Analysis of JB Hi-Fi's Financial Statements

The assignment is a detailed analysis of JB Hi-Fi's financial statements, covering its assets, inventory management, and debt management. It concludes that financial statements are crucial for business operations and helps companies improve their performance by making necessary changes. The document references various studies and research papers on accounting and decision-making, providing a comprehensive understanding of the topic.

ACCOUNTING FOR DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Purpose of financial accounting statements................................................................................1
Accounting practices of company to produce annual report.......................................................2
Ratio analysis..............................................................................................................................3
Future of JB Hi-Fi.......................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting is the system which records, summarize all business transactions in order to
conduct the operations in smooth manner (Collier, 2015). The main agenda of maintaining these
records is to identify financial position of entity and make necessary modifications in operations
so that performance of the company can be improved. Present report is based on JB Hi-Fi which
is the leading home entertainment retailer of Australia. Firm is growing well in the market and
has gained competitive advantage due to its quality products and services. Current assignment
will analysis financial position and performance of JB Hi-Fi. Furthermore, study will calculate
profitability ratio, solvency, liquidity ratios of the organization.
MAIN BODY
Purpose of financial accounting statements
Financial statements of the organization play significant role in the business unit, by
looking at these report's management can measure its performance and can make necessary
changes in its operations (Francis and et.al, 2015). These are formal records of economic
activities through which authorities can identify actual position of JB Hi-Fi. There are various
financial statements which need to be prepared by all firms. These are such as balance sheet,
income statement, equity statements, cash flow statement etc. As per the international accounting
standards it is compulsory for all firms to maintain these records. Purpose of preparing these
statements are as following:
 The main agenda of these information is to get essential information related to the
operations so that overall position of company can be measured (Millo, Barman and Hall,
2016). By looking on these records stakeholders of JB Hi-Fi can make their decisions.
Stakeholders of JB Hi-Fi are managers, shareholders, investors, banks, suppliers,
customers, employees etc. They all need details related to firm's performance, its
revenues ad marker position. By looking at these statements or annual reports investors
can make their decision of investment on the JB Hi-Fi. If annual records show that
financial position of the company is not good then they invest in other brands (Butler and
Ghosh, 2015). With the help of these financial statements suppliers and creditors can
identify credit worthiness of the business which helps them in making their judgements.
 Income statement defines the profit earning capabilities of the corporation. By preparing
these statements JB Hi-Fi can identify sales volume, type of expenditures occur in the
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business. That helps in measuring net profit earned by the entity after deducting all
spendings. That supports in analysing trends of the business units (Bebbington, Unerman
and O'Dwyer, 2014).
 The main purpose of preparing balance sheet is to make the stakeholders aware with the
financial position of the organization. These information assists in estimating funding,
liquidity and debt position of the entity.
 Cash flow is another financial statement which main aim is to get information about cash
inflow and outflow in the JB Hi-Fi (Betz, 2016).
 On the bases of these statements credit, investment, taxation and union bargaining
decisions can be made effectively that may support in making necessary changes in the
organization so that overall financial performance of the JB Hi-Fi can be improved.
 Financial statements support the organization in identifying its credit worthiness. By this
way lenders can make their credit decision for the organization. Lender use these details
and make decision whether to give them credit or should restrict it.
 Investment decisions can be made by preparing these financial statements effectively. By
looking upon the annual report of JB Hi-Fi investors can make decision whether to invest
in business or not.
 With the help of these records JB Hi-Fi can estimate its liquidity and debt position which
help in conducting the further operations.
