Critically determine the business valuation and financial analysis of a company
.4 Quality On Disclosure
The firm seeks to provide relevant and timely information to its shareholders and has put into place controls designed to ensure the integrity of its financial reporting. JB Hi-Fi prepares its half-year and annual reports in compliance with the accounting standards and the use of critical accounting estimates. JB Hi-Fi uses the historical cost convention in preparing the company’s financial statements to ensure consistency with the firm’s goals and accounting purpose.
JB Hi-Fi’s segments are disclosed in a manner consistent with the internal reporting provided to the chief operating decision maker (JB Hi-Fi 2015). The Chief Executive Officer takes into consideration the business from a geographic perspective, where management has identified two reportable segments, that is, Australia and New Zealand. JB Hi-Fi has an investor relations program, which involves regular meetings with significant current and potential investors, and with the analysts and the financial media.
The company specifies a number of factors, which may threaten both its future operating and financial performance. There is no guarantee that JB Hi-Fi will achieve its stated objectives due to the influence of the economy and business condition such as competition, a loss of reputation, the level of consumer demand, increased cost of doing business, and failure to maintain key supplier relationships. However, the company has also strived to minimise its credit risk through dealing with creditworthy counterparties (JB Hi-Fi 2015).
4.5 Potential Red Flags
It is one of the biggest challenges to any organisation to minimise potential errors in its accounting data. Red flags may indicate financial distress or underlying problems within the company.
4.5.1 Trade and Other Receivables
JB Hi-Fi is exposed to a risk of rising accounts receivable of $70,745 in FY2014 to $81,480 in FY2015. This also comes with the risk of rising inventories from $458,625 in FY2014 to $478,871 in FY2015. The rise in accounts receivable and high inventories may mean the company is having trouble selling its products. If this trend continues for several quarters, investors have to determine the issue causing the inability to empty its warehouse.
An account for allowance is when it is evident that the company will not be able to collect all of its trade receivables. While sales revenue has increased from $3,483,775 in FY2014 to $3,652,136 in FY2015, the allowance for doubtful debts has decreased from $449 in FY2014 to $431 in FY2015. Although the company does not have any significant exposure to credit risk, this allowance increases the company’s exposure to credit risk. The report states that an allowance has been made for estimated irrecoverable amounts arising from a review of individual debtors (JB Hi-Fi 2015, p85).
4.6 Undo Accounting Distortions
In order to resolve the distortions of the company, JB Hi-Fi should review their products and services for the trend of rising accounts receivable and inventories for the past 3 years. Due diligence should be put into place to avoid making a bad decision for the company. This means paying particular attention to the red flags on the financial statements and reading expert analysis to make informed decisions about security or business opportunity. It is important for JB Hi-Fi to keep their information updated to ensure the risk of potential errors is minimized for future periods.