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.