Assignment 2 Draft

Part 1 

Ideas, reflections and reactions to reading Chapter 4 of the study guide ‘Analysing Financial Statements’

 ‘Whoever wishes to foresee the future must consult the past…’

This quote by Machiavelli was the quote I liked most out of the three that were in the beginning of chapter 4.  My understanding on it, it’s that in order to predict what is going to happen in the future we need to know what has happened before and what is happening now as well.

I realized the purpose of the chapter is to restate the financial statements and while doing that also understand them. This is done through consulting past transactions that have occurred in the firm  and  through using two common frameworks: Free Cash Flow and Economic Profit.

When I began reading about Free Cash Flow I got a bit confused because it was a lot of information on this new concept I’d never really dealt with before so I had to read it once more in order to understand. I realized that free cash flow is the money that enters the firm on two directions, the investments made by the owners and the cash coming in from operations like sales. So investments are an asset and cash flow from operations would be profit. This is how I understand that FCF=C-I. I is negative because it is money spent on an investment like supplies that are expected to be future profit.  Reading through it I also realized that it is in the firm owners’ hands whether to have high or low cash flow since they are the ones controlling the investments. This got me reflecting about how to invest in a business. Before you start studying accounting or business in general it all seems either black or white. Only now I realize that if you’re going to invest on shares of a company you’re not only going to do research on their income, but also on their investments. The more I study accounting the more I realize that understanding a company is a lot more complicated than it seems.

It took me a while to wrap my head around how to calculate the economic profit through the formula. Before I read this part I believed that the economic profit was the same as the return on net operating assets but now I know that it is depended also on the costs. It was pretty easy to maintain concentration at the rest of information about economic profit.

After reading all of that I understand how Free cash flow and economic profit are different because the economic profit measures the value added to the firm (Profit for the company and the shareholders) whereas FCF is simply a transfer of value between all the stakeholders.

At first glance, financial and operating activities seemed too complicated to me. All I saw was Capital letters and numbers and I was so frightened I thought I’d never manage to make sense out of all of that information. To me both financial and operating activities seem equally important because they both affect the profit at the end of the year.

At the beginning I wondered why do we even have to restate the financial statements? It seemed like we were just organizing the same information in a different order. How would that be of use to us to understand more about the firm? I realized why after I finished restating it and that took me nearly two weeks. I realized that through restating them I understood what each (not all but most) of the activities presented there were. I gained more knowledge.

Another question that still remains unanswered to me is that why aren’t the financial statements already restated in the annual report since they are so helpful, but we have to spend so much time restating them?

What I found most difficult was separating financial and operating activities, but the chart helped distinguish between the two.

After reading the rest of the chapter I finally understood what dirty surplus actually is but I’m still wondering why does it have to exist? Why not include all earnings in the income statement in order to make it easier to restate and understand?

The explanation for restating each of the statements was very clear, but it still seemed abstract. I only understood it after I finished restating the financial statements of my firm. I believe it is almost impossible to understand them without doing and example yourself, because every firm is different and each activity is also different. I understood how to restate the balance sheet by the first time II read it and I think it’s the easiest out of the three.

I also understood that profitability and efficiency are basically the two main objectives of each company.

All in all, it was a chapter with a lot of new information and formulas so it required to read each paragraph more than once in order to understand, but now that I’m done reading it I do feel more confident. I feel like I can understand what is going on with my firm and its annual report.

Part 2.

Brief Commentary

While restating financial statements I went through some problems. First with restating statement of changes in equity what I found difficult was the Equity at the end of the year by the time I was done wasn’t the same as the Statement in the annual report. First I got confused but later I realised that I had added by mistake a transaction value. After having removed that, it all made sense.

Restating the balance sheet was the easiest for me. It was kind of difficult to distinguish between operating and financial assets, liabilities but with the help of our lecturer I understood how to separate them. And the rest seemed very easy to me.

The income statement to me was the hardest out of them all. Firstly I didn’t understand how to separate revenue and incomes and expenses because they were all put together in the annual report. It was complicated because some of them were part of revenue and the others part of expenses depending on whether they were positive or negative. On the annual report of my company CMI there were also other comprehensive income which in the beginning I thought that were operating and that caused me to make mistakes. After consulting with my lecturer I realized they weren’t operating. Also the tax benefit confused me a bit but the powerpoint slides helped me understand how to calculate it.

In general, it didn’t take me much time to understand how to restate the financial statements, but it sure was a complicated process for a first year student like myself.

