Analysis of Telstra Corporation's Cash Flow, Other Comprehensive Income Statement and Corporate Income Tax | HI5020

This report provides an analysis of Telstra Corporation's cash flow statement, other comprehensive income statement and corporate income tax. It includes a description of Telstra Corporation and its financial statements, a comparative analysis of the cash flow statement, and a description of the items in the other comprehensive income statement.

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HI5020 Corporate Accounting

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Contents
Introduction......................................................................................................................................3
Description of Telstra Corporations Limited...................................................................................3
Section 1: Cash flow Statement.......................................................................................................4
Section 1.1: Important items listed in cash flow statement of Telstra Corporation and
understanding of each item of cash flow statement.....................................................................4
Section 1.2: Comparative analysis of three main activities of cash flow statement and its
evaluation.....................................................................................................................................6
Section 2: Analyses of the other Comprehensive income statement...............................................7
Section 2.1: Items reported in other comprehensive income statement.......................................7
Section 2.2: Description of each of the items of other comprehensive income statement...........8
Section 2.3: Reason why the above items are presented in other comprehensive income
statement......................................................................................................................................8
Section 3: Accounting for Corporate Income Tax...........................................................................8
Section 3.1: Tax Expenses reported in the latest financial year...................................................8
Section 3.2: Difference between the accounting tax expenses as per fixed tax rate and tax
expenses shown in profit and loss account..................................................................................8
Section 3.3: Deferred tax assets and deferred tax liabilities reported in the balance sheet..........9
Section 3.4: Current tax assets or income tax payable as reported in the balance sheet............10
Section 3.5: Income tax expense and income tax paid..............................................................11
Section 3.6: Self learning from the accounting of taxes............................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
The financial statements developed by a business entity play a very critical role in
making significant decisions relating to its future expansion and growth. It depicts the financial
strength of an entity by providing an analysis of its major financial items such as assets,
liabilities and equity. The major financial statements that are developed by a business entity are
statement of profit and loss, balance sheet and cash flow statement. The business entities around
the world are required to develop and disclose their financial statements in their annual reports
and the relevant methods used for their preparation as per the international accounting standards.
The business entities operating within Australia also need to develop their financial statements as
per the international accounting standards. Australian business entities need to adopt the relevant
accounting standards of AASB for development and disclosure of their financial information.
In this context, the report has undertaken the analysis of financial statements and the
notes section of a public limited company listed on the ASX. The report has provided an analysis
of the cash flow statement of the selected company by providing an in-depth understanding of
each of its items such as operational, investment and financing activities. Also, it carries out an
analysis of the items reported in the income statement and also provides a discussion in relation
to the items that are not reported in the profit and loss statement of the company. In addition to
this, it also examines and evaluates the tax treatment provided in the latest financial statements of
the selected company. The company selected in this context is Telstra Corporations Limited a
recognized telecommunication entity in Australia listed on stock exchange.
Description of Telstra Corporations Limited
Telstra Corporation Limited is a recognized leading telecommunication and technology
company of Australia that is involved in providing telecommunication services within Australia
market. The company is involved in retail mobile, fixed voice and broadband services to its
consumers within Australia and at international level. The company by providing technology
efficient and content solutions has attained the position of largest and fastest mobile network
within the country. It is also actively involved in providing digital communication services to the
consumers of Australia. The company besides providing its operations within Australia and also

