Financial Accounting Statement: Purpose, Accounting Practices, Ratios Essay.

Purpose of Financial Accounting Statements

Question:

Discuss about the Accounting in Business for Entertainment Retailer.

The general purpose of the financial accounting statement is to give information regarding the results of the operations, financial position and cash flow of the company. The information that is stated in the financial statements is to make aware the users of the financial statements regarding the distribution of the resources. An assertion can be stated that lenders make use of the entire set of the information in the financials to understand whether they must extend the credit to the business or limit the sum of credit that has already extended. The purpose of the financial statement for the investors is to make the use of the price per share at which they are interested to invest.

The purpose of the financial statements for the government is to tax the business based on the assets and income and they can generate the information from such financials. Additionally, a union can base their position of bargaining on the apparent ability of the business to pay. Therefore, such kind of information can be obtained from the financial statements. In other words, the financial statements possess number of purposes, depending upon who the reader is and which financial statement is being perused.

The accounting practices adopted for the preparation of the general-purpose financial statements complies with the “Australian accounting standards” and interpretations that is issued by the board of the “Australian Accounting Standards and the Corporation Act 2001”. The financial statements of the Jb Hi-Fi comply with the international financial reporting standards that is issued by the International Accounting Standard Board (Jbhifi.com.au, 2017). The accounting practices that has been implemented in the preparation of the fiscal statements is based under the convention of historical cost, excluding the financial assets and the liabilities combined with the certain classes of plants and equipment’s that are measured in terms of the fair value. The critical accounting assumptions and estimations of Jb Hi-Fi is used during the preparation of the financial statements that is constantly evaluated by the company and take account of the historical experience and other factors. The accounting assumptions and estimations comprises of the upcoming proceedings that might create a fiscal effect on the company are considered practical under the current circumstances.      

Jb Hi-Fi measures the revenue based on the fair value of the sum of considerations that is receivable or received. The sum of amounts that is disclosed in the form of revenue represents the net amount of returns, amount of trade allowance, repayments and amounts that is collected by the company on behalf of the third parties. Jb Hi-Fi recognizes revenue at the time when the sum of proceeds can be measured dependably. It is likely for the company the future economic welfares would flow in the company and the specific criteria of the business has been met.

Accounting Practices adopted by JB Hi-Fi

The company bases its estimates in terms of the historical results by taking account of the type of customers, the type of transactions together with the specific of each arrangements. Revenue derived from the sales is recognized when the company has transmitted the purchaser the noteworthy risks and reward associated with the ownership of goods. On the other hand, when the company acts in the form of agent instead of being principal in the transaction the revenue recognized represents the net amount of commission that is made by the company. Revenue that is recognized from the contract of services is identified by the reference to the share of amenities which is provided in agreement with the contract. Proceeds derived from the time and physical agreements is identified at the contractual rates in the form of labour hours delivered and direct expenditure that are occurred.

Profitability ratios is referred as the financial tool that is put into use to assess the capability of the business to harvest earnings in comparison to the expenditures with other pertinent commercial cost that is incurred during the period. Considering the return on equity of Jb-Hi-Fi the business reported a return on equity of 40.68 for the year 2016 and in the subsequent year of 2017 the business reported the return on equity of 27.4 (Jbhifi.com.au, 2017). This reflects that profit generated on each dollar of common stockholders. The return on equity of Jb-Hi-Fi is rated second among the other related companies. The return on equity of provides that how the company effectively manage their money or reinvested. The return on equity provides the ability of Jb-Hi-Fi to produce profits from its shareholders’ investments in the organization. After adjusting the long term liabilities Jb-Hi-Fi present holds around 2.77 billion in current valuation by claiming around 40% of the diversified wholesale and retail industry.

The return on asset reported by the company for the year 2016 stood 16.13 however in the subsequent year of 2017 it declined to 10.01. The return on assets ratio of Jb-Hi-Fi represents the net income that is generated from the total assets for the year 2017 in comparison to the net income to the average total assets. The financial leverage reported by Jb-Hi-Fi stood 2.45 in the year 2016 and the subsequent year of 2017 the financial leverage reported by the company stood 2.87. JB Hi-fi reported an asset turnover of 4.19 in the financial year 2016 but in the year 2017 the asset turnover marginally felled down to 3.27 (Jbhifi.com.au, 2017). This represents that somewhat the measurement of the assets has not been efficiently managed to generate profit during the financial year 2017. The total asset of Jb-Hi-Fi represents the amount of current and long term assets that is retained by the firm during the specified time period.

Profitability Ratios for 2016 and 2017

The assets of the Jb-Hi-Fi are listed on the balance sheet and they are characteristically valued depending on their purchasing prices and not on the present market value. The return on asset reported by the company is from the long-term value of the property and other capital assets which is anticipated to be useable for more than a year. As the sole purpose of the Jb-Hi-Fi is to produce revenues and generate profit the return on assets assist the management and investors of Jb-Hi-Fi to gauge into the performance as how efficiently the company convert its assets in the profits.  

The earnings per share reported by the company for the financial year 2016 stood 1.5 however in the following year of 2017 the earnings per share reported by the company marginally increased to 1.53 (Jbhifi.com.au, 2017). The rise in the earnings per share of the Jb-Hi-Fi is marginally attributed to the equity settled benefits reserves derived from the grant of the share options to the executives and the non-executive’s management under the organizations share options plans.   

