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Financial Accounting JB Hi-Fi Limited

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Question:

Discuss about the Financial Accounting JB Hi-Fi Limited.
 
 

Answer:

Introduction

JB Hi-Fi Limited is a publicly-listed company on the Australian Stock Exchange and a fast growing retailer of consumer goods and home appliances which include hardware and electronics. Its head office is in Melbourne and has 112 stores in the whole of Australia and New Zealand. Its competitors include Target Australia, Big W, Harvey Norman and David Jones (JB-Hifi, 2016).

The Annual Report for the financial year ending 30 June 2016 has been referred to for the purpose of this assignment.

Total value in the consolidated financial statements the following items at the end of the year

Account Head

Total Value as on 30 June 2016 ($’000)

Cash & Cash Equivalents

51,884

Inventories

546,437

Sales Revenue

3,954,467

Other Income

546

Plant & Equipment

183,570

Interest Expense

3,857

Sales & Marketing expenses

404,575

Occupancy expenses

173,792

Trade & Other payables

384,928

Borrowings (Non-current)

109,736

Normal  balance for each of the accounts

Account Head

Normal Balance

Affect on decrease

Cash & Cash Equivalents

Debit Balance

Credit Side

Inventories

Debit Balance

Credit Side

Sales Revenue

Credit Balance

Debit Side

Other Income

Credit Balance

Debit Side

Plant & Equipment

Debit Balance

Credit Side

Interest Expense

Debit Balance

Credit Side

Sales & Marketing expenses

Debit Balance

Credit Side

Occupancy expenses

Debit Balance

Credit Side

Trade & Other payables

Credit Balance

Debit Side

Borrowings (Non-current)

Credit Balance

Debit Side

 

Accounts that are affected

Apart from the dual impact of debit and credit, the multiple impacts of this debit and credit on other accounts has also been analyzed and presented below.

  • Cash & Cash Equivalents

Increasing Cash and Cash Equivalents is possible by increasing the revenues, other incomes or reducing the expenses. The impact of this is seen by the way of increase in the profits which is further attributed to the owners in the form of Reserves and Retained Earnings (JB-Hifi, 2016). The increase in Cash and cash equivalents can also be invested in current or noncurrent assets and utilized in acquiring tangible assets like Inventories and Plant and Equipment (Horngren, 2013). Similarly, the increase in Cash and Cash Equivalents can also be utilized to pay off the current liabilities like Trade and other payables or noncurrent liabilities like Borrowings.

  • Inventories

The increase in inventories will decrease the balance of Cash and Cash Equivalents due to the investment required for the same (Portor & Norton, 2014). In the Statement of Profit and Loss Account, the balance in Closing Stock will also increase. If the inventories have been acquired on borrowed money, then the finance costs in the form of interest expenses will also increase. If the inventories have been purchased on credit, then the balance of Trade and other payables will increase accordingly.

  • Sales Revenue

Sales Revenue increase has a direct impact on shooting up the profits. But there will be additional costs involved to achieve this increased revenue in the form of an increase in the cost of sales, selling and marketing expenses, administration expenses, and other expenses (JB-Hifi, 2016). This increase in profits will lead to increase in the balance of retained earnings and reserves. If the increased sales revenue has been achieved in cash and cash equivalents, then the cash balance will increase (Berk et. al, 2015). Else if the increased sales revenue is achieved on credit basis, then the balance of trade and other receivables will increase to the corresponding extent.

  • Other Income

Other income comprises of the items that are not directly sales revenue. But the nature and impact of an increase in other income is similar to that of sales revenue. There are not much direct and indirect costs involved for increasing other income as it is mostly earned in connection with the other business activities. If some nominal expenses are incurred, then this increase in other income will lead to an increase in such expenses (Subramanyam & Wild, 2014). The profits will increase to reflect the impact of increased other income and the balance of Reserves and Retained Earnings will increase accordingly. In most cases, the other income is earned in cash (Brealey et. al, 2011). So the balance of Cash and Cash Equivalents will also increase accordingly.