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has international presence across 20 countries. The company since its establishment is known to
providing innovative communication solutions to customers and improving their quality of life
and work with the help of better connection services. The major telecommunication product and
services provided by the company includes mobile phones, mobile devices and broadband
internet and entertainment products and services. The telecommunication and information
services provided by the company are utilized by businesses, governments, communities and
individuals within Australia and at international level (Annual report 2017: Telstra Corporation).
Section 1: Cash flow Statement
Section 1.1: Important items listed in cash flow statement of Telstra Corporation and
understanding of each item of cash flow statement
Below table shows the important items that are listed in the cash flow statement of the
Telstra Corporation.
Important financial items of Cash Flow Statement
Telstra Corporation
For last three years ( 2015, 2016 and 2017)
Amount in $ million
Particulars 2017 2016 2015
Items of operating activity
Cash Received from customers
$
31,288.00
$
31,163.00
$
29,521.00
Cash payments made to suppliers and employees
$
(21,997.00)
$
(21,179.00)
$
(19,621.00)
Government grants received
$
235.00
$
182.00
$
166.00
Net placement of deposits by Auto home Inc. that
are not part of cash equivalents
$
-
$
(173.00)
$
-
Income taxes paid
$
(1,751.00)
$
(1,860.00)
$
(1,755.00)

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Items from investing activity
Payments for property, plant and equipment
$
(3,725.00)
$
(3,051.00)
$
(2,845.00)
Payments for intangible assets
$
(1,596.00)
$
(1,143.00)
$
(2,257.00)
Proceeds from sale of property, plant and
equipment
$
679.00
$
470.00
$
94.00
Proceeds from sale of business and shares in
controlled entities (net of cash disposed)
$
-
$
1,340.00
$
1.00
Proceeds from sale of other investments
$
285.00
$
56.00
$
3.00
Items from the financing activity
Cash received from borrowings
$
4,710.00
$
4,987.00
$
1,793.00
Cash payment for borrowings
$
(4,571.00)
$
(3,954.00)
$
(3,413.00)
Share buy-back
$
(1,502.00)
$
-
$
(1,004.00)
Finance costs paid
$
(854.00)
$
(860.00)
$
(916.00)
Dividends paid to equity holders of Telstra Entity
$
(3,736.00)
$
(3,787.00)
$
(3,699.00)
(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)
Items from the operating activity
 Receipts from customers: The cash received from the customers when goods and services
are provided to them are shown under the cash flow from the operating activity. From the
above table it can be said that there has been increasing trend in the cash receipts from
the customers. The possible reason for increase in the cash inflow from the customer can
be increase in sales or increase in efficiency level of management to collect the debtors.

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 Cash Payment to suppliers and employees: The main outflows of cash are payment made
to suppliers and employees. There has been increasing trend in cash payments that clearly
indicates increase in cost of goods sold because of increase in net sales from year 2015 to
2017.
 Tax Payment: It can be seen from the above table that Telstra Corporation has been
paying taxes on regular basis (Baker and Nofsinger, 2010).
Items from the investing activity
 Cash paid for buying the property, plant and equipment: It has been that Telstra
Corporation is regularly making investment in the plant, property and equipment so that it
can maintain necessary assets required for increasing the sales revenue. There has been
increase in cash paid for buying the property, plant and equipments.
 Cash received from the sale of plant, property and equipment: Management at Telstra
Corporation is continuously involved in retiring its main assets after they have become
obsolete. It helps the Telstra to make enough cash for making investment in new plant,
property and equipments.
 Cash received from the sale of business or share in any controlled entity: It has seen from
the above table that Telstra has sold its major business unit in year 2016 that has raised its
cash to $1340 million.
Items of Financing Activity
 Cash receipts from the borrowings from the financial institutions: Telstra Corporation
uses debt as the major source of finance to fund their assets. Cash received from the
borrowing are regularly increasing that give an indication that Telstra is planning to make
debt source of capital as the major source of finance and make the Telstra a leverage
firm.
 Cash payment for borrowing: As the debt capital rise through borrowing the fund from
the banks it also creates a responsibility to pay the borrowing on time. In this context, it
can be seen that Telstra has been paying the borrowing funds to banks on time and also
paying the finance cost together with it.

