ACCT20074 - Understanding JB Hi-Fi's Profit Downgrade Using Theories

This assignment analyzes JB Hi-Fi's decision to release a profit downgrade using classical political economy theory and the managerial branch of stakeholder theory. It explains classical economics as a laissez-faire system emphasizing free markets without government intervention, highlighting its relevance to JB Hi-Fi's decision-making. The analysis also covers institutional theory, which examines the impact of the macro-environment on businesses, particularly how unfavorable conditions can threaten organizational legitimacy. The stakeholder theory section discusses the importance of managing stakeholder interests and ethical considerations in corporate reporting decisions, relating it to the impact of the profit downgrade on JB Hi-Fi's shareholders and overall company value. The essay references various academic sources to support its claims, providing a comprehensive overview of the theoretical frameworks applied to the JB Hi-Fi case study.

ACCT20074 Final Assignment
Term 1, 2018
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Question 1: Use Classical Political Economy Theory to explain JB Hi-Fi’s decision to release its profit downgrade
in the way it did. Make sure you explain what Institutional Theory is, and support your observations with evidence
from the case study.
The classical political, economic theory which is also sometimes referred to as the laissez-faire economics is a type of
economic theory that entirely insists on the ideas of having a free market. According to the thoughts of the classical economists, apart
from having a free market, the entire business activities in the Market are supposed to be free from any government interruptions and
regulations (Gerald & Chandran, 2004). This type of theory also emphasizes on not only having a free market but also having a market
that exhibits significant competition among the market players. The market, business, and the surrounding society need to feel some
impacts of the trade regarding growth and development. Considering the government has little to offer in this type of economic theory,
the government however has an obligation to ensure the presence of political stability in the business environment (Shannon, 2014). In
the case of business conflicts arising in the market, the market players often look up to the government for solutions. As a way of
offering solutions to the business conflicts, the government is supposed to play the role of creating and enforcing a legal justice system
that defines how business woes can be handled in case they arise (Lionel, 2014).
For the fact that an individual would explore resources solely for profit making, this entirely explains the reason why the
classical economists held on to their thought that, the funds in a jurisdiction can be exploited to the utmost utility without the
government having to interrupt or run the exploitation of resources. Since an entrepreneur would always try to maximize their gain

regarding profits from a business process, it is this concern that will consequently result to the efficient exploration of the resources
which can happen without the government having to interrupt the process unnecessarily (Moore, 2015).
Classical economists also explain that, because the need for profits can result in efficient exploitation of resources, there exists a
high chance of a stable and self-regulating market coming up. The theory explains that the stable market is always in place to ensure
the consumer needs are ever met. Since there are many market players all in the pursuit of customers for profits, the market players are
always on the move to ensure the goods and services they offer are designed to provide maximum utility on the consumer’s side. It is
the level of utility a good or service has that will bring about beating the competition for profits by a respective entrepreneur. The
classical proponents also believed that the success of the business should be felt by an impact on the business, the surrounding society
or community. Exploitation of resources is also supposed to influence the growth of a countries wealth according to the classical theory
proponents (Michael, 2000).
In financial accounting, sometimes two business entities whereby one is a subsidiary of the other can be treated as separate
companies during the recording of financial statements; this is where a stand-alone statement is prepared. A Stand-alone statement
indicates the financial statements of solely the holding company from which, the values representing the performance of the subsidiary
business entity are done away with. A profit downgrade, on the other hand, comes to being when financial analysts detect a possibility
in the fall of profit projections for the subsequent fiscal year in comparison to the previous profit projections. The classical point of
view can also be used to explain the motive behind JB Hi-Fi Electronics Company‘s move to release a profit downgrade in its

subsequent year's financial forecast rather than a stand-alone statement to the stock exchange. Despite the unfavorable macro-
environment causing the impending downfall in the level of profits, the company, basing on its self-evaluations finds it more
appropriate to indicate a profit downgrade in the financial forecast rather than make a stand-alone statement to the stock exchange.
References:
Gerald, F., & Chandran, K. (2004). Handbook of Political theory. Oxford: Thousand Oaks, calif; Sage publication.
Lionel, R. (2014.). Theory of Economic Policy. (Not yet identified): Palgrave Macmillan
Michael, P. (2000). Classical political economy and the secret history of primitive accumulation. The Invention of capitalism. 2-3.
Moore, M. (2015). A political theory of territory. Oxford: Oxford University Press.
Shannon, C. (2014.). Classical Political Economy. The Encyclopaedia of political thought, 19-24
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
The assessment presents a fairly
detailed and focused summary of
The assessment presents a
somewhat detailed and focused
The assessment provides limited
detail with no clear summary of the
The assessment fails to provide
any clear evidence of the ideas

Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
the ideas presented; drawing clear
and well thought-out conclusions.
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
summary of the ideas presented;
providing some evidence of
conclusions.
ideas presented; drawing limited
conclusions.
presented; drawing no clear
conclusions.

