company.
Actual Payments made to the suppliers and the employees of the company. The same has
decreased in comparison to last year which may be due to longer credit period allowed by
suppliers to the company (Jagannathan, Meier & Tarhan, 2011).
Interest received during the year which comprises of interest on investments of the
company.
The company has invested in purchase of plant, property and equipment which is shown
under cash flow from investing activities.
Other investing transactions are proceeds from sale of company’s assets that were held
for sale, proceeds from dividends and some deposit that has been paid for acquiring a
property by the company.
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Inghams Ltd and Woolworths Ltd
Financing activities in the year 2018 comprise of repayment of borrowings, dividends
paid and interest on loans taken by the company. This has reduced in comparison to last
year where there were many other transactions as well.
Comparative evaluation
iv. Woolworths Ltd
It can be seen that the company’s net cash from operating activities have declined when
compared to the past year and the reason is because of extreme payments being made to the
employees and suppliers. Further, in relation to net cash from investing activities, the reason
behind such decline can be because of higher purchases and lesser returns from sale of PPE
when compared to the previous tenure (Woolworths limited, 2017). In addition, the company
has also used lesser cash in relation to its financing activities.
The company Inghams Group Limited has the following components in its cash flow
statement:
Cash flow from operating activities consists of the recurring expenses and incomes of the
company during the year. The net cash from operating activities has increased in comparison
to last year as a net effect of receipts from customers, receipt from interest income and
payments to suppliers and employees & income taxes paid (Inghams Group Limited, 2017).
Net cash used in Investing Activities has decreased considerably since last year. The reasons
are that there have been higher receipts from sale of some assets sold this year. Moreover
lesser amount has been paid for purchase of property, plant and equipment, etc as compared
to the last year.
There has been no cash inflow from financing activities. No borrowings have been done for
the year ending 2018. There has been only outflow during year 2018 which includes
repayment of borrowings, dividends paid and interest and finance charges paid.
The net result of all these three activities is increase in cash and cash equivalents at the end of
the year which shows a good liquidity position of the company at the year end (Inghams
Group Limited, 2017).
v. Insight of such comparative evaluation
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Inghams Ltd and Woolworths Ltd
In association with Woolworths, it can be commented that the company has experienced
improvements in its cash and cash equivalent in the present year that signifies better
development and growth.
Comprehensive income statements
vi. There are several items disclosed by the company in its annual report under the
head comprehensive income statement. The first item is that there are movements
in the company’s equity reserves, the second item is that there are movements in
the company’s fair value of cash flow hedges and income tax, and the last item is
that there is translation of foreign currencies and income tax.
vii. The following items have been reported in Comprehensive Income Statement of
Inghams Group Limited:
 The changes in fair value of cash flow hedges and income tax thereon on the amount
of change which amounted to a net of $ 1.2 m during the year ended 30th June 2018 as
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Inghams Ltd and Woolworths Ltd
compared to net change of $10m during the year ended 30th June 2017 (Ingham,
2017).
 Exchange differences on translation of Foreign Currency operations and the income
tax effect thereon. The net effect was a loss of $2.7m for the year ended 30th June
2018 (Ingham, 2017).
The total comprehensive income has resulted in a net loss of $2.7 m increased in comparison
to $ 1.4m in the previous year. The total comprehensive income as shown in below statement
of $113.10m includes the net profit for the year 2018 of $114.60m.
viii. The company’s comprehensive income statement comprises of revenues and
expenses that have not been realized. This means that once such transactions have
been obtained, the gains or losses are then recognized as recognized gains or
losses (Merchant, 2012). After this step, the same is depicted or portrayed in the
income statement. Thus, the comprehensive income statement has been
alternatively framed for the unrealized sales. Nonetheless, if this income has been
portrayed in the company’s income statement, it will signify that such income that
has not been attained ahs also been reflected in the financial statements. Besides,
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Inghams Ltd and Woolworths Ltd
according to the principles laid down under the IFRS and GAAP, the net salaries
must be separately reflected in the financials to reflect that there are possibilities
of income that can be incurred in the coming years. Moreover, these must form
part outside the income statement of the company because such income is
regarded as the income which has not been obtained in the current tenure.
In association with the items mentioned in the prior segments, if these found place in the
income statement of the company, the shareholders’ attributable profits would deteriorate.
