Financial Forecasting Investment Analysis: Liabilities And Profit Allocation In Partnership And Organization

Current and Non-Current Liabilities

Question:

Discuss About The Financial Forecasting Investment Analysis?

As per the annual report, the overall current liabilities of JB Hi-Fi Limited got enhanced in the year 2013 as compared to the year 2012. The entire current liabilities enhanced by $2.9 million. Going by the annual report, it is witnessed that the current assets of the company stand at $439.38 in 2012 as compared to the current liabilities that stands at $442.38 million (JB-Hifi, 2013).

As a matter of fact, the current liabilities pertains to the amount that is payable to the creditors in a span of 1 year. Current liabilities are classified as those liabilities that need to be discharged in a span of 12 months. This indicates that the payments need to be done in the near future (Albrecht et. al, 2011). The company should have the adequate amount of current assets so that it can cover the current liabilities with ease and flexibility (JB-Hifi, 2013).  In the case of JB-HiFi, the liabilities that are contained in the balance consist of Accounts payables, Income tax payables, Accrued Payroll and other current liabilities of miscellaneous nature. This consists of the liability that does not appear in any of the classes consisting above.

The major liabilities include those liabilities that pertain to the short-term, as well as long-term. Such have a major bearing on the balance sheet because they pertain to the long run. The major liabilities consist of accounts payables, debts that are convertible in nature and the taxes-debit that are deferred in nature (Davies & Crawford, 2012).

A provision pertains to the amount that a firm keeps aside for any liability that is expected in the near future or for any asset that declines in the value. The amount can be specific in nature or may be unknown (William, 2010).  In the case of JB Hi-Fi, the provision consists of debt that are non-convertible in nature and taxes that are of deferred nature (JB-Hifi, 2013).

When it comes to the non-convertible debt it pertains to the bonds that are unsecured and cannot be converted into stock or equity. Such debts are popularly called as non-convertible debentures that are long-term liabilities.

The tax liabilities that are deferred can be said to be the amount that generates from the difference that is temporary in nature, the carrying value of the taxes and the firm’s accounting, the income tax that is expected and the sanctioned amount along with the estimated tax that needs to be paid in the current year of operations (Spiceland et. al, 2011).

Provisions and Tax Liabilities

As per IAS37/AASB137, provisions consist of a difference as compared to other liabilities as they have uncertainty when it comes to the point of timing and the amount that is expected for the expenditure of a future course of time for the settlement purpose.  Hence, going by the current state, it can be commented that taxes that are deferred (debit) non convertible debts are provision for liabilities. As per the balance sheet of JB-HiFi, the payroll that is accrued in nature projects the benefits of the employees, wage, bonus, salary, and commission. The accrued payroll enhanced from $27.8 million in 2012 to $35.11 million in 2013 (JB-Hifi, 2013).

As per the cash flow statement of JB HiFi, the net inflow of $121.1 million. As per the previous year, the new outflow comprises of $27.66 million. The increment projects that the company has enhanced the operations (JB-Hifi, 2013).

Non-current borrowings are to be repaid in a span of two years amounting to $9.42 million and the remaining $23.35 needs to be repaid in a time frame of 2 to 5 years (JB-Hifi, 2013).

In the balance sheet of JB Hifi, there appear two non current provisions that are the provision for lease, deferred taxes and the charges along with the risks

The essential concept of a partnership firm is that all the losses and profits flow through to all partners in the firm, who are then liable for such amounts. In relation to the payment of income tax or income tax expense, only a corporation records the same in their income statement. In other words, a partnership does not record income tax expense in its income statement because the same is not the firm’s expense. A partnership maintains a drawing and capital account for every partner. This is the reason why even retained earnings do not form part of the financials of a partnership (Guerard, 2013). Furthermore, since the income tax of partnership firms is reported on the individual tax returns of respective partners, income tax expenses does not accrue just like it appears in the case of a corporation. In contrast to recording income tax expense in the income statement, partnership firms can make a provision in their profit and loss account or profit and loss appropriation account. Hence, it can be concluded that since a corporation pays taxes based on their profits, they are allowed to make references to total income before income tax expense, income tax, etc. However, since a partnership firm net income is depicted through the personal tax returns of the partners, they are neither allowed to make references to income tax expense nor they are liable to pay federal income taxes like corporations (Graham & Smart, 2012). Moreover, the income statement of partnership usually contains vertical evaluation ratios for every amount wherein all ratios are computed by dividing every amount by sales so that ascertain whether every amount is within their specified target range or not (Porter & Norton, 2013).

Profit Allocation in Partnership

The expense item is not present in the income statement of partnership. The expense of income of the partnership is treated just like the sole proprietorship. The expense of the income tax of partnership is alike the sole proprietorship. The tax expense is not reflected on the income statement because the partners are responsible for the income tax of individual (Country Road Limited, 2013).

Based on the annual report of Country Road Limited, it can be observed that in relation to retained earnings, the total available profit is appropriated by subtracting the net dividends and losses from the accumulated earnings.

