Accounting Business Reporting for Decision Making

294 Accounting: Business Reporting for Decision Making

in accounts payable. The delay in settling accounts payable would have the effect of increasing cash

from operating activities. In some instances this could signal a company in distress that cannot pay its

accounts payable. An inspection of the balance sheet shows that the inventory is greater than accounts

payable. Comparing these two figures gives some insight into an entity’s inventory management. If

the balances are approximately equal, it may point to a self-funding inventory model. This means

that the entity is trying to turn over inventory prior to having to pay suppliers. That is, it is selling

inventory and collecting the cash from accounts receivable prior to paying suppliers for the cost of

the inventory. This is great working capital management, and if inventory turnover is reasonable and

it continues to work towards a self-funding inventory model, healthy future cash flows should result.

Therefore, the inventory management, together with the reduction in borrowings (and consequently

in interest payments) suggest that JB Hi-Fi Ltd is actively trying to manage its cash resources in this

tough retail environment.

• Net cash flows from investing activities were $(44.4) million. This amount is slightly higher than in
  2014. Note that the investment in plant and equipment was $(42.5) million, while the proceeds from
  the sale of plant and equipment was $0.5 million. A judgement needs to be made about whether the
  investment in plant and equipment is adequate to maintain existing operations or whether the invest-
  ment will increase or decrease cash flows in the future.


• The major financing activities included repayment of borrowings of $(40.1) million, and a dividend of

$(87) million. The repayment of borrowings would decrease balance sheet risk and relieve future cash

flows of paying interest in future years. The payment of dividends is payment back to shareholders

and thus increases the risk for accounts payable. However, most investors would expect some return

on their investment. In fact, a reduction in the dividend paid could signal to the investment market that

there may be some financial trouble. Notice in 2014 there was a share buy-back. The share buy-back,

according to the preliminary final report, is to stop the dilution of company shares through employee

share options. Each year the company intends to buy back shares on the open market to appropriately

cost and account for the employee salary arrangements.

• Overall, JB Hi-Fi Ltd seems to be in a healthy position. The global financial crisis started in early

2008, and from all reports the retail sector was one of the hardest hit. However, the company shows

good profit and good cash from operating activities despite the downturn in the economy. The cash

from operating activities are helping the company to invest in plant and equipment. The entity appears

to be in a healthy cash position. However, its growth strategy would need to be carefully conducted

as too much debt would weigh the company down. This would be risky in a weak retail economic

environment.

How do you know how much cash is enough? The statement of cash flows for JB Hi-Fi Ltd

shows cash on hand increasing from $43.4 million in 2014 to $49.1 million in 2015. From the bal-

ance sheet, we can calculate that this cash amount represents about 14.3 per cent of net assets and

5.5 per cent of total assets in 2015 (2014: 14.7 per cent and 5.1 per cent for net assets and total

assets respectively). The appropriate amount of cash to keep on hand depends on the type of business

and the risk profile of management. Keeping too much cash means capital is tied up in low-return

investments; however, sufficient cash must be available to provide flexibility during business down-

turns. Entities that operate in high-risk industries or are of a cyclic nature may prefer to have high

cash reserves. Some business managers prefer to have limited reserves of cash and to manage the

cash flow cycle using short-term debt. Financing arrangements will be covered in more detail in

chapter 13.

Generally, an analysis of the statement of cash flows would include an identification of cash-flow

warning signals. These would include the following.

• Cash received is less than cash paid. Overall the cash inflows should be greater than the cash out-

flows, otherwise there would be a depletion of cash on hand over time.

• Operating outflows. The cash flows from operating activities represent the cash flows from normal

business operations. This is an important measure to gauge the entity’s ability to generate cash, meet