The primary reason behind this is that the average influence of such transactions has played a
key role in the generation of losses and hence, the shareholders will become bound to take
responsibility of such losses. Nonetheless, this means that the same would be an
inappropriate treatment due to the losses or gains arising out from the extraordinary
transactions that are not so specific as their occurrence (Berk, DeMarzo & Stangeland, 2015).
Hence, it means that it is accurate or effective to depict such transactions outside the scope of
income statement.
ix. The items that have accommodated in the comprehensive statement of income of
the company are the ones that have not encountered realization. This means that
the company has failed to be ware that such transactions pursue the most
possibility of occurrence (Damodaran, 2010). Moreover, such transactions can
also play a key role in evaluation of the future profitability of the company in
association to its income statement. For example, the assessment of income
statement can play a key role in reflecting the investment scenario of the
organization and how they have been capable of generating losses or revenues
(Peirson et.al, 2015).
 Exchange differences on translation of Foreign Currency operations and the income
tax effect thereon. The net effect was a loss of $2.7m for the year ended 30th June
2018. The total comprehensive income has resulted in a net loss of $2.7 m increased
in comparison to $ 1.4m in the previous year. The total comprehensive income as
shown in below statement of $113.10m includes the net profit for the year 2018 of
$114.60m. The net profit attributable to the shareholders would decrease if these were
shown in the income statement as there was a net loss of $2.7m in the comprehensive
income segment in the year 2018.
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Inghams Ltd and Woolworths Ltd
As the company is not certain about the happening or realisation of the
comprehensive income, these are not shown in the Income Statement. But these
information are usually analysed by the analysts to judge the overall performance of
the company. So, it may be said that it may evaluate the performance of the managers
of the company as well.
Accounting for corporate income related tax
(x)
The tax expenses that have been disclosed by the company in its annual report in the current
tenure are firstly that it has disclosed its income tax costs in the consolidated P/L account.
Furthermore, these costs have been depicted by the company at an amount of $718 million in
relation to the present year while the same has been reported at $651 million in relation to the
past year. Nonetheless, these income tax costs have been reported on the organization’s
profits from its ongoing activities. However, in contrast to this, the expenses of tax of the
company in relation to all discontinued activities reported at $74 million for the present
tenure.
The tax expenses shown in the financial statements of Inghams Group Limited for the year
ended 2018 which are shown in the consolidated profit or loss account are $36.80m.
In the last year these expenses were $ 18.10 m.
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Inghams Ltd and Woolworths Ltd
(xi)
Calculation of effective tax rate:
Effective or efficient tax rate is the rate that can be calculated by dividing the costs related to
income tax with the company’s earnings before tax (Needles & Powers, 2013). Therefore, in
relation to the company, it can be noted that the company has its income tax expenses to be
around $718 million in the current phase and its earnings before tax were reported at $2394
million. Therefore, the effective rate of tax in this phase comes at $718/$2394*100 that
concludes the amount to be at 30%.
Effective Tax rate of the company can be calculated as under:
Inghams Group Limited-
Income Tax Expenses as shown in Income Statement- $ 36.80 m
Profit before tax as shown in Income Statement - $151.40m
Effective Tax Rate= $36.80m/ $ 151.40m *100= 24%
(xii)
Deferred assets
In relation to the company, it is visible that its net or total deferred assets stood at $271
million in the present year. Besides, the same amount was $372 million in the past year that is
2017. This sheds light on such deterioration in the company’s deferred assets when compared
to the previous year. However, such deferred tax assets have been calculated to record the
temporary changes that prevail between the carrying amounts of the assets and liabilities of
the company for the purpose of taxation goals and financial reporting (Madura & Fox, 2011).
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Inghams Ltd and Woolworths Ltd
(xxiii)
It is visible from the aforesaid analysis that the company has encountered a major decline in
its deferred tax assets in comparison to the previous year. This decline is because of changes
in time in association with assets and liabilities. In contrast to this, no such change is visible
in case of Inghams because the same was nil in both 2017 and 2018 respectively (Ingham,
2017).
