Corporate Accounting: Wesfarmers Ltd. Financial Statement Analysis

This report provides a detailed analysis of Wesfarmers Ltd., an ASX-listed company, focusing on its financial statements. It examines the company's cash flow statement, breaking down cash flows from operating, investing, and financing activities, and provides a comparative analysis over three years. The report also analyzes Wesfarmers Ltd.'s other comprehensive income statement, explaining the various items reported, such as exchange differences and cash flow hedges, and why these are not included in the profit and loss statement. Furthermore, the report delves into the company's corporate income tax, discussing tax expenses, deferred tax assets and liabilities, and the relationship between income tax payable and income tax expense. The analysis utilizes information from Wesfarmers Ltd.'s financial statements to provide a comprehensive overview of the company's financial performance and accounting practices.

Corporate Accounting
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Table of Contents
Introduction......................................................................................................................................3
1. CASH FLOWS STATEMENT...................................................................................................3
2. OTHER COMPREHENSIVE INCOME STATEMENT............................................................5
3. ACCOUNTING FOR CROPORATE INCOME TAX...............................................................8
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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Introduction
Evaluation of financial statements of a firm helps in analyzing its performance, assessing its
accounting treatments, evaluating its taxes paid, etc. This report consists of a discussion of
Wesfarmers Ltd., an ASX listed company with largest turnovers in the country of Australia
(Wesfarmers.com.au, 2018). In this report, the cash flow statement of the company is going to be
analyzed along with analyzing Wesfarmers Ltd.’s corporate taxes and other comprehensive
income statement.
1. CASH FLOWS STATEMENT
(i) List of each item in cash flows statement and the understanding of each item
As stated by Reid & Myddelton (2017), a cash flow statement of a company determines the net
cash position of a company through categorizing the cash inflows and outflows as per their
respective activities. The following are the items contained in the cash flows statement of
Wesfarmers Ltd. -
 Cash flows from operating activities - Gordon et al. (2017) stated the net changes taking
place in a company’s cash due to operating such as cash received from sales, etc. is called
cash flow from operating activities. The cash flows of Wesfarmers Ltd. from operating
activities changed from $3365 million in 2016 to $4226 million in 2017
(Wesfarmers.com.au, 2018). This change has possibly taken place due to the increase in
the receipts from customers, reduction in borrowing costs, increase in payment to
employees and suppliers, net movements in financing loans and advance, decrease in
dividends and interest received and reduction in income taxes paid.
 Cash flows from investing activities - Warren and Jones (2018) stated the net changes
taking place in a company’s cash due to investing such as investment in fixed assets is
called cash flow from investing. The cash flows of Wesfarmers Ltd. from investing
activities changed from $2132 million in 2016 decreased to $53 million in 2017
(Wesfarmers.com.au, 2018). These changes have taken place due to the reduction of the
company’s payment on fixed assets, increase in sales of fixed assets, increase in sales of
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associates and businesses, decrease in acquisition of subsidiaries and increase in net
redemption.
 Cash flows from financing activities - As stated by Stevanovic et al. (2017), the net
changes taking place in a company’s cash due to financing such as purchase of equity
capital is called cash flow from financing activities. The cash outflows of Wesfarmers
Ltd. from financing activities have further increased from $1333million in 2016 to
$3771million in 2017 (Wesfarmers.com.au, 2018). This change has taken place due to the
decreased in proceed from borrowings, increase in repayment of debts and decreased in
payment of equity dividends.
(ii) Comparative analysis of your company’s three broad categories of cash flows and
comparative evaluation for three years
The comparative analysis of the company Wesfarmers Ltd.’s three main categories of cash flows
during the past three financial years has been done in the table below -
Particulars 2017 (in $) 2016 (in $) 2015 (in $)
Net cash balance as per operating activities 4226 million 3365 million 3791 million
Net cash balance as per investing activities - 53 million - 2132
million
- 1898
million
Net cash balance as per financing activities - 3771
million
- 1333
million
- 3249
million
(Source: Wesfarmers.com.au, 2018)
As shown in the table above, it can be noticed that the cash flows of the company from operating
activities show a decrease from $3791 million in 2015 to $3365 million to 2016, followed by an
increase again in 2017 to $4226 million (Wesfarmers.com.au, 2018). This indicates that the cash
position of the company has improved from the year 2015 to the year 2017. The comparison of
the cash flows of Wesfarmers Ltd. from investing activities show a net outflow of $1898 million
in 2015, which increased to $2132 million in 2016 and again decreased to $53 million in 2017
(Wesfarmers.com.au, 2018). An improvement can also be noticed in Wesfarmers Ltd.’s cash
flows from investing activities as the net outflow of cash from the company has decreased during
the three past years. However, the cash outflows of the company Wesfarmers Ltd. show an
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increase over the three past years from $3249 million in 2015 to $3771 million in 2017, which is
not a good sign for the cash position of the company (Wesfarmers.com.au, 2018).