Accounting practices of company to produce annual report
JB Hi-Fi follow all the norms of international accounting standards. It makes Updation in
its accounting practices in order to prepare the records in effective manner. For producing the
annual reports JB Hi-Fi follow all provisions. Accounting practices can be defined as the
procedure which is used to create and record all transaction of business unit. JB Hi-Fi is the big
organization conduct audit every year so that it can ensure its transactions. Furthermore, it
examines performance of all departments and accounting staff measure cash inflow and cash
outflow of the organization so that they can prepare accurate annual reports (Oboh and
Ajibolade, 2017). JB Hi-Fi store its sales volume separately, all sales records from
telecommunication, accessories are stored and calculated to find out the total sales of the
company at the end of year. It always uses same method to calculate cost which is occured on
paying overtime salaries to employees. JB Hi-Fi pays amount of invoice to its suppliers in every
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three months. Calculation of depreciation is always same in the organisation. It records sales
volume, records inventory details, generate bills and keep record of small transaction occur in the
business.
JB Hi-Fi follow standards of Generally accepted accounting principles (GAAP) and
accordingly it treats all complex transactions. JB Hi-Fi has developed a system where JB Hi-Fi
regularly report and asses all transactions in order to measure progress of the entity. Furthermore,
JB Hi-Fi take review from its employees if they are facing any issue in maintaining records
(Mardani, Jusoh and Zavadskas, 2015). In order to produce annual report it follows principles of
regularity, consistency, sincerity, performance of methods, non-compensation, prudence,
continuity, periodicity and full disclosure. All these practices of the JB Hi-Fi are effective
enough and helps in preparing the authentic annual reports. It conducts audit every year, but it
needs to conduct internal audit in every six months. It will help in identifying loop falls and
making necessary changes in its operations. By this way JB Hi-Fi will be able to improve its
performance and building its financial position in the market (Kwak and et.al, 2015).
Every accounting data is reviewed by the accounting department of JB H—Fi regularly.
Executives of financial departments prepare journal entries and record all the data into ERP
software. That helps in generating the statements at the end of financial year. All entered data is
cross checked by higher authorities and financially it is reviewed by auditor every year. This
accounting practices of the JB Hi-Fi helps entity in improving its performance and gaining trust
of stakeholders (Velasquez and Hester, 2013).
Ratio analysis
Profitability ratio
Profitability ratio is the tool that helps in measuring profit of the company. By calculating
this ratio company's performance can be measured.
Return of equity
Return on equity is main profitability ratio that defines the profit generating capabilities
of JB Hi-Fi. By looking at this ratio management can identify investment management strategy
of the organization (What Is a Profitability Ratio Analysis?, 2017). If it is not good then JB Hi-Fi
can modify its operations by this way it will be able to earn more profit in future. It shows how
effectively JB Hi-Fi can use its money in order to generate more revenues
Formula 2017 2016
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Net income/ shareholder's equity 171.2/853.5=20.050% 156.2/404.7=38.59%
By looking at the return on equity it can be interpreted that in the year 2016 ROE of the
JB Hi-Fi was 38.59% whereas in 2017 it reached to 20.05%. Decreasing ratio of equity shows
that JB Hi-Fi is not utilizing its money well. JB Hi-Fi needs to use investors money in effective
manner by this way it will be able to generate more money and will be able to sustain in the
market for longer duration. This ratio shows that JB Hi-Fi pay less amount to shareholder which
is not good for the organization. Due to which shareholders will not further take interest in the
business which is not good for the organization.
Return on assets
It is another profitability ratio, it shows the efficiency of the organization to manage its
investments in assets. On other hand it can be defined as assets profitability of the organization
in order to generate more revenues. It is considered as one of the most important element which
is used to analysis financial performance of the company (What Is a Profitability Ratio
Analysis?, 2017).
Formula 2017 2016
Net income/Average assets 171.2/
(2452.3+992.3/2)=9.94%
156.2/(992.3+895/2)=16.55%
From the calculation it can be interpreted that in the year 2016 return on assets of the JB
Hi-Fi was 16.55% whereas in 2017 this ratio reached to 9.94%. From the discussion it can be
interpreted that ratios are decreasing which means it is not favourable situation for the
organization. JB Hi-Fi is not managing its assets well that is why it is unable to generate more
revenues. JB Hi-Fi is required to change its strategy and have to utilize its assets well this will
help in generating more profit in the future. This shows that entity is not performing well and its
is unable to utilize its resources well which impacts negative on its organization. That is why JB
Hi-Fit needs to make strategy to improve its sales and utilize assets well.