  • Plant and Equipment

Plant and Equipment forms a part of the Non-Current Assets. To acquire plant and equipment, the cash balance is required, so the Cash and Cash Equivalents will decrease to that extent. The increase in plant and equipment will also lead to increase in depreciation expense. The related expenses are occupancy expenses, administration expenses which cover insurance expenses and the running costs involved. If more staff is required to be employed for operation of the Plant and Equipment, then these costs will increase accordingly. If the Plant and Equipment have been acquired on credit, then the borrowings will increase and the associated finance costs in the form of interest expenses will also increase (Berk et. al, 2015). The immediate impact of this increased investment in Plant and Equipment cannot be seen but the long term impact is seen by the increase in revenues and profits.

  • Interest expense (Financial costs)

Interest expenses increase when additional capital is required for the business and borrowings have been opted for the same (Guerard, 2013). Hence the increase interest expenses can be directly linked to the increased borrowings. Interest is also levied on the taxes due which are included in the current taxation liabilities. If this additional capital and increased interest expenses have turned out to be favorable for the business, then the increased sales revenue is seen. Else the increased interest expenses will bring down the profits.

  • Sales and Marketing expenses

Sales and marketing expense are incurred to achieve a higher sales revenue and in turn higher profitability for the business. Hence increase in these expenses will lead to increase in Sales Revenue (JB-Hifi, 2016). As expenses are incurred, the payment for the same is either in cash or on credit basis. This will lead to a reduction in the balance of cash and cash equivalents or an increase in the balance of the trade and other payables which include all the current and short-term liabilities payable by the company.

  • Occupancy expenses

This refers to the costs incurred for acquiring additional office spaces or such other areas of business operation. The increase in occupancy expenses leads to a decrease in the balance or cash and cash equivalents and an increase in the balance of trade and other payables (Christensen, 2011). Apart from this, all the other administration and operational expenses are set to increase due to the additional costs to be incurred for running a business from the additional spaces. The impact of this can be seen by the increase in the revenue due to the increased sales achieved and the corresponding increase in profits if the additional business spaces turn break even and get converted into profitable areas of operation (Deegan, 2011).

  • Trade and other payables

Trade and other payables increase due to the purchase of goods or acquisition of services on credit. It reflects the balances outstanding and payable by the company (Graham & Smart, 2012). As payables have increased, the cost of sales which includes the purchases will also increase. Apart from this, every other item of expenses or cost which is kept outstanding like employment expenses or marketing expenses or administration expenses will all get reflected as an increase in the other payables (Davies & Crawford, 2012). The benefit of this is that the immediate cash balance will not get impacted as the payment has to be made in intervals and so the balance of cash and cash equivalents will be relatively higher to this extent (JB-Hifi, 2016).  

  • Borrowings (Non-current)

The increase in borrowings will increase the cash balance in the first place as it is similar to the introduction of additional capital and finance for the business (Shah, 2013). This additional cash can be utilized by the business in many ways which are either the acquisition of current assets like inventories and noncurrent assets like plant and equipment or such other investments (Albrecht et.  al, 2011). Accordingly, the balance in each of these accounts will increase based on its utilization. The cash can also be used to incur expenses like occupancy expenses, selling and marketing expenses, so on and so forth and based on the utilization, these account balances will increase accordingly. Apart from this, every additional capital comes at a cost; hence the increase in borrowings will increase the finance costs in the form of interest expenses (Choi & Meek, 2011). Thus increase in borrowings has the impact of increasing or decreasing the profits based on the matching of the incomes and expenses for which it is used.

Conclusion

As the financial statements are connected, every business transaction has dual impact namely debit and credit. So the impact of increase or decrease in each of the items mentioned above is seen both in the Statement of Profit and Loss and in the Statement of Financial Position. Every account is connected to other accounts both directly and indirectly. But it is difficult to trace the direct impact of the increase to any specific account and hence the impact and various possibilities in each case have been discussed.

 

References

Albrecht, W, Stice, E. & Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Berk, J, DeMarzo, P & Stangeland, D 2015, Corporate Finance, Canadian Toronto: Pearson Canada.

Brealey, R, Myers, S & Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Choi, R.D & Meek, G.K 2011, International accounting,  Pearson .

Christensen, J 2011,  ‘Good analytical research’, European Accounting Review, vol. 20, no. 1, pp. 41-51

Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill.

Graham, J & Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

JB-Hifi 2016, JB-Hifi Annual report & accounts 2016, viewed 11 May 2017 https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual%20Report_ASX.pdf

Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning

Shah, P 2013, Financial Accounting, London: Oxford University Press

Subramanyam, K & Wild, J 2014, Financial Statement Analysis, McGraw Hill

 

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