Harvey Norman and JB Hi-Fi financial compariosn free essay sample

The main aim of this assignment is to present an exploration of two major parts of financial statements i. e. Statement of Comprehensive income and statement of financial position. This is done by comparing elements of Balance Sheet and income statement of two separate companies and discussing similarities and difference of Presentation and Disclosures of these two separate organizations. Furthermore, discussing different methods adopted by two separate entities to measure Assets and Liabilities. Along with key strengths and weaknesses demonstrated by the Balance sheet of organizations. For this purpose we will use key ratios to identify difference between different periods presented in Balance sheet of Organizations. Along with the Balance Sheet, we will also discuss structure of Income statement of two separate organizations, and methods to recognize Income and expenses over a period of three years. Moreover, we will analyze strengths and weaknesses of these entities as revealed from Income statement. In the end, we will analyze the strengths and weaknesses of the entities from cash flow perspective. Introduction of Companies: JB Hi-Fi Limited: The business was established in 1974 by Mr. John Barbuto (JB), trading from a single store in East Keilor, Victoria. He had one simple philosophy: to deliver a specialist range of Hi-Fi and recorded music at Australias lowest prices. The business was sold in 1983 and by 1999 another nine stores were opened. In July 2000 JB Hi-Fi was purchased by private equity bankers and senior management with the aim of taking the successful model nationally. In October 2003, JB Hi-Fi was floated on the Australian Stock Exchange. Now, maintaining Barbutos original philosophy, JB is one of Australasias fastest growing and largest retailers of home entertainment. In July 2004, JB bought the Queensland Clive Anthony chain of stores which sell consumer electronics, white goods, cooking appliances and air-conditioning. JB stores offer the worlds leading brands of Hi-Fi Speakers, Televisions, DVDs, VCRs, Cameras, Car Sound, Home Theatre, Computers and Portable Audio and continues to stock an exclusive range of specialist Hi-Fi products. JB Hi-Fi also offers the largest range of video games, recorded music, DVD music and DVD movies with over 50,000 CDs and most major studio DVD releases, all at cheap prices. Customers are able to buy online from huge range of CDs, DVDs, and games. (JB Feb 07, 2002) Harvey Norman Limited: Harvey Norman Holdings Limited is a listed company whose shares are traded on the Australian Stock Exchange. Main activities comprise of a combined retail, property enterprise and franchising. Harvey Norman’s prime activities are, Computers Communications, Electrical components, House hold appliances, Furniture, Lighting, carpet flooring. Harvey Norman stores are present in New Zealand, Australia, Ireland, Singapore, Malaysia and Slovenia. They turned out to be a domestic brand name and people are familiar with this brand. Purpose of Financial Statements: The purpose of financial statements is to deliver information about the financial position, performance and changes cash flow position of an entity that is beneficial to a wide range of stakeholders in taking financial and investment decisions. A complete set of financial statements consists of Statement of Financial Position commonly known as Balance Sheet, Statement of Comprehensive Income commonly known as Income Statement, Statement of changes in equity, Statement of Cash flow and Notes to the accounts. Users of financial statements include broad categories such as Shareholders, Employees, Suppliers and Government Authorities such as ATO and ASX. Financial Statement should provide true and fair position of the organization’s financial position and performance and cash flow situation for a specific time period. Furthermore, financial statements should be understandable by users of financial statements. Relevance is another vital factor for financial statements to be useful for users. One of the most important factors is reliability of financial statements. Reliability is further ensured by audit of financial statements. At last but not least, financial statements should be made in a comparable format either with previous periods or with the competitors. Balance Sheet: Balance sheet displays the financial position of an organization at a specific time. Financial Position is demonstrated using the fundamental Accounting Equation, i. e. Assets= Liabilities + Equity. Assets and liabilities are bifurcated in current and non-current. Current asset is defined as any asset which can be converted into cash readily and will be used within one accounting period normally 1 year e. g. Receivables, Inventory, Prepaid Expenses. While current liabilities are liabilities which are to be settled within one accounting period or 12 months. Equity is the internal claim of shareholders over the assets of organization. Equity portion of Statement of Financial Position contains mostly but not limited to Common Stock and Retained Earnings. Statement of Comprehensive Income: Statement of Comprehensive income contains information relating to the performance of an organization over a specified time period. Performance means the revenue generation and expense related to all these activities and in the end Net Income generated from these operations. Statement of Cash Flow: Balance sheet and Income statement is based on Accrual Accounting System. Accrual accounting method is a technique that measures the performance and position of an organization by identifying financial occurrences irrespective of when cash transactions take place. But the issue with is that cash is also an important indicator of liquidity position of company. Without positive liquidity the company’s â€Å"Going Concern† is in