Assessment 2: Step 1

KCQ’s Chapter 4.

As I get further and further into this unit, I am beginning to realise how much information is contained in a firm’s financial statements, and how it helps to paint a picture of the realities and possible future of a company. I have looked at financial reports before, but I will be honest in saying that I never really understood what I was looking at. I was more focused on the future goals, how long the CEO had maintained their position and if the CEO had benefitted the company or not, which in hindsight is just jargon that the company puts in to reel in buyers. I will admit that although my husband and I own shares in a few Australian companies, we chose these companies as either emotional buys or blue-chip, 100% franked with a dividend reinvestment plan.

Now that assessment 1 is out of the way, I am very eager to begin restating my firm’s financial statements. I really enjoyed entering the figures into the spreadsheet, the first time around. In all honesty, I have not been enjoying all the reflective writing, that’s not to say I don’t understand why it is essential, more that it is not something I enjoy doing. The spreadsheets were much more interesting, the idea that I can take any firms financial statements and the separate the operating and financial activities is a captivating possibility. Recently, in economics, I have been learning about the supply and demand curves of a firm and how different markets work concerning the scarcity of resources. It will be interesting to make connections throughout both units.

I was quite taken aback by the idea that I do not consider the opportunity costs involved in my own personal life and to be perfectly honest, it is true. I do not think about the highest valued alternative that I am sacrificing. Perhaps if we all spent some time reflecting on our own choices, we would all lead different lives. For example, the extra hour I spend watching Netflix or the weekends I go out partying instead of studying and putting in the effort into my assessments. In the long run, I guess It could be considered hindsight, but, if I actively spent the time looking at all my choices from here out, how different would my life be? It has been an insightful concept, and I intend to apply it to my everyday life. The difficulty with opportunity cost is that it isn’t always monetary, so how do you calculate the value of an opportunity cost. It seems that this would be difficult when calculating the economic profit.

The idea of capitol is not a new concept for me, I understand that companies need to invest wisely in order to make good returns, for both themselves and their investors. Afterall, as an investor you are in turn investing in the company with the expectation of returns through compounding interest from dividends. A few years ago, my husband and I were looking into buying investment properties and found that although we could build equity through paying off our mortgages, we could also build equity in capital. If I remember correctly, capital growth on properties is produced when the current value of the property is more than the amount you paid to purchase. This seems quite like capital gains of a company where the company invests in areas with the prospect of greater returns in the future.

All the different considerations and opportunity costs involved in a firm’s business dealings and future aspirations must be overwhelming. I guess It is like everyday life where you must make numerous decisions about yours and your families’ own future and weigh up all the costs involved. For instance, if you don’t eat well and exercise today you may not be as healthy as you could in the future. The same goes for career choices. For companies however, they must consider not only the future of the company, but also the future of their investors, equipment and workers. It must involve some very significant decisions, that could result in substantial consequences if not done correctly. When I consider all these variables, I can see why accounting is central to the firm’s future prosperity and success. After all, if I were to make the decision to go and gamble all my money away at the Star Casino this weekend, my whole family would suffer in consequence. However, if I took my money and invested it wisely into high dividend paying shares, my family would benefit in the future through possible passive income.

I have come to like the idea of restating my companies’ financial reports. To me, it seems as if it will be like doing my families budget, breaking up necessary, luxury and unforeseen expenses then subtracting that from our household income. The reference to the kinder surprise is an interesting one. I used to love kinder surprises as a child. Although I must admit, the novelty has worn off since having my own children and now being pestered to buy them. The further I read into this chapter, the more excited and increasingly nervous I am to begin restating my companies’ financial statements. All the information hidden in the statements is impressive, you just need to know where to look for it all. I also had no idea you could ‘see’ how well a firm is doing (or not doing) based on its ability to transfer equity from net operating assets and net financial assets. To me, it sounds like a big balancing act, the waiter or waitress who carries multiple plates of food or the acrobats at the circus. The idea of the family budget becomes more appealing to me because for us we can predict our future expenses and see where we could maybe cut back on some luxuries. So, in relation to my companies operating and financial assets, both the firm, the investors or anyone interested could do the same and predict the possible future financial standing of the firm.

A lot of the methods for restating financial statements contained in chapter 4 are confusing at this point, and until I begin restating my own firm’s statements, I won’t fully understand the processes involved. Mostly, I learn through doing and asking questions. I find it more beneficial if I hit roadblocks, where I must figure it out. Last semester I studied physics, for me, it was incredibly frustrating. I found that even after watching all the lectures, reading the study guide and making my own attempts, I was having a difficult time grasping the correct methods to work out the equations. However, I persisted. I watched YouTube videos and just practised whenever I had a free moment. In the end, I achieved a distinction and felt that all my hard work had paid off. I am hoping that restating won’t be as frustrating as physics, but at least I know to keep persisting and try to look at it from different angles.

The insight into profitability and efficiency is fantastic, I would never have thought you could break a company down into this much detail and get two percentage values on how the company is performing financially and its efficiency. It makes me eager to investigate other big businesses because, for the most part, the financial statements are just a distraction. If all companies stated their profitability and efficiency openly, many companies would look entirely different. I considered this to be like some people on social media, they project an image completely different to real life.

Overall this chapter has been a roller coaster of uncertainty, excitement and confusion. I am looking forward to getting into restating my companies’ financial statements next week. It will be exciting to see how well it is doing in profitability and efficiency, especially after the merger last year. I am eager to see if the merger has had an impact on the firm’s overall financial standing. My next move is to print out both the financial statements, begin a glossary of the acronyms and the numerous equations, and the study guide so that I can have them close for reference throughout the next step.