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2. OTHER COMPREHENSIVE INCOME STATEMENT
(iii) Items that have been reported in the other comprehensive income statement
The following are the items, which have been included and reported in Wesfarmers Limited’s
statement of other income during the last financial year -
 Exchange differences over the translation of the foreign operations
 Changes in the cash flow hedges reserves
 Retained profit or earnings from other income sources
 Other comprehensive losses during the year (net of taxes)
 Total comprehensive profit attributable to the members of the company’s parent
A detailed list of all the items included in Wesfarmers Ltd.’s statement of other income during
the last financial year has been provided in the figure below -
(Source: Wesfarmers.com.au, 2018)
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(iv) Understanding of each item reported in the other comprehensive income statement
The following points can be helping in developing an understanding of all the items included in
Wesfarmers Ltd.’s statement of other income during the last financial year -
 The difference that results from translation of a given volume of units of a certain
currency to another currency of dissimilar exchange rates is the exchange differences
over the translation of the foreign operations. A change can be noticed in Wesfarmers
Ltd.’s foreign currency translation reserve from $15 million in 2016 to -$2 million in
2017 (Wesfarmers.com.au, 2018).
 Cash flow hedges are used in companies for the elimination or minimization of the
exposure, which arises from the changes in cash flows of any financial liability or asset
because of various risks. It can be noticed from Wesfarmers Ltd.’s other income
statement that the company has a reserve for cash flow hedges, which contains several
items. Various changes can be noticed in the items under the cash flow hedge reserves of
the company Wesfarmers Ltd. from the year 2016 to the year 2017.
 Another item under Wesfarmers Ltd.’s other income statement is retained earnings.
Retained earnings refer to the earnings that are retained in a company after paying off
dividends to shareholders. Changes can be noticed in the retained profits of Wesfarmers
Ltd. as well, which will not be reclassified to profit and loss.
 The last item listed under the Wesfarmers Ltd.’s other income statement is other
comprehensive income or loss for the year net of taxes. It can be noticed that the
company faced a net loss of $78 million during 2016, which increased to $18 million
during the year 2017 (Wesfarmers.com.au, 2018).
(v) Why these items have not been reported in Profit and Loss Statement / Income
statement
The OCI, which stands for the other income statement, refers to a specific type of financial
statement prepared in a company for recording the income and expenses of a company for other
operations except for the normal course of operations. The items recorded in the OCI consist of
transactions that have an effect over the balance amount of a firm (Nejad & Ahmad, 2017).
However, such items are not recorded in the profit and loss account of an organization but
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entered into the OCI that is prepared by it. The list of the items that are recorded in the other
income statement of Wesfarmers Ltd. such as cash flow hedges reserves, etc. do not have an
impact on the net income of the company. Such items also do not have an impact on the retained
earnings of the company. Hence, as there are no impacts on the retained earnings and net profits
of the company, the company Wesfarmers Ltd. does not record them in its profit and loss or
income statement.
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3. ACCOUNTING FOR CROPORATE INCOME TAX
(vi) Firm’s tax expense in its latest financial statements
The tax expenses that a company pays to the government as a part of its net income is recorded
and presented in the profit and loss statement of a company (Lee et al., 2017). The tax expenses
of the company Wesfarmers Ltd. is also recorded in the company’s financial statements. The
analysis of the income statement of the company Wesfarmers Ltd. shows that the tax expense
made by the company Wesfarmers Ltd. amounted to $1266 million during the last financial year
2016 (Wesfarmers.com.au, 2018).
(vii) Is this figure the same as the company tax rate times your firm’s accounting income?
Explain why this is, or is not, the case for your firm
Evaluation of the financial accounts of the company Wesfarmers Ltd. shows that the figure of the
tax expense of the company is same as the company’s tax rate times of its total accounting profit
or income. The tax rate payable to Australian Government is usually 30% (Burkhauser, Hahn &
Wilkins, 2015). As per the accounting treatment of taxes made in Wesfarmers Ltd., it can be
identified that the effective rate of taxes paid by the company for its global operations is 30.6%
(Wesfarmers.com.au, 2018). The multiplication of this rate with the net income of the company
shows that the figure is same as the company’s tax rate times of its total accounting income.
(viii) Comment on deferred tax assets / liabilities that are reported in the balance sheet
articulating the possible reasons why they have been recorded
According to Wang, Butterfield & Campbell (2016), the deferred tax assets of a company can be
referred to as the assets, which can be held in an organization for minimizing its taxable income.
On the other hand, the deferred tax liabilities of a company can be referred to as the liabilities,
which can be mentioned in the balance sheet of an organization for increasing its taxable income
(Mullinova & Simonyants, 2016). Evaluation of the financial accounts of the company
Wesfarmers Ltd. shows that the balance sheet of the company consists of deferred tax assets. The
company had a total amount of $1042 million deferred tax assets during the year 2016, which
can be noticed to be decreasing to $971 million during the year 2016 (Wesfarmers.com.au,
2018). However, the deferred tax liabilities of the company are nil. The possible reasons for
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which the company has recorded its deferred tax assets in its balance sheet is that the deferred
tax assets are the prepaid income of the company and helps in reducing its tax expenses.
(ix) Is there any current tax assets or income tax payable recorded by your company? Why
is the income tax payable not the same as income tax expense?
