Linking Operational And Financial Performance

Overview of the case study questions

Discuss about the Linking Operational and Financial Performance.

Cash and cash equivalent: Increase in cash will increase the bank balances. It can be used to pay off the creditors which in turn will decrease the amount of creditors and can be used to purchase assets, thereby will increase the balance of fixed assets as well as current assets (Harford, Mansi and Maxwell 2012).

 Inventories: Increase in inventory will results in decrease the balance of cash and cash equivalents. It will result in lower sales and gross profit as increase in inventory means decrease in sales and in turn decrease in gross profit (Jones and Tuzel 2013).

Sales revenue: Increase in sales revenue will result in increase in cash as well as debtors. It will also increase the gross profit which in turn will increase the net profit. Increase in net profit will increase the shareholders wealth. Therefore, increase in sales will increase the asset account balance and equity balance (Stiglitz and Rosengard 2015).

Other income: Increase in other income will increase the net profit which in turn will increase the shareholders wealth. Therefore, increase in other income will increase the equity balance (Blanden, Gregg and Macmillan 2013).

Plant and equipment: If plant and equipment is purchased on cash then it will reduce the cash balance and if it is purchased in credit then will increase the creditors balance. Increase in balance of Plant and equipment will also increase the depreciation account balance. Therefore, increase in plant and equipment will increase the asset account balance (Clemens et al. 2013).

Interest expenses (Financial Cost): Increase in interest expense will increase the debt account and at the same time will reduce the cash and cash equivalent account. Therefore, interest expense will increase the liability and decrease the asset. It will also reduce the net profit, which in turn, will reduce owner’s equity (Vogel 2014).

Sales and marketing expenses: Increase in Sales, marketing expense will reduce the cash and cash equivalent account as well as it may reduce the prepaid expenses account. It may also increase the balance of liability account like accounts payable or increase in accrues expenses payable account. Therefore, interest expense will increase the liability and decrease the asset. It will also reduce the net profit, which in turn, will reduce owner’s equity (Dinner, Van Heerde and Neslin 2014).

Occupancy expenses: Increase in occupancy cost may increase the other expenses associated with this such as, tax expenses, insurance expenses and utilities expenses. At the same time it will reduce the cash and cash equivalent account as well as the prepaid expenses account. It may also increase the balance of liability account like accounts payable or increase in accrues expenses payable account. Therefore, interest expense will increase the liability and decrease the asset. It will also reduce the net profit, which in turn, will reduce owner’s equity (Zhang, Lawrence and Anderson 2015).

Overview of the chapter and topic

Trade and other payables: Trade payables increase when any new asset or inventory is obtained. Therefore, it will increase the balance of asset or inventory. Thus, increase in trade and other payables will increase the asset as well as the liability (Molina and Preve 2012).

Borrowings (non-current): Borrowing will increase the debt balance and at the same time will increase the asset account for which loan is taken. Therefore, both the asset as well as liability account will increase. It will also increase the interest expense account and thereby reduce the net profit, which in turn will reduce the owner’s equity (Stango and Zinman 2014).

The case study has represented few questions related to the consolidated financial statement of JB Hi-Fi Limited for the year ended 30^th June, 2016. Questions are related to few items of consolidated financial statement and some are related to consolidated revenue statement. The questions asked about the closing balance of the items given, effect of their increase and decrease on other accounts and how these accounts affect the debit side and credit side of the statement with their increase or decrease. The questions asked here can give a clear idea about JB Hi-Fi Limited’s financial position and the analysis of financial data that can help to get an overview of the company (Healy and Palepu 2012).

The chapter “Financial Analysis” includes the recognition of several items of a company’s financial statement for the given period. It states:

• Trends: It provides trends for major items of the financial statements over more than one year period to evaluate the performance of the company. Usual trend analyses are for the gross profit, net profit, accounts receivable, debt, cash and owner’s equity (Grant 2016).
• Proportion: A collection of ratios are presented to analyse the size of different accounts in the financial account. For example, a company’s current ratio can be calculated to evaluate the proportion of current liabilities compared to its current assets or debt-equity ratio can be calculated to measure the debt portion of the company. These evaluations are frequently done between the expense and revenues listed in the revenue statement and the equity accounts, liabilities and assets listed in the balance sheet.

