Outline the method used in presenting the statement of cash flows for each company. If the direct method is used, identify whether an appropriate reconciliation has been reported in the notes to the accounts.
Preparation of cash flow statement is based on two types of methods, namely direct and indirect method. These two methods are distinguished from each other regarding cash movement in the financial transactions (Paul, 2004). The direct method involves direct calculation of cash flows from operating activities, where the net amount paid and received is considered. Customers and suppliers are the two elements to consider in the calculation of cash flow indirect method. The indirect method is based on converting the net income after several adjustments to find out the net cash came and went from the business to the stakeholders. Both the methods are rigid to their calculations. The direct method is quite rigid to find out the exact amount paid the suppliers and received from the customers (Pandey, 2004). This reason has led the indirect method an advantage to follow to prepare the cash flow statement comfortably. Both the companies used the different methods in the preparation of cash flow statement of their operating activities. Wesfarmers uses a direct method whereas the other company Woolworths uses an indirect method to calculate the cash flow statement. The cash flow statement of Wesfarmers is needed a balanced reconciliation which has also supplied in detail in a detailed manner. All the related cash transactions are illustrated in a systematic way in figure B of the given information about the two companies. The Net operating income of Wesfarmers for the year 2016 has reached at $3365 mn. (Paliwal et. al., 2015)
Examine the information about cash flow from operating activities, cash flow from investing activities and cash flow from financing activities retrieved from the Wesfarmers Ltd and Woolworths Ltd financial reports.
Both the scenario has a different segment of cash flow order in their financial year of 2016. The difference between investing activities and financing activities of both the farms differ with a big difference. The difference between the investing and financing activities of Westfarmers is $566 mn. Whereas the difference in Woolworth is $326 mn. It is clearly shown that the difference is around $240 mn. Among each other’s investing and finance activities. It illustrates that the finance transactions of Westfarmers have more than Woolworths. In a wide view, the difference between the investing capacities of both firms is $1538 mn., Whereas Woolworths has the advantage to invest more even after its investment activities. In another hand, the financing sources of cash for the investment activities of both the companies are $1007 mn., Whereas Westfarmers take the advantage for a better financing source than Woolworths. It indicates that when Westfarmers has the competence to invest the finance in some business activities, Woolworth have the merit of arranging the finance in a better way. All the financing activities done in both the companies are important in their respective situations. The operating activities in both of the companies show a difference of $305 mn. which is quite close to each other regarding operational efficiency? But in a broad case, the operational activities of Woolworths is better than that of Westfarmers. The overall efficiency of both the firms is quite rigid to evaluate, but moreover the net cash flow status of both the companies stands at a difference of $76 mn. And Westfarmers takes the lead in the case (Akinsulire, 2006).
Undertake an analysis of the cash flow information given for Wesfarmers Ltd and Woolworths Ltd. Include in this analysis the computation of measuring Cash Adequacy Ratio, Cash Flow Ratio (Liquidity), Debt Coverage Ratio (Solvency), Cash Flow to Sales Ratio (Profitability).
All the ratios calculated about the cash flow statement of both the companies are with the purpose to analyze the status of financial health in the financial year of 2016. The cash flow adequacy ratio is the overview of efficiency in a meeting of the long-term financial payments to the stakeholders and acquisition of fixed assets to run the business comfortably (Ei-Dalabeeh, 2013). A ratio result of one or more shows a good standard of running the business in long run. Both the companies have a different scenario of cash flow adequacy at 1.46 in the case of Westfarmers and 0.51 in the Woolworths. Clearly, the standard maintained by Woolworths is below than the efficiency needed to be maintained. Westfarmers has shown a good report of cash adequacy at a thrice time of Woolworth. Cash flow ratio is the overall record of the total cash flew in a company within an accounting period. A consequent cash flow shows the efficiency in maintaining working capital to meet the short-term liabilities efficiently. The cash flow record can be analyzed within two organizations, and the efficiency level is measured as per the strength in maintaining the cash flow (Nuhu, 2014). Among the two companies, Westfarmers has a cash flow ratio of 0.32, whereas Woolworths has 0.5 less than that of Westfarmers. This state evidently illustrates the efficiency level of Westfarmers is better than Woolworths to meet the current liabilities in time. Debt coverage ratio is the phenomenon of satisfying the debtors with timely payment of debts from the net operating income. A higher percentage shows the higher efficiency of covering the debts (Adedeji, 2014). Westfarmers has a debt coverage ratio of 0.18 and Woolworths has quite more than Westfarmers and set at 0.44. In this case, the strength of meeting the debtors goes to Woolworths, on another hand, it is also shown that the debt scenario is more at Woolworths. High debt is not valued as efficiency for an organization but is a weakness. Sales and cash flows are the two patterns where the financial transactions depend most. Sales are the major source of generating the money for business. Cash flow is the running level of cash in an organization for various purposes. An increasing cash flow to sales or profitability ratio determines a growth opportunity for a company (Thomas, 2015). Both the company has almost a close number of ratio circumstances. Westfarmers has a 0.051 ratio, and Woolworths has slightly more than Westfarmers at 0.056. Wesfarmers need to increase its profitability ratio as it is important for the company to maintain a satisfactory result in making growth and development activities.
Based on the analysis, you are required to make conclusions and recommendation which will answer the following questions:
Which business would you expect to be a better short-term credit risk?
Westfarmers has a reasonable standard in maintaining the short-term credit risk in comparison to that of Woolworths’. It is suggested that Woolworths should increase its working capital availability to meet the short-term creditors promptly.
Do you think both companies have adequate cash resources?
Both the companies have a different segment of cash resource as the ratio varies from each other. Regarding financing Westfarmers has the efficiency than that of Woolworths. Still both the companies should focus to increase their cash resources effectively.
Assess both companies’ ability to survive in the longer term.
In the long term, the circumstances of Westfarmers is a good choice to select as it is approximately thrice capable in maintaining the long-term business activities than that of Woolworths’.
Which company is better at generating cash from their sales revenue?
Both the companies are quite close to each other in generating cash from their sales revenues, but Westfarmers has the merit result for the case in maintaining a satisfactory sales revenue than that of Woolworths’.
Reference List
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Akinsulire O. (2006). Financial Management. 4th Edition, Lagos: Ceemol Nig. Ltd.
Ei-Dalabeeh, A. K. (2013). The Role of Financial Analysis Ratio in Evaluating Performance (Case Study: National Chlorine industry). INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS. 5 (2).
Nuhu, M. (2014). The role of Ratio Analysis in Business Decisions:
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Pandey, I.M. (2004) Financial Management, 9th Edition, New Delhi: Vikas Publishing House PVT Ltd.
Paliwal, A. G., Ahirrao, M. B. and Rana, V. S. (2015). Cash Flow Statement: Comparative Analysis of Financing, Operating and Investing Activities. PRATIBHA: INTERNATIONAL JOURNAL OF SCIENCE, SPIRITUALITY, BUSINESS AND TECHNOLOGY (IJSSBT), 3 (2).
Paul, S. (2004). Financial Management: Concepts, Analysis and Capital Investments, Lagos: Brierly Jones Nig. Ltd.
Thomas, A. (2015). Ratio analysis as a corporate performance measuring tool. Multidisciplinary international journal. 1.