Step 1 (5 Marks)
Chapter 4 ‘Analysing Financial Statements’
My Key Concepts and Questions
KCQ
1: ‘An equity interest in a firm is not like buying
a dead fish in the Sydney Fish Markets’ I find this to be a very interesting and
really random analogy. I enjoy when the author makes the discussion relatable
to the audience. It makes the reading far more enjoyable rather than just
simply discussing accounting terminology.
KCQ
2: ‘If we are wrong about the past, we are unable
to predict the future very well.’ I enjoy reading these kinds of quotes. I
believe this statement can apply to everyday life and not just accounting.
KCQ
3: What does the discounted cash flow and economic
profit framework involve?
KCQ
4: We are not learning about restating financial
statements, rather, we will be restating our firm’s financial statements to
‘learn about financial statements’. This statement makes it clear to me that
our goal is to learn about our firms and not just simply learn how to restate
financial statements. I found that in high school when I did accounting, all we
learnt was how to do journals and ledgers. We never learnt about the company
which we were doing these statements for and whether or not it was a successful
company. It is good to look into the truths behind a firm, rather than just
writing up numbers.
KCQ
5: ‘No one ever got rich by simply analyzing the
past; no one.’ This is a very true statement that I have never really thought
about before. We have to move on from the past and stop looking back.
KCQ 6: Free cash flow (FCF) is driven by two things; cash flow from
operations and net cash invested into a firm’s operating assets. I feel like
this is going to be a very important thing to know later on in this course.
KCQ
7: What does ‘occupation rights’ mean?
KCQ 8: In the chapter, Martin talks about
the Greek symbol ‘delta’. What does this symbol have to do with accounting? This
part is getting me really confused?
KCQ 9: When choosing whether or not we
should go with Marks Inc or Kings Enterprises, I was confused with what the
actual answer was to this. Although, both firms have the same expected
operating income, Kings Enterprises expects to invest less each year to achieve
the same earnings growth as Marks Inc. But I am still confused as to which
company to go with. Do we choose Kings Enterprises because they expect to
invest less but achieve the same earnings as Marks Inc?
KCQ 10: What is the difference between
operating and financial activities? I feel like this is a really stupid
question because the author kept describing about how important it is to know
the difference between these two. I don’t recall reading about the differences
in the chapter, so I was still really confused. Then the ‘light bulb’ moment
hit and I realized that they are exactly what they are called if that makes
sense. We have to separate accounts into financial and operational. This was
then discussed further in the Kinder Surprise analogy.
KCQ
11: Restating our firm’s statement of changes in
equity, helps us identify any other comprehensive income. What does
comprehensive income mean? I found that in our spreadsheet, we had a lot of
accounts that included this so it seems important.
KCQ
12: Why are we only looking into the group accounts
and not the parent accounts? I question I’ve been wondering for a little while
now that I am still to find out.
What is the author trying to say?
The author is trying to get across one
specific message that really stood out to me. Our goal for all the assessments
is to look into the realities of a firm. We want to know how to understand a
firm and their activities. In this chapter, we have started to look at a way of
viewing business reality. Through this, we then received the knowledge of how
to restate financial statements which was the main topic of this chapter. After
we learnt how to do this, it became clear as to whether or not our firm’s
financial statements could help us understand what is really going on in our
firm. It was stated above that, we are not learning about restating financial
statements, rather, we will be restating our firm’s financial statements to
‘learn about financial statements’. This statement makes it clear to me that
our goal is to learn about our firms and not just simply learn how to restate
financial statements.
What do I find confusing?