uncertainty which is the basic assumption for preparation of Financial Statements. This is the reason for providing a separate report revealing Cash Flow position of an organization. Cash Flow statement demonstrates all the cash inflows and outflows of a company for a specific time period. Structure of Balance Sheet: The structure of Statement of Balance Sheet / Financial Position is relatively same in all entity. Statement of financial position is prepared in accordance with framework i. e. International Accounting Standards guidelines. There are some similarities and differences observed in Balance Sheet of Harvey Norman Ltd and JB Hi-Fi Limited. These are described as follows: Similarities: The current assets of Harvey Norman Limited and JB Hi-Fi Limited included all the usual basic elements i. e. Inventory, Accounts Receivables, Cash and equivalents. Non-current assets of both Harvey Norman Limited and JB Hi-Fi Limited included PPE along with Intangible assets and Deferred Tax Asset. Current Liabilities of Harvey Norman included items such as Interest bearing loans, Trade and other payables, Current Tax Liability, Borrowings, provisions and other liabilities. Evidently these all elements were present in Current liability portion of JB Hi-Fi Limited. Non-current Liability Portion of Harvey Norman Limited and JB Hi-Fi Limited have similar items such as Long Term Borrowings, Provisions, Deferred Income Tax Liability, Provisions and Other liabilities. Equity of both companies was same and included elements such as Contributed Equity, Reserves and Retained Earnings. Differences: Current assets of Harvey Norman Ltd include other financial assets which are not included in JB Hi-Fi Limited. This consists of investment mainly in securities. Harvey Norman Ltd’s Non-current assets include â€Å"Investment accounted for using equity accounting method† which represents investment in Associates. JB Hi-Fi Ltd does not have any investment in Associate. Investment property is included in Non-current assets of Harvey Norman which is not part of JB Hi-Fi Ltd. Methods used to Measure Assets and Liabilities: IFRS and Australian GAAPs allow organizations to measure asset and liabilities in a number of ways. Generally asset and liabilities are measured by the Historic Cost method, Current Cost method, Realizable Value method and Present value model. These methods of measuring assets and liabilities are mentioned in the accounting policies and estimates portion of Annual report of both Harvey Norman Ltd and JB Hi-Fi Ltd. Harvey Norman Ltd measure its â€Å"Investment properties† on Fair Value model, Investment in associate is measured by Equity accounting method which is a derivative of fair value model. PPE is presented at historical cost subtract accumulated depreciated less any impairment losses. Certain classes of PPE are valued on fair value model. Fair value is determined by reference to market-based evidence, which is the amount for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arms length transaction as at the valuation date.(victoriasmilling. com Oct 10, 2012) Non-financial assets are valued at Fair Value model and an impairment test is conducted at the start of each financial period to calculate any impairment to the financial assets. All financial liabilities are recognized initially at fair value plus, in the instance of loans and borrowings, directly attributable transaction costs. The consolidated entity’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings and derivative financial instruments. (victoriasmilling.com Oct 10, 2012) JB Hi-Fi Limited recognizes Leasehold PPE at historical cost less accumulated depreciated less impairment losses Trade and other payables are stated at amortized cost while Non-current liabilities are measured at fair value. Strength and Weakness from Balance Sheet point of View: Horizontal Analysis: With a head to head analysis of Balance sheet for previous three annual financial years of Harvey Norman Ltd total assets in 2011 stood at a level of $4 Billion which reduced by a substantial 1. 3% in year 2012 and finally sustained at a level of $4.  065 Billion hence increasing assets by a total of 2. 86 % in year 2013. A brief summary of this analysis is given as follows. In case of JB Hi-Fi Ltd the picture is different. JBH managed to raise its total assets at a level of $534 million in year 2012 from $500 million in year 2011 with an increase of 6. 5%. In year 2013 this level increased by 5. 5% to a level of $563 million. A brief summary of this analysis is given as follows Vertical Analysis: Vertical analysis provides us ratios which can be useful to assess the position in a given year. 2011: JBH’s current ratio in 2011 was at a level of 1.44, quick ratio 0. 27, Inventory turnover was 13. 75%, Price-to-Earnings ratio 13. 77, while Harvey Norman’s current ratio was 1. 63 times, quick ratio 1. 29 times, and inventory turn-over 13. 23% and Price-to-earning stood at 11. 29. 2012: JBH’s current ratio in 2012 was at a level of 1. 21, quick ratio 0. 24, Inventory turnover 13. 69% and price to earnings ratio stood at a level of 8. 36. In the same year Harvey Norman’s current ratio was 1. 63, quick ratio 1. 34, inventory turnover 11. 20% and Price to earnings ratio was 10. 46. 2013: In year 2013 JBH’s current ratio was 1.27, current ratio 0. 31; inventory turnover was 12. 88% and price to earnings ratio w as14. 36. HVN’s same ratio was 1. 83, 1. 51, 12% and 13. 