Comparative Analysis Of Financial Statements Of Harvey Norman Ltd And JB-Hi Fi Ltd

Analysis of Owner’s Equity

The main purpose of this assessment is to conduct a comparative analysis of the financial statements of Harvey Norman ltd and JB-Hi fi ltd which belongs to same industry. The report will be analyzing the financial statements of both the companies in order to identify the significant items which are covered in the financial statements. The companies which are selected for this assessment are both engaged in the business of retailing and fulfilling the needs of the consumers of the business.

JB-Hi fi ltd is one of the Australian companies which is engaged in the business of retailing of consumers goods and the major products which the company offers to the consumers are video games. In addition to this, the company offers CDs, DVDs and other electronic devices on the demand of the consumers of the business (Jbhifi.com.au. 2018). The company has its headquarters in Melbourne, Australia. The company is known for its diversified product line which is offered in the business.

Harvey Norman ltd is an Australian company which is engaged in the retail business and the main products which are offered by the company are bedding, furniture, computers and electronic gadgets (Harvey Norman Holdings. 2018). The company is mainly known to operate in franchise. As per recent estimate the company has around 280 stores which are franchise based in Australia.

The assessment shows different items which are present in the annual reports of both the companies and how the same are represented for the company over a period of three years. The assessment also includes analysis of the cash flow statement of both the companies which will also include graphs which will be making the comparison more effective. In addition to this, the cash treatments of the business are also considered as per the requirement of the assessment including calculation of effective tax rate and cash and book tax rate of the business.

Harvey Norman Ltd

The balance of owner’s equity is shown in the balance sheet of the company and the main items which are shown in the owner’s equity section are contributed equity, reserves and retained earnings of the business. The contributed equity of a business refers to the share capital which is accumulated by the business for the purpose of financing various activities of the business. The contributed equity is accumulated by the business by issue of equity shares. As per the annual reports of the company for the year 2017, the figure for contributed equity has increased significantly during the period which is shown to be $ 386,309,000 which is much more than $ 385,296,000 for the year 2016 which suggest that the business has issued shares during the current year (Isberg and Pitta 2013). The cash flow statement shows that the business has issued shares during the year. The contributed equity of the business for the year 2015 is shown to be $ 380,328,000. The trend in equity is shown to be positive as the equity capital of the business is growing. Reserves which is shown in the owner’s capital section comprise of a part of set out profits which the management of the keeps for a specific purpose of meeting certain emergencies in near future. The reserves balance of the company for the year 2015 is shown to be $ 113,290,000 and the same is shown to be $ 174,950,000 for the year 2017 which suggest that the business is on its right track and earning significant amount of profits which allows the management to set out a part of the earnings in the reserves of the business. The retained earnings of a business show a part of profits which set aside by the management of the company for the purpose of financing the same in the business of the company. This is also known as use of internal capital of the business or ploughing back of profits of the business (Sultan 2014). The retained earnings of the business are shown to be on a rise from the profits which is shown for the previous year. The overall increase in retained profits of the business suggest the internal strength of the business and potential for development for the business.

Analysis of Cash Flows Statement

JB-Hi fi Ltd

The balance sheet of the business which is prepared for the year 2017 shows the owner’s capital balance of the business. The owner’s equity of the business also consists of contributed equity, reserves and retained earnings of the business which is shown consistently for the three years period. The contributed equity which is shown in the balance sheet of the company shows the investments which are made by shareholders in the shares of the company. The contributed equity of the business is to be utilized by the business for the purpose of financing various activities of the business. The contributed equity of JB-Hi fi ltd for the year 2017 is shown to be $ 438.7 million which has significantly risen in comparison to previous year 2016 in which the figure is shown to be $ 49.3 million. The cash flow statement of the company shows that there has been significant buyback of shares of the business and also the significant number of shares have been issued by the business in order to raise capital for financing the activities of the business. The increase in the equity capital of the business also suggest that the management of the company is trying to restructure the capital structure of the business (Robinson et al. 2015). The reserves of the business are also shown to have increased significantly during the current year which shows the improvement in profit generation ability of the business. The retained earnings of the business also are shown to have improved in comparison to previous year analysis which suggest that the management of the company is planning to bring about overall improvement in capital structure of the business.

The capital structure of a business is considered to be an important factor in the decision-making process of the management. The composition of the capital structure of the business depends on the decisions which are taken by the management of the business.