Reading the chapter, I felt quite
overwhelmed. I found with discussions with other students, they were all
overwhelmed as well. It gave everyone a headache. There was so much to learn
and so much information crammed into one big chapter. I felt whenever the
author talked about equations, for example; economic profit = (RNOA – cost of
capital) x NOA, I just immediately felt my brain turn into moosh. I find it
hard to remember what the accounting terminology means, let alone to remember
all the different abbreviations for the equations. One concept that really
confused me to begin with was the difference of forecast between Marks Inc and
Kings Enterprises. This was briefly stated above in KCQ’s. When you look at
their forecast operating income, they seem to be worth the same. We discussed
this concept in class, and I sat there for a good five minutes under the belief
that it was a trick question and that you could go with either business. I was
so confused until Martin explained further into the future free cash flow. Although
both firms have the same expected operating income, Kings Enterprises expects
to invest less each year to achieve the same earnings growth as Marks Inc. But
I am still confused as to which company to go with. Do we choose Kings
Enterprises because they expect to invest less but achieve the same earnings as
Marks Inc? The main thing I was confused with this chapter is that it talked
about how important it is to know the difference between operating and
financial activities. I was waiting to find out the definitions and the
differences, thinking it was going to be really difficult to understand but it
wasn’t! Stupid me! The operational activities means just that, same with the
financial activities. You just have to separate the accounts into those groups!
Here I was, thinking it was going to be so difficult. The tricky part was really
trying to determine if one account was either operational or financial as there
were some tricky ones for my company, but I got through it!
What do I find hard to believe or something that
surprised me?
When I reading about Kinder Surprise and Martin stating that it was an Italian company, I was really shocked! The word ‘kinder’ is the german word for ‘children’, so I was under the impression it was an Germany company because that made sense. I was really surprised to find out that it was an Italian company. Who would have thought?! Another concept that really surprised me was the statement Martin made about liquidity. He stated the reason behind catergorizing assets and liabilities and how it can be traced to the influence of the banking sector in the early development of financial statements. It facilitates an assessment of the long term and short term liquidity of a firm. It was interesting reading about this as it provides a reason why we separate assets and liabilities. I had no idea!
When I reading about Kinder Surprise and Martin stating that it was an Italian company, I was really shocked! The word ‘kinder’ is the german word for ‘children’, so I was under the impression it was an Germany company because that made sense. I was really surprised to find out that it was an Italian company. Who would have thought?! Another concept that really surprised me was the statement Martin made about liquidity. He stated the reason behind catergorizing assets and liabilities and how it can be traced to the influence of the banking sector in the early development of financial statements. It facilitates an assessment of the long term and short term liquidity of a firm. It was interesting reading about this as it provides a reason why we separate assets and liabilities. I had no idea!
What do I find boring?
I personally wished that the chapter could
have been more condensed as I found that there was so much information to
process and understand. From previous experiences in high school, I found
myself getting really bored when there is too much information in one reading. The
main parts of the chapter I found particularly boring was the explanation of
equations, e.g economic profit = (RNOA – cost of capital) x NOA and so on. I
find myself zoning out as I just couldn’t understand. Another part I found quite
boring was the overview of each section and what will be explained in the next
part. I found this to become quite repetitive and not necessary as it is just
more reading to do and we would have found out what was in the next section
soon anyway.
What do I find exciting?
One thing I really find enjoyable about
this chapter is the analogies that the author uses to try and explain
something. The author uses an everyday concept that is relatable to the readers
to understand accounting. One concept Martin used was chocolate again. I
remember from another chapter, Martin used the example of cadbury to explain production
costs. Well once again, he discussed kinder surprise in regards to explaining
the difference between operating and
financial activities. It made me hungry and crave chocolate! It was also
exciting reading about the Sydney Fish Markets in comparision to capital
markets. I find this to be a great learning method and much more exciting and
relatable. Not only was I able to learn about restating financial statements, I
also learnt a bit about history. I had never heard about Marc Bloch, so it was
interesting to learn that he was shot in World War 2 by the Gestapo. I wanted
to learn more about this, so I did some further reading into the subject. Very
cool to know, as I take a strong interest in history.
