Financial Reporting Analysis JB HIFI and Dick Smith Holdings Limited

Question: Discuss about theFinancial Reporting Analysis for JB HIFI and Dick Smith Holdings Limited. Answer: Introduction HIFI and Dick Smith Holdings limited. The successful ways of analysing the financial statement of both the companies is to either perform a horizontal analysis or by vertical analysis of such statements. The analysis of financial statement will help in drawing comparison of both the companies for better understanding when dollar amounts vary in a significant manner. In addition to this, the analysis undertaken will evaluate the performance of both the companies over a period. The report focus on horizontal and vertical analysis approaches which are simpler in computation of amount reported by the company to understand the trend and changes in financial statement. The base year being 2014 and 2015 to subsequently derive the desired result from such analysis and interpreting the results thereon. Findings and Discussion: Horizontal Analysis: The horizontal analysis focuses on trends and changes in the financial statement items over the time as this helps in understanding the relative changes. Such analysis helps in the identification of positive trends or troubled time to draw out the comparative results. Initially the income statement is taken for consideration for JB HiFi where the investment in subsidiaries are accounted for cost after deducting the impairment charges in the separate financial statement (Brigham and Ehrhardt 2013). The revenue of JB HiFi reflects the company at fair value in consideration of the amount received or receivable measures the change of 4.83% as the revenue. The amounts disclosed by JB HiFi are revenue derived from returns, trade allowance rebates and amounts collected on behalf of the third party. On the other hand, Dick Smith reported a revenue change of 7.50% from FY year of 2014 to 2015 as Dick Smith Holdings have not impaired all the debts, which are due from the past considerations, a nd the company considers the majority of the amount yet to be recoverable. The gross profit reported by the Dick Smith Holdings is greater than that of JB Hifi with 6.12% and 5.59% respectively. Whereas the profit before tax reported by JB Hifi represents 7.04% and 86.11% is largely due to the higher sales revenue as reported by Dick Smith Holdings. JB Wifi reported profit a positive change in profit for the year with an increase of 6.28% whereas the net profit reported by Dick Smith Holdings represents 91.19 with amount of revenue and gross margins. This is due to higher amount of cash and cash equivalents including cash on hand held with financial institution, other short-term liquidity investment with maturity period of less than three months, which are easily convertible to cash (Weygandt, Kimmel and Kieso 2015). It should be noted that JB Wifi 2014 net income of 6.28% for the base year amount even though the operating expenses had increased to 7.55% of the base year amount reported. This is perhaps due to increase in selling price or due to fall in the inventory cost. Vertical Analysis: Vertical analysis is also understood as common size analysis as the amounts represented in the financial statement are converted into key financial component. Vertical or common size analysis allows an in depth composition each of the financial statement and reports any change that have occurred for both JB Hifi and Dick Smith Holdings (Healy and Palepu 2012). The vertical analysis of both the companies are determined with the help of balance sheet to ascertain the various liabilities and equities along with the assets of the company. The total current assets represents the growth of 76.69% for Dick smith holdings with inventories rising subsequently by 57.63%. The non-current assets of Dick smith holdings reflected a growth of 23.31% as the inventories are realised at net realisable value. The includes the cost of purchase of goods along with the cost that are directly attributable during the acquisition of inventory after deducting applicable rate and discount settlement. On the ot her hand, JB Hifi reported an increase in current assets of 68.93% and this is largely because of the higher contribution from inventory of 53.50%. Furthermore, the intangible assets consisting plant and equipment represents an increase of 19.69% of JB Hifi as it is stated at cost after deducting the accumulated depreciation and impairment cost (Warren, Reeve and Duchac 2013). This includes the expenditure, which is directly attributable to the acquisition of the assets. Dick Smith holdings states the fixtures and expenditure at cost after deducting the impairment losses. The company reported an increase in the plant and equipment of 18.20% with gain arising from disposal of portion of plant and equipment as determined and the difference is recognised in the income statement, which represents the carrying amount of the assets. Financial Ratio Analysis: Profitability Ratios: Profitability ratio can be defined as the ratio, which measures the financial metrics to assess the business ability to generate earnings. The profitability ratio of consist of the gross margin ratio and margin ratio (Dolvin, Jordan and Miller 2012). The gross margin ratio of JB Hifi for the financial year 2014 represents 21.70% and for 2015 being 21.86%, whereas, Dick Smith holdings reported a profitability ratio of 25.09% and 24.77% for the year 2014 and 2015 respectively. The net profit ratio on the other hand of JB Hifi is superior to the Dick Smith. JB Hifi reported the net profit ratio of 3.74 however, Dick smith holdings reported 2.87%. This is because the company does not have any collateral over trade receivables with the exceptions of withholding of title over definite number of consumers. The Assets Efficiency Ratios: The assets turnover ratio can be defined as the ratio which measures the ability of the company to generate sales from its assets after comparing net sales with the average of total assets. The asset efficiency ratio reported by JN Hifi was for the year 2014 49.24 however it fell to 44.24 due to impairment loss (Brigham and Ehrhardt 2013). On the other hand, Dick smith holdings reported the asset turnover of 26.29 for the year ended 2014 however it fell to 24.75 in the following year. The company reports that the intangible assets are not fixed and have detrimental payment which is not quoted by Dick Smith in the active market. Liquidity Ratios: The liquid ratio can be defined as the ratios, which determines the business ability to meet short term liabilities. The current ratio reported by JB Hifi is 1.64 times and 1.62 times for the financial year of 2014 and 2015 respectively. Dick Smith Holdings reported the current asset of 1.26 and 1.23 for 2014 and 2015. It is evident that JB Hifi is superior to Dick Smith is discharge of its short-term obligations (Pratt 2013). The cash ratio of JB Hifi reported for the financial year 2015 was 0.13 whereas Dick Smith reported 0.09 for the year 2015 this represents that cash and cash equivalent include higher cash in hand than Dick Smith with lower outstanding of bank overdraft. Capital Structure Ratios: The capital structure ratio consist of debt equity ratio where JB Hifi reported decline in debt equity ratio prior to the previous year of 2014 (Deegan 2013). In the year 2015 JH Hifi reported debt equity ratio of 0.41 which is lower than previous year of 0.61. Furthermore Dick Smith debt equity ratio accounted for 0.06 and 0.10 for the financial year of 2014 and 2015 respectively. The debt equity ratio of Dick Smith Holdings is superior than the JB Hifi due to the lower long term borrowings and higher equity share capital. Furthermore, Fixed asset to net worth ratio reported by JB Hifi is 0.96 and 0.86 for 2014 and 2015 respectively where as Dick Smith Holdings reported net worth of 0.69 and 0.70 respectively for 2014 and 2015. JB Hifi has higher net worth than Dick Smith holdings due useful estimated lives of plant and equipment and other fixed assets. Market Performance Ratios: The market performance ratios consist of price earnings ratio where JB Hifi reported the price earnings of 19.00 for the year 2015 while Dick Smith holdings reported 14.70. JB HIfi price earnings is higher than the Dick Smith holdings the company grants the weighted average value of options during the financial year of 2015. The fair value of shares are recognised using the black shoe option pricing model which takes into the consideration the price and the term of options depending upon the experience of previous years (Weygandt, Kimmel and Kieso 2015). On the other the dividend yield of JN Hifi represents 4.90% whereas, Dick Smith holdings reports 4.80% perhaps there is not much to differentia the dividend yield of both the companies since the price volatility of the anticipated dividend yield is the risk free interest rate vesting upon the series of options shares. Conclusion and Recommendations: To conclude with, it is understood that the financial reports are prepared by the companies are in accordance with revised accounting standards and the interpretation however does not have any material impact on the amount recognised along with the disclosure presented in the financial statement. Below stated are the recommendations are as follows; Estimations and judgements of Dick Smith financial holdings should be evaluated under the historical cost data for future events which may have an financial impact on the company It is also recommended that intangible assets suffering any impairment should be recovered through cash generating assets. Reference List: Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory practice. Cengage Learning. Chen, R.R., Chidambaran, N.K., Imerman, M.B. and Sopranzetti, B.J., 2014. Liquidity, leverage, and Lehman: A structural analysis of financial institutions in crisis. 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