Part 3: 

Products

Contribution Margin

Contribution Margin per each unit of activity is calculated through the formula:   CM= Sales – Variable Costs. So it depends on the sales and the variable costs. For example if any of the prices of the products mentioned above would drop, the contribution margin would be lower too. And the same would occur if variable cost changed depending on whether it was increased or decreased.

The Contribution Margin is different for each product that CMI produces. This happens because every product is different. First of all each product has undergone through a specific manufacturing process which had a certain cost. Depending on the labour required, the basic material and supplies, the time needed, etc a price has been decided. The price is also based on the prices of the same products that are produced by other electrical competitors. It may be slightly different because of the quality and the factors mentioned. For example the brass conduit has a very good quality because the material used to produce it is very expensive and it lasts longer than another material. This affects its price & cost and therefore it affects the contribution margin.

The firm can’t only produce one product with the highest Contribution Margin because not everyone needs that product so they are not going to buy. Customers need variety so If the firms offers a variety of products with different prices, the customer will have the opportunity to choose so the profit will be higher. For example, out of the three products of CMI electrical I’ve chosen, The Ordinary Duty Cable has the highest CM. If this company would only produce this cable, a customer who wants a multiwire cable can’t find it here so he will buy it somewhere else. The number of total sales will decrease.

This is what I've come up with so far. If you want leave your blog links or your ass#2 drafts in the comments so I can have a look at them and give you my feedback. :)

Restated Financial Statements

I'm Finally done with step 2 of assignment two. Here are the restated financial statements. It did take me a while to understand how to restate them but I did it ! ^_^

SPA 1

Hey guys, haven't had much time to breathe lately. Assignments everywhere.
Anyhow here's my SPA in which I have to say I didn't get the grade I expected or wanted. I am open to critics. Please, give me your feedback and help me to find out what I have done wrong because I honestly still haven't understood how to do this the right way.

SPA 1- Chapter 6.

Chapter 6 was about understanding key cost relationships. At first glance I thought it shouldn’t be that difficult since costs are supposed to be simple and not complicated, but reading throughout the chapter I learned more about costs and the fact that they’re not as simple as they may seem.

There was a quote there by Jean Shepherds that I did not quite understand.
“I’ve met them down in the Cost and Accounting Department, clean-shaven and in white collars. They can’t see a damn thing ridiculous about themselves... only about you.”

Who are them exactly, the accountants and employees of that department? Why are they supposed to be ridiculous? I find it difficult to relate it to the rest of the text.

In the beginning I even found it difficult to concentrate but later on I started to understand more. I did learn the definition of how costs include not only money and resource but general value leaving the firm. I think one of the most important things in the chapter is the key way to assist managers to understand costs, because in order to analyse something and relate it to something else you have to firstly understand it.

I also managed to understand how even if you attach the costs to the cost objects they still can be confusing and messy so you need to be concentrated and smart not to get so easily confused.

Reading the title ‘Products as cost objects’ also confused me. The first thing that popped in my mind was a question: Aren’t products supposed to represent revenue and not an expense (or a cost)? But apparently as everything in accounting products are very tightly related to cost. They are themselves cost objects. My understanding is that when the firm buys the products (supplies) they become inventory. At this point they are a cost that is expected to bring future benefits. So they are cost objects. Once they are sold they become revenue.

I realised that you really need to be careful with the firms profit because otherwise misunderstandings like overstating or understating can happen and they may create a mess it would be difficult to get out of.

I have to admit I had no idea there were various kinds of costs, such as direct and indirect ones and the figure did not help much, but I started understanding when I read it.

A random thought at this point was: Why not just call it one name such as indirect cost but also call it overhead cost?

It got a bit boring at the point when it started counting businesses and I lost my concentration so I simply read through them without really ‘reading’, but at the last paragraph I got the point. Our countries economies are service economies meaning the firms create products that we can see and understand.

My brain definitely needed the extra explanation on indirect costs. It is easier to understand when it is explained with actual examples. Not completely maybe, but I understood how direct & indirect costs really work and how indirect costs can be the electricity bills or the maintenance of the factories. Also I got to learn how Cadbury chocolates are made. I have to admit you had my full attention at the mention of the word ‘chocolate’.

