Accounting Concepts and Systems of Wesfarmers’

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August 31, 2013

Wesfarmers’ cash and cash equivalents include demand deposits and cash on hand, together with highly liquid short term investments which are convertible readily to a known cash amount and which are subject to an inconsequential change risk in value. Wesfarmers’ help notes show that normally an investment meets cash equivalent definition when it has a three or less month’s maturity from the acquisition date. Equity investments are left out, except if they are in cash equivalent substance (for instance preferred equity share within three months of the detailed date of redemption (Wesfarmers Annual report 2012, page 177). Repayable on demand bank overdrafts that also form an important component of the cash management of the company are also incorporated as part of cash equivalent and cash.

The operating cash flow was to a tune of $1,472 million. The core revenue generating activities of the company which are not financing or investing activities are the operating activities and therefore, the operating cash flows comprised of cash paid to employees and suppliers as well cash obtained from customers. Investing activities included long term assets disposal and acquisition as well as other investments which are not viewed to be cash equivalents. The financing activities were entries that change the borrowing structure and equity capital of the company. Dividends and interest paid and received were categorized as financing, investing and operating cash flows because they were consistently classified as such the entire period.

The company used the direct method to indicate each major category of gross cash payments and gross cash receipts. The section of operating cash flow of the cash flow statement looked like the below illustration since they used the direct method (Wesfarmers Annual Report 2012 page 178).

Cash paid to employees 276,098

Interest paid 156,084

Customer’s Cash receipts 987,367

Cash paid to workers 28,746

“ to suppliers 65,976

Paid income taxes 256,865

Net operating cash flow 1,471,636

Cash flows from financing and investing activities were classified as gross by main cash receipts class and cash payment major class, apart from the below instances, that can be entered on a net basis.

Cash payments and cash receipts on customers behalf (for instance, repayment and receipt of banks demand deposit as well as receipts collected and paid over on behalf of the property owner).

Cash payments and receipts for particulars whereby the turnover is rapid, has shorter maturities and amounts are huge (Wesfarmers Annual Report 2012 page 179).

The cash flows from investing activities were cash outflows and inflows associated to external financing sources (creditors and owners) for the investment. They included in this group were cash inflows drawn from bonds, mortgages, borrowing on notes, and proceeds from stock issuance and additional debt from other creditors. Succeeding transactions linked to these investing activities, for instance stock buyback, debt repayment and the shareholders dividend payments were also classified as investing activities (Wesfarmers Annual Report 2012 page 180).

Outflows

Cash payments made for:

Shareholders’ dividends

Stock repurchasing from owners

Principal payment to creditors (apart from interest that is of course an operating activity).

Inflows

They include Cash receipts from

Stock issuance to owners

Bonds, mortgages, borrowing notes, from creditors

Financing activities comprised of owners or stockholders’ equity and liabilities. Financing activities are entered on its side of the financial statement referred to as cash flow statement. Long term liabilities examples of financing activities comprised redemption and issuance of bonds. Bonds payable increase in recorded as a positive figure of the financing activities. The positive figure implies a cash source or that the issuance of additional bonds provided that cash (Wesfarmers Annual Report 2012, page 181).

Entries of financing activities regarding owners’ equity comprised the issuance of preferred stock and common stock. When these stock accounts increase that was captured by the positive figures within the financing activities portion of the cash flow statement. The positive figure implies that cash provided through the issuance of more stock shares (cash source). Some of the uses of cash that were recorded in negative figures within the financing activities portion of the cash flow statement comprised the company’s purchase of its stock, as well as the dividends paid and declared on its stock.

Free Cash Flow = Net operating cash flow minus expenditure capital minus cash dividends.

FCF = Operating Cash Flow {depreciation + NOPAT {EBIT (1-Tax rate)-Operating capital gross investment {depreciation + operating capital net investment {(inventories + A/R +cash)-(accruals +A/P) + long term operating assets (equipment & net plant).

N/B

NOPAT = EBIT (1-Tax rate)

EBIT – Income Tax Expense

(1,519, 138 – 497, 972)=1, 021,166 (NOPAT)

Operating cash flow = depreciation + NOPAT

= (339,299-1,021,166) = 1,360, 465

Operating capital net investment

= (3,186, 205 – 3,413, 731) = -227, 526

Operating capital gross investment

= (-227,526 + 339,299) = 111, 773

Free Cash Flow = (1,360, 465- 111,773) = 1,248, 692.

