Analysis of increase or decrease in current liabilities of JB Hi-Fi Limited
The present report aims to present an analysis of the various financial elements present in the consolidated financial statements of two ASX listed company. The business companies selected for the purpose are JB Hi-Fi Limited and Country Road Limited.
Analysis of the consolidated financial statements of JB Hi-Fi Limited
Analysis of increase or decrease in its current liabilities
The current liabilities refer to the debt obligations of a business entity that is liable to be paid within a year and is stated in the balance sheet. The current liabilities of the company are short-term debt, accounts payable, accrued liabilities and other financial obligations that must be paid within short-period of time (Epstein and Jermakowicz, 2010). The JB Hi-Fi Limited is a recognized retailer of Australia involved in providing variety of products to the people of the country such as consumer goods, video games, DVDs, CDs, home appliances and others.
The current liabilities as reported in the balance sheet of the company are trade and other payable, other financial liabilities, current tax liabilities, provisions and other current liabilities. The current tax liabilities include income tax and provision includes employee benefits and lease provision. The other financial liabilities includes interest rate swap while the other current liabilities include lease accrual and incentives. The current liabilities of the company have increased significantly in the year 2013 of amount $442,379 as compared to year 2012 of $439,481 (JB Hi-Fi Limited: Annual Report, 2013).
Major liabilities of JB Hi-Fi Limited
The major liabilities of JB Hi-Fi Limited include both current and non-current liabilities. The total liabilities of the company at the end of the financial year 2013 are reported to be $599,476 (000). The major non-current liabilities of the company include borrowings, provisions, other non-current liabilities, other financial liabilities. The main difference between the current and non-current liabilities is the non-current liabilities are to be paid by the company in longer period of time that is more than 1 year (JB Hi-Fi Limited: Annual Report, 2013). The major liabilities of the company as depicted in its balance sheet are as follows
Items included under ‘Provisions’ in the ‘Current Liabilities’
The ‘Provision’ section in the current liabilities of a business entity represents an account that is maintained for meeting the current expected liability. The business entities set aside an amount from its profits for meeting an expected or future liability (Weygandt, Kieso and Kimmel, 2010). The JB Hi-Fi Limited has included the employee benefits and lease provision under the ‘provisions section in the current liabilities. The employee benefits include $3,595 thousand of annual leave accrued and the lease provision includes the best predictions taken by the company regarding the amount to be returned to the leased premises as per IAS and AASB standards (JB Hi-Fi Limited: Annual Report, 2013). The items included under provisions in JB Hi-Fi Limited can be illustrated as:
The IAS 37 and AASB 137 have specified the guidelines to be followed by business entities for accounting the provisions, contingent assets and liabilities. As per the standards, the provisions should be measured at best estimate though the inclusion of all the significant risks and uncertainties. The estimates should be made in accordance with the expenses that will be incurred for meeting the respective financial obligation (IAS 37 — Provisions, Contingent Liabilities and Contingent Assets, 2017). Thus, it can be said that nature of items included under provision of JB Hi-fi satisfies the standard requirements of IAS and AASB. The company has reported an increase in its liabilities for employee benefits in the year 2013 of $35,111 (000) as compared to the financial year of 2012 of $27,802 (000) (JB Hi-Fi Limited: Annual Report, 2013).
Major liabilities of JB Hi-Fi Limited
Cash raised by interest-bearing loans
The interest rates represent the amount of interest paid by a business entity on total sum borrowed from other financial institutions such as bank. As analyzed from the annual report of JB Hi-Fi, there is not significant amount of cash raised by interest-bearing loans. The repaid amount of borrowings is $ 26,210 (000) in the financial year 2013 as compared to the $84,174 (000) amount of borrowings repaid in the financial year 2012 (JB Hi-Fi Limited: Annual Report, 2013). The same can be as illustrated from the cash flow statement of the company as:
Secured Non-Current Liabilities
There are mainly two types of borrowings included in the non-current liabilities section of the company that are, secured and unsecured loans. The secured loans are protected by any collateral while unsecured are not secured and thus the lender is not liable for gaining control over the property (Palepu et al., 2007). As depicted in the non-current liabilities section of the annual report of JB Hi-Fi. The company has secured bank loans amounting to $149,775 (000) at the end of the financial year 2012 while in the year 2013 there is unsecured borrowings of bank loans of $124,331 (000) that can be depicted as (JB Hi-Fi Limited: Annual Report, 2013):
Amount of the non-current borrowings due to be repaid
The amount of non-current borrowings that are to be repaid by the company as reported at the end of the financial year 2013 can be depicted as follows:
Thus, as depicted by the company, the total amount to be repaid within 5 eyras of time is $146,306 (000). Out of which, the amount to be paid within 6 months is $ 3,551, in between 6-12 months is $3,551 and that to be given under 1-2 years is $7,102. The amount that is repaid between 2-5 years is $132,102 (JB Hi-Fi Limited: Annual Report, 2013).