(xiv)
Nonetheless, calculation of cash tax amount can be undertaken by the following formula:
Woolworths Ltd:
Net tax provision ($718million)
Decline in deferred tax assets $90 million
Less- DTA provisions and accruals ($44million)
Decrease in deferred tax liability $11 million
Cash tax= $661m
Ingham Ltd:
Total tax provision ($3576)
Decline in deferred tax assets reported at Nil
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Inghams Ltd and Woolworths Ltd
Less- DTA provisions and accruals Nil
Decline in deferred tax liability Nil
Cash tax= $3576
(xv) In relation to the aforesaid analysis, cash rate of tax can be calculated by dividing the
cash tax by earnings before tax. Inghams has reported such amount at thirty percent but
Woolworths pursues an effective tax rate of 27.61% that can be obtained by dividing cash tax
by earnings before tax. In this phase, Inghams is in a better scenario than the former.
In order to calculate the cash tax amount, we shall use:
 book tax amount,
 changes in deferred tax assets and deferred tax liabilities
For Inghams Group Limited, cash tax shall be :
Total Tax Provision as per Company’s Income Statement – ($36.8m)
(Increase)/Decrease in Deferred Tax Liability - $2.2m
Cash Tax Amount $34.6m
Cash tax is paid to the government bodies and must form part in the income tax return of
companies. Besides, such amounts are used by every stakeholders of the company for their
own benefits so that organizational performance can be attained (Arnold, 2010). Further, the
deferred tax assets and liabilities are also reported in the financials that assist in ascertaining
the actual tax payable by the company. Nevertheless, the company has reflected its income
tax liability in its annual report even if the same can be transacted in future. Overall, cash and
book tax are different because of deferred tax assets and liabilities together with all
provisions established for income tax liabilities forming part of the financials (Davies &
Crawford, 2012).
Cash Tax Rate
Cash Tax Rate can be calculated in the same manner as effective tax rate, but in place of
income tax expense we shall take the cash tax amount:
Inghams Group Limited-
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Inghams Ltd and Woolworths Ltd
Cash Tax amount- $ 34.60 m
Profit before tax as shown in Income Statement - $151.40m
Effective Tax Rate= $34.60m/ $ 151.40m *100= 22.85%
(xvi) The cash tax and the book tax of the company are different due to the effect of
deferred tax liabilities that have been considered while calculating the cash tax amount
(Gowthrope, 2011).
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Inghams Ltd and Woolworths Ltd
References
Arnold, G. (2010). The Financial Times Guide to Investing. Prentice Hall.
Banbura, M., Giannone, D. and Lenza, M. (2015). Conditional forecasts and scenario
analysis with vector autoregressions for large cross-sections. International Journal of
Forecasting, 31(3), pp.739-756. Retrieved from:
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1733.pdf?
34d83c4b9cc14af18001108a69abb1c3
Berk, J., DeMarzo, P. and Stangeland, D. (2015). Corporate Finance. Canadian Toronto:
Pearson Canada.
Damodaran, A. (2010). Applied Corporate Finance: A User’s Manual. New York: John
Wiley & Sons
Damodaran, A. (2012). Investment Valuation. New York: John Wiley & Sons.
Davies, T., and Crawford, I. (2012). Financial accounting. Harlow, England: Pearson.
Gowthrope, C. (2011). Business accounting and finance for non specialists (3rd ed.). South
Western
Jagannathan, R., Meier, I., Tarhan, V. (2011). The Cross Section of Hurdle Rates for Capital
Budgeting: An Empirical Analysis of Survey Data. Unpublished Working Paper.
Northwestern University.
Ingham. (2017). Ingham 2017 annual report & accounts 2017. Retrieved from:
http://investors.inghams.com.au/FormBuilder/_Resource/_module/11sM2pu-
rkuf_aNBmyFnWw/file/ING-FY17-Annual-Report.pdf
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific
Accounting Review, 24(3), 1-34. Doi: https://doi.org/10.1108/01140581211283904
Needles, B.E., & Powers, M. (2013). Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Peirson, G., Brown, R., Easton, S., Howard, P & Pinder, S. (2015). Business FinanceNorth
Ryde: McGraw-Hill Australia.
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Inghams Ltd and Woolworths Ltd
Woolworths limited. (2017). Woolworths limited Annual Report and accounts 2017. [online]
Retrieved from:
http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2017.pdf
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