Analysis of Financial Statements of Harvey Norman

The study critically analyses the financial statements using key financial ratio, uses of accounting standards and conceptual framework with special orientation to the firm Harvey Norman. Also, this study focuses on the market in which the firm operates and presents a review of the same. Additionally, this study also elucidates in detail about the competitive forces and competitive position of the firm.

Running head: ACCOUNTING THEORY & CONTEMPORARY ISSUES
Accounting Theory & Contemporary Issues
University Name
Student Name
Authors’ Note

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Executive Summary
The study critically analyses the financial statements using key financial ratio, uses of
accounting standards and conceptual framework with special orientation to the firm Harvey
Norman. Also, this study focuses on the market in which the firm operates and presents a
review of the same. Additionally, this study also elucidates in detail about the competitive
forces and competitive position of the firm. The findings of financial analysis suggests about
a favourable profitability condition of the firm as it has maintained positive trends in profit
margin. However, issues can be detected in the liquidity position that can be addressed by
means of the suggested measures discussed in the study.

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Table of Contents
Introduction................................................................................................................................4
Body...........................................................................................................................................4
-Current Market Analysis of the company.............................................................................4
-Accounting Standards used by the company........................................................................4
-Contingent liability of the company.....................................................................................6
-Conceptual Framework.........................................................................................................6
-Competitor Analysis of the company...................................................................................7
-Ratio Analysis of the company.............................................................................................8
Recommendations................................................................................................................13
Conclusion............................................................................................................................14
References................................................................................................................................15
Appendix..............................................................................................................................17
INCOME STATEMENT.....................................................................................................17
BALANCE SHEET.............................................................................................................18
Ratio Analysis......................................................................................................................20

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Introduction
The study at hand concentrates on delivering an insight regarding analysis of financial
statement using key ratio, review of accounting standards used and conceptual framework
with special reference to the company Harvey Norman. Harvey Norman, a publicly listed
firm on the Australian Stock Exchange is selected for undertaking the research on the
financial statements. Moving further, the company also presents a critical analysis of the
market in which the firm operates and further reviews the competitive forces that affect the
operations of the firm.
Body
-Current Market Analysis of the company
The company Harvey Norman Holdings Limited is primarily engaged in retailing business of
products such as furniture, electrical products, communications, bedding as well as computers
2001 (Harveynormanholdings.com.au, 2018). The business enterprise undertakes overseas
business activities that are outside Australia all the way through franchising model. In itself,
this firm gets lease payments from different franchise stores based on percentage of sales.
Currently, they own around 260 retail stores across the nation as well as franchise stores all
around the world. This publicly traded (ASX) listed company is supposed operates different
labelled department stores in different locations namely Australia, Malaysia, New Zealand
and Ireland among many others (Harvey Norman Australia, 2018). Also, this company is
regarded as largest retailer of computer hardware as well as software products in the world.
-Accounting Standards used by the company
The financial statement of the Harvey Norman Holdings Limited is a general-purpose
financial report prepared as per the regulations stipulated under the Australian Accounting

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Standards Board-AASB as well as International Financial Reporting Standards-IFRS.
Simultaneously, the yearly declaration has also observed the regulations of the Corporation
Act 2001 (Harveynormanholdings.com.au, 2018).
Figure 1: Extracts taken from annual report of Harvey Norman
(Source: Harveynormanholdings.com.au, 2018)
Based on the above mentioned extracts taken from yearly report of Harvey Norman Holdings
Limited, it can be hereby observed that the corporation has followed the AASB standards.
Harvey Norman has also arranged the consolidated yearly declaration. In essence, the extracts
derived from yearly pronouncements are also divulging the fact that the pronouncements are
prepared by means of the method of historical cost (Harveynormanholdings.com.au, 2018).
Nevertheless, valuation of land as well as buildings, various listed shares of the company,
derivative financial instruments has been reflected based on fair value system.
Thus, the yearly report of the firm Harvey Norman Holdings Limited is signifying that the
firm has not correctly followed all the guiding principles mentioned in the AASB,

