Accounting Business Reporting for Decision Making

340 Accounting: Business Reporting for Decision Making

When calculating the days debtors, only the gross value of current trade-related debtors should be

included in the numerator. Recall that the gross value of debtors is the value prior to the deduction of

the allowance for impairment losses. In 2015, JB Hi-Fi Ltd took on average 60 days to sell its inventory

items — one day more than the average days taken in 2014. The suitability of this ratio needs to be con-

sidered in light of the industry average. JB Hi-Fi Ltd is a high-volume business and the company relies

on turning over its inventory quickly. A quick turnover of inventory is imperative for a business that sells

perishable inventory such as food items. While this same imperative does not exist for JB Hi-Fi Ltd, it

requires high turnover to maintain low margins and to ensure that its inventories do not become obsolete.

JB Hi-Fi Ltd’s business is predominantly cash based and so the management of trade receivables is

not as critical as it would be for a business that sells on credit terms. Calculating the debtors turnover

(days) using gross trade receivables rather than trade and other receivables, the turnover of eight days

in 2015 and seven days in 2014 highlights the predominance of cash sales in the business. As stated

in the notes to the company’s accounts, JB Hi-Fi Ltd does sell some goods on credit with a 30-day

credit period and no interest charged on trade receivables. With inventory turning over on average every

60 days and most sales being cash sales, JB Hi-Fi Ltd asset efficiency is strong and its activity cycle is

relatively short. A short activity cycle provides liquidity to the business.

The debt collection issues faced by the Australian Taxation Office (ATO) are discussed in the reality

check ‘ATO owed more than $35b in tax debts’.

REALITY CHECK

ATO owed more than $35b in tax debts

The old saying is that there are two certainties in life: death and taxes. However, the second part of that equation

is looking less certain, with the Australian Taxation Office owed more than $35 billion. A new report from the

inspector-general of taxation, Ali Naroozi, has found that the amount of money owed to the Federal Government

is rising fast, despite also revealing a large number of complaints about aggressive debt collection practices.

ATO data show the tax man was owed $35.3 billion in 2013–14, which is equivalent to nearly 2.3 per cent

of Australia’s annual economic output that year. The amount of tax debt outstanding was up 9.7 per cent on

the previous financial year. The report showed that around 24 per cent of the debts were disputed, meaning

they may not end up being owed, while another 19 per cent were owed by insolvent firms or bankrupts who

could not pay. However, that still leaves $20.3 billion owed to the Federal Government that, in theory, the

ATO should be able to collect immediately. The inspector-general’s figures show that small businesses are

the main offenders for late payment, with 60 per cent of collectable debts within this sector...

One way the Tax Office has been trying to recover more of the debts owed to it — although clearly

with limited success — is by using external debt collection agencies. Beginning with a pilot program in

2005–06, the ATO has used external collectors to pursue small debts. Between September 2011 and

June 2013 alone, the ATO advised Mr Naroozi that more than 800 000 cases worth $3.6 billion had been

referred to external debt collectors, with $2.36 billion collected.

Source: Janda, M 2015, ‘ATO owed more than $35b in tax debt’, The World Today, ABC News, 15 July.

VALUE TO BUSINESS

•   The asset turnover ratio measures an entity’s efficiency in generating sales revenue per dollar of

investments in assets, and impacts on the entity’s ROA.

•   The days inventory and days debtors ratios reflect management’s efficiency in managing these

current assets. It is desirable for these ratios to be as short as possible. While the days inventory

ratio is critical for a retail, wholesale or manufacturing business, it is not a significant ratio for a

service-oriented business that carries little inventory. Similarly, a days debtors ratio is important for a

business selling goods or services on credit but it is not as meaningful for a business that sells most

of its products or services for cash.

•   The sum of the days inventory and days debtors represents the entity’s activity cycle. Given that the

entity needs to finance investments in inventory and debtors, a shortening activity cycle suggests

that asset efficiency is improving.