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 Dividend payment: It has been seen that Telstra has been paying same level of dividend
to their shareholder with very less increase in total dividend (Baker and Nofsinger, 2010).
Section 1.2: Comparative analysis of three main activities of cash flow statement and its
evaluation
Comparative Analysis of Cash Flow Statement
Telstra Corporation
For last three years ( 2015, 2016 and 2017)
Amount in $ million
Particulars 2017 2016 2015
Cash flow/used from Operating Activity
$
7,775.00
$
8,133.00
$
8,311.00
Cash flow/used from investing activity
$
(4,279.00)
$
(2,207.00)
$
(5,692.00)
Cash flow/ used from Financing Activity
$
(6,104.00)
$
(3,777.00)
$
(6,882.00)
Net Change in cash and cash Equivalent
$
(2,608.00)
$
2,149.00
$
(4,263.00)
(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)
 Cash flow from operating activity: Net cash flow operating activity is decreasing despite
of increase in sales receipt. It clearly signifies that Telstra has failed to maintain the
proper flow from its operating activity. There has been constantly decrease in cash inflow
from the operating activity and possible reasons for such decrease are decrease in sales
revenue, lower efficiency level of management to collect the cash from the debtors and
increase in cash expenses. The decrease in operating cash inflow affects the company
performance as there is lower availability of cash and cash equivalents and management
has take conservative decisions regarding investment in assets and in prospective
projects.
 Cash outflow from the investing activity: This activity provides information on how cash
has been used to buy the assets and amount used for investment purpose. It has been seen
that Telstra focus on investing huge sum of money in new assets.

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 Cash used in financing activity: This activity provides the information on how cash has
been utilized and generated from the sources of finance. It also provides information on
cash outflow to pay the dividends and interest cost (Arnold, 2013).
Overall cash position of Telstra Corporation in year 2017 was worst as compare to cash
position in year 2016. In year 2016 there was increase of $ 2149 million cash and cash
equivalents whereas in year 2017 it has decreased to $2608 million, reflecting the poor
management of cash by management of Telstra.
Section 2: Analyses of the other Comprehensive income statement
Section 2.1: Items reported in other comprehensive income statement
Items that are reported in other comprehensive income of Telstra
Financial Items 2017 2016
Amount in $ m
Profit/(loss) for the year from continuing and discontinued
operations
$
3,874.00 $ 5,849.00
Items that will not be reclassified to the income statement
Retained profits
$
176.00 $ (211.00)
Fair value of equity instruments reserve
$
(6.00) $ 8.00
Foreign currency translation reserve
$
(4.00) $ (12.00)
Sub Total
$
166.00 $ (215.00)
Items that may be subsequently reclassified to the income
statement
Foreign currency translation reserve
$
(77.00) $ (26.00)

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Cash flow hedging reserve
$
(50.00) $ 21.00
Foreign currency basis spread reserve
$
(32.00) $ (2.00)
Sub Total
$
(159.00) $ (7.00)
Total other comprehensive income
$
7.00 $ (222.00)
Total comprehensive income for the year
$
3,881.00 $ 5,627.00
(Annual report 2017: Telstra Corporation) and (Annual report 2016: Telstra Corporation)
Section 2.2: Description of each of the items of other comprehensive income statement
Other comprehensive income statement contains all those changes that are not permitted to be
included in the profit and loss account. The two major categories of items that cannot be
included in the profit and loss and has to be presented in the income statement are as follows:
 Items that will not be reclassified to the income statement: This section contains all those
items that cannot be treated as items of income statement but has significant impact on
the profit and loss of the company. Some of the important items that are shown under this
heading are Changes in revaluation surplus, Gains and losses from investments in equity
instruments (Fair value) and Actuarial gains and losses.
 Items that may be subsequently reclassified to the income statement: The financial items
that can be shown in the profit and loss statement but does not belong for the particular
period has been shown in other comprehensive income statement. Some of the examples
of items presented in this section are foreign exchange gains and losses and gains and
losses on hedging instruments presented as cash flow hedge (Brealey, Myers and Marcus,
2007).