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
particularly for enumerations of different financial values barring certain assets. Again, in
case of the yearly statement of the firm it has been stated that corporate governance of the
company is essentially good, although nothing has been stated to uphold that the corporate
governance status is at a satisfactory level. Basically, the report presented by the director of
the Harvey Norman declared that the firm has pursued diverse principles and doctrines of
good corporate governance but the principles that the firm has followed has not been stated in
the declaration (Harveynormanholdings.com.au, 2018).
-Contingent liability of the company
According to AASB 137, a business entity is supposed to reveal contingent liabilities in case
if it regards itself to be liable towards the community. Nevertheless, analysis of the yearly
declaration of the firm Harvey Norman Holdings Limited reveals that the company has
divulged about the contingent liabilities clearly in the report (Harveynormanholdings.com.au,
2018). As per report for the period of June 30, 2017, this consolidated business entity does
not necessarily have contingent liabilities at all. According to reports, the contingent liability
registered as on June 30 of the year 2016 was $10.30 million associated to “guarantee” for
presentation of joint venture unit that had entered into a specific loan facility together with
many other parties (Harveynormanholdings.com.au, 2018).
-Conceptual Framework
Harvey Norman intends to commit towards attainment of sustainability in the upcoming
period. This necessarily gives an explanation for socio-economic, environmental influence of
diverse operations carried out for the purpose of analysis of future period. This necessarily
concentrates on presenting best outcomes that can reap benefits for the society and carry
positive business necessarily in an effectual manner. Fundamentally, this makes sure
developing on reputation and helps in placing as first-rate corporate citizen in the future
period. So far as the notion of conceptual framework is concerned, this necessarily takes into

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
consideration explanation of different objectives present in the process of arrangement and
preparation of GPFR (general purpose of financial reporting)
(Harveynormanholdings.com.au, 2018). Essentially, this can be considered as one of the
realistic tools that support and help the Board in the process of arrangement and preparation
of reports as per regulations stipulated under IFRS standards. As such, it concentrates
primarily on preparation of financial accounting for the purpose of developing a variety of
accounting strategies simultaneously (Mohanram, et al., 2018). Fundamentally, there exists
no definite IFRS standard that assists the overall process of preparation of financial assertions
of firms. Robinson, et al. (2015) suggests that it facilitates the process of comprehension
along with interpretation of financial assertion on the whole. According to Robinson, et al.
(2015), conceptual framework aids in the process of enhancing ways in particularly the
system of economic reporting. Thus, it attains the objectives concerning present conceptual
framework by the members of the Board. Moving further, it has the intention to update and
improve the “conceptual framework” in modified form. However, conceptual framework also
appropriately defines overall nature and rationale of accounting principles in unison, makes
certain tackling theoretical along with conceptual concerns in compliance with business
actions (Griffin, 2015). Also, it has the need to make certain that system of financial reporting
can bring rational and reliable information in the most suitable manner. Essentially, this
intends to underpin developments of accounting standards.
-Competitor Analysis of the company
There are quite a number of firms that act as competitive forces to the firm Harvey Norman.
It can be hereby observed that that the United States exerts a huge threat. In essence,
packaged software corporate is associated to technical know-how as well as savvy marketing
exercises. In essence, the economy of U.S. exerts influence on business spending for diverse

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
software products and overall accomplishment of programming. For this the firms relies
strongly on technology as well as technical know-how (Harveynormanholdings.com.au,
2018). However, small sized software corporations compete to a large extent by means of
development of packaged goods in different petite niche areas or else manufacture custom
products for particularly individuals. There are certain small sized corporation that present
alliances with larger business in a bid to promote their wares. Whilst Harvey Norman
competes in this specific segment, it too competes in different other segments as well. In
general, key competitors of the firm Harvey Norman are Woolworths Myer Holdings Ltd as
well as David Jones Limited (Harveynormanholdings.com.au, 2018).
-Ratio Analysis of the company
Based on the results of the ratio analysis of the firm for the period 2013-2017 (refer to table 1
presented in appendix) it is possible to analyse the condition of the financial health of the
firm. The findings of the key ratios are hereby analysed one by one:
Current ratio: The current ratio calculated for the period 2013 to 2017 shows a declining
trend. This shows that the potency of the firm to pay off different short term debts has
declined considerably, reflecting unfavourable financial condition (Drake, et al., 2017). Also,
the current ratio is not even close to the industry standard of 2:1 that means a firm possessing
double assets in comparison to that of liabilities, reflecting greater potency of paying back
debts (Grant, 2016).