Question 2: Use the Managerial branch of Stakeholder Theory to explain JB Hi-Fi’s reporting decisions. Make sure
you support your observations with evidence from the case study.
The institutional theory concerns matters relating to how the macro-environment in which a business is operating can affect
the business. Generally, the theory seeks to explain the relationship or interaction between the macro-environment and the business
entity or organization operating in the business environment (Roger & Robert, 2007) .The theory also looks into the aspect of the
legitimacy of an organization; furthermore, the theory illustrates that sometimes an institution or organization can undergo some
factors that can affect its legitimacy. A keen observation by the theory into some factors that can bring about organizational legitimacy
compromise reveals that sometimes the macro-environment the institution operates in can play a significant role in compromising of
institutional legitimacy (Dacin & Goodstein, 2002).
The critical role of this theory is to oversee how organizations can react and adapt to some of the unfavorable and threating
institutional environments to help maintain organizational legitimacy. Due to the unfavorable business climate around the company, JB
Hi-Fi Electronics Company foresees future possibilities of reduction in the level of profits. The unfavorable macro-environment of the
company poses a threat to compromising the company’s legitimacy. However, opponents of the institutional theory argue that the
theory does not highlight on the aspect of institutional adaptation to this institutional environment threats that aim to compromise

institutional legitimacy.
The stakeholder theory majorly handles two main aspects; the management of an organization and the relevant ethics
associated with operating business. Apart from the theory applying to govern business ethics, the stakeholder theory is also applicable
in ensuring the aspect of corporate social responsibility. This theory has also played a vital role in Global reporting initiative. The
applicability of the theory in global reporting initiative has been because it majorly involves the aspect of shareholder analysis (Robert,
2002).
This theory further governs the moral stipulations and values the management running an organization should always put into
consideration. With two types of stakeholder theories having existed, the traditional point of view of the theory indicates, the
shareholders in any given organization are the most important niche of a company. The organization or company is in turn supposed to
keep the shareholders’ interests in mind as the first priority before the interests of any other party in the organization (Freeman, 2017).
The new stakeholder theory is however for the idea that every part of the company is important since it is an impetus to the company
towards its objectives. The competitors are also mentioned among the important parts of an organization since in a way or another;
they also influence the general operations and strategies of the company. Apart from the competitors, other parts of an organization
regarded as important include; the staff of the company, the financial lenders and the government sections in charge of ensuring the
market and market players are running according to the stipulated rules and regulations (Jensen, 2001).
With the shares of JB Hi-Fi Electronics Company having shrunk down by 10% due to the company’s decision to lower its

net profit after tax by 3% and the impending profit downfalls in the company’s subsequent fiscal year projections, the impending profit
downfall will mean a significantly lower return on the shares. The resulting consequence will be a relatively lower share capital since;
investors will have indicated reluctance in investing in the company at the previous share price because of the projected lower levels of
dividends on the shares. Since a reduction in the profit projections can hurt the face value of a share, the company will consequently
experience a fall in the capital earned on the sale of shares.
References:
Dacin, M., & Goodstein, J. (2002.). Introduction to special program research forum. Institutional theory and Institutional change. 57-
68.
Robert, P. (2002). Stakeholder theory; Impacts and prospects. Cheltenham: Edward Edgar 2002 Freeman, R. (2017.). Divergent
stakeholder theory. Academy of management Review. 59-71. Jensen, M. (2001). Value maximization, Stakeholder theory and the
corporate objective function. European financial management, pp. 39-46
Roger, F., & Robert, R. (2007). New institutional in Organizational Analysis. Bringing society Back in: Symbols, practices, and
institutional contradictions. 232-263.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0

Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.

Question 3: To what extent do current share prices anticipate future earnings announcements? Use the case
study to support your answer.
The implications of the current share price will significantly depend on the probability of the market conditions or the macro-
environment at large turning to being favorable to the company. A fall in the market value can have a negative influence on a company
that seems to have a little more dependency on external funding (Anat, Peters, Martin, Demarzo, & Admati. 2017). JB Hi-Fi electric
company will, therefore, have the only alternative as reducing the share price of their shares; This is because the presence of the
downfall in the profit projections of the company’s subsequent fiscal year forecast outlook will result to the reduction of the face value
of the shares. The current share rates will, therefore, fall lower than the previous year. When shares are going for a lower rate, it means
the total capital that can be raised from the sale of shares is lower. Since the company’s available alternative is to reduce the share
prices, The Company will also experience a significant fall in the amount of capital generated from selling shares. The reduction in the
amount of share capital can have a negative impact on the level of investments the company can exploit to increase revenue generation
methods (Ronald, 2003).
The partial solution plan of the scenario can also be exploited. Research into ways to help combat the prevailing
unfavorable market conditions for the company or somewhat help the company to adapt to the current harsh macro-environment can

provide a solution. A strategy by the company to adapt to the current business climate can play a vital role in helping the company to
get back to its midpoint profit trend levels. The profit downfall, the consequent reduction in the face value and the reduced share
capital can result from the market instability affecting JB Hi-Fi electric company. However, the company can explore the alternative by
deciding on selling its shares at the current face value, despite the amount of capital generated from the sale of shares experiencing a
fall; the company can use the generated capital to exploit diversification in terms of broadening its revenue generating methods. The
diversification of resources can help generate broaden revenue generation through exploitation of alternative markets. A complete
realization of the diversification can help supplement the projected values in the forecast outlook. This can be vital in terms of ensuring
the profit levels get back to their previous trend (Gerard, 2013).
References:
Anat, R., Peters, M., Martin, F., Demarzo, & Admati. (2017). the Leverage Ratchet Effect. Journal of Finance., (73)1.
Gerard, R. (2013). Equilibrium distribution of sales and advertising prices. Uncertainty in Economics. 493-513.
Ronald, W. (2003). The impact of capital structure change on Firm Value. The journal of Finance. (83)7.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
Demonstrates a balanced and high
level of knowledge of core
Demonstrates a good level of
knowledge of some of the core
Demonstrates limited knowledge of
core concepts by providing a
Demonstrates little, if any,
knowledge of the core concepts

Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
limited level of analysis. Utilises
few current, appropriate and
credible sources.
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.