The annual report of the Harvey Norman ltd for the year 2017 shows that the business has borrowings which are shown in the current liabilities and non-current liabilities of the business. The borrowings of the business for the year 2017 is shown to be $ 333,858,000 which is much more than the loan amount which is shown in previous year. This signifies that the management is utilizing debt capital in order to finance the activities of the business. The equity balance which is shown for the year 2017 is shown to be $ 386,309,000. The mix of equity and debt capital which is used by the company are more or less in equal proportion. The equity figure of the business has improved over the years and so has the debt capital which is used by the business (Robb and Robinson 2014). In addition to this, the management also has significant amount of retained earnings which can also be used by the business for the purpose of reinvesting in the business.

In the case of JB-Hi fi ltd, the annual reports of the business for the year 2017 shows the debt capital which is used by the business for the purpose of financing the activities of the business. The debt capital which is available to the business and which is shown in the annual report of the business is shown to be $ 558.8 million which shows that the overall debt capital of the business has increased significantly during the year in comparison to previous year which is shown to be $ 109.7 million. The overall increase in the debt capital of the business suggest that the management is planning to bring about massive changes in the capital structure of the business. In current year scenario the debt capital which is used by the business is more than the equity capital of the company which confirms the intention of the management to bring about changes in capital structure of the business (Graham, Leary and Roberts 2015). In addition to this, the management has also made buyback of shares during the year and is also issuing new share.

Analysis of Other Comprehensive Income Statement

As per the analysis of the discussion which is shown in the paragraphs above, the company of JB-Hi fi ltd is more equipped with debt capital which is used by the management of JB-Hi fi ltd. The business of Norman Harvey does not have much debt capital and the capital structure of Harvey Norman is mostly based on equity capital of the business. This can be identified as the basic distinction between the two companies of the business. The current analysis suggests that both companies takes debt capital in the capital structure mix of the business, however the proportion of debt capital in the capital structure mix is quite different.

The cash flow statement of a business shows the liquidity position of the business and also shows al the activities which are undertaken by the business for the purpose of showing all the cash inflows and outflows of the business.

Harvey Norman Ltd

The above graph and table shows the cash flow analysis of Harvey Norman business for the three years period which is considered for this assessment. The cash from operating activities of the business represents the cash which is generated from general; activities which are related to core business of the company. The main cash inflows which can be recognized from the operating activities of the business are receipts from franchises and receipt from direct customers of the company as well. The cash generated from operating activities of the business is shown to be $ 425,140,000 for the year 2017 which has slightly fallen due to the expenses which have been undertaken by the company (Atieh 2014). The cash from operating activities of the business is shown to be positive and the main receipts or inflows of the business has increased which is a positive sign of the business. The cash from investing activities of the business shows that the management of the company has undertaken several purchases for which the payments are made by the business during the year. The cash from investing activities of the business is shown to be in negative which suggest that the cash outflows in this section has been much more for the company. The investments which are made by the business has increased significantly during the current year in comparison tom previous year. The cash which is generated from financing activities of the business the main cash flow is related to the dividend which is paid by the business and also the issue of shares which is undertaken by the business for raising the capital of the business. The financing activities of the company shows that the management has also repaid a part of the borrowings of the business.

JB-Hi fi ltd

The cash flow statement of the company is prepared following the general format and is shown to comprise of cash generated from operating, financing and investing activities of the business. The business of JB-Hi fi has the main receipts or cash inflows from receipts from customers in the ordinary course of business. The receipt from customers for the year 2017 is show to be $ 6025.5 million which is comparatively more than estimates which is shown for 2015 and 2016. This also shows that the liquidity position of the business has improved from previous year’s analysis (Bhandari and Iyer 2013). The major cash outflow which is shown in the annual report comprise of payments which is made to suppliers and employees and the income tax expenses which the business has to bear during the period. A graph below shows the comparative analysis between the three heads in a cash flow statement.

Accounting For Corporate Income Tax

The above graphs portray the different activities which are undertaken by the business for the purpose of generating cash flows for the business. The cash from investing activities of the business is shown to have mainly made up of the payments which is made by the business for the purpose of purchasing a plant and property for the operational purpose of the business. The cash which is generated by the business for financing activities mainly show the repayment of loans and buyback of shares has resulted the estimate to get negative. The financing activities of the business has been shown to be on the rise as per the cash flow statement which is prepared by the management of the company.

The insights which can be give about the cash flow statement which is prepared by both the company is that the cash which is generated by both the companies from operation is shown to be on the rise which suggest that the operational structure of both the business are tremendously appropriate. The investing activities of the business of Harvey Norman clearly shows that the management has undertaken lot of purchases which is to further improve the operational efficiency of the business. The cash flow from investing activities of JB-Hi fi ltd shows purchase of property plant and equipment. The financing activities of both the companies mainly comprise of loan repayments and dividends which is offered by the business during the year.