Allocation of profit available for appropriation is distinct from that shown in the case of Country Road Limited because of the following reasons. In a partnership firm, capital is contributed by the partners who agree to invest the same through a partnership agreement. Furthermore, during the time of allocation of profit, in exchange for utilizing the profit and loss account that is used by Country Road Limited, the partners do not use the same (Country Road Limited, 2013). Instead, the partners use profit and loss appropriation account so that they can easily apportion their respective losses and profits based on the agreement entered into between them when the partnership is created. Besides, the profits attained by a partnership cannot be presumed to be the same in case of a company like Country Road Limited. This is because such profits are earnings of the company whereas the same is profits of partners in partnership firms. Besides, capital contributed by the partners cannot be regarded as a part of factor organization because capital in this case itself is a distinct factor (Country Road Limited, 2013). Hence, the profit available for appropriation is distinct between a partnership and Country Road Limited.

When it comes to partnership, the partners are required to contribute capital to the business. When the allocation of profit is done, instead of utilization of the profit and loss account, the partner uses Profit and loss appropriation account.  The profit and loss appropriation is done in tune with the agreement done in partner’s agreement (Choi & Meek, 2011).

In relation to Country Road Limited, its issued and paid-up capital is identified at the fair value of the attained consideration. This signifies the fact that the issued capital of Country Road Limited cannot be similar to that of a typical partnership. The reason behind this is that such issued capital is the amount that an organization raises by selling its stock to the public investors (Shah, 2013). Furthermore, this issued capital only becomes the authorized capital of the firm. In the annual report of Country Road Ltd, the entire issued capital raised by the organization is the authorized capital of the respective organization. However, in relation to a partnership, the partners are only liable for raising the capital that can be further utilized in the attainment of partnership motives or goals. Furthermore, even in the balance sheet, the issued capital forming part of the same is not mentioned as ‘issued capital’ and instead it is replaced by the name of every single partner operating in the partnership and the respective amount of funds they have raised through their activities (Subramanyam & Wild, 2011). For example, if a partner raised $40000 in the initial stage and $20000 in the subsequent stage, then the amount of capital raised by him would be $60000 and this would represent his capital account. This ideology continues for the rest of the partners as well (Country Road Limited, 2013). Therefore, even though most items in the balance sheet are similar between a partnership and an organization, yet there are various items that differ on a serious note.

Profit Allocation in Organization

The profit that is available is appropriated by the deduction of the net losses and dividend from the accumulated earnings. Issued capital pertains to the amount that the firm raises when the stocks are sold to the investors (Berk et. al, 2011). The firms authorized capital is the issued share capital. When it come to the partnership, the partners are mainly responsible for raising the capital. Hence, in the balance sheet the issued capital is replaced by the partners name and the amount that is raised (Brealey et. al, 2011).

In partnership, the partners are responsible for raising capital. Therefore, in the balance sheet, the Issued Capital is replaced by the name of each partner and the amount that they have raised.

Organizations like Country Road Limited are required to prepare cash flow statement for determining their cash position based on different activities. This does not signify that a typical partnership must not comply with the same. In other words, a typical partnership also necessitates the preparation of cash flow statement, as the same is a major indicator of flow of cash in business activities from investing, operating, and financing activities. Moreover, the preparation of statement of cash flow assists the partners in determining where the resources of the partnership have been spent (Country Road Limited, 2013). For instance, partners can evaluate whether cash has been used or not with the help of increase or decrease in their inventory levels. Further, if their businesses have expended additional customers, then also it signifies that additional cash has been utilized. These things are not prevalent in the income statement of a partnership and therefore, preparation of statement of cash flow allows the partners to focus on the cash that is excessive in nature. Nonetheless, the partners obtain a capability to make better financing or investing decisions with the help of cash flow statement, they attain a position wherein they utilize cash resources of the partnership in such a way that can provide them additional benefits in terms of profits and goodwill. Therefore, it can be concluded that even a typical partnership is under an obligation to prepare a cash flow statement, as it provides various benefits that can assist in the fulfillment of various motives and objectives (Wagenhofer, 2014). Further, the statement helps the partner to shed light on the cash that is present in excess. In order to generate profit, the cash needs to be used in a wise manner that is through the cash flow statement. The partners can therefore, make financing decision. The cash flow statement enables the partners to learn from where the funds are spent. This means that if there is an increment in the inventory then it signifies that the cash is utilized. If the business enhanced the customer base then more cash is utilized (Horngren, 2013).

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.

Country Road Limited 2013, Country Road Limited Annual Report and accounts 2013, viewed 10 October 2017 https://www.countryroad.com.au/images/assetimages/ASX/CRG_Annual_Report_2013.pdf

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

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 2013, JB-Hifi Annual report & accounts 2013, viewed 10 October 2017 https://www.annualreports.com/HostedData/AnnualReportArchive/J/ASX_JBH_2013.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

Spiceland, J, Thomas, W & Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin University Press

William, L 2010, Practical Financial Management, South-Western College.

Wagenhofer, A 2014, The role of revenue recognition in performance reporting, OxfordUniversity Press