Accounting Concepts and Systems of Wesfarmers’

Accounting Concepts and Systems of Wesfarmers’

Student Name

Institutional Affiliation

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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).

3

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.

5

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 tha.............