The other comprehensive income statement which is shown in the annual report of Harvey Norman ltd for the year 2017 shows various items such as foreign exchange translation which is related to translation of foreign currency into domestic currency and hedge contracts which are also undertaken by the management of the business. The comprehensive income statement also shows presence of revaluation balance which is done on land and buildings during the year. The revaluation of assets which is shown in the financial statement shows that the business is anticipating a rise in the value of the assets of the business. Similarly, the comprehensive income statement of JB-Hi fi ltd shows similar changes in fair value of hedge contracts and exchange difference which arises from foreign currency (Campbell 2015).

The comprehensive items are non-regular and extraordinary in nature which is the main reason that the same cannot be included in the profit and loss statement which is prepared by the management. From the view point of full disclosure, these items are separately presented and a profit after deducting such items are also shown in the annual reports of the business.

The comprehensive items which are shown in the business of JB Hi fi and Harvey Norman shows certain common elements which are exchange differences which arises on foreign exchanges by both companies and hedge contracts which are held by both the companies. The comprehensive income statement of Harvey Norman shows revaluation of land and building which is included in the statement during the year. The above transactions however make it evident that both the companies engage in foreign trade

If the items are included in the profit and loss statement, the net profit of the business will either increase or decrease the income of the business and since the items are not considered to be of that significant of nature therefore the management should not consider the same while taking appropriate decision regarding the same. The performance of companies should not be based on comprehensive items as these items are of extraordinary nature and might not be recurring in nature.

The tax expenses which is shown for Harvey Norman ltd for the year 2017 is shown to be $ 186,840,000 which has increased in comparison to previous year of the business. The tax expense for JB Hi fi ltd is shown to be $ 86.8 million during the year.

The effective tax rate refers to the average tax which is paid by businesses during a particular period. The effective tax rate of JB Hi fi ltd is shown to be highest which is 33.49% and the effective tax rate of Harvey Norman is shown to be 29.17% for the present year. The computation of effective tax rate considers earnings before tax and the income tax expenses for the year.

The deferred tax liabilities of Harvey Norman show a figure of $ 267,219,000 which has increased in comparison to previous year analysis. There are no deferred tax assets for the business during the year. On the other hand, the business of JB Hi fi ltd has no deferred tax assets but had a figure in previous year which suggest that the same was set out and therefore no deferred tax asset is being shown in the balance sheet of the business (Sikka 2017). The business has a deferred tax liability which is shown to be $ 8.2 million for the year 2017. The main reason for such deferred tax assets and liabilities is the difference in treatments or some carried forward losses of the business.

The cash tax rate is computed without considering the non-cash items of the business while book tax rate is computed considering all items which affect the profits of the business (Enyi and Akindehinde 2014). The cash tax rate is shown to be higher for JB-Hi fi ltd in comparison to Harvey Norman ltd. One other difference is that cash tax rate considers only current period while book tax rate considers both present and future periods.

Conclusion

The above discussion clearly shows the analysis of the financial statement of JB-Hi fi ltd and Harvey Norman ltd for the purpose of discussing the significant items which are included in the annual report of the business for a period of three years. The cash flow statement analysis reveals that the business of JB-Hi fi has more debt capital than Harvey Norman ltd. The above discussion also shows analysis of debt equity position of the business. The assessment concludes with treatments for effective tax rate and book tax rate and explanation for the same.

Reference

Atieh, S.H., 2014. Liquidity Analysis Using Cash Flow Ratios as Compared to Traditional Ratios in the Pharmaceutical Sector in Jordan. International journal of Financial research, 5(3), p.146.

Bhandari, S.B. and Iyer, R., 2013. Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), pp.667-676.

Campbell, J.L., 2015. The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), pp.243-279.

Enyi, E.P. and Akindehinde, A.O., 2014. Human resource accounting and decision making in postindustrial economy. International Journal, 2(1), pp.19-35.

Graham, J.R., Leary, M.T. and Roberts, M.R., 2015. A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.

Harvey Norman Holdings. 2018. Home. [online] Available at: https://www.harveynormanholdings.com.au/ [Accessed 23 Sep. 2018].

Isberg, S. and Pitta, D., 2013. Using financial analysis to assess brand equity. Journal of Product & Brand Management, 22(1), pp.65-78.

Jbhifi.com.au. 2018. [online] Available at: https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed 23 Sep. 2018].

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Robinson, T.R., Henry, E., Pirie, W.L., Broihahn, M.A. and Cope, A.T., 2015. International Financial Statement Analysis, (CFA Institute Investment Series). John Wiley & Sons.

Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier.

Sultan, A.S., 2014. Financial Statements Analysis-Measurement of Performance and Profitability: Applied Study of Baghdad Soft-Drink Industry. Research Journal of Finance and Accounting, 5(4), pp.49-56.

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