Discuss about the Predicting Financial Distress and Evaluating.
JB Hi-Fi Limited current liabilities for 2013 financial year were $442379000 while for 2012 financial year were $439481000. The current liabilities for 2013 financial year increased to $2898000 from 2012 financial year. The Company classified the following liabilities under current liabilities; provisions, current tax liabilities, trade and other payable, and other financial liabilities. The company classified liabilities that were not in these class as other current liabilities (Nobes, 2014).
The JB Hi-Fi major liability at the end of 2013 financial year was trade and other payable. The amount was $387020000 which formed 65% of the total liabilities of the company. Secondly was the borrowing. The company borrowing at the end of 2013 financial year amounted to $124331000. This accounted for 20% of the total liabilities for the company at the end of 2013 financial year. In general, the current liabilities of JB Hi-Fi were the major liabilities for the 2013 financial year. The current liabilities amounted to $442379000 that accounted for 70% of the total liabilities that JB Hi-Fi has for 2013 financial year.
JB Hi-Fi included the following items on provision on the company balance sheet; employee benefits and lease provisions. The provisions were under current liabilities and amounted to $36391000. The employee benefits amounted to $35111000 in 2013 financial year which was up from $2780200 in 2012 financial year. The lease provision for 2013 financial year amounted to $1280000 down from $2871000 in 2012 financial year. The items included in the provisions on the JB Hi-Fi financial statement satisfy the IAS37/ AASB137 definition. The items listed are different from other liabilities that are classified in the company’s financial statements such as accruals or trade payables (Bardia, 2012). The provisions are contingent in terms of amount and timing. Therefore, the provisions included on the JB Hi-Fi’s balance sheet were liabilities with uncertain amount and timing. The employee benefits liabilities for JB Hi-Fi Company increased by $7309000 from 2012 to 2013 financial year.
The JB Hi-Fi limited used bank loans as a source of interest bearing cash to finance it operations. The company raised $124331000 in 2013 financial year down from $149775000 in 2012 financial year. The company cash bearing interest balance in 2013 financial year was $125000000 while 2012 financial year was $150000000. The balance repaid in 2013 financial year was $25000000.
The JB Hi-Fi Company had no secured noncurrent liabilities for 2013 financial year. The company had unsecured bank loans amount ting to $124331000. This was different from 2012 financial year where the company had secured noncurrent liabilities amounting to $149775000. This means that the company secured it bank loans in 2012 FY and had unsecured bank loans for 2013 FY.
The JB Hi-Fi only had bank loans that were non current borrowing. The bank loan balance for 2013 financial year amounted to $124331000. The bank loan was due within 5 years.
The JB Hi-Fi Company has non-current provisions. They include the following; employee benefits, lease provisions and other provisions. The company recorded employees benefited as noncurrent liabilities at $3747000 in 2013 FY which was above 2012 FY at $ 3304000. The lease provisions for non current provisions amounted to $5522000 for 2013 FY below 2012 FY which was $3304000. Other noncurrent provisions amounted to $147000 in 2013 FY below $2132000 in 2012 FY. The non current provision on the JB Hi-Fi financial statements were provision whose amounts were uncertain but the time was certain. The amount in this provision was determined to be due for a period of more than one year hence recorded as noncurrent provisions in the balance sheet (Choi, and Meek, 2011). Therefore, the non current provision on the JB Hi-Fi financial statements represented uncertain amount whose timing was more than one year.
The country Road Limited is a public company and it income statement shows deductions for income tax expense. This deduction would be different to an income statement of a partnership form of business. The income statement of a partnership does not have a deduction for income tax. First, a partnership is not an entity of its own. A partnership business is not separate from the owners who started it and therefore cannot be taxed as a separate entity (Schroeder, Clark, and Cathey, 2011). This is different from a limited company which is an entity by its own making it an artificial person. A limited organization operates on it owns as an individual and therefore pays tax to the authority. Secondly, a partnership does not pay income tax on profits that the business earns in a financial year. The profit and loss earned by the business in a partnership is shared among the partners. Then each partner then pays tax on their own. An individual in partnership discloses the profit earned from the business to the authority when filling personal returns. Therefore, the income tax is not deducted on a partnership income statement but rather the tax is attributed to each partner in a partnership.
From the Country Road Limited statement of change in equity, the total profits are appropriated to retained earnings. The total profit from a financial year is added to the retained earnings for the company. The profits for the period are added to the previous period retained earnings. The total profits of a period are either paid out to the shareholders in terms of dividends or retained in the business. This is different from a partnership form of business. The profits of a period are appropriated among the partners in the business in their agreed ratios. There are no retained earnings appropriated in the business financial statement. Retained earnings in a partnership are not allowed because they create confusion for taxation in a partnership. The difference in appropriation of profits for the period between Country Road Limited and a Partnership are because of the nature of formation of the business and submission of tax. A limited company is owned by shareholders who are paid in terms of dividends. Since a limited company is an artificial person according to law, it requires funds to undertake it emergency or unforeseen actions in the planning process (Birt et al., 2013). Secondly, a limited company is taxed as an entity on the profits earned from the financial period. The authority is able to tax the company before the profits of the company are declared which is different from a partnership where taxes are not deducted directly to the profits earned within a financial period. The taxes of a partnership are paid by partners in the business as part of their individual taxes. Therefore, the appropriation of retained earnings in Country Road statement of equity change will b different to a partnership because of the different in business formation and payment of taxes.