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
2013-06 2014-06 2015-06 2016-06 2017-06
1532 1607 1676 1606
1112
2533 2618 2682 2826 3077
Current Assets-Liabilities
Current Assets Current Liabilities
Quick Ratio: The quick ratio of the firm shows a fluctuating trend during the period during
the specified period of 2013-2017. Nevertheless, the ratio has improved during 2017 in
comparison to the figure registered in the year ago period.
2013-06 2014-06 2015-06 2016-06 2017-06
181 167 212 164 108
1235 1286 1355 1261
749
Quick Ratio
Quick Assets Current Liabilities
Gearing Ratio: The gearing ratio reflects overall proportion of borrowed wealth in
comparison to equity possessed by the firm (Wahlen, et al., 2014). The gearing ratio also
represents a fluctuating trend throughout the period. However, the same is said to have

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
increased considerably during the period of 2017 in comparison to the previous year period.
This is due to the fact that the debt figure of the firm has enhanced considerably during 2017
in proportion as compared against the equity funds possessed by the corporation, reflecting an
unfavourable financial condition for the firm. It is so because higher proportion of debt funds
replicates greater risk of repayment and burden of payment of interests.
2013-06 2014-06 2015-06 2016-06 2017-06
648
238 290 200 330
2330 2471 2537 2666 2790
Gearing Ratio
Long term debt and liabilities Equity
Gross Profit Margin Ratio: This profitability ratio calculated for the firm Harvey Norman
shows the extent and degree to which the sales percentage surpass the costs of goods sold
(Dalnial, et al., 2014). The gross profit margin has increased to some extent during the period
2017, in comparison to the prior periods, reflecting a favourable financial condition.

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
2013-06 2014-06 2015-06 2016-06 2017-06
1295 1370 1454 1594 1669
2240 2435 2581 2826 2905
Gross Profit Margin
Gross Profit Net Sales
Operating Profit Margin Ratio: This is a specific profitability ratio that enumerates the
percentage of firm’s revenues that is obtained out of operating earnings. Therefore, a greater
ratio reflects a better financial condition (DeFusco, et al., 2015). Operating Profit Margin
Ratio has increased significantly during the period 2017 in comparison to the negative figures
registered during the prior periods, representing a desirable financial condition of the
corporation. This is essentially due to the positive EBIT figure recorded during 2017.
2013-06 2014-06 2015-06 2016-06 2017-06
-419
-107 -131 -264
256
2240 2435 2581 2826 2905
Operating Profit Margin
EBIT Net Sales
Return on Assets Ratio: The return earned on assets ratio enumerates the extent to which a
company can effectively earn a return out of investment in its assets (Vogel, 2014). However,

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
a higher ratio can be considered to be more desirable to financiers as it reflects that the firm is
more efficiently handling its assets to acquire higher net earnings (Weygandt, et al.,
2015). The ratio calculated for the firm reflects an upward moving trajectory, signifying an
increasing trend and therefore can be said to be favourable.
2013-06 2014-06 2015-06 2016-06 2017-06
142 212 268 349 449
4065 4225 4359 4432 4190
Return on Assets
Net Income Average Total Assets
Return on Capital Employed: This is a profitability ratio that enumerates how resourcefully a
business can make profits out of its capital employed (Loughran and McDonald, 2016).
Evidently, a higher ratio is said to be more desirable as it signifies that more profits is
generated out of the capital employed (Gitman, et al., 2015). This ratio calculated for Harvey
Norman is said to have increased significantly during 2017 in comparison to the prior periods
reflecting a desirable financial condition of the firm. The ratio has considerably increased
during the period 2017 owing to the significant increase in the EBIT.

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
2013-06 2014-06 2015-06 2016-06 2017-06
-1000
0
1000
2000
3000
4000
5000
Return on Capital Employed
EBIT Total Assets
Return on Equity: The return on equity also known as ROE ratio is a definite profitability
ratio that enumerates the potency of a business to make profits out of investments of
shareholders in the firm (Fraser and Ormiston, 2016). In this case as well, higher ratios are
better than lower ones (Mousa, 2015). The ROE calculated for the firm Harvey Norman is
noticed to have increased throughout the period of 2013 to 2017, reflecting a favourable
financial condition for the firm. The upward moving trajectory signifies a desirable financial
condition.
2013-06 2014-06 2015-06 2016-06 2017-06
0
500
1000
1500
2000
2500
3000
Return on Equity
Net Income Shareholder's Equity Ratio

