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Readings In Accounting For Management Control System

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Wesfarmers and Woolworths limited are the largest listed companies in Australia. Wesfarmers and Woolworth are the top competitors in retail business in Australia. Wesfarmers has diverse operations in business and is the largest private sector employer. Woolworth Limited have been competing on price and they have been adding products in their shelves. The report outlines the manner of preparing the cash flow statement of both the competitors (Bebbington et al., 2014). Information in relation of different component of cash flow statement has been discussed. In the later part of report, analysis of cash flow information has been done by calculating several ratios. Recommendation has been made after conducting the analysis of cash flow information that would help in judging the credit risk of both the companies.

The cash flow statement of Wesfarmers and Woolworths limited has been prepared using direct method. Under this method, the operating activities are reported by way of cash disbursement and cash receipt. It calculates the net cash inflow and outflow in few steps and that encompasses the cash generated from operating, investing and financing activities. The statement of cash flow depicts in the very first step the cash flow from operating activities followed with the cash flow generated from investing activities and in the last comes cash flow from financing activities (Anderson et al., 2015).


The annual report of both the organization has depicted appropriate reconciliation of statement of cash flow in the notes to accounts. Woolworth limited and Wesfarmers have reconciled the cash flow statement in notes to accounts.

The method of preparing the cash flow of both the organization has been done using direct flow method and the above screen shot from annual report of Wesfarmers and Woolworths limited depicts that they have reconciled the cash flow in their notes to accounts.

Cash flow of Wesfarmers limited has included both continuing and discontinuing operations. Proceeds from borrowing and repayment of borrowing are allowed under AASB 107 statement of cash flow. The consolidated statement of cash flow of Woolworths limited has been prepared on historical cost basis by aligning with the Accounting policies. Such borrowings have been presented on net basis for the borrowings and their repayment. Inclusion of cash flow is done on a gross basis in the consolidated financial statements (McLaney&Atrill, 2014). Most recent approved business plan of the Wesfarmers for a period not beyond five years forms the basis of future cash flows. Expected cash flow beyond the approved business plan are extrapolated using the estimated long-term rate of growth. The value in use is assessed by future cash flow estimation that are reduced to their present value using the discount rate that taken into account the current market assessment of time value of money (Bonczek et al., 2014).

The cash flow from operating activities of depicts the new cash inflow or outflow resulting from continued and discontinued operations. It gives the information about amount received from customers and payments made to suppliers. Net increase or decrease in the finance costs are depicted in this particular section. Dividend paid to shareholders and distribution received from associates along with income tax paid and interest paid on borrowed amount is included in cash flow from operating activities. Cash flow from investing activities depicts the income received from the proceeds of sale of plant, equipment and property along with sale of controlled entities (Carlon et al., 2014). It shows whether the organization has acquired any subsidiaries or not in the current year. Net cash flow from financing activities involves proceeds from borrowing, repayment of borrowing and whether the organization has paid any capital return or equity dividend in the current year. All such information together depicts net cash flow available to the company. This net cash is the amount that is available for making payment to shareholders in the event of winding up of company (Deegan & Ward, 2013).


Wesfarmers has generated positive cash flow in the current year and the amount stood at $ 1233 million. On the other hand, Woolworths limited has generated positive cash flow in the current year at amount $ 956 million.

Wesfarmers generated substantial free cash flow and has no impact on cash flow due to Accounting impairments. The operating cash flow of the group reduced in the current financial year 2016 and this reflect that across the retail portfolio, the group has higher working capital investment. It also evident that investment has been made for supporting the growth in sales. The net cash used in investing activities shows information about the payment to equity and capital return. Information about repaying the borrowed amount proceeds from borrowing and exercising of in-substance under employees share plan is also depicted in the statement of cash flow. Wesfarmers has used net cash in investing activities and this comprise of proceeds generated from sales of equity or associates and from selling equipments, plant and property ( 2017).

The cash flow from operating activities of Wesfarmers limited depicts the information about their trading performance and the impact of timing of making payment to creditors and this evaluates the credit worthiness of the organization. It also depicts the information from home improvement business and shows whether the organization has invested any amount in buying the assets that is plant, property and equipment. It shows the proceeds from shares and there was lower activity in the current period and this shows that expenditure on development of investment was reduced. Operating cash flow of Woolworths is presented as a percentage of net profit after tax before amortization and depreciation. Woolworths has used net cash from investing activities and this comprise of payment made to intangible assets, for the development of plant, property and equipment. Proceeds received from selling of subsidiaries and investment along with payment from selling from equipment, property and assets are depicted in the statement of cash flow. Net cash used in financing activities are presented in the cash flow statement and this involves information about payment of dividend, dividend payment to non controlling interest and repayment of borrowing ( 2017). In addition to this, information about proceeds generated from issuing equity securities to shareholders and non-controlling interest. Net cash invested and used by the organization is depicted in the cash flow statement.