The liquidity ratios represent the ratio between the liquid assets and the liabilities of the company to measures the ability of the organization to discharge its obligations of debt (Otley & Emmanuel, 2013). The cash ratio of Jb-Hi-Fi represents the ratio of liquid assets of the company to its current liabilities. The cash ratio of Jb-Hi-Fi reported for the year 2016 stood 11.61 however the cash ratio of the company marginally declined to 8.219 for the year 2017 (Jbhifi.com.au, 2017). An important consideration in regard to the Jb-Hi-Fi cash ratio is that cash and cash equivalent comprises of the cash in hand and in bank along with the net outstanding of the bank overdraft. The cash ratio of the company is rated third in overall category among the other related companies.

In respect of the profitability ratio, the current ratio reported by the company stood 1.57 for the year 2016 however, in the subsequent year of 2017 the current ratio reported by the company marginally fell to 1.32. The current ratio of Jb-Hi-Fi is considered to be third overall in respect of the other related companies under the current liabilities. The current ratio of Jb-Hi-Fi is rated to be third overall in current ratio group amid the other associated businesses. Gauging at the current ratio reported by Jb-Hi-Fi, can be stated that the short-term creditors would generally favour a high current ratio subsequently it lowers their total risk. However, the investors might prefer a lower current ratio since the investors are more concerned regarding the growth of the business by using the business assets.

Liquidity Ratios for 2016 and 2017

Quick ratio can be defined as the tool to measure how better an organization can meet the short term financial obligations or liabilities. The quick ratio reported by the company for the year 2016 stood 0.34 and in the subsequent year of 2017 the quick ratio of Jb Hi-Fi stood 0.30. The cash equivalents of the Jb Hi-Fi represent the current assets which the company easily convert into the short term bonds, savings account, money market funds or the certificate of deposits in order to discharge the short term obligations of the company. The cash and cash equivalents of Jb Hi-Fi is rated third among the other company since the company creates around 55,151,515 of cash and cash equivalents per quick ratio (Jbhifi.com.au, 2017).

Under the liquidity ratio Jb Hi-Fi reported a receivables turnover of 44.05 for the year 2016 and in the following year it reported a lower receivable turnover of 38.2 for the year 2017. The decline in the receivables turnover is primarily attributed to the non-impairment of all the debts of the that are past because on the reporting date the company considered numerous amounts of its debts to be written off was credited against the other expenditure in the profit and loss account.

On the other the inventory turnover reported by Jb Hi-Fi stood 6.03 for the year 2016 and in the following year of 2017 the inventory turnover stood 6.25. The inventory reported by the Jb Hi-Fi are usually stated at lower cost at the net realisable value. Costs are generally allocated to the separate items of inventory based on the weighted average cost following the deductions of the rebates and discounts.

The solvency ratio represents one of the numerous ratios that is used to assess the competence of the business to discharge its long term debts. Under the solvency ratio the time interest earned reported by Jb Hi-Fi for the year 2016 stood 57.48 while in the subsequent year of 2017 Jb Hi-Fi reported a lower Times Interest Earned ratio of 25.22 (Jbhifi.com.au, 2017). On the other hand, a cash coverage ratio for Jb Hi-Fi stood 1.69 for the year 2016 which subsequently declined to 0.34 in the following year 2017. In order to represent a sufficient ability of Jb Hi-Fi to pay for its borrowing interest expenditure the ratio was substantially greater than 1:1 in the year 2016 however it declined to below the ratio of 1:1 with the company reporting 0.34 in the subsequent year of 2017.

Concerning the debt to equity ratio Jb Hi-Fi is considered to be rated second in the overall category of the debt to equity among the related firms as the company reported a debt to equity ratio of 1.45 in the year 2016 which subsequently increased marginally to 1.87 in the year 2017. The increased debt to equity ratio of Jb Hi-Fi is typically reflecting that the firm has been borrowing aggressively to fund its development and as a consequence of this the company might shoulder the burden of increased interest expenditure.

The market-based ratio is used to assess the present price of share of the organizations publicly held stock. Jb Hi-Fi is rated in the second position in the overall price to earnings growth class among the other related companies as the company reported a price to earnings ratio of 3.95 in the year 2016 and subsequently increases to 1.87 in the year 2017. The growth can be attributed to the increase in the working capital with improved operations from the use of existing resources.

Conversely, the dividend yield ratio of Jb Hi-Fi for the year 2016 stood 1.33 and increased to 1.55 in the subsequent year of 2017 (Jbhifi.com.au, 2017). The dividend declared by the board represents an increase of 18 cents from the previous year that ultimately resulted the dividend to stand at 118 cents each share. The growth in the dividend is generally attributed to the growth of business in order to maximize the returns of the long term shareholders.

The study can be concluded by stating the JB Hi-Fi continues to achieve growth and it is on track of delivering a long-term sales aspiration of around $500 million. The analysis conducted represented that The growth in the dividend is generally attributed to the growth of business in order to maximize the returns of the long term shareholders. The analysis conducted above represented that Jb Hi-Fi has maintained a competitive advantage and it is focussed on the growing productivity by reducing its expenditure.

The market of home appliances market in Australia is considered be larger than several other categories of $4.6 billion in which JB-Hi-Fi operates. Therefore, this presents the company with the opportunity of leveraging the strength and trust in the brand of the JB-Hi-Fi. By levering the robust inheritance, the company can foresee its continued expansion in the products of home appliances and ultimately provides the noteworthy opening for the JB-HI-Fi in the future market.

In addition to this, the Home store roll-out will enable the company to introduce small appliances in the existing stores of the company. JB-Hi-Fi sees that the roll-out of the small appliances in its current network would result in the natural development of the proven home appliances strategy and the company in the long run anticipates most of its stores to carry its appliances. 

Reference List:

JB Hi-Fi | JB Hi-Fi - Australia's Largest Home Entertainment Retailer. (2017). Jbhifi.com.au. Retrieved 23 October 2017, from https://www.jbhifi.com.au/