Questions:

HI5020 Corporate Accounting
Assessment item 2 — Assignment
Due date: 11.59pm Friday Week 10
Weighting: 30 %
Total Marks: 30
Instructions:
1. This assignment needs to be submitted using safe-assign. No hardcopy or email attachment will
be accepted.
2. It is the responsibility of the student who is submitting the work, to ensure that the work is
her/his own work. Plagiarism will be heavily penalised
3. Assignment should be of 3,000 words. Please use “word count” and include in report.
Format of the Report

Your submitted assignment at least should have the following details:
a. Assignment Cover page clearly stating your name and student number
b. Executive summary
c. A table of content
d. A brief introduction of the companies you had chosen and an overview of what you
discussed in this assignment
e. Body of the report where you write your answers with appropriate section headings
f. Conclusion (No recommendation is necessary).
g. List of references. (Inclusion of any references in this list without in-text referencing will
be a futile exe
Assessment task
Select two public limited companies listed on the Australian Securities Exchange (ASX) that
are in the same industry. Go to the website of your selected companies. Then go to the Investor
Relations section of the website. This section may be called, “Investors”, “Shareholder
Information” or similar name.
In this section, go to your companies’ annual reports and save to your computer your firms’
latest annual reports consecutively for last three years. Do not use your companies’ interim
financial statements or their concise financial statements. Please read the financial statements
(balance sheet, income statement, statement of changes in owner’s equity, cash flow statement)
very carefully. Also please read the relevant footnotes of your companies’ financial statements
carefully and include information from these footnotes in your answer.
You need to do the following tasks:
OWNERS EQUITY (5 Marks)
(i) From your companies’ financial statements, list each item of equity and write your
understanding of each item. Discuss any changes in each item of equity for your
firms over the past year articulating the reasons for the change.
(ii) Provide a comparative analysis of the debt and equity position of the two firms that
you have selected.
CASH FLOWS STATEMENT (5 Marks)
(iii) From the financial statement of your chosen companies, list each item reported in
the cash flows statement and write your understanding of each item. Discuss any
changes in each item of cash flows statement for your companies over the past years
articulating the reasons for the change.
(iv) Provide a comparative analysis of your companies’ three broad categories of cash
flows (operating activities, investing activities, financing activities) and make a
comparative evaluation for three years.
(v) Also provide a comparative analysis of the two companies that you have selected
explaining the insights that you can get from the comparative analysis.
OTHER COMPREHENSIVE INCOME STATEMENT (5 Marks)
(vi) What items have been reported in the other comprehensive income statement for
each company?
(vii) Why have these items not been reported in Income Statement/Profit and Loss
Statements?
(viii) Provide a comparative analysis of the items shown in the other comprehensive
income statement section for the two companies. If these items were included in the
income statement / profit and loss statements of each company, how would the
profit attributable to shareholders of the company be affected?
(ix) Should other comprehensive income be included in evaluating the performance of
managers of the company?
ACCOUNTING FOR CROPORATE INCOME TAX (15 Marks)
(x) What are the tax expenses shown in the latest financial statements of the two
companies that you have selected?
(xi) Calculate the effective tax rate for both companies that you have selected.
Effective tax rate is calculated as (income tax expense / earnings before tax).
Which one of the companies has the higher effective tax rate?
(xii) Comment on deferred tax assets/liabilities that is reported in the balance sheet
articulating the possible reasons why they have been recorded.
(xiii) Was there any increase or decrease in the deferred tax assets or in the deferred tax
liability reported by each of your selected companies?
(xiv) Please calculate the cash tax amount for both companies using the book tax
amount, changes in the deferred tax assets and deferred tax liability (please do
your own research for your better understanding of these concepts and the method
of calculating the cash tax amount the book tax amount.)
(xv) Calculate the cash tax rate for both companies. Which company has higher cash
tax rate? (Please do your own research to familiarise yourself with how to
calculate cash tax rate).
(xvi) Why is the cash tax rate different from the book tax rate?
Please remember some aspects of your companies’ treatment of tax can be a very complicated
area, particularly for some companies. For a better understanding of the concepts included in
the assignment that has not been introduced in the class, please do your own research.
PRESENTATION
You might have to do a presentation in the class where your lecturer will question you from
different angles of the assignment and you will have to satisfy the lecturer that you were
sufficiently and appropriately involved in preparing the assignment. The presentation will take
place in the last hour of the classes of week 11 and week 12. It is the discretion of the lecturer
either to ask any student to do the presentation or to award marks to a student without asking
to do the presentation. However, every student needs to be prepared for the presentation and
well conversant about everything that has been written in the submitted assignment.

Answers:

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

2017. 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.

419. 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

• 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 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.

    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.

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

1. 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).

1. Insight of such comparative evaluation

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

1. 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.

• 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 30^th June 2018 as compared to net change of $10m during the year ended 30^th 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 30^th 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.

• 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, 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.

1. 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 30^th 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.

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.

(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).

(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

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-

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).

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 (3^rd 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 (2^nd 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.

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