If anyone would like to give a look at this it would be greatly appreciated!
ASS#2 Step 2
ASS#2: Understanding Key Cost Relationships
Step 2:
Chapter 6:
Reading through this I felt like I understood the material much more than Chapter 4, as the idea of cost and fixed cost was easier to grasp. A quote which w reused from chapter 1 stood out for me, ‘Some people think numbers merely reflect reality … but we believe that numbers create reality.’ How might numbers create reality, rather than ‘merely’ reflect it?’. This is a very interesting view, what we do in life creates the occurrence of numbers but in fact, numbers create what occurs in life. This has been expanded on by many people the most popular of this generation would be The Matrix series. The Matrix is a series about a dystopia in which robots have taken control of the earth and use humans as batteries to run them. They lie in the matrix where everything seems normal but it is all numbers and just a code. This can be put into real life aspect in the way that if I would like to go watch a movie but do not have enough money to pay for the movie than I will not be allowed to watch it. This shows how money, and the number of how much I have, controls what I can do currently. This is also seen through my company Distil Plc as they would like to expand their beverage Blackwoods Vodka to different markets such as Australia, but as they do not have the numbers for people who would like to buy the beverage in that current market which therefore cancels their opportunity to spread out there.
Reading on I reach ‘How costs change’ in which Martin tarts talking about how his eldest son is running gigs with his band The Henderson Experience in Wellington, New Zealand. He goes in detail of how his son had to think of the fixed cost of running the gig, not considering if anyone turns up at all. He must automatically pay for the venue, the security and the equipment that will immediately put him at a loss until customers start turning up. At his first gig, he had a fixed cost of $170 which must be reached in revenue to just break even, to reach he needed 34 people at $5 a head. They raked in 90 plus customers and made a profit of $305. As of this they covered their fixed cost and had extra money in their pocket as they finished for the night. This is a notable example of a business forward thinking their fixed costs and giving themselves the best opportunity to not leave the night with a loss. This is also quite familiar with my own company Distil Plc. Distil Plc must cover a lot more fixed cost than The Henderson Experience as they have multiple overheads, factories, research and distribution to deal with a total fixed cost of a substantial amount. They must automatically think the most efficient way to make the most of what they got, to almost guarantee to the best of their abilities to not make a loss for the year.
Overall costs and fixed costs in a rather fascinating subject from accounting that rather piqued my interest. I believe I have a reasonable handling on what they are and how to read it which I am glad of from reading this chapter. I however will be having to do a bit more research after I submit this on The Henderson Experience as I am extremely passionate about music I would love to see how good your son actually is.
ASS#2 Step 1
ASS#2: Analysing Financial Statements
Step 1:
Chapter 4:
I would like to start off with a simple thank you to Martin for putting in the site for the glossary of terms, if I did not have this I wouldn’t have even understood half of what Martin was trying to explain. I was looking forward to gaining a greater understanding of a firm’s financial statements as I when I was doing ASS#1 I was not confident with what I was doing and wish to improve that for later assessments and for just becoming an accountant.
Reading on I reached ‘How firms add value’ which than goes into an interesting conversation of ‘Free cash flow’. From my initial thoughts, I believed free cash flow to be simply the profit of the company that may be used in either investments or income. So, in my theory of it free cash flow wold show the profits (value) of a firm but from reading what Martin had to say it is not even close as free cash flow is just a transfer of value, only transferring from firms operating activities to its financial activities or vice versa. Also, a firm’s free cash flow determines how much dividend the investors get each year, so if the company decides to invest more in their operating activities there will be less free cash flow overall and therefor smaller dividend for the investors for that year. But it is not a promising idea to always go for the company with the highest free cash flow at a given time, as a firm could have easily just invested in technology or land and would therefore increase its free cash flow tenfold in the next 3 years.
I have only heard of operating and financial activities very briefly and not very in depth so I was extremely intrigued when I reached the section ‘Operating and financial activities’. I find this fascinating as I always thought that all statements were just one grouped together on the balance sheet, I had no idea that they could be separated into two different activities. Reading on, it makes total sense on how and why they do this. With operating being investments in land, labour or capital whilst financial is movements of equity to equity investors. The explanation for how to determine which statement goes into which activity was a little too complex for me to grasp after the first few reads so I will be reading this another few times after this is submitted to gain a better explanation on which goes where.
Overall this chapter has been a great step up in difficulty for me to grasp. I will have to revisit this a few more times too hopefully get a full understanding of operating and financial activities. It seems I will be needing to up my game in the next few chapters coming up also.
FINAL DRAFT
It’s a bit late I know but here is the complete draft, hopefully you catch on to something I didn’t.