The Country Road Limited has issued capital in their balance sheet. The company recognizes issued and pays capital at fair value of the consideration of when issued or received. The company ensures that costs arising from ordinary shares issuing is recognized directly as a reduction in the equity (Horngren et al., 2012). This is different from a typical partnership. A partnership does not issue capital to the public. First, a partnership is owned by partners while a limited business is owned by shareholders. The shareholders contribute capital to the business. The limited business issues shares that are bought by willing buyers from the public that form the capital of the company.
A limited company offers it shares for buying through the stock exchange. The number of shares that a person or organization buys from the company determines the amount of dividends to be paid. Limited companies pay dividends per share. This is different from a typical partnership where capital is contributed by the partners who come together to start the business. The contribution of capital forms the ratio for sharing profits (Chandra, 2011). Therefore, a limited company has to account for the shares issues for every financial year. Secondly, a limited company has limited liability to the owners of the company. The company operates as a separate independent entity and therefore owners the resources and liabilities. This necessitates the company to issue part of it ownership to individuals by issuing shares. The process of issuing shares for capital increasing the number of owners of a company. A limited company can also reduce the number of owners by buying the shares from the shareholders (Needles, Powers, and Crosson, 2013). The company has it liabilities limited to the capital that enables owners’ wealth not to be repossessed to settle debts in case the company is unable to settle all its debts. This is different from a partnership. A partnerships is neither a separate entity from it owners nor do it owners have a limited liability. Partnership owners are not separate from the entity and the entity does not exist independently from its owners. This means that there is no difference between the business capital and liabilities and owners’ capital and liabilities. If the business is unable to settle it liabilities the owners’ assets can be taken to settle the business obligation. This entails that partnership capital is not separate from that of its owners and therefore it cannot be accounted as a different asset.
Country Road Limited is required to prepare statement of cash flow for the company and be included in the financial statements. The cash flow statement is an important statement in financial reporting of a company. Limited companies are required prepared statement of financial statement by Accounting Standard AASB 107. This standard is under section 334 of the corporations Act of 2001 of Australia (Price, 2012). The cash flow objective in financial reports is providing useful financial information to users of annual reports. It enables the users to assess an entity’s ability to generate cash and cash equivalents. Cash flows in an entity enable the users to make informed economic and financial decisions regarding the entity. The statement of cash flow outlines the investing, financing, and operating activities of an entity for a given period of time. The cash flow shows the cash outflows that were invested by an entity in a specific period of time. This helps determine the amount invested. Secondly, the statement of cash flow shows where an entity gets it financing from. The statement shows the sources of funding for the period. Third, the statement of cash flow the cash outflow to operating activities from the entity. This information is important to several stakeholders of the entity. First, the statement of cash flow is important to lenders who assess the ability of the entity to settle their debts. Lenders use cash flow to assess the amount of cash received by the company (Bradbury, 2011). Secondly are the owners who use the information to analyze the ability of the company to increase their wealth. Thirdly, the statement of cash flow is used by the management to assess the ability of the entity to meet it obligations as they fall due (Halabi, Barrett, and Dyt, 2010). This is different from a typical partnership. A partnership has no separate owners and their business is not assessed as a separate entity. A partnership is assessed through the partners by lenders. The statement of cash flow is not a requirement for partnership in Australia. A partnership is not also required to report to the public about its operations. Therefore, a partnership is different from a limited company and is not required to make statement of cash flow because of it nature of formation and ownership.
References
Bardia, S.C., 2012. Predicting financial distress and evaluating long-term solvency: an empirical study. IUP Journal Of Accounting Research & Audit Practices, 11(1), p.47.
Bradbury, M., 2011. Direct or indirect cash flow statements?. Australian Accounting Review, 21(2), pp.124-130.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Birt, J., Chalmers, K., Byrne, S., Brooks, A. and Oliver, J., 2013. Performance measurement.
Choi, F.D. and Meek, G.K., 2011. International accounting. Pearson Higher Ed.
Halabi, A.K., Barrett, R. and Dyt, R., 2010. Understanding financial information used to assess small firm performance: An Australian qualitative study. Qualitative Research in Accounting & Management, 7(2), pp.163-179.
Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012. Financial accounting. Pearson Higher Education AU.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Price, J., 2012. Return on equity traps and how to avoid them. Equity, 26(3), p.4.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2011. Financial accounting theory and analysis: text and cases. John Wiley and Sons.
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