As stated by Morris (2017), a current tax asset refers to the prepaid taxes of a company. On the
other hand, a current tax liability, also known as income tax payable is the outstanding taxes of a
company, which it is liable to pay within a year (Balakrishnan Blouin & Guay, 2018). Evaluation
of the financial accounts of the company Wesfarmers Ltd. shows that there are no current tax
assets of the company. However, there is income tax payable by the company. The income tax
payable of Wesfarmers Ltd. amounted to $29 million during the financial year 2016, which can
be noticed to increase to $292 million during the year 2017 (Wesfarmers.com.au, 2018).
However, the income tax payable of the company is not the same as its income tax expense. The
income tax expense is the amount that is paid to the government as a part of the company’s net
income while the income tax payable is the amount that the company is still liable to pay to the
government within the period of one financial year (Gitman, Juchau & Flanagan, 2015). This is
reason for which Wesfarmers Ltd.’s income tax expense and income tax payable are not the
same.
(x) Is the income tax expense shown in the income statement same as the income tax paid
shown in the cash flow statement?
Evaluation of the financial accounts of the company Wesfarmers Ltd. shows that the figure of the
tax expense of the company shown in its income statement differs from the income tax paid
shown in its cash flow statement. According to Gao, Givoly & Laux (2015), the income
statement of a company contains the income tax expense attributable to a company from its net
income while the cash flow statement of a company records the amount that has been paid in
cash to the government as income tax during a specific period. Due to this reason, there can be
noticed a difference in the income tax paid of Wesfarmers Ltd. and the income tax expense that
has been recorded in its income statement.
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(xi) What do you find interesting, confusing, surprising or difficult to understand about the
treatment of tax in your firm’s financial statements?
After conducting an in-depth analysis of the financial accounts and statements of Wesfarmers
Ltd., it can be said that the most interesting factor in the treatment of taxes in the financial
statements of the company is the way in which the company has accounted for income tax has
been completely disclosed in the notes to financial accounts of the company. The notes to
financial statements of the company where the taxes of the company have been recorded indicate
the notes to financial statements, which contain the breakdown of the treatment of taxes. There is
tax transparency disclosures of the company specified in all the financial reports of Wesfarmers
Ltd., which has made it easier to interpret and understand the financial statements of the
company and understanding the treatment of taxes in the company.
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Conclusion
Therefore, from the detailed analysis of the financial statements and corporate accounting details
of the company Wesfarmers Ltd., it can be determined that the company’s financial statements
have been prepared in a way such that it has been easy to interpret them. The analysis of the cash
flows statement of the company indicates that there has been changes in the company’s cash
flows from different activities while the analysis of its other comprehensive income statement
shows the different other sources such as cash flow hedges reserves from which the company has
earned sources. Lastly, the analysis of the company’s corporate taxes show that the treatment of
the taxes of the company has been done in an effective manner.
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References
Balakrishnan, K., Blouin, J., & Guay, W. (2018). Tax Aggressiveness and Corporate
Transparency. The Accounting Review.
Burkhauser, R. V., Hahn, M. H., & Wilkins, R. (2015). Measuring top incomes using tax record
data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), 181-205.
Gao, Z., Givoly, D., & Laux, R. (2015). On the valuation of tax expense.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Gordon, E. A., Henry, E., Jorgensen, B. N., & Linthicum, C. L. (2017). Flexibility in cash-flow
classification under IFRS: determinants and consequences. Review of Accounting Studies, 22(2),
839-872.
Lee, B. B., Shin, H., Vetter, W., & Kim, D. W. (2017). Management of income statement
variables to report small positive earnings numbers. Asian Review of Accounting, 25(1), 58-84.
Mechelli, A., & Cimini, R. (2014). Is comprehensive income value relevant and does location
matter? A European study. Accounting in Europe, 11(1), 59-87.
Morris, J.L. (2017). Classification of Deferred Tax Assets and Deferred Tax Liabilities: An
Evaluation of FASB's Attempt at Standards Simplication. Journal of Accounting and
Finance, 17(8), pp.198-208.
Mullinova, S., & Simonyants, N. (2016). Reflection of a deferred tax liability in the credit union
reporting according to IFRS (IAS) 12" Income taxes". Modern European Researches, (1), 83-88.
Nejad, M. Y., & Ahmad, A. (2017). Value Relevance of available-for-sale financial instruments
(AFS) and revaluation surplus of PPE (REV) components of other comprehensive income.
In SHS Web of Conferences (Vol. 34). EDP Sciences.
Reid, W., & Myddelton, D. R. (2017). Cash flow statement. In The Meaning of Company
Accounts (pp. 16-16). Routledge.
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Stevanovic, S., Belopavlovic, G., & Lazarevic-Moravcevic, M. (2017). Creative Cash Flow
Reporting–the Motivation and Opportunities. Economic analysis, 46(1-2), 28-39.
Wang, Y., Butterfield, S., & Campbell, M. (2016). Deferred tax items as earnings management
indicators. International Management Review, 12(2), 37.4
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Wesfarmers.com.au (2018). Home. [online] Wesfarmers.com.au. Available at:
http://www.wesfarmers.com.au/ [Accessed 23 May 2018].
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