Step 4: Chapter Discussion

CHAPTER 1

**this is going to be wordy - but bare with me**

I really enjoyed Martin’s interesting analogies from parties to games and to Barry Humphreys! Who knew this was accounting.

I did agree with Martin in the fact that yes, maybe it is a game in parts. Having to figure out what fits where, what’s the next step, what do things mean is similar to playing a game for sure. But it’s how we account for the money what parameters it goes under and where it fits in the statements. For the decision making process – yes, we need to know what’s going on within the business. If we want to invest then we need to know what we are investing in and how they are performing.

KCQ: Using just the numbers to connect to reality may not always show the true reality of the business. It shows the quantitative but not the qualitative. There is a business culture that can impact upon the overall performance, is this quantitative enough? I know this is not covered in this subject but culture and they way a company does business can also be important. Do you want to invest in a toxic business?? Can pure numbers and accounting help us give the big picture in decision making? This is the big question in this subject - using accounting for decision making, how can it help and what are its limitations?

However, delving in deeper to the financials and being a little more analytical there may be a slight picture of this in the Annual Reports and statements. High turnover of staff may not be present but redundancy payouts, staff salary expenses can be recorded. Is there a dramatic increase in employee expenses or “provisions” for example, which they can sometimes be called. This may be due to staff training but maybe ‘new’ staff training or Lump sum A’s as another example. Accounting may not always show this qualitative information of the culture but can be stretched using a deeper analysis of the qualitative information.

It was interesting the “market” discussion and realized “I am in the market”, many markets in fact!

My initial thought in Martin's description of businesses was what a great cluster of businesses; lots of diversity. In business this is a good thing because of the convenience of close locality to one another e.g. you might go to the groceries but need a coffee beforehand to enable you to get through your shopping whilst listening to various screaming kids (or maybe that’s just me). By locating adjacent they can value-add to each others business rather then. Hmm there’s that work VALUE!! What is this value to you? Grouping business’ as we generally see in most locations draws more customers. A customer of Rip Curl may not be an intended customer of Subway, but the convenience of it located near may attract them to grab a quick sandwich. So this increases ‘potential’ customers. Not accounting related or related to the Chapter but this was a concept that was highlighted to me due to my business-link thinking mind. The bottom line comes with increasing business turnover. And yes –they all would keep account of that.

I identified that I was very much aware of the types of business entities. This also highighted to me that I am pretty lucky in being a mature aged student having a wealth of experience in project management, business management and Government management. Now working in the industry I do have an advantage in that my world revolves around numbers and businesses! it also adds to the pressure of "YOU MUST DO WELL THEN" But its hard!!!!! As being in taxation I do the tax accounting for a number of them, in particular sole traders and individuals who are in partnerships or have income from trusts. I am also being trained up in taking over my father’s clients (a company, a few partnerships and one trust) for their taxation and accounting needs when I am fully qualified, and he retires, so these are very familiar to me and I was able to identify with. This is a major bonus for me studying accounting and working in the industry and having a great mentor in my father of over 40 years experience as an accountant.

With my own clients I use QuickBooks to develop their profit and loss statements. So the question Martin raised, “can accounting make it easier or more difficult to engage with and understand what is really going on in a firm?”, and my answer is yes. It makes it so much more easier form the taxation of a business’s perspective. It makes my job so much easier having records. If it cannot be substantiated then it doesn’t go into the tax return! So this is how accounting helps me currently.

KCQ: I also found it important that we need to UNDERSTAND! Understanding concepts rather than just knowing about them verbatim, has helped me so much in working in our own business in particular it has enabled me to grasp new concepts easier and have been able to apply them in real life taxation accounting situations in my day to day job.

His discussion about journals and ledges gave me heaps of light bulb moments. I was thinking, yes, I know this stuff because I now do it every day. It’s interesting when you actually put into practice the leanings from previous subjects. Now I know I AM learning!

This Chapter also enabled me to point one of my fellow students (Emma Walker) to this section to read over this as this is her first accounting subject, so this information is covered in Principles of Accounting which she has not done. She raised this question in her blog and I answered it for her as easily as I could but now provided her with this paragraph to help her more.

I think Martin has provided good examples of assets, liabilities and equity. This section again highlighted my existing knowledge that I have gained in the course of this degree so far. I agreed in the value of the firm is expressed in it assets and liabilities, which for me, I think of it as its worth or net worth.

I enjoyed reading the revenue and expenses section, as well as the explanation of the extended accounting equation as it was very simple to follow and easy to understand. I needed this explanation initially in Principles of Accounting I think! But maybe it’s just the fact that I now have more knowledge about the accounting equation theoretically and practically.

This chapter has re-emphasized the double entry accounting process and the accounting equation for me in a practical sense. It also provided me with a bit of thinking laterally behind business and I asked myself where does this all fit in, and where is my knowledge at. The review was simple and easy to follow.

Finally... I guess it really is kind of a game to bring us back to Martin's first analogy – a “game of numbers” in part. So to use some different analogies like Martin did I will go with the Game of Thrones (G.O.T), where the King on the Throne (equity) I guess is always changing depending upon who you owe, or liabilities (e.g. the Iron Bank); where your expenses go (e.g. who you pay or bribe in G.O.T only of course but not in real life accounting cases LOL! these are just general expenses and creditors); and revenue (who pays you or again in G.O.T e.g. who bribes you, or your customers etc). This is just my little quirky analogy I guess :-)

CHAPTER 3

My initial thoughts was, yes the nitty gritty!