Analysis of financial statement is an effective tool for various users of the statement and each of the users have different requirement from the financial statement of the company. There are various users of financial statement. They are:

• Investors: Both existing as well as potential investors analyse the financial statements to evaluate the company’s ability for issuing dividends, generating cash flow.
• Creditors: Any institution who lent money to the company is willing to know their ability of paying back the loan and therefore will scrutinize various cash flow items.
• Management: the management of the company prepares an analysis statement for financial results, particularly for operational activities that are not revealed to outside organizations.
• Regulatory authorities: If a company is held publicly, its annual statements are scrutinized by the exchange commission to analyse if its statements match with different statements of accounts (Brigham and Ehrhardt 2013).

The questions presented here can assist in evaluating the financial condition of the company. Various account balance and their fluctuations can evaluate the financial statement in better way. The items presented in the questions can be used to assess the financial condition of JB Hi-Fi limited and effect of their increase or decrease on other account. Cash balance, plant and equipment balance and inventories balance can be used to evaluate the asset position of the company and borrowings and trade payables can be used to evaluate the liability position of the company (Zeff 2016). On the other hand, sales revenue and other income can be used to assess the income and gross profit of the company and interest expenses, occupancy expenses and sales and marketing expenses can be used to evaluate the net profit of the company which in turn will affect the owner’s equity.  The increase or decrease in any item will have contra effect such as increase in expenses will reduce the cash balance; increase in sales revenue will increase the cash balance or debtors balance. In the same way, increase in borrowing will affect the debt balance as well as the interest expenses. The expenses like occupancy expense, sales and marketing expenses and interest expenses will reduce the cash balance as well as net profit, which in turn, will affect owner’s equity (Nyabwanga et al. 2013).

Relations of the study questions to the chapter and topic

To analyse any company’s financial position, few important items from statements are chosen for assessment such as cash and cash equivalents, trade payables, sales revenue, expenses, inventories and borrowings. The increase or decrease in amount of these items is compared with one or more years amount to assess the position of the company over the years.  How the increase or decrease in the value of these items are affecting other accounts of the statements are asked in the question to analyse the relation between various items and to check that whether in the financial statement, appropriate alteration has been shown for  change in value of other items. Analysis of the items from financial statement also assists in evaluating the risk factors and profitability of the company. Therefore, the questions asked in the case study will assist in analysis of financial position of the company and are relevant to the chapter and topic.

References:

Blanden, J., Gregg, P. and Macmillan, L., 2013. Intergenerational persistence in income and social class: the effect of within?group inequality. Journal of the Royal Statistical Society: Series A (Statistics in Society), 176(2), pp.541-563.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Clemens, S., Aarts, M.G., Thomine, S. and Verbruggen, N., 2013. Plant science: the key to preventing slow cadmium poisoning. Trends in plant science, 18(2), pp.92-99.

Dinner, I.M., Van Heerde, H.J. and Neslin, S.A., 2014. Driving online and offline sales: The cross-channel effects of traditional, online display, and paid search advertising. Journal of Marketing Research, 51(5), pp.527-545.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Harford, J., Mansi, S.A. and Maxwell, W.F., 2012. Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.

Healy, P.M. and Palepu, K.G., 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

JB Hi-Fi Annual Report 2016. (2016). 1st ed. [ebook] Australia: jbhifi.com.au, pp.55,56. Available at: https://www.jbhifi.com.au [Accessed 31 Dec. 2016].

Jones, C.S. and Tuzel, S., 2013. Inventory investment and the cost of capital. Journal of Financial Economics, 107(3), pp.557-579.

Molina, C.A. and Preve, L.A., 2012. An empirical analysis of the effect of financial distress on trade credit. Financial Management, 41(1), pp.187-205.

Nyabwanga, R.N., Ojera, P., Simeyo, O. and Nyanyuki, N.F., 2013. An empirical analysis of the liquidity, solvency and financial health of small and medium sized enterprises in kisii municipality, Kenya.

Stango, V. and Zinman, J., 2014. Limited and varying consumer attention evidence from shocks to the salience of bank overdraft fees. Review of Financial Studies, p.hhu008.

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of trends. Routledge.

Zhang, J.J., Lawrence, B. and Anderson, C.K., 2015. An agency perspective on service triads: Linking operational and financial performance. Journal of Operations Management, 35, pp.56-66.