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Section 2.3: Reason why the above items are presented in other comprehensive income
statement
The main reason why above items are shown in other comprehensive income statement is
that above items does not impact the current accounting profit but has significant impact on net
profit in any subsequent year and there are some items that does not belong to profit and loss
statement but impact the profit attributable to the equity shareholders.
Section 3: Accounting for Corporate Income Tax
Section 3.1: Tax Expenses reported in the latest financial year
Telstra Corporation has reported corporate income tax of $1773 million dollar for year
2017 and $1768 million in year 2016. Income tax expenses has been reported in income
statement of the company and this amount represent the accounting tax expenses adjustable to
changes in tax expenses due to prior year items, tax on associates, impact of non deductible items
and any change in tax rate (Annual report 2017: Telstra Corporation).
Section 3.2: Difference between the accounting tax expenses as per fixed tax rate and tax
expenses shown in profit and loss account
On the basis of information presented in income statement and notes to account it can be
said that tax reported in income statement and tax calculated at flat rate of 30% is not similar.
The accounting tax expense is also called as notional tax expenses and it is adjustable to many
financial changes such as tax rate impact of other countries on profit of the company, any
changes due to tax of prior year and various non taxable and non deductible items (Deegan,
2013).

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(Source: Annual Report 2017: Telstra)
Section 3.3: Deferred tax assets and deferred tax liabilities reported in the balance sheet
Following items have been reported as deferred tax assets and deferred tax liabilities in the
statement of financial position:

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(Annual report 2017: Telstra Corporation)
The difference in book profit and taxable profits give rise to timing differences and it can
be temporary or permanent in nature. The temporary timing differences are capable for reversing
in any subsequent year while permanent differences cannot be reversed. The timing difference of
treatment of expenses or income as per book and tax provisions give rise to deferred tax assets
and deferred tax liabilities. Deferred taxes assets refer to those assets are created to reduce the
future tax liabilities. It means company has to pay more taxes in current year and can avail future
tax credits on them. Deferred tax liabilities refer to those tax liabilities that are due in current
year but they are not paid or subsequent paid after the due date. This the reason why deferred tax
assets are recognised in balance sheet as there is reasonable confirmation that company will
realize these assets in subsequent year. While deferred tax liabilities are due to be paid in
subsequent year that create obligation on management to recognize as liabilities in balance sheet
(Brigham and Houston, 2012).

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Section 3.4: Current tax assets or income tax payable as reported in the balance sheet
The current tax payable reported by the Telstra in the statement of financial position was
$161 million for year 2017 and $176 million for year 2016. The amount of tax payable and tax
expense is not same because current tax payable represent the tax due to tax authorities while tax
expense shows the balance of tax calculated as per accounting policies and it also includes tax
payable (Annual report 2017: Telstra Corporation).
Section 3.5: Income tax expense and income tax paid
No, the income tax expenses shown in income statement is not same as income tax paid
reported in the cash flow statement because tax paid shown in cash flow statement represent that
cash outflow that has been actually paid to tax authorities and it can be related to previous year
or current year as well (Firer, 2012).
Section 3.6: Self learning from the accounting of taxes
It found very confusing the treatment of deferred tax assets and deferred tax liabilities by
Telstra and also it is interesting to that tax treatment done in normal accounting situation is
totally different from tax treatment as per tax provisions (Annual report 2017: Telstra
Corporation).
Conclusion
Understanding the financial statement of the company is very difficult task and it requires
high level of knowledge to extract the exact information required. In this report financial
information of Telstra has been examined from various points.

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References
Annual Report 2016. Telstra Corporation. [Online]. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-Annual-Report.pdf
[Accessed on: 23 May, 2018].
Annual report 2017. Telstra Corporation. [Online]. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF
[Accessed on: 23 May, 2018].
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Baker, H.K. and Nofsinger, J.R. 2010. Behavioral Finance: Investors, Corporations, and
Markets. John Wiley & Sons.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw
Hill, New York.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition. Berkshire.McGraw-Hill
Companies, Inc.