Martin’s analogies are very interesting! Yes, it is really like meeting someone although I would never have thought that analogy. You know what it looks like and you know the names (e.g. financing activities, the Balance Sheet etc)

I found it very true the statement that Martin made “But when we understand something and what it means to us and how it is connected to our lives and to our prior knowledge and previous understanding of the work , then we generally just remember it” Very true! This has provided quite a few light bulb moments in just undertaking this assessment. I am able to relate the financial statements to previous study and, even better still, to my own work as an undergraduate accountant and in learning how to run our family business. I really need to understand many concepts not just know what they are verbatim so I can appropriately apply them to my work.

****LBM- it is a marketing document! They sell what they do well but do not overly advertise where they go wrong. I was able to pick up on this in my own company as they didn’t; do quite as well in one of Divisions for one of the years, however they were able to alleviate this with exemplary year in another division. However, what I did find impressive is that they did mention this and provide explanations for this.****


KCQ: In bad performing companies how do they sell themselves and what do they say about their poor performance?

****LBM: The additional documentation in the annual reports e.g. statement of accounting policies and notes are what I am currently studying in Issues in Financial Reporting subject, so it was good for me to be able to read these and see how these two subjects and these two concepts of decision making in accounting and issue in financial reporting are linked.****

KCQ: Yes, just one day – yes, it is it is at the 31 December or 30 June etc. Imagine the differences if the stock market crashed the next day. And the report was finalised then, how would the company look?? Interesting concept. I guess this is where the liquidity and solvency concept comes into it, the ability to pay out liabilities. I guess this is a very good decision making point to keep note of.

KCQ: Different words but similar concepts or meanings: this was highlighted in one of the questions raised by another student regarding “organic revenue”. It is also basic revenue or just revenue. There are probably many other ways to describe this and I gather this is where a bit of lateral thinking is required in accounting. We need to ask what does the word or the item truly mean? And yes, as Martin mentioned footnotes are very handy in regards to this.

****LBM: The Parent Company – yes it’s the ability for them to buy the shares. I actually answered this question to one of the other students, so I got it right! I was trying to work this out myself in the beginning and did a bit of reading (obviously before I attempted reading this study guide!) and found out myself.****

KCQ: What I want to know more about is the Parent Accounts – how are they broken up, how are the amounts translated into the parent balance sheet etc, but I know this is yet to come !

I liked the explanation of ownership of subsidiaries in that other entities can own or part own these and the way Martin had worded this I was able to fully understand this concept, as well as non-controlling interest and controlling interest, as I came across this in my Company and began to understand this, but more so now.

****LBM: Non-controlling interest and minority interest will be deducted – yes this is now self explanatory because the company do not ‘own’ that portion of the profit – it is owned by this who makes up the non-controlling interest.****

Historical context and descriptions were quite interesting, hearing the origins appealed to me.

****LBM: Criteria to assess ratios I feel underpins decision making in accounting, but to do this requires production of the financial statements and a good understand of financial statements in that fact. However, I feel that ratios are not to be used solely, but looking at the financial statements and the ratios together and understanding them together can help to shape the picture of the company.****

KCQ: At this stage I believe they can go hand in hand and really depends upon what you are trying to make your decision upon. Is it for investing or something else?

I also agree that predictions of the future using just numbers alone has little benefit but should not be used without looking at the bigger economic picture. Martin does write this in the chapter that there “needs to be a focus on the understanding of the economic and business drivers of a firm”, to which I totally agree.

KCQ: What about 2008 Global Financial Crisis? I am sure the company’s financial report and ratios of a number of companies (including my own) were great. What happened six to 12 months later after the dramatic crash changed these result dramatically for a lot of companies. They did not look so good with losses and deficits. Was this predicted looking at the numbers alone? No. So I think there needs to be more lateral thinking about the whole economic climate as a whole picture in the party so to speak e.g. what type of party are you going to I guess you could say using Martin’s analogy.

KCQ: What I am concerned with in the coming few weeks is that I did not get a good grasp on ratios in Principles of Accounting and I hope to increase my knowledge and understand of this in further in this course to be more proficient in this area.

I did get a little lost when Martin started discussing profit margins and turnover ratios, and I had to read this paragraph a few times to get it to sink in. This would be more a reflection of my lack of grasping the ratio concepts I believe, however I am making a concerted effort now as it is being covered. We will see in the exam wont we!

Dividend double dividend and cash flow discussion was a little confusing for me. I understand the concepts in part but not fully yet and I need further reading about this to appreciate how they sit within the content of this subject. This is a point that I know I need to focus on in the coming weeks.


CONCLUSION:

I found both these chapters very easy to read however, the key point that was highlighted to me was that reading this study guide first would have been very helpful then reading it as my last task step in this assignment! However, I was able to undertake my own research and answer these myself, so by doing this I found that it helps me understand the concepts better then to just read it in a chapter.

I feel that this discussion has raised some interesting questions on my behalf, some questions that I would not have thought to ask or highlight; and has made me think more lateral then just understanding the concepts. I like the way that martin has phrased these Chapters and perhaps this style of writing has enables me to think more laterally about these concepts.

I am looking forward to seeing where this next discussion takes us and what analogies martin continues to use. I find these analogies interesting and are applicable which helps the learning process.