In-depth Analysis of Wesfarmers' Financial Statements 2017

This report presents a comprehensive analysis of Wesfarmers' financial performance for the year ended June 30, 2017. The analysis includes a detailed examination of the cash flow statement, categorizing cash movements into operating, investing, and financing activities. The report highlights fluctuations in cash flow over three years, attributing them to changes in receipts, taxes, and investments. The comprehensive income statement is then reviewed, focusing on items like foreign exchange differences and unrealized gains/losses, and differentiating it from the profit and loss account. The report also delves into the accounting for corporate income tax, comparing the tax expense in the income statement with the tax payable and tax paid figures, and explaining the creation of deferred tax assets and liabilities. The analysis underscores the complexities in tax calculations and the significance of financial statement interpretation.

ASSESSMENT TASK
Wesfarmers being a public limited company recognized in Australian Stock Exchange is selected
and a detailed analysis is being conducted for the year ended 30th June, 2017.
Wesfarmers is one of the largest public limited Australian based company engaged in diversified
business activities and operations. It has a huge shareholder base and aims at increasing
stakeholders returns both in monetary and non- monetary aspects.
CASH FLOW STATEMENT
I. Cash Flow is a statement prepared by the enterprises to calculate and observe the
movement of the cash and cash equivalent within the organization. It divides the cash
expenditure and receipts in three categories named as Net Cash Inflow / Outflow from
Operating Activities, Investing Activities and Financing Activities. The primary objective
of preparing the cash flow statements by the enterprises is to check out the movement of
the cash inflow and outflow in depth and in a detailed way and the closing balance of the
cash with the enterprise at the end of the year to meet its working capital requirements.
The operating activities is concerned with the regular operations of the business of the
enterprise i.e.- the primary activities carried out by the enterprise to run its business. This
activity includes receipts from customers and debtors of the enterprise, payments to
Suppliers and creditors and other regular business expenses incurred to carry on its day to
day activities and excludes non-cash items viz depreciation. The positive cash flow from
this activity signifies a stable cash position of the enterprise. Thus the cash flow from the
operating activities gives a proper vision of cash flow to the enterprise relating to its
primary business carried out by the enterprise.
In context of the Wesfarmers cash flow statement, operating activity specifically includes
interest and dividends received and taxes paid and borrowings were deducted to arrive at
the cash flow from operating activities which is $4226m positive and higher than the
previous year cash flow. The reason being the increase in receipts and mere decrease in
taxes paid and lower borrowing cost (WesFarmers 2017)
Secondly, the investing activity deals with the cash invested in the business in the form of
both fixed and movable assets, investment in other body corporates or shares or
debentures or any property plant and equipment. Investments include both short term and
long term investments. Intangible assets are also considered under the Investment
activity. Similar to purchases of assets and investments, sale of assets and investments
during the year is also considered under this activity to arrive at the net cash flow from
the Investing activities. Hence, this activity gives a clear vision of the assets and
investments acquired and sold by the enterprise during the year and its current holding at
the end of the year. The cash flow from the Investing activities of the company selected
shows a net cash outflow of Rs $53m which is far better as compared to last year. The
major reason being a substantial sale of associate by the enterprise and redemption of
loan notes.

Lastly, comes the Financing activities which includes the cash movement relating to
finance viz issue and redemption of shares and debentures, interest and dividend received
and paid, borrowings in the form of both short and long term acquired and repaid during
the year. Thus, financing activities gives a clear cut vision of the sources of cash inflow
and outflow to the enterprise and its cost of capital. The financing activities of the
wesfarmers indictaes a negative cash flow amounting to Rs $3771m which is worse as
compared to last year due to a substantial decrease in “proceeds from borrowings”.
Thus, after considering all the activities under cash flow statement the firm is left with a
closing cash balance of Rs $1013m (WestFarmers 2016)
II. While making a comparitive analysis of the cash flow statements of Wesfarmers of the
three financial years, it has been observed that the receipts from its customers is
increasing at an average of five percent every year whereas the operating cash flow has
decreased in the year 2016 as comapred to 2015 by approximately eleven percent and
then a subsequent increase in the cash flow in 2017 by twenty five percent as compared
to 2016. The major reason of such fluctuations are an uneven increase and decrease in
interest income and dividend income received by the enterprise and its corresponding
effects in taxes paid by the enterprise.
Similarly, in case of investment activity it had been observed that the major increase and
decrease in cash flows in all the three years is due to an uneven sale and acquistion of
associates and subsidiaries by the enterprise along with acquisition and redemption of
loan notes in an unstructured manner (WestFarmers 2016)
Lastly, financing activities reflects a different scenario of cash movement within the
organization. All the items under this activity which includes repayment and proceeds
from borrowings payment of capital return and equity dividends are having an scattered
pattern of receipts and payments which ultimately resulting in an unequal movement of
cash flows within the organization under financing activities.
However, taking an overall view of all the activities together , the firm is under a
progressive status of improvement as compared to last three years i.e.- 2015,2016 and
2017 (WesFarmers 2017)
OTHER COMPREHENSIVE INCOME STATEMENT
III. Comprehensive Income statement is prepared to bypass the Income statement and include
items that had not been actually realized and is said to be notional income or losses. In
other words, comprehensive income is said to be the statement prepared to recognize all
incomes and losses of the enterprise for a specified period. However, the comprehensive
income statement of the Wesfarmers includes Exchange difference on account of foreign
operations, unrealized losses on account of hedge of cash flows , the tax effect ,
losses/gains of defined benefit plans and share of associates and joint venture reserves.
IV. The exchange difference on account of translation of foreign operations recorded in the
comprehensive income statement arises due to transaction with the business partners of
other countries. The exchange difference thus occurs on account of change in rates of
currency exchange at the time of billing or payment or receipt of consideration against
the services performed or goods delivered. For instance a vendor in India billed his