Financial leverage
It can be defined as amount of debt that is utilized by an organization for buying more
assets. It is used to increase productivity volume so that entity can generate more profit. If the
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amount of debt is high that means financial leverage is good whereas if debt amount is less then
entity will not be able to increase its production volume (What Are Solvency Ratios and What Do
They Measure?,2017).
2017=2.87
2016=2.45
From the calculation its can be interpreted that in the year 2016 financial leverage of the
JB Hi-Fi was 2.45 whereas in 2017 it reached to 2.87. Increasing ratio shows that JB Hi-Fi is
performing well. It has strong control over its debt and in future it will be able to generate more
revenues.
Assets turnover
It is an efficiency ratio that helps in measuring the ability of the organization to generate
more sales. If entity is able to generate more sales by using its assets well that means
corporations is performing well (Betz, 2016). But if its sales is low that means entity is not
performing well.
Net sales/Average total assets
2017= 5628/2452.3+992.3/2)=3.26
2016=3954.5/992.3+895/2= 4.19
From the above calculation it can be interpreted that in the year 2016 assets turnover ratio
of JB Hi-Fi was 4.19 whereas in the year 2016 it was 3.26. From the above discussion it can be
interpreted that entity is not performing well and it is not utilizing its assets well that is why
overall sales volume of the organization is low. It impacts negative on JB Hi-Fi, because its sales
has increased but assets management is poor which impacts on its overall turnover. If it does not
improve its strategy to manage assets then it may face huge loss in the future.
Liquidity ratio
Liquidity ratio can be defined as liquidity position of the organization. It can be show by
looking at the capabilities of the firm to repay its liabilities on time. If entity is able to repay its
all outstanding on time that means its performance is good and it is able to sustain in the market
for longer duration (Mardani, Jusoh and Zavadskas, 2015).
Current ratio
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Current ratio shows the ability of an entity to repay its short term liabilities on time.
Company has limited time to repay its short term liabilities so if it does not have capability to
repay it which means it is not performing well.
formula 2017 2016
Current ratio= Current assets/
current liabilities
2452.3/1598.8=1.53 992.3/587.6=1.68
From the above calculation it can be interpreted that in the year 2016 its current ratio was
1.68 whereas in the year 2017 it reached to 1.53. Idea current ratio needs to be 2:1. It is moderate
in nature but JB Hi-Fi needs to improve its performance and have to utilize its assets well so that
it can earn more profit and can repay its short term liabilities on time.
Receivables turnover ratio
It is also known as efficiency ratio which defines effectiveness of the organization to
extend its credit and collect debts. It shows capabilities of an organization to use its total assets.
Formula 2017 2016
Net credit sales/ average
account receivable
5628/(196+98/2)=38.28 3954.5/814.80+98=8.66
From the calculation it can be interpreted that in the year 2016 receivable turnover ratio
of JB Hi-Fi was 8.66 whereas in 2017 it reached to 38.28%. From the discussion it can be said
that entity is not able to generate more revenues because it is unable to utilize its assets well. It
needs to make changes in its operations and have to use assets effectively so that it can generate
more revenues and can increase its performance. It can be said that receivable turnover ratio is
increasing which impacts good on JB Hi-Fi. Company is performing well and it is able to
increase its sales in future as well.
Inventory turnover
It is another ratio which shows that management of inventory in the organization.
