Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 339

ILLUSTRATIVE EXAMPLE 8.1

An entity’s activity cycle

Purchase

inventory on

credit

Pay for

inventory

Sell

inventory

on credit

Receive

cash from

debtors

100

Days

0 25 45

negative

cash ow

negative

cash ow

Analysis of asset efficiency: JB Hi-Fi Ltd

We will now calculate and interpret the asset efficiency ratios for JB Hi-Fi Ltd for 2015 and

2014. Asset efficiency ratios measure the efficiency with which an entity manages its current and

non-current investments and converts its investing decisions into sales dollars. The ratios are pre-

sented in figure 8.9.

JB Hi-Fi Ltd’s ability to convert a dollar investment in assets into sales revenue dollars has marginally

declined over the two years. In 2015, an investment of $1 in assets generated $4.16 of sales revenue,

compared to $4.09 in 2014.

2015 2014

Asset turnover ratio

$3 652136

($895 013 $859 841 )/2

4.16times

++









==

$3 483775

($859 841 $843 304 )/2

4.09times

++









==

Days inventory

($478 871 $458 625 )/2

$2 853883

365 60 days

 ++







××==

($458 625 $426 000 )/2

$2 727794

365 59 days

 ++







××==

Note: The inventory includes the current portion of finished goods, raw materials and work in progress.

Days debtors

($81 480 $70 745 )/2

$3 652136

365 8days

 ++







××==

($70 745 $64 246 )/2

$3 483775

365 7days

 ++







××==

The trade and other receivables comprise trade receivables and non-trade receivables (refer to note 12 to

the company’s accounts). The latter includes rebates receivable from suppliers for purchases of inventories.

Recalculating days inventory using trade receivables only yields the following:

($28 113 $24 071 )/2

$3 652136

365 3days

 ++







××==

($24 071 $20 322 )/2

$3 483775

365 2days

 ++







××==

FIGURE 8.9 Analysis of JB Hi-Fi Ltd’s asset efficiency

Note: All numbers are in $000s and days inventory and days debtors are rounded to the nearest whole day.