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Recommendations
In a bid to avert the liquidity issues as is evident from the liquidity ratios enumerated for the
firm, the management of the firm can undertake the following steps:
- Assess overhead costs and lessen them (Lin, et al., 2015)
-Track accounts receivable for ensuring receipt of payment quickly
-Identify firm’s unproductive assets
-Tracking money that is drawn out of the business for different non-business purposes.
Conclusion
This study has effectively scrutinized the financial assertions of the Harvey Norman which is
company listed on ASX -Australian Stock Exchange. Based on analysis of the statements it
can be said that company has attained higher operational efficiency in 2017. The higher
profitability ratio registered during 2017 reflecting the fact that the firm has attained higher
potency to generate profits. The net income of the firm has increased while the operating
expenses have decreased, replicating greater level of operational effectiveness. However, the
liquidity ratio is noticed to be non-satisfactory and is observed to be much below the
established benchmark. Under these circumstances, the management of the firm can address
the identified issue of liquidity by undertaking the above recommended steps.
Based on results of the findings, the investor can be given a “BUY” or hold recommendation
as positive estimates can be predicted based on upward moving trajectory of the profitability
ratios calculated for the firm.

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
References
Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Detecting fraudulent
financial reporting through financial statement analysis. Journal of Advanced Management
Science, 2(1).
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E.,
2015. Quantitative investment analysis. John Wiley & Sons.
Drake, M.S., Quinn, P.J. and Thornock, J.R., 2017. Who uses financial statements? a
demographic analysis of financial statement downloads from edgar. Accounting
Horizons, 31(3), pp.55-68.
Fraser, L.M. and Ormiston, A., 2016. Understanding Financial Statements. Pearson Higher
Ed.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Griffin, P.A., 2015. Financial Statement Analysis. Finding Alphas: A Quantitative Approach
to Building Trading Strategies, pp.119-125.
Harvey Norman Australia. 2018. Harvey Norman | Shop Online for Computers, Electrical,
Furniture, Bedding, Bathrooms & Flooring | Harvey Norman Australia. [online] Available at:
https://www.harveynorman.com.au/ [Accessed 29 Aug. 2018].
Harveynormanholdings.com.au. 2018. Home. [online] Available at:
http://www.harveynormanholdings.com.au/ [Accessed 29 Aug. 2018].

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement
fraud: The analysis of the differences between data mining techniques and experts’
judgments. Knowledge-Based Systems, 89, pp.459-470.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Mohanram, P., Saiy, S. and Vyas, D., 2018. Fundamental analysis of banks: the use of
financial statement information to screen winners from losers. Review of Accounting
Studies, 23(1), pp.200-233.
Mousa, G.A., 2015. Financial Ratios versus Data Envelopment Analysis: The Efficiency
Assessment of Banking Sector in Bahrain Bourse. International Journal of Business and
Statistical Analysis, 2(2), pp.75-84.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement
analysis and valuation. Nelson Education.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Appendix
INCOME STATEMENT
HARVEY NORMAN HOLDINGS LTD (HVN)
CashFlowFlag INCOME STATEMENT
Fiscal year ends in June. AUD in millions except per
share data.
2013-
06
2014-
06
2015-
06
2016-
06
2017-
06
Revenue 2240 2435 2581 2826 2905
Cost of revenue 944 1065 1127 1232 1236
Gross profit 1295 1370 1454 1594 1669
Operating expenses
Sales, General and administrative 1384 1160 1302 1574 1082
Other operating expenses 330 318 283 284 331
Total operating expenses 1714 1478 1585 1858 1413
Operating income -419 -107 -131 -264 256
Interest Expense 46 36 33 29 20
Other income (expense) 652 445 542 786 404
Income before income taxes 188 301 378 494 640
Provision for income taxes 43 89 109 142 187
Minority interest 2 1 1 3 4
Other income 2 1 1 3 4
Net income from continuing operations 144 212 269 351 453
Other -2 -1 -1 -3 -4
Net income 142 212 268 349 449
Net income available to common shareholders 142 212 268 349 449
Earnings per share
Basic 0.13 0.2 0.25 0.31 0.4
Diluted 0.13 0.2 0.24 0.31 0.4