I also understood that there can be period and product costs. Period costs can be seen as expense when the products are incurred and product costs are seen as expense only after the products are sold. But I can’t really understand how do you decide which are included in the product costs and which in the period one? Isn’t this a bit complicated and wouldn’t it be easier to do the same thing for all the products, like either seeing all of them as expense when they are sold or when they are incurred?

I completely agree with Brian Plowman’s words. Indirect costs seem indeed like the black hole to me.

What does apportion exactly mean? I googled it and it is explained as 1.divide up and share out and 2.assign. I find it difficult to wrap my head around how products and service departments are related to each other through apportion.

The financial-based costing systems were easier than I thought. The cost and the profit as always are related to the activity. This is also connected to variable costs. They were very clearly explained. Costs may change according to the activity that occurs. Nothing in business is precise or fixed (except maybe one or two things) and I do understand that now. It was really helpful how it was explained so clearly with Martin’s son’s band and their gigs. It’s amazing how when put in relation to a simple example a very complicated thing can become easy to understand. I also found it easy to understand the mathematical equations. Finally I am learning something in accounting that is connected to math!!

 Key Concepts:

Ø  Costs are money, resources and value leaving the firm.

Ø  Attaching a firm’s costs to various cost objects is the main way to help managers understand costs.

Ø  Managers really need to be careful, smart and very concentrated to separate different kinds of costs and to understand them.

Ø  Our countries economies are service economies meaning the firms create products that we can see and understand.

Ø  Different types of costs: Direct and indirect costs.

Ø  Costs may change according to the activity that occurs.

Questions:

Ø  What does Jean Shepherd’s quote really mean?

Ø  Why not just call it one name such as indirect cost but also call it overhead cost?

Ø  How do you decide which costs will be period and which will be product costs?

Ø  What is apportion and how is it related to product and service departments?

Ø  What are Caveats?

And here's a random cute baby just because : 

My top 3 Blogs

So I finally came around to looking at some blogs and choosing my favorites.

These are my top 3:

1.Kristy Holmes' Blog (or best said Chatter Page). First of all, the layout is excellent. That puppy is so cute. It actually reminds me of my face when I first started accounting. Anyway it's changed a bit now. (Because of this assignment) I'm more like :                         

Anyway, I think Kirsty's blog in general is excellent. It is fun and interesting to read. It includes everything, her feelings, impressions, moods and also lots of information. Keep up with the good work Kirsty!
Here's the link : https://kirstysholmeschatterpage.wordpress.com/



2. Ishak Ahmed's Blog. As usual what attracted me most was the layout. As soon as you see colors, how every article is related to pictures you think of a fun blog and it is indeed.
There is a wide range of information on himself, on his company, his impressions, the assignment draft. It is interesting in general.
And the link so you can see for yourselves: https://ishakahmedcqu.wordpress.com/

3. Joshua Douglas' Blog. It is bold and simple and it has all the information we need. I like the colors, I like the way the information is arranged, how it includes the introduction and all we have been assigned to do so far. Pure educational purpose.
You can find it here: http://joshduggo.blogspot.com.au/
(Ps. I like what he's done to his name in the url. Seems much cooler.)

Company Spreadsheet - CMI

Ass#1 Draft

Assignment 1

Step 4 (5 Marks) :  My ideas, reflections and reactions to Chapter 1 & 3 of the Study Guide.

Study Guide Chapter 1

Key Concepts:

Ø Accounting is for understanding and connecting to the realities of a firm.

Ø There are 4 types of businesses: Sole traders, Partnerships, Company and Trust.

Ø Double-entry is the concept that each transaction has two effects and Double entry accounting besides recording these transactions makes sure there is a complete relationship between the two elements.

Ø The difference between a book keeper and an accountant is that a bookkeeper writes the journals, ledgers and trial balances and the accountant uses these to prepare the financial statements.

Ø The Entity concept explains that the owner of the business is separate from the business itself.

Ø Five elements of accounting and The Accounting Equation :

Assets + Expenses = Equity + Liabilities + Revenue

What I find Confusing and difficult to Understand :

Being introduced to the entity concept made it a bit confusing for me how the owner is supposed to be separate from his firm because they have separate activities, but still the transactions that are made within the firm can affect his owner even if they don’t have the same legal identity.

Difficult to Believe:

Accounting has been first written for in 1494. Wow! I find it more than interesting how it is a very old concept and still nowadays is one of the most important things that help us develop our economy and run our businesses.
It’s unbelievable how it has been such a long time and how it has evolved so much until 21^st century.