customer at Australia on a certain date amounting to Rs $100 when the exchange rate was
Rs 50 against a dollar. Now at the year end the exchange rate is Rs 48 against each dollar
i.e.- there is an appreciation in rupee against the rate of Australian dollar. Now the Indian
vendor recognizes a notional loss of Rs 200/- [(100*50)-(100*48)] in his books of
account which is not actually a loss actually incurred by the vendor since the vendor has
not yet received the payment. Thus, these exchange differences are recorded in
comprehensive income statement and in the statement of profit and loss account since the
same is notional in nature. Further, other items recorded in comprehensive income
statement viz defined benefit plans, heeding of cash flows and reserves of joint ventures
and associates does not actually have an impact on the operations and profits of the
business and are basically grouped under extra-ordinary items which means that they
these transactions are not often entered into by the enterprise and as a result of which the
same are recorded and recognized under other comprehensive income rather than in the
statement of profit and loss account (WesFarmers 2017)
V. The international reporting financial standards identifies a difference between the
comprehensive Income statement and the statement of profit and loss account. The major
difference being the actual realization and the impact of the same in the retained earnings
and the profits of the business. Thus we can say that the items under the comprehensive
income statement bypass the items under the income statement. Further, this items are not
reflected in the income statement as it only leads to change in the accumulated other
comprehensive income and will hardly affect the returns of the equity shareholders of the
enterprise.
ACCOUNTING FOR CORPORATE INCOME TAX
VI. The tax expense of the organization is calculated as per the defined rules and provisions
of the Income Tax Assessment Act, 1936. The same is calculated by considering all the
incomes of the firm and availing the benefits given by the Income Tax to the firm, if any.
The income pre-taxes are said to be ‘Profit before tax’ and income post tax are said
‘Profit after tax’. However, as per the question the tax expense of the firm i.e.
Wesfarmers amounts to Rs $1265m for the year ended 30th June, 2017 (WesFarmers
2017)
VII. Generally, the prescribed Income tax rates are fixed at an average of 30% of the income
of the enterprise. In some countries the rates may differ according to their acts and use .
In our case the WesFarmers is having a tax expense of approximately 30 percent of its
income in the year 2017 which is a general rate of tax prescribed all over (WesFarmers
2017)
VIII. A deferred tax asset / liability is created due to timing differences in respect of certain
items recognized differently under the Income Tax Laws and the Companies Act. The
deferred tax asset in the balance sheet of Wesfarmers includes deprecation effect on
assets, transaction in Derivatives, Accrued incomes i.e. the income which are due to be
received by the enterprise but not yet received by the enterprise, Intangible assets and

other significant balances that effect the provisions of Income Tax and Companies Act
differently. The major reason of recording such transactions as deferred is that the effect
of the income and losses and expenses and receipts of all these items are treated
differently at the moment under both the laws which subsequently affects the tax liability
of the firm. However, at one point of time they are to be settled together.
IX. Yes, the income tax payable recorded by the company amounts to Rs $292m whereas the
income tax expense as per the Income Tax statement amounts to Rs $1265m. The Income
tax expense in the income statement includes the current tax payable by the enterprise,
adjustment of deferred tax asset or liability based on timing difference and the taxes of
the earlier periods. On the other hand, the income tax payable recorded under current
liabilities in the balance sheet includes only the current tax liability of the enterprise
(WesFarmers 2017)
X. The income tax expense recorded in the income statement amounts to Rs $1265m and the
income tax paid in the cash flow statement amounts to Rs $951m. Thus, the tax expense
recorded in both the statements are different from each other. The reason for the same is
the adjustment of deferred tax asset or liability and taxation of earlier periods to the tax
expense recorded in income statement while the taxes paid shown in the cash flow
statement is the actual tax paid by the enterprise to the government in respect of the
income derived from its business operations for the current year i.e. 30th June, 2017.
XI. According to the fact findings from the financial statements of Wesfarmers for the year
ended as on 30th June,2017 it is observed that the income tax amount in cash flow
statement, taxes payable in the balance sheet and the tax expense in the income statement
are having different values of tax amounting to Rs $951m, $292m and $1265m
respectively. This found to be both confusing and difficult and surprising too. Thus it
seems that the calculation of taxes to be paid to the Government is not as simple as
calculating thirty percent of the tax on income. Both the calculation of income and taxes
is a difficult task to be performed and thus shall be performed only by a qualified member
having sound knowledge in finance. Further, it’s interesting to observe that that the taxes
in all the three statements viz cash flow statement, income statement and balance sheet
have different meanings from each other’s perspective and have their own significance
and reliability (Merritt 2018)
Bibliography
Merritt, C 2018, The Difference Between Income Tax Expense & Income Tax Payable,
<http://smallbusiness.chron.com/difference-between-income-tax-expense-income-tax-payable-
60779.html>.
WesFarmers 2017, Annual Report,
<https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0>.

WesFarmers. (2016). Annual Report. Retrieved from
https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?
sfvrsn=4