Cheers
Step 5 Ass#1
Chapter 2: Understanding the Game
From the last readings, I was looking forward to reading what Martin had to say next about accounting and get a better insight into the career. From the first paragraph that we will be learning about why firms give out their financial statements to be seen by more than just powerful firms and what the rules and regulations, (or ‘Rules of the Game‘) are that govern firms. From my research of my company Distil Plc and looking at others companies I automatically thought that companies just gave out all their financial statements for all to see for the purpose of luring potential investors for their company. I have no idea why a company would not want to give out all their financial statements for all to see to get said investors (if they are looking for them) and what the other benefits are in releasing said information out for all?
Reading on I get to the section about GAAP (Generally accepted accounting principles) which are ‘the rules of the game‘ that I’ve been so intrigued about. They are not a set rule for all accountants to follow but vary from country to country, showing the difference in culture. In Australian listed companies the GAAP consists of material from Australian Accounting Standards Board (AASB), Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX). Taking a large amount of information from these sources creates a varied and sizeable set of rules, and none of these organisations keep their own rules and regulations the same. How is one supposed to remember all these guidelines for accounting with so many and continually changing, and not screw up a financial report? Even at the end of the paragraph it says that these are not all the rules. With what has already been stated there would be hundreds upon hundreds of rules to remember and you are expected to know even more? I’m not sure how accountants manage this and I am hoping there is a easier way around this explained further in this chapter.
Continuing on I find out that Australia is also ran by AASB (Australian Accounting Standards Board) for which its rules are taken from IFRS (International Financial Reporting Standards) which was developed by the IASB (International Accounting Standards Board). With over half of the countries in the world following said rules it seems they must have some pretty competent rules that works well for everybody. I wonder how they managed this and what they had to go through to make such universally acceptable standards? As I have trouble getting my family of six to decide where to go out for dinner, I can not imagine how they got so many countries to follow it.
‘In the next section, we will see it is not possible in the world of accounting to have a written rule for everything…‘ These words struck out to me, you don’t have to know all the rules as all rules don’t work for every situation. So does this mean you ignore all the rules above and just wing it? Or is it you need a very brief overview of the rules and adapt them to your situation? I personally would prefer the later as I am one for rules and regulations and have a direction or a scaffold to follow to make sure I do not mess something up.
Chapter 3: Introducing Financial Statements
Starting this chapter Martin starts talking about meeting financial report is like getting introduced to a new person at a party. As I finished Step 3 and 4 before starting on Step 5 I have already gone through the introduction of meeting financial reports and knowing their names and appearance reasonably well. But from what is about to come up I expect I will find out from when and where they were born to what they had for breakfast 2 weeks ago.
Reading on I come to a paragraph talking about ratios, a old idea taken from a Ancient Greek Euclid of Alexandria and used to compare different items in a firms financial statements to see if the firm is likely to fail in the future. It just amazes me that a concept that was created and in use over 2000 years ago is still playing a major part in today’s world. For the modern era it only truly hit off in 1919 with Alexander Wall with his book Study of Credits Barometrics. This book showed how you could use the financial statements just like a barometer, predicting the weather outcomes for the coming days. With the financial statements he could see the potential of a company going to massive profit to liquidating in the future. How could some ratios predict such a major part of a firms future? Does it include losses that will quickly turn to profits and vice versa? I looked up the said ratios and started reading about it, unfortunately it was all gobbledygook to me and not what I expected to find. Hopefully by the end of this course (or degree) I can go back on this and read it with confidence of what it all means.
Eventually I reached ‘The value if anything‘ with a great quote from Warren Buffet, ‘Price is what you pay; value is what you get‘. This is a very observant statement, as price and value are not the same but equally linked. If I pay $8 for a Subway Footlong, the price would obviously be the $8 I gave to the business, the value however is the satisfying feeling I get when I have finished it and I feel content with life. If that same Footlong was $28 for its price I would not think its worth the value of feeling that content. This can also be used in business as cash flow, as a investor investing in a company they are hoping that the company’s cash flow (or value) goes up and create large dividends for the investor. So if a share is worth $100 per share and the cash flow shows that it will be a negative outcome for the investment the investors will not go to it. However if the same share was worth $1 per share the cash flow displayed a positive output then investors would flock to it to make gain a profit.
At the end of these two readings I feel a little exhausted. Compared to the first two chapters this was a lot harder to understand and communicate back. It helped that I read my financial reports on Distil Plc and did Step 3 and 4 before this as I would of been even more confused with what happened in Chapter 3 when explaining about the balance sheet and so on. It is quite extraordinary how so many rules and regulations dictate what can and cannot be released for financial statements when put out for the public eye. Before reading this I always thought it was just putting out all key information for the company, I was so wrong. And once again a rule or formula that I only thought belonged in Math C or engineering comes through and is utilised in accounting. And this rule being over 2000 years old! Those Greeks were a lot smarter than our current bunch I can tell you that much. I was really hoping at the end of this I would have a better grasp of accounting as a whole compared to when I finished in week 2 but unfortunately all the things in week 2 are now simple compared to what we are learning now. Hopefully it will, once again, catch on sooner rather than later.
Accounting for the Future 