What I found boring :

There were too many pictures and the list of the businesses seemed quite boring so didn’t read all of them.

What I found exciting or surprising :

What seemed exciting to me is that the chapter in general included many beautiful quotes from different people and the surprising thing was that there were fun facts and information such as the QWERTY keyboard and its history or personal experience of the writer which made the guide much more interesting and kept my attention throughout the whole reading.

Another exciting thing was that when explaining new words such as journal or ledger there were also definitions and the country of origin given. This is very useful and interesting information for a person who really wants knowledge.

I found very exciting how accounting actually relates to our lives and even though it may seem a bit boring from the outside, it can be very interesting as well.

My Questions :

Ø If a trustee carries on a business for the benefit of others then what is the benefit of this person/ company itself? Why does it do it?

My understanding :

I realized that accounting can make it easier to understand what is going on in a firm only if you know accounting and how to use the information for your own understanding. I would compare it to a language and the only way to understand the language is to learn how to speak it.

Also accounting can be very similar to life and other areas in general. As there are two sides to everything there two sides to accounting.

I understood that value is always changing and the businesses and the economy are always on the move so through accounting we need to try to keep up with it in order to try and make a difference for the better.

Questions- Answers

Q 1: Why do we have double-entry accounting? Why do we put in everything twice? Why not just once?

Double entry accounting or book keeping is a systematic recording of transactions ( Debits and Credits) This is done to ensure the relationship between these two. For every credit there is a debit. E.g When we buy a car we give cash and we get the car. So there are two accounts, one which we give value and one which we receive value. These need to be recorded so that we understand the realities of a firm.

Q 2: Assets, Liabilities and Equity – Three items per each.

My Blog: http://myaccountingblog121.blogspot.com.au/

My comments on other people’s Blogs: http://professionaccounting.blogspot.com.au/2015/03/ass1-draft-acct11059-assignment-student.html?showComment=1428208763725#c4645054297843139969

Study Guide Chapter 3

Key Concepts:

Ø Now I know that an annual report is also a marketing document.

Ø Financial Statements include The Balance Sheet, The Income Statement, The Statement of changes in Equity and Cash Flow Statements.

Ø I realized that there is no standard format for a balance sheet but they’re still all similar.

Ø Footnotes are useful because they give details on a specific item.

Ø Business is always on the move.

Ø ‘U can’t survive without cash.’

Ø Ratios help to understand, compare and see if there’s progress or not.

Ø There is a relationship between cash flow and dividends :
Dividends (d) = Operating cash flow (C) – Capital outlays (I) + Net cash flow from debt owners (F)

What I found Confusing and difficult to Understand :

At first I found confusing the dividend forecasts for two companies, but now I realize that the dividends payout ratio is actually controlled by the company itself and obviously one would invest in the company with the highest ratio.

What I found boring :

The chapter in general was full of new information to me and almost none of it was boring at all.

What I found exciting or surprising :

What I always find exciting are the quotes in each chapter. They really make it much more appealing to me.
Another exciting thing was that we now use ratios which have been first used many centuries ago by the Greeks and they are still of use to us.

Using examples from out daily life to explain certain things such as introducing us to the financial statements seems like a very clever approach to me. It helped me understand more what Martin was trying to explain.

It is surprising though how easy it is to read through all this information and concentrate without actually trying.

My Reactions:

I have to admit that when I first started reading the chapter I was a bit scared because it seemed like a long chapter with lots of yet unknown information to me. In the beginning it seemed like a lot of new material to absorb but as I read I started understanding more.

The more I read the more I realize that some parts of accounting can indeed be boring, but they are all very true. One segment talks about cash and how without it our businesses wouldn’t carry on with their activities.Our entire life is revolved around numbers, cash and decision making.

Some comparisons such as meeting new people at a party with introducing ourselves to financial statements seemed interesting and even funny, but they are very helpful indeed. These kind of examples remind me of rap songs made for teaching purposes. The lessons are explained through lyrics and in that way its so much easier to memorize and remember them.

I liked most the quote by Warren Buffet: “Price is what you get, value is what you pay.”
It is the most true statement I had seen in relation to value and business In general. Businesses try to offer value to the customers and they pay for it. The customer gets value and the company gets profit.

My understanding :

Now I have basic information on what Financial Statements are and what are they used for. Through Financial statements we can really understand how a firm works. By the numbers included there we can learn from basic information such as whether it is a big company or not, if it has only one owner or if it is made of other groups of companies. I can understand whether there are any minority shareholders.