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Weighted average shares outstanding
Basic 1078 1078 1094 1112 1113
Diluted 1078 1078 1095 1112 1114
EBITDA 323 415 488 601 738
BALANCE SHEET
HARVEY NORMAN HOLDINGS LTD (HVN)
CashFlowFlag BALANCE SHEET
Fiscal year ends in June. AUD in millions except per
share data.
2013-
06
2014-
06
2015-
06
2016-
06
2017-
06
Assets
Current assets
Cash
Cash and cash equivalents 162 145 186 140 80
Short-term investments 19 22 26 25 27
Total cash 181 167 212 164 108
Receivables 1054 1119 1143 1097 641
Inventories 269 298 298 316 316
Prepaid expenses 19 12 16 28
Other current assets 9 11 24 13 20
Total current assets 1532 1607 1676 1606 1112
Non-current assets
Property, plant and equipment
Land 312 351 359 390 414
Fixtures and equipment 784 769 751 772 780
Other properties 4 5 5 6 5

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Property and equipment, at cost 1099 1125 1115 1168 1199
Accumulated Depreciation -551 -556 -562 -587 -574
Property, plant and equipment, net 549 569 553 581 625
Equity and other investments 1884 1945 1973 2089 2297
Goodwill 0 0
Intangible assets 59 78 84 81 75
Deferred income taxes 28 19
Other long-term assets 13 7 73 75 80
Total non-current assets 2533 2618 2682 2826 3077
Total assets 4065 4225 4359 4432 4190
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 172 470 408 452 385
Capital leases 0 0 1
Accounts payable 517 642 683 626 183
Deferred income taxes 24 24 35 43 43
Deferred revenues 1 0 1 38
Other current liabilities 119 126 156 158 93
Total current liabilities 834 1262 1283 1279 743
Non-current liabilities
Long-term debt 648 238 290 200 330
Capital leases 6 4
Deferred taxes liabilities 194 208 199 226 267
Deferred revenues 3
Pensions and other benefits 1 2 4 6 5

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Minority interest 34 20 20 22 22
Other long-term liabilities 24 24 26 26 24
Total non-current liabilities 901 492 538 486 656
Total liabilities 1735 1754 1821 1766 1399
Stockholders' equity
Common stock 260 260 380 385 386
Other Equity -15 -20 -7 -3 1
Retained earnings 2009 2109 2043 2125 2229
Accumulated other comprehensive income 77 122 121 159 174
Total stockholders' equity 2330 2471 2537 2666 2790
Total liabilities and stockholders' equity 4065 4225 4359 4432 4190
Ratio Analysis
Ratio Analysis Harvey Norman
Current Ratio 2013-06 2014-06 2015-06 2016-06 2017-06
Current Assets 1532 1607 1676 1606 1112
Current Liabilities 2533 2618 2682 2826 3077
Ratio 0.604816 0.613827 0.624907 0.568294 0.361391
Quick Ratio
Quick Assets 181 167 212 164 108
Current Liabilities 1235 1286 1355 1261 749
Ratio 0.146559 0.12986 0.156458 0.130056 0.144192

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Gearing Ratio
Long term debt and
liabilities 648 238 290 200 330
Equity 2330 2471 2537 2666 2790
0.278112 0.096317 0.114308 0.075019 0.11828
Profitability Analysis
Gross Profit Margin
Ratio
Gross Profit 1295 1370 1454 1594 1669
Net Sales 2240 2435 2581 2826 2905
Ratio 57.8125 56.26283 56.33475 56.40481 57.45267
Operating Profit Margin
Ratio
EBIT -419 -107 -131 -264 256
Net Sales 2240 2435 2581 2826 2905
Ratio -18.7054 -4.39425 -5.07555 -9.34183 8.812392
Return On Assets Ratio
Net Income 142 212 268 349 449
Average Total Assets 4065 4225 4359 4432 4190
Ratio 3.493235 5.017751 6.148199 7.874549 10.71599

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ACCOUNTING THEORY & CONTEMPORARY ISSUES
Return on Capital
Employed
EBIT -419 -107 -131 -264 256
Total Assets 4065 4225 4359 4432 4190
Ratio -10.3075 -2.53254 -3.00528 -5.95668 6.109785
Return on Equity
Net Income 142 212 268 349 449
Shareholder's Equity 2330 2471 2537 2666 2790
Ratio 6.094421 8.579522 10.56366 13.09077 16.09319