30 respectively for year 2013. Other financial ratios for JBH and HVN for year 2011, 2012 and 2013 were as follows. Income Statement: Structure of Income statement is provided in guidelines provided by International Financial Reporting Standards and Australian GAAPs. Some similarities and difference between Harvey Norman and JB Hi-Fi Limited are defined below. Similarities: Both JBH and HVN have presented the income statement with parts, i. e. Income from operations and Other Comprehensive Income. The main format of overall statement of comprehensive income is similar which includes Revenue and direct and indirect expenses i. e. Cost of Goods sold, Administration expenses, Distribution and marketing expenses etc. Profit from operations has been distributed between Parent and Non-controlling interest in both JBH and HVN. Differences: HVN’s statement of comprehensive income has been divided between â€Å"Continuing operations† and â€Å"Discontinued Operation†, while there is no such distinction in JBH’s statement of comprehensive income. HVN’s Other comprehensive include Foreign Currency translations, Fair value gain on available for sale investment, Fair value revaluation gains on property plant and equipment and Cash flow hedges, while JBH’s OCI include Foreign currency Translation reserve and cash flow hedges. Strength and Weakness Analysis from Income Statement point of view: Horizontal Analysis: Horizontal analysis of JBH reveals Revenue of $2. 9 Billion in year 2011 while a healthy increase in year 2012 of 5. 69% to take revenue to a level of $3. 12 Billion. In year 2013 revenue increased consistently by 5.77% and reached a level of $3. 3 Billion. The major reason behind this consistent increase is said to be the consistent advertisement and marketing strategy. Graphical presentation is given below. During the same period HVN’s revenue figures were $1. 55 Billion, $1. 40 Billion and $1. 32 Billion in year 2011, 2012 and 2013 respectively. Other figure of Harvey Norman and JB Hi-Fi Ltd are s hown in the table. Statement of Cash Flow: International Financial Reporting Standards and Australian GAAPs allow methods for preparation of financial statements i. e. direct method and indirect method. Both methods will provide the same ending cash balance. The only difference between Direct and Indirect method is that Direct methods deals with direct cash payments and cash receipts, while indirect method use indirect calculation of cash beginning from profit after tax. JB Hi-Fi Ltd and Harvey Norman Ltd both use direct method for the preparation of Statement of cash flows. Horizontal Analysis: Net Operating Cash Flow: Operating cash flow of JB Hi Fi Ltd stood at positive $109 million in 2011 which increased to $215 million in year 2012, almost 96% increase. In 2013 this cash flow reduced by 27% to end at a balance of $156 million. While Operating cash flow of HVN was positive $358 million in year 2011, $200 million in 2012 and finally $239 million in 2013, showing a decrease of 44% in 2011 and an increase of 19% in year 2013. Net Investing Cash Flow: In year 2011 net cash flow from investing activities of JBH remained at a level of negative $43. 9 million and decrease by 2% to sustain at a level of $44. 8 million in 2012. In year 2013 this cash outflow decreased by 14. 56% at a level of $38 Million. Harvey Norman Ltd’s net investing cash flow was outflow of $366 million in year 2011, which decreased by a drastic 53% in year 2012 having net cash outflow at $171 million. In year 2013 this outflow increased due to new investments at a level of $208 million hence increasing by 21% from last year. Net Financing Cash Flow: HVN obtained a positive cash flow of $25. 5 million in year 2011 which converted into negative cash flow of $8. 5 million in the next year, while in year 2013 this outflow increased enormously and remained at $46. 5 million. JBH demonstrated negative cash flows in all three years. In 2011 JBH paid off $90 million in financing activities which increased to a level of $157 million in year 2012. In the latest year JBH paid off $91 million dollars for financing activities. Vertical Analysis: Net cash flow from operating activities remained at a level of positive $109 million in year 2011. The major contributor of this cash flow is the increased cash receipts from the accounts receivables. Interestingly Revenue of JBH was around $2 Billion while the receipts from customers remained at a level of $3 Billion and the receivables were also consistent, which is evidence of the great recovery time of accounts receivable. Investing activities showed a cash outflow of $43 million in year 2011, while the financing cash was $90 million outflow which is evidence that investment activities were supported from cash generated from Operating activities. This is a healthy indication of a company’s growth. Conclusion Recommendations: Both JB Hi-Fi Ltd and Harvey Norman are growing actively and have a good expansion strategy and it is evident in all three parts of financial statements discussed above. Harvey Norman’s main strength lies within its Investment property operation, while JB Hi-Fi Ltd is aggressively growing from an acquisition policy. But rapid expansion can be dangerous for organizations who do not handle key issues faced by organizations during growth phase. During growth sudden changes are made in organization structures which the employees could not cope with and lose morale and hence declining the organizations growth. This case can be linked with JBH’s hostile takeover policy. Management should take steps to manage changes in smaller organization and maintaining an overall company environment in all aspects. Here the key is introduction of accounting policies and controls to newly acquired organizations. Harvey Norman Ltd is investing heavily in investment property as part of its forward and backward integration policy to acquire good investment property and use it for its own outlet purpose or earning revenue through rental income. Investment properties are apparently safe investments but sometimes these properties are only acquired on speculation basis of future development of a part of a city or town. There is a certain risk that these speculations will not fulfill its requirement and hence affecting the investment for HVN. Care should be taken when making such decisions.