I can also understand the rhythm through which the company has evolved since it was created up to now. I can come to this conclusion through looking at specific data included in the statements. Data such as the 5 main elements of accounting, Assets, Liabilities, Equity ( found in the balance sheet) and Revenue and Expenses (Income Statement). I can understand whether the company has grown or not, the profit it has through the cash flow statement and through looking at ratios between the different items. I can see whether the company has progressed or not.

I learned how dividends are depended on the Operating cash flow, the capital outlays and the net cash flow from debt owners.

I have a general idea on what each of what’s mentioned above is.

Questions - Answers

Q1:What is wrong with just doing what ‘works’ in relation to analysing financial statements? There are plenty of experienced practitioners in our capital markets. Why do we not simply find out what most are doing and just do this ourselves? What do you think and why?

I think we can not just do what everyone else is doing simply because every firm is different. If you check the financial statements of different companies you understand that all the data displayed there is different in each. With different income, investments, owners there is not possible way that the same practice works for each of the companies. One firm may need to invest more in order to profit and another firm will need to invest less to develop even more. It depends on the market that they are part of. They can both be doing the same things and getting different results simply because the market they operate in and the products that they are offering are completely different from each other.

Q2: What is the benefit of having a structure, such as the du Pont company’s framework, to help use ratios to analyze a firm’s financial statements? Is it any better (or worse) than simply doing what experienced practitioners do? Why or why not?

Dupont’s company framework is a structure where they measure assets at their gross book value. It is better because ratios actually do help a lot to understand, compare and see the true financial position of the firm. This kind of analysis determines what is driving a company’s return on investment, determine whether the company is weak or strong and know where to search for more answers. Using this kind of analysis is helpful but both experienced practitioner’s analysis and the Dupont one are not 100%  accurate. 

Chapter 1 of Study Guide: Question 2.

This writing includes three items for each: Assets, Liabilities and Equity. I explained them mostly through reading the footnotes of the annual reports of my company (CMI) since I had never been in contact with such information before. I have to say that they still seem a bit confusing to understand to me. 

Here we go:

Assets.

1. Property, plant and equipment
The property, plant and equipment bought by the company from the suppliers in order to use these in the making of the products.

They include Gross carrying amount with balance, additions transfers and disposals, and Accumulated Depreciation/ Amortisation / Impairment and net book value at 30 June.

This item has no restrictions.

2.Current trade and other payables

This item includes trade payables and other creditors and accruals.
Includes Fair value, Financial guarantees (not considered materials) and Terms of payables (non interest bearing and generally on 30-60 day terms.

3.Goodwill

It includes Gross carrying amount, Accumulated impairment losses, Net book value, Allocation of goodwill to cash generating units and electrical components. They produce similar products.

The excess if the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired.

Liabilities.

1.Current Borrowings Secured and unsecured

Include Fair values, Interest rate, foreign exchange and liquidity and so on.

2.Current Provisions

Involve Employee benefits (the aggregate amount of annual leave and long service leave entitlements) and onerous leases ( future costs expected to be incurred in relation to the TJM retail premises closed the prior year. )

3.Leases

Includes Financial leases with Leasing arrangements with lease terms of 3-5 years, and Operating leases with leasing arrangements that relate to property, plant and equipment with lease terms of 1-13 years.

Lease also involve non-cancellable operating leases.

Equity.

1.Issued Capital

The issued capital includes Fully paid ordinary shares that includes within Balance at the beginning and end of financial year and Class A shares with the same but entitled to only vote in specific circumstances. These share have the right to a preferred ranking over ordinary shares for payment of dividends

2.Reserves

Reserves include reserves comprise and movements in reserves. Movements in reserves also include Foreign currency translation reserve, Employee Equity settled benefits reserve and class A share reserve.

3.Retained Earnings

Retained Earnings include balance at the beginning of a financial year, the net profit/loss attributable to members of the parent entity and dividends provided for or paid.

I have tried to make sense for each of them. I am open to suggestions, critics and further explanations for each of the items. I believe these would help us understand and have more clues on what the items exactly mean and how we can use them in out advantage to understand the realities of the company that we've been assigned this assessment and later when we will have to deal with a wide range of maybe even larger companies.

This is the link to the company's website : http://www.cmilimited.com.au/Home/

These are the links to its annual reports: http://www.cmilimited.com.au/Investor-Centre/?page=Annual-Reports