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.

Step 2: Chapter 6 KCQ’s

In my opinion, managing a business is a lot like a large-scale household, where you are the manager, and you have to organise the staff (family members), order and maintain stock (shopping and essentials) and oversee and maintain all the costs involved (budgeting). Of course, for a household it only takes one to two people to uphold relative order, from a business perspective, it makes complete sense to me that it would require an array of specially skilled individuals working together from areas of their expertise. I understand now how accountants can hinder business and why the foundation of business is trust. For me, it is a lot like my relationship with my husband, we must work together to keep our house running smoothly. We both have certain assets or strengths that we must use to help each other, for the sake of our children. For instance, he is currently the breadwinner, while I maintain most of the household and social aspects of ours’ and our children’s lives. If he were to stop going to work, or I could not trust him to do so, it would put a strain on our relationship. When we don’t work together, everything falls into chaos, three children are a difficult feat to manage. For us, however, it is only our household that falls into disarray, I could not even begin to imagine the pressures managers of big firms feel if any of their team is not cooperating or providing disorganised information. Especially when there are sometimes millions of dollars and numerous people depending on you to provide a future.

I will admit that I have never given much thought to how chocolate is made; I do frequently enjoy eating it, though! Attaching costs to cost objects is something I am familiar with from my work as in upholstery. My experience with cost objects comes from working in upholstery for around 8 years. It is quite a lengthy process, and both the direct and indirect costs can add up quite quickly. The direct costs are easy to calculate, for instance, wood, webbing and foam for the frames, fabric to cover them and the time to construct the products from start to finish. After all, most of the steps cannot be done simultaneously, the frame needs to dry for at least 24 hours before you can add the foam and webbing. The indirect costs are a little more complicated, servicing of the machines, electricity to power them and the receptionist who would order the fabrics and oversee order deliveries. All the costs involved can add up quickly, it can be expensive even before the material has been chosen. Therefore, companies like Harvey Norman and Fantastic Furniture import most of their products from overseas. The sacrifice they must make is on quality and durability. Concerning big companies, I never would have thought about all the costs involved. In particular, the staggering amount of indirect costs that are involved. It seems to be quite tricky to try and calculate them all and seems to work more on predictions, estimations and cost-cutting techniques. I have also been learning about direct and indirect costs in economics, although for the most part, they are referred to as explicit costs because they involve monetary spending by the firm.

To me, the idea of cost objects seems very similar to budgeting, where you can take all your income and expenses and then project your spending. By looking at what expenses you have incurred in the past or present, you can anticipate likely future expenses. This is easy in theory, but as I have found, it isn’t straightforward in practice. I found it easy to calculate how much weekly and monthly bills and expenses were going to amount to and then subtract that from our income. Although, I found it challenging to calculate unforeseen costs, like trips to the chemist when someone is ill and needs a prescription. The allocation of indirect costs is a somewhat new concept for me. I have little to no hands-on experience, and for me, it seems as if it would rely on estimations of individual costs, based on past expenses.

Allocating costs to cost objects of my company is difficult to comprehend because they do not sell products in the traditional sense. They provide online services and the costs involved in these services are mostly subjective. I think step 7 may be a little more difficult for my company later in this assessment when I must identify three products.

I have recently finished reading about fixed and variable costs and how they both add up to equal the total cost of a firm, in economics. These costs are then used to calculate other variables associated with a firm’s past, current or possible future performance. This is helpful to determine the profit maximising level or price and output of a firm. The different examples that Martin has added into the study guide are fascinating, and it has been enlightening to see how the different variables can be used to manipulate the graphs. For the most part, economics has been quite dry in content and mostly theory-based. I have primarily been focusing on the types of firms, perfect competition, and how all the variables work together. The equation suggests excellent elasticity because no matter how much the variable for х changes, γ is continuous. The fixed costs of a firm do not change with the level of output and productivity, they are mainly associated with the rent or mortgage repayments, insurance and machinery. Variable costs, however, as the name suggests, vary with the level of output, the more a firm increases its production output, the higher the variable costs. In upholstery the sewing machines, staplers and compressors would be considered fixed costs and the wages, delivery and raw materials, e.g. foam, fabric and wood. I have learnt that a natural monopoly firm has very high fixed costs, which blocks other firms from entering the market.

In conclusion, the key concepts in this chapter have been quite easy for me to connect with. There have been some enlightening ideas, especially regarding the indirect costs and the real-life application of demand curves and, fixed and variable cost curves. I have enjoyed getting a business feel for how accountants are essential in providing accurate costs information to help managers make informed decisions for the company, and how if the information provided is untidy, it could restrict the managers. I look forward to completing the next 2 chapters of the study guide, all this reading and reflective writing has been strenuous, I have found it especially difficult to make personal connections with the key concepts.

Step 3- Restating Financial Statements

Comments on restating

I thoroughly enjoyed restating my financial statements, I did hit a couple of roadblocks here and there though. My first hurdle came with the statements of changes in equity, more precisely separating the comprehensive income into operating and financial. A lot of the items, I had obviously, never seen before and ended up guessing what two of them were. When it came to the balance sheets, everything was going well until the very end when two of my NFO + Equity didn’t add up to the correct value. I found myself combing through my financial statements twice before I found the small error in operating liabilities. The wrong cell had copied over when I was linking my figures, but because it was in the 2016/2015 columns It was tricky to find.

Lastly, The income statement was the most infuriating statement to restate. Sifting through the financial notes to try and find the Other Expenses, Other Income and any other items that needed to be separated was quite taxing. I managed to find everything and hopefully, separated the items correctly. At the end, I thought everything was running very smoothly until it came to the Total Comprehensive Income for the year sum. The sum didn’t add up and the figures were all wrong, some of the figures were nearly $4,000 out. I went through my links, sums and totals twice and all of them were correct, I just could not figure out where the error was coming from. I will admit I had to close my laptop and sleep on it because I was getting incredibly irritated and stressed out. The next day I went back and came to the only possible item that I had split. The Other Expenses. I had, had to separate some of the associated items into Financial and Operating expenses. I went back and retyped and re-summed them up and still it was incorrect! Talk about frustrating! But I persevered and after adding up all the expenses manually on a calculator, I realised that the total didn’t match the original Other Expenses in my financial statements. I didn’t even think to double check the values when I first split them up.

The key concepts that I have learnt from this task is how to look closer at all the items contained within a firms financial statements, how to separate them and then how when you really look at the liabilities involved, especially the financial liabilities, it can really change your perception on how a firm is doing. I would have like to have had more examples of the differences in financial and operational items. It was quite difficult to decide which category to put them in.  Overall, I thoroughly enjoyed restating my financial statements and look forward to doing similar activities in the future. It is exciting to get more hands on and use some complex problem solving.