Non-Current Provisions
The non-current provisions refer to the contingency reserve maintained by a business entity for meeting the future liabilities that are expected to be met in a longer period of time (Weil, Schipper and Francis, 2013). The notes to financial statements section of the company have presented its non-current provision that is employee benefits, lease provision and other provisions. The lease provisions are made by taking into account the past history of the company regarding the returns paid for the leased premises (JB Hi-Fi Limited: Annual Report, 2013). The items included under provisions in the non-current liabilities of JB Hi-Fi can be depicted as follows:
In this part of the assignment various requirement of making the financial statements by the public listed company and partnership firm is compared. For this purpose company named as Country Road Limited is taken in order to compare the various requirements for companies and how it is differentiated form the financial statements of the partnerships.
Income Tax Expense
Income tax refers to the fixed percentage of charge that every entity or person has to bear on their net income. The income tax is given to the government as a charge on the company. Company and partnership firms both have to pay the income tax expenses but there is difference of manner of payment of income tax under both the entities. Company is regarded as the separate legal entity and has no liability on the property of the members holding the shares of such company.
Items included under ‘Provisions’ in the ‘Current Liabilities’ of JB Hi-Fi Limited
On the other hand partnership consists of two or members and all the members have are bears the liabilities of the partnership firm in the ratio of their contribution to the capital or as defined in the partnership agreement. So company has its own separate identity in the eyes of government and can be sue or sued for its action or issues faced (Country Road, Annual Report, 2013). Therefore the income tax expense on the company is legal charge by the government that has to be borne by the company itself not by its members (Shareholders). In case of partnership firm liabilities are borne by the members, so it is liabilities of partners to pay the income tax on behalf of partnership firm (Gibson, 2010).
So it can be said that interest expenses in the income statement of the Country Road Limited has to deducted from the net income left after provided all the expenses. But in case of partnership firm income tax is paid by the partners so no need for deduction of same.
Distribution of Profits
Profits remained after deducting all the expenses and tax liability has to either transferred to the retained earnings or has to be distributed to the members (Shareholders) of the respective entity. In case of companies profits are derived after deducting the expenses are transferred to the equity capital in form of retained earnings and it is subject to distribution in case dividends are declared by the company. Dividend refers to distribution of profits earned by the company to their respective shareholders as per the number of shares hold by them. In statement of change in equity various balance such as retained earnings, equity share capital, etc are recorded and any change to them is also provided so to make the changes in amount of leftover retained earnings with the company.
The total profit available is appropriated in total number of shares subscribed by the shareholders of the company. Profits are divided into two main parts one is retained earnings and current year dividends (Country Road, Annual Report, 2013). Retained earnings is leftover of profits remained after distribution of dividends. In case of partnership firms profits of company are distributed to the respective partners in ratio of their capital contribution or any manner specified in the partnership agreement.
So it can be said that there is difference of distribution of profit among company and partnership firm in various ways. Firstly their no liability on company to distribute the profits but in case of partnership partners have right to receive the profits. There is no fixed percentage of profits to be distributed to the shareholders of the company whereas a partnership firm has to pay fixed profits to their partners (Stickney, 2009).
Issued capital
Capital refers to the amount that is contributed by the members to the entity and it can be in many forms. In case of companies shareholders are invited to subscribe the equity shares of the company at fixed price and in such way they can become the members of the company (Country Road, Annual Report, 2013). The shareholders are referred to the owners of the company but they don’t have right to take part in the active management of the company has members appoint the board of directors to fulfill such responsibilities.
In case of partnership firm, two or more partners that constitute the partnership contribute the amount in fixed proportion and it is termed as capital. There is no issue of equity as likely in case of company and in case of partnership firm members are true owners of the partnership entity as they handle the active management of the partnership entity. It is reason why capital under statement of financial position is termed as issued capital in case of company and it is termed as contributed capital in case partnership firm (Bragg, 2004).
Cash Flow Statements
Cash flow statements refer to the financial statements that provide the flow of cash from various activities such as operating activity, investment activity and financial activity (Country Road, Annual Report, 2013). It is mandatory for the companies to prepare the cash flow statement whereas there is no such requirement in case of partnership firms. As per the companies act and IFRS there is requirement to include the statement of cash flow together with other statement in case of companies. Cash flow statement is detailed overview of cash flows and it can also be seen from the bank and cash account of the entity. In order to make it simple to understand for the users of financial statement of company, cash flow statement is prepared and no such requirement is posed in partnership firms (Ernst and Häcker, 2012).
Conclusion
Understanding the financial statement of the company is not easy and it involves inclusion of various topics and sub topics. There are many items in the complex financial statements of any company.
References
Bragg, S. 2004. GAAP Implementation Guide. John Wiley & Sons.
Country Road. 2013. Annual Report. [Online]. Available at: https://www.countryroad.com.au/images/assetimages/ASX/CRG_Annual_Report_2013.pdf [Accessed on: 6 October, 2017].
Epstein, B and Jermakowicz, E. 2010. WILEY Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons.
Ernst, D. and Häcker, J. 2012. Applied International Corporate Finance. Vahlen.
Gibson, C. 2010. Financial Reporting and Analysis: Using Financial Accounting Information. Cengage Learning.
IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. 2017. [Online]. Available at: https://www.iasplus.com/en/standards/ias/ias37 [Accessed on: 6 September 2017].
JB Hi-Fi Limited. 2013. Annual Report.
Palepu, K. et al. 2007. Business Analysis and Valuation: Text and Cases. Cengage Learning EMEA.
Stickney, C.P. et al. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
Weil, R., Schipper, K. and Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley & Sons.
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