ACCG101 Accounting and Governance: JB Hi-Fi Inventory Analysis Report

This report provides an in-depth analysis of JB Hi-Fi's inventory accounting policies, focusing on the FY2018 annual report. The report examines the company's approach to inventory valuation, specifically the use of the lower of cost and net realisable value, and the weighted average cost method for determining the cost of goods sold. It highlights the potential impact of these policies on the income statement, particularly the cost of sales and profitability. The report also explores the factors that accountants must consider when selecting appropriate inventory accounting methods, including relevant accounting standards (AASB 102), the type of business, and the nature of the inventory. The report emphasizes the importance of accurate inventory costing for the reliability of financial statements and discusses the implications of different cost assumptions, such as FIFO and LIFO. The analysis concludes with a summary of the key considerations for inventory accounting, reinforcing the need for consistent and appropriate policies based on the specific context of the business.

ACCOUNTING AND GOVERNANCE
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Executive Summary
The report aims to present the accounting policies of JB Hi-FI in regards to inventory as
reported in the annual report for FY2018. In relation to reporting inventory, it has been
reported that the company reports the lower value from the cost and the realisable value from
inventory after adjustment of selling costs. Cost of goods used is computed considering
weighted average cost. Also, it has been highlighted that any changes in this regards can
potentially significantly alter the income statement by altering the cost of sales and
profitability. In relation to determine the inventory related accounting rules, the accountant
needs to consider host of factors including the accounting standard norms, business type and
inventory nature.
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Table of Contents
Executive Summary...................................................................................................................1
Table of Contents.......................................................................................................................2
Introduction................................................................................................................................2
Inventory Accounting Policies – JB Hi-Fi Limited...................................................................3
Consideration of Factors............................................................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................6
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Introduction
The chosen company in relation to the given task is the entertainment consumer major JB Hi-
Fi Limited with the latest annual report of FY2018. The objective of the given task is to
critically analyse the inventory disclosure of the company with regards to the various aspects
of inventory and their potential impact on the inventory valuation and cost of goods sold.
Another key aspect that has been analysed is with regards to the underlying factors that are
critical to decide the appropriate inventory accounting policy for various entities from an
accountant’s perspective.
Inventory Accounting Policies – JB Hi-Fi Limited
The relevant disclosure related to inventory can be found in the notes to the financial report
and is pasted as follows (JB Hi-Fi, 2018).
The above screenshot clearly highlights that the closing inventory would be measured by
choosing the lower value from two options namely cost and realisable value from sale of
inventory after adjustments of underlying costs. The above practice makes sense considering
the company’s business being technological oriented and thereby the inventory can undergo
significant depreciation on account of obsolescence which needs to be represented in the
financial statements (Deegan, 2014). However, one potential risk of the policy being pursued
by the company is the fact that realisable value is the discretion of the management and their
best judgement. As a result, it is probable that the same may pose misrepresentation risk
whereby the management may aim to serve their motives at the cost of shareholders. In order
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to safeguard against the same, it would be a considerate practice that at the end of every two
years, a detailed inventory audit be held for ascertaining the price of stock (Caanz, 2016).
In this case, recording the inventories at cost would lead the closing inventory to be
overestimated and simultaneously the cost of goods sold could have been lower. The result
would be that profit would be inflated in the current period at the expense of next year profits.
This would result in financial statements being misrepresented and the same ought to be
avoided. The estimation of inventory costs has been carried out using the average cost
method. Thus, irrespective of the high and low fluctuations in the price of inventory, the cost
of goods sold presents an average picture (Gay & Simnett, 2012).
The choice of average cost has a sizable influence on the cost of sales which can be indicated
by highlighting the effect of choosing other methods. Consider for instance, that there is fall
in the inventory cost and the LIFO method is used. In this situation, the cost of sales would
come out as lower in comparison with corresponding value through weighted average
approach. But the inventory value would end up as a higher value as the expensive inventory
which was bought at the year beginning would be retained. The end result is that the profits
are higher. Therefore, the choice of inventory valuation that is deployed is quite significant
(Deegan, 2014).
Consideration of Factors
The consideration of the various factors that ought to be taken into cognizance for reporting
entities in the context of accountant are highlighted as follows.
 Applicable accounting standard – The inventory related accounting policy of any
reporting entity need to be in confirmation with the underlying accounting standard
that is applicable. The relevant standard is AASB 102 and no provision should be
violated by the concerned accounting policy and treatment (AASB, 2016).
 Business Type – AASB 102 does not mandate the usage of a particular costing
approach to inventory but provide flexibility with regards to the same so that the
businesses can use the approach which best captures their business operations (AASB,
2004). The trend witnessed in the inventory cost is a crucial input element. For an
inventory of an item whose pricing trends are stable, FIFO seems to be the most
suitable method as the variations in cost tend to indicated majorly in the same time
period only without causing huge volatility in profits. For a volatile inventory item
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without any pre-defined trend, a weighted average method is preferable since it
provides a balanced middle approach which does not lead to frequent fluctuations in
the cost of sales (Deegan, 2014).
 Inventory nature– For inventory that is stable in cost and does not exhibit easy and
significant depreciation, the inventory may be measured using cost basis. However,
the same would not be suitable for a firm selling products which are high end. In such
cases realisable value becomes a critical aspect as owing to change in technology, the
depreciation can be quite sizable (Gay & Simnett, 2012).
Conclusion
In line with the discussion carried above for the company (JB Hi-Fi), it is imperative that
method used to determine inventory cost along with cost of sales is a pivotal aspect related to
accuracy of financial statements. In this regards, therefore, it is vital that accounting policies
for inventory need to be designed after considering a variety of factors including the
consistency of the policy with applicable accounting standard, the type of business along with
the inventory type that is associated with the business.
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References
AASB (2004) AASB 102, [online] Available at
https://www.legislation.gov.au/Details/F2005B01550 [Accessed October 6, 2018]
AASB (2016) AASB 102, [online] Available at
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed October
6, 2018]
Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3rd ed., Sydney: John
Wiley & Sons
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gay, G. and Simnett, R. (2012) Auditing and Assurance Services in Australia, 5th ed.,
Sydney: McGraw-Hill Education
JB Hi Fi (2018) Annual Report 2018, [online] Available at https://investors.jbhifi.com.au/wp-
content/uploads/2018/10/Annual-Report-2018-with-Chairmans-CEOs-Report.pdf [Accessed
October 6, 2018]
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