Analysis for cash flow information for Woolworths and Wesfarmers limited using ratio analysis.

The cash adequacy ratio of Wesfarmers limited is comparatively higher than that of Wesfarmers limited. An ideal adequacy ratio is generally higher than one. The ratio stood at 0.81 for Wesfarmers as compared to 0.75 for Woolworths. It is indicative of the fact that equity funding or debt requirement of Wesfarmers is less than Woolworth Limited. The adequacy of capital in maintaining the exposures to market is more for Wesfarmers and depicts that the financial system of organization is efficient and stable and thereby safe for investors.

It is clear that cash flow ratio for Wesfarmers is higher than Woolworth. This ratio is obtained by dividing cash flow from operations from current operations. Cash flow ratio for Wesfarmers stood at 0.322 as against 0.262 for Woolworths. This indicates that cash flow generated by both the companies is not sufficient for clearing off their short-term obligations (Dumitru&Matei, 2014). However, cash flow generated by Wesfarmers is more than Woolworths limited. Wesfarmers is more liquid in relation to cash flow from operations in short run.

Debt coverage ratio is obtained by dividing net operating income by total cost oif servicing debt. It is depicted from the analysis that debt coverage ratio of Woolworth is higher than Wesfarmers limited. The debt coverage ratio for Woolworths stood at 6.535 and for Wesfarmers ratio stood at 4.37. This higher ratio indicates that for servicing of debt, enough income is available to Woolworths. However, income available to Wesfarmers is also sufficient, although it is less than Woolworths. Availability of net operating income of Woolworths for servicing its current debts is comparatively higher than Wesfarmers.

Cash flow to sales ratio depicts the organization ability to generate cash from its sales.  It is obtained by dividing cash flow by net sales. The cash flow to sales ratio for Wesfarmers limited is higher than Woolworths. For Woolworths, value stood at 0.040 and the ratio for Wesfarmers is 0.051. Wesfarmers is more efficient in converting their sales into cash. It is always desirable for companies to have higher amount of operating cash flow. Higher ratio indicates that the company is effectively translating its sales into cash (Edwards, 2013).



From the above discussion and analysis, it can be concluded that the short-term credit risk of Wesfarmers is better than Woolworth. The above ratio is indicative of the fact that both the organizations have adequate cash resources. Nonetheless, cash adequacy for Wesfarmers is higher than Woolworth limited. The revenue generated by Wesfarmers is comparatively higher than its competitors and the cash flow to sales ratio is higher. Therefore, Wesfarmers is superior at creating cash from their sales revenue. The debt payment ability of Woolworth is higher as compared to Wesfarmers as indicated by debt coverage ratio. Ability of the company to survive in long run is quite positive as they have enough net cash flow from their business. Although, the net cash flow Woolworth is higher than Wesfarmers.



Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., & Cochran, J. J. (2015). An introduction to management science: quantitative approaches to decision making. Cengage learning.

Bebbington, J., Unerman, J., &O'Dwyer, B. (2014). Sustainability Accounting and accountability. Routledge.

Bonczek, R. H., Holsapple, C. W., &Whinston, A. B. (2014). Foundations of decision support systems. Academic Press.

Carlon, S., McAlpine-Mladenovic, R., Palm, C., Mitrione, L., Kirk, N., & Wong, L. (2015). Financial Accounting: Reporting, Analysis and Decision Making. John Wiley and Sons Australia.

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.

Deegan, C., & Ward, A. M. (2013). Financial Accounting and Reporting: An International Approach.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Dumitru, A. P., &Matei, C. (2014). MANAGEMENT ACCOUNTING AT THE BOUNDARY BETWEEN CLASSICAL AND MODERN. Challenges of the Knowledge Society, 644.

Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Henderson, S., Peirson, G., Herbohn, K., &Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.

Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.

Kemp, R., &Waybright, J. (2016). Financial accounting. Pearson.

May, G. O. (2013). Financial accounting. Read Books Ltd.

McLaney, E. J., &Atrill, P. (2014). Accounting and Finance: An Introduction. Pearson.

Nuhu, N. A., Baird, K., &Appuhami, R. (2016). The Association between the Use of Management Accounting Practices with Organizational Change and Organizational Performance. In Advances in Management Accounting (pp. 67-98). Emerald Group Publishing Limited.

Otley, D., & Emmanuel, K. M. C. (2013). Readings in accounting for management control. Springer.

Radu, F. (2016). The Information-ConnexionBetween Financial Accounting and Management Accounting. Ovidius University Annals, Economic Sciences Series, 16(2), 595-599.

Salako, M. A., & Yusuf, S. A. (2016). Cost Accounting: A Pivotal Factor of Entrepreneurial Success.

Talk, O. M. (2016). Operations management.

Wagenhofer, A. (2015). Usefulness and implications for financial accounting. The Routledge Companion to Financial Accounting Theory, 341. (2017).  Retrieved 1 May 2017, from

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