Corporate Accounting: Wesfarmers and Woolworths Financial Analysis

This report provides a comprehensive analysis of the financial statements of Wesfarmers Limited and Woolworths Limited, two leading companies in the Australian food and staples industry. The report delves into key accounting terms and examines the components of owners' equity, including issued capital and retained earnings, comparing the capital structures of both companies. It then proceeds to analyze the cash flow statements, comparing operating, investing, and financing activities, and highlighting trends in cash movement. Furthermore, the report investigates other comprehensive income, including exchange differences, cash flow hedge reserves, and changes in defined benefit plans. Finally, the report examines corporate income tax, providing a holistic view of the financial performance and position of both Wesfarmers and Woolworths, utilizing data from their annual reports to support the analysis.

Corporate Accounting
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Executive Summary:
The following assignment contains a detailed analysis on few parts of the financial statements
of Wesfarmers limited and Woolworths Limited. Both the companies are the top participants
of the food and staples industry in Australia. In order to understand the financials of the
company it is important to have a clear understanding of few accounting terms. In the
discussion below few of such terms have been discussed in order to have better understanding
of the financial statements.
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Contents
Introduction................................................................................................................................4
Analysis of Owners Equity........................................................................................................5
Analysis of Cash Flow Statement..............................................................................................7
Analysis of Other Comprehensive Income..............................................................................12
Analysis of Corporate Income Tax..........................................................................................14
Conclusion................................................................................................................................18
Bibliography.............................................................................................................................19
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Introduction
In our report below we have used the data of two largest listed companies in Australia which
belong to food and staples industry- Wesfarmers limited and Woolworths limited.
Wesfarmers limited is a conglomerate based in Australia. The company mostly engages in
retails chemical, coal mining, fertilizers and safety products. The company became the
Australia’s highest revenue generating company in Australia in 2016 beating the top two
companies, BHP Billiton and Woolworths limited. The company has been known to employ
about 223000 people. The company was established as a cooperative society in 1914, later in
1984 the co-operative society was converted into a company and subsequently listed on the
Australian stock exchange.
Woolworths group is another largest revenue generating companies in Australia which rank
second after Wesfarmers. Woolworths is primarily engaged in the business of retail, hotels
and poker machines. The first store of the company was opened in 1924, when only 619
subscribers subscribed to the shares of the company. The store gained recognition for using
the first cash register printing electronic receipts for the customers. The business slowly rose
and now the company has over 205000 people working for t all around.
Both the companies are the top players of the retail food staple industry. We have used the
data of both the companies using the annual report.
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Analysis of Owners Equity
In accounting terms equity is the amount net off assets and liabilities. It represents the worth
of share that the owners hold in the company. The main components of the owner’s equity
are share capital and reserves (Alvarez, 2013).
i. The owner’s equity of Wesfarmers limited and Woolworths limited consist of the
following:
Wesfarmers 2017 2016
Issued Capital 22,242.00 21,909.00
Retained earnings 1,509.00 874.00
Reserves 190.00 166.00
Woolworths 2017 2016
Issued Capital 5,615.00 5,252.20
Retained earnings 3,797.20 3,124.50
Reserves 113.80 93.90
The issued share capital of the company represents the equity and preference shares issued to
the public and other holders. The shareholders are entitles to vote on certain matters of the
company based on their shareholding (Bragg, 2015).
We see that the shareholding of Wesfarmers have increased from $21909 million to $ 22242,
the increase in shareholding was due to issue of shares under Wesfarmers Dividend
Investment Plan and Wesfarmers Employee Share acquisition plan. The shareholding in the
equity of Woolworths limited increased from $5252 million in 2016 to $5615 million in
2017. The major variance in shareholding was due to issue of shares under dividend
reinvestment plan.
The retained earnings represent the portion of profit and loss accumulated over the years. The
retained earnings can be disposed off in the manner as the management deems fits. We see
that the retained earnings of the Wesfarmers group have increased from $874 million in 2016
to $1509 million in 2017. The increase in retained earnings was due to transfer of the current
year profits. The management also distributed dividends of $2235miilion in 2017. The
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retained earnings of the Woolworths group have increased from $3124 million in 2016 to
$3797 million in 2017. The increase in retained earnings was due to transfer of current year
profits earned.
The reserves represent the amount of profits set aside which are to be used to some set
purposes (Donohue, 2015). The reserves of Wesfarmers group increased from $ 166 million
to $190 million. The reserves of Woolworth’s group increased from 93.9 million to $113.8
million. The increase in reserves for both the companies is due to appropriation of profits to
reserves for the financial year (Easton, 2010).
ii. The major sources of capital for a company are its share capital and loan from the
third parties. Both the sources of capital have their respective pros and cons (Elaine, 2015).
