Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 323

in a two-column format containing the figures for the current reporting period and the figures for the

comparative reporting period. This permits the user to readily calculate the absolute dollar change and

the percentage change in the reported numbers between periods. The dollar change is calculated as

shown in the equation below:

Current period’s number

less Previous period’s number

The percentage change is calculated as shown in the following equation:

Current period’s number less previous period’s number

× 100

Previous period’s number

The percentage change cannot be calculated if the equivalent reported figure for the previous year was

zero. Care must also be exercised when ascertaining and interpreting the direction of the change. For

example, if expenses or cash outflows are greater in the current year than in the previous year, the direc-

tion of the change is upwards, but this has a negative rather than a positive impact on reported profit or

cash flows.

The 2015 and 2014 balance sheets, statement of profit or losss and statements of cash flows for JB

Hi-Fi Ltd are provided in figures 8.1 to 8.3 respectively. (The statements of comprehensive income and

statements of changes in equity have not been provided in this chapter.) Note that JB Hi-Fi Ltd’s annual

reports are available from the company’s website at http://www.jbhifi.com.au. Information in these statements

and supporting notes will be used throughout the chapter to illustrate concepts as they are introduced.

The columns headed A and B are the absolute dollar figures in the financial statements. The column

headed C shows the change in the absolute dollar amount from 2014 to 2015, and the column labelled

D represents the percentage change in the reported amounts from 2014 to 2015. From an inspection of

the financial statements, it is easy to identify which reported numbers have increased or decreased. By

performing horizontal analysis, the magnitude and significance of the dollar changes becomes apparent.

As can be seen in figure 8.1, JB Hi-Fi Ltd’s total assets increased by $35.2 million (4 per cent),

total liabilities decreased by $13.7 million (2 per cent), and equity increased by $48.9 million (17 per

cent). There are some items that in absolute dollar terms appear to have changed significantly, but the

percentage change is relatively small. Similarly, there are some items that in percentage terms appear

to have changed significantly, but the absolute dollar change is relatively small. Columns C and D pro-

vide insights not easily revealed by columns A and B. The horizontal analysis reveals that JB Hi-Fi

Ltd was holding more cash and cash equivalents as at 30 June 2015 than at the same time in 2014 (up

$5.7 million, 13 per cent) and more trade and other receivables (up $10.7 million, 15 per cent), while

the change in most other asset classes were less than 5 per cent. Trade and other payables increased by

$22.6 million (7 per cent). JB Hi-Fi Ltd reduced its reliance on borrowings in 2015 relative to 2014,

with borrowings down $40.2 million (22 per cent). As shown, horizontal analysis identifies significant

changes between reporting periods, alerting the user to matters that warrant further investigation.

Consolidated Change

Notes

A

2015

$’000

B

2014

$’000

C

$’000

D

%

Current assets

Cash and cash equivalents 49 131 43 445 5 686 13

Trade and other receivables 9 81 480 70 745 10 735 15

Inventories 10 478 871 458 625 20 246 4

Other current assets 14 7 416 5 332 2 084 39

Total current assets 616 898 578 147 38 751 7

FIGU R E 8 .1 JB Hi-Fi Ltd balance sheet (continued)