Value investors consider free cash flow to be more significant than earnings. The reason being that in principle, shareholders own the net cash, which can be taken from the entity. FCF can be utilized to reduce debt, grow business or return to shareholders in share buybacks and dividends. The calculation of FCF can be used to establish the intrinsic values of the firm.

The retail to coal conglomerate recorded a net profit totaling $.2.26 billion within 12 months, from $2.13 billion that was recorded last financial year.

The company’s shares increased 1.8% to $42.72 after the announcement of the capital return and financial results. Liquor and food earnings before tax and interest at Wesfarmers’ Coles stores that account for nearly 40% of its total revenue increased 11.4% to 1.37 billion. Woolworths, Cole’s biggest competitor recorded a 4.3 % increase for the group’s total revenue, and this can be attributed to the fact that liquor and food sales momentum rose in the second quarter of FY 2012. Both firms which control almost 80% of the grocery market have cut the cost of basic commodities for instance toilet papers, milk and food to increase sales. From its resources component, EBIT declined by 66% to $148 this is because of the higher Australian Dollar and low export prices resulted in a considerable drop in the export revenue.

I think that the statement means that business managers depend on correct financial information and materials to make sound decisions regarding the business. The cash flow statement and the balance sheet can all the used for this purpose. However, cash flow statement provides vital information regarding the cash that the company spends and takes in, as well as the amount of equity that belongs to the owner in the entity. Cash flow statement also provide information about the cash funds that the company has paid out or taken in from any other sources over a given time period. It is the same as the income statement only that it does not provide details for the accrued items that are recorded within the income statement. CFS is usually prepared by the close of an accounting duration and it provides details of all the cash activities for the particular time period.

Lenders: Institutions that lend review the financial statement of a company when deciding on how much to lend, if to lend, for what collateral and at what interest rate.

Investors: The venture capital companies will look at the financial statements history to check the performance of the firm and to assess the capabilities of the management team. Venture capital Company as opposed to lenders in interested in the future of the company since the company anticipates a higher return on investment.

Executives and Owners: All owners have to look the financial statement of the firm every month. Revenue shortfalls, as well as expenses exceeding estimated budget levels have to be addressed. A combination of high expenses and low revenues can in the long run be deadly. Unit managers assess P & L of their departments. Chief operating officers and CEOs asses the P& L of every department as well as the balance sheet and company P & L.

Government: The internal income service does not assess firm financial statement, however the information regarding the loss and profit statement in included in the firm’s tax returns. A number of governments have laws that require tax returns to be completed. If the firm is listed, the financial statement must be reported on annual and quarterly basis to the Exchange and Securities Commission.

Shareholders: The financial annual report that comprises of balance sheet as well as profit and loss statement is sent to the shareholders, also known as stockholders of the companies that are established as corporations.

Wesfarmers Board of Directors is a great supporter of good corporate governance. It is dedicated offering a suitable return to the shareholders and discharging its corporate governance responsibilities and obligations to the best interest on the organization as well as its stakeholder. The company conforms to the ASX second edition of the Corporate Governance Recommendations and Principles that was published in 2007 and amended in 2010. The company’s corporate governance activities for the financial year closing 30th June 2012 are detailed in the section of the corporate governance brief that makes up part of that annual report.

The framework for governance is entrenched within the Trust’s compliance structure (referred under the section Compliance and risk control, page 22) to reinforce transparency and ethical behavior and to protect the interest of unit holders. Wesfarmers corporate governance statement summarizes the fundamental practices of corporate governance of the responsibly company, that they accomplished the entire year. In compliance with the ASX guidelines, Wesfarmers being a responsibly entity has published its corporate governance practices on their website ( HYPERLINK “http://www.bwtrust.com.au” www.bwtrust.com.au).

Business Sustainability

Wesfarmers includes sustainability in its financial statement. For instance, one of their unit operations (the target) is devoted to entrenching sustainability in the business and developing a culture reliable for becoming a sustainability leader. Regarding safety, the supermarket teams were involved through enlightening DVD to enhance safe work awareness practices, with the lost time injury rate FY2012 7.99% in comparison to 6.87 the previous year. The decrease in energy consumption resulting from air conditioning supermarkets went on with a progressive adoption of variable temperature control, which are connected to external conditions and regulated fresh air levels. Moreover, systems for automated controls for decreased lighting past trading hours have been put in place and in a number of outlets power factor correction facilities have been installed to enhance energy efficiency (Wesfarmers Annual Report 2012 page 30).

Reference

Wesfarmers Annual Report 2012 pdf.