The capital structure of the company is planned in such a way so that the cost of capital is
least. We the following dent and equity for both the companies:
Debt and equity
Wesfarmers Woolworths
Debt 5,413.00 3,030.50
Equity 23,941.00 9,526.00
Total Assets 40,115.00 22,915.80
Debt % 13.49 13.22
Equity % 59.68 41.57
From the table above we see that the proportion of debt in total capital for both the companies
is almost 13%. This indicates that the industry to which these companies belong operate on a
low debt ratio. The equity of Wesfarmers group is 60% approximately; this indicates that the
company has a strong hold on its assets, as most of its assets are funded by owner’s equity.
The equity of Woolworths group is 42%; this indicates involvement of more third party funds
in the operations of the company.
Overall the capital structure of both the companies seems to be in a healthy position.
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Analysis of Cash Flow Statement
The books of accounts of the companies are made on accrual basis and not on cash basis in
order to determine the profitability of the business (Fisher, 2012). But it is necessary that cash
flow of the companies also be taken care of in order to have a check on the liquidity position
of the company (Fridson & Alvarez, 2012).
i. The cash from operating activities for Wesfarmers include the cash receipt and
payments from its customers, suppliers. Movement in inventory, reversal of interest dividend
and borrowing costs and income tax paid. Major movements in operating cash for the year
were witnessed in increases receipt and payments from its customers and to its suppliers. The
tax paid for the current year was lower than what was paid last year. Overall increase in cash
from operating activities foe Wesfarmers was noticed in the current year.
The cash from investing activities of Wesfarmers mostly comprise of payments and recipes in
connection with purchase and sale of properly and assets and associates. The company nearly
made investments of $2132 million in the last year, but in the current year only $53 million
was spent on investing activities.
The cash from financing activities show a major decline in receipts from borrowings. The
company has made regular repayments of loan and dividends. The overall cash outflow from
financing activities of the company increased from $1333 million in 2016 to $3771 million in
2017.
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The cash from operating activities for Woolworths for the year mainly comprised for cash
receipts and payments from its customers and suppliers along with the income tax authorities.
There was a little increase in cash receipts from customers and lower payment to suppliers
were made in the current year. This resulted in higher operating cash of $3122 million in
current year as compared to $2357.5 million in the last year.
The cash from investing activities many involve cash from disposal and purchases of
property and other businesses. The cash outflows from investing activities are $ 1431.4
million in 2017 as compared to $1266.7 million in 2016.
The increase in cash flow from financing activities of Woolworth’s group increased to
$1729.3 million from $1474.9 million. The major increase was a result in increased outflow
for payments of debts.
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ii. Following tables show the comparison between the cash flow from operating
activities for both the companies:
Cash flow - operating activities
2017 2016 2015
Wesfarmers 4,226 3,365 3,791
Woolworths 3,122 2,358 3,345
2017 2016 2015
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Wesfarmers
Woolsworth
The trends in movement of operation cash for both the companies have been same. But the
rate of change in movement in cash from Wesfarmers is higher. This is why the company has
been ranked number one in revenue in Australia (Girard, 2014).
Following tables show the comparison between the cash flow from investing activities for
both the companies:
Cash flow - Investing activities
2017 2016 2015
Wesfarmers -53 -2,132 -1,898
Woolworth
s -1,432 -1,267 -1,334
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2017 2016 2015
-2,500
-2,000
-1,500
-1,000
-500
-
Wesfarmers
Woolsworth
The investments made by Wesfarmers have declined in the current year, whereas
Woolworths seems to follow huge investments policy. Decline in investments by Wesfarmers
for the current year was about 97%, whereas increase in investments by Woolworths in the
current year was 13%. (Wesfarmers Group)
Following tables show the comparison between the cash flow from financing activities for
both the companies:
Cash flow - financing activities
2017 2016 2015
Wesfarmers -3,771 -1,333 -3,249
Woolworths -1,729 -1,475 -1,611
2017 2016 2015
-4,000
-3,500
-3,000
-2,500
-2,000
-1,500
-1,000
-500
-
Wesfarmers
Woolsworth
Wesfarmers has almost doubled its cash outflows from financing activities from last year.
Whereas only 177% increase in cash outflows from financing activities for Woolworths was
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witnessed. Wesfarmers has been trying to reduce the debt financing which has resulted in
higher cash outflows in the current year. (Woolsworth Limited)
iii. The overall analysis of the cash flows for both the companies is quite different. The
cash flows of Woolworths have been in the same trend, whereas there has been total
structuring of overall cash flows from Wesfarmers. There have been high variances in change
in financing and investing cash flows for Wesfarmers, whereas those of Woolworths have
been following the general trend (Ittelson, 2009).
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Analysis of Other Comprehensive Income
i. The other comprehensive income of Wesfarmers constitute of exchange differences
arising in foreign operations, changes in values due to cash flow hedge reserve, and changes
in values of defined benefit plan. All these items represent holding of an asset or a liability by
the company. Since these items are still held by the company, the changes in the values are to
be recorded. These changes cannot be classified as an item of profit or loss, so they are
adjusted with profits but named as other comprehensive income.
Just like the other comprehensive income of Wesfarmers, the other comprehensive income of
Woolworths show the changes in the fait value of defined benefit obligations, changes in the
value of cash flow hedge and exchange differences.
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