Formula 2017 2016
Cost of goods sold/ average 4397.5/859.9+546.4/2=6.25 3089.1/(546.4+478/2)=6.03
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inventory
From the discussion it can be interpreted that JB Hi-Fi is utilizing its inventory
moderately and it needs to improve it more. It can be said that JB Hi-Fi is not managing its
inventory well and it needs to improve this otherwise it may create loss for the organization.
Solvency ratio
Cash coverage ratio
2017 2016
operating cash flow/ total debt 190.6/560=0.34 185.1/110=1.68
From the discussion it can be interpreted that in the year 2016 ratio was 1.68 whereas in
2017 it reached to 0.34. It can be said that decreasing cash coverage ratio shows that
performance of entity is average. But it needs to manage its cash flow well otherwise it will have
to face trouble.
Debt-to-equity ratio
2017 2016
Total liabilities/ total
shareholder's equity
1598.8/853.5=1.87 587.6/404.7=1.45
From the discussion it can be interpreted that in 2016 ratio was 1.45 whereas in 2017 it
reached to 1.87. From the ratio it can be said that debt of JB Hi-Fi is increasing so it needs to
control over its debt. Otherwise, it would not be able to sustain in the market for longer duration.
Market Based ratio
Price/earning ratio
Net earning/no of share
2017=154.30
2016=151.90
In the year 2016 price ratio was 154.30 and in 2016 it was 151.90
Future of JB Hi-Fi
From the above calculation and ratio analysis it is clear that performance and financial
position of JB Hi-Fi is not good. It needs to improve its assets, inventory management
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operations. Otherwise, it would not be able to sustain in the market for longer duration. It has
strong control over its debt so it is able to repay its liabilities on time. But for the further
improvement it needs to pay attention on increasing sales volume so that it can sustain in the
market for longer duration.
CONCLUSION
From the above study it can be concluded that financial statements are important part of
business operation, by preparing these records company can analysis its performance and can
make necessary changes in operations in order to improve its financial position.
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REFERENCES
Books and Journals
Bebbington, J., Unerman, J. and O'Dwyer, B., 2014.Sustainability accounting and
accountability. Routledge.
Betz, G., 2016. Accounting for possibilities in decision making. InThe Argumentative Turn in
Policy Analysis (pp. 135-169). Springer International Publishing.
Butler, S. A. and Ghosh, D., 2015. Individual differences in managerial accounting judgments
and decision making. The British Accounting Review. 47(1). pp.33-45.
Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Francis, B. and et.al., 2015. Gender differences in financial reporting decision making: Evidence
from accounting conservatism. Contemporary Accounting Research. 32(3). pp.1285-1318.
Kwak, W. and et.al., 2015. Group Decision-Making Tools for Managerial Accounting and
Finance Applications. In Handbook of Financial Econometrics and Statistics (pp. 791-
840). Springer New York.
Mardani, A., Jusoh, A. and Zavadskas, E. K., 2015. Fuzzy multiple criteria decision-making
techniques and applications–Two decades review from 1994 to 2014. Expert Systems with
Applications. 42(8). pp.4126-4148.
Millo, Y., Barman, E. and Hall, M., 2016. Accounting measurement tools and their impact on
managerial decision making. economic sociology_the european electronic
newsletter. 17(2). pp.17-23.
Oboh, C. S. and Ajibolade, S. O., 2017. Strategic management accounting and decision making:
A survey of the Nigerian Banks. Future Business Journal. 3(2). pp.119-137.
Velasquez, M. and Hester, P. T., 2013. An analysis of multi-criteria decision making
methods. International Journal of Operations Research. 10(2). pp.56-66.
Online
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What Are Solvency Ratios and What Do They Measure?,2017. [Online] Available through:
<https://www.thebalance.com/what-are-solvency-ratios-and-what-do-they-measure-
393211>. [Accessed on 23rd October 2017].
What Is a Profitability Ratio Analysis?, 2017. [Online] Available through:
<https://www.thebalance.com/profitability-ratio-analysis-393185>. [Accessed on 23rd
October 2017].
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