Step 2 (18 Marks)
Commentary on issues I had and discussions with others
Throughout the task of restating my
financial statements, I had a lot of fun. NOT. It was a very time consuming and
difficult task but I got there in the end with a lot of questions asked along
the way. Firstly, it took me a while to understand that all I was doing was
shifting around different items in the statements. Took me a while to realize
this as I read the task sheet for the assignment last. Silly me.
Movements
in Equity
SCREENSHOT
Firstly, I had to figure out what was
operating and what was financial. As the statement of equity was quite a short
statement, I thought it would be easy. I commenced by printing out the
statements and I writing an ‘O’ and a ‘F’ next to each account so I knew what
was what.
However, I wasn’t sure what to do with a couple
of things regarding this statement. We have an item called 'opening balance' and then I noticed from
other examples that there was an item called 'profit of the period'. In my
movements of equity, I didn’t have this item but instead, I had 'profit after
income tax benefit for the year'. I wasn’t sure what this meant and if it meant
the same thing. I posted on the ASS #2 forum but I unfortunately got no
answers.
SCREENSHOT
I then posted on
the Facebook group and Bridget Mallory was able to respond to my answer and
tell me that it was the same.
SCREENSHOT
Luckily now, I was able to continue restating my financial statements by following other examples. I was a little confused as to what the ‘transactions with shareholders’ meant as I didn’t have to put these into two accounts but under this account. Besides these little issues and thoughts I had, I found restating the equity accounts quite easy and somewhat made sense to me.
Balance
Sheet
SCREENSHOT
Moving onto the next statement, I had no
issues as I found the process of this one logical and flowing. After reading
about all these equations and abbreviations in chapter four, it finally made
sense to me what all this meant and how I can apply it. I once again, put all
the items into two accounts.
One thing I couldn’t understand was the
item called ‘financial obligations’. Although I didn’t have any, it came before
the account called ‘financial assets’. I just couldn’t understand if this was
the opposite of financial assets. I asked some other peers of mine and they
didn’t know this either. I am yet to find someone who can answer this.
Income
Statement
The big and tough statement of course came
last. This was by the most frustrating and time consuming one and considering, I
have 8 marks for this, I had to put my best effort into it. Firstly after
deciding what was operational and what was financial, I realized there were a
couple of unclear things.
SCREENSHOT
In
this statement, I had an account called ‘revenue from continuing
operations’ that is right at the top of the document, I was unsure if was to
put this under ‘operating revenue’ or if this was a separate account that
still belongs at the top of the statement. I was very confused so I posted on
Facebook.
SCREENSHOT
My question for this was then answered by
Martin and John but by then, I had another issue which was finding out my
company’s reported tax. I couldn't find this anywhere in my financial
statements and I wasn’t sure whether I was to work something out or just copy
and paste from the financial statements. However, Martin was able to answer
this for me and tell me that it was the tax expense from my financial
statements. I was able to find this then, as it was just worded a little
different.
I found the income statement by far the
most challenging statement to restate. I became very confused as a lot of
accounts were worded differently to the examples given. There was also a lot of
adding and multiplying that became a bit overwhelming. I found Anna Towan’s and
Martin’s examples very helpful throughout restating my financial statements. In
conclusion, I think I have done everything correctly and I have now learnt
about restating financial statements. Chapter 4 makes so much more sense to me
now when I read over it.
Step 3 (4 Marks)
Estimated
selling price, variable cost and CM
1. Individual consultant service
|
2. General
set up fee for the billing service
|
3. Emergency
secretarial cover
|
|
Selling
price
|
$300
|
$250
|
$350
|
Variable
Cost
|
$150
|
$125
|
$175
|
Contribution
Margin
|
$150
|
$125
|
$175
|
Commentary
on contribution margins
When I was searching
for services that my company provides, I was really stuck in a rut. My company
is in investment with very limited information on the website. However ICS Global owns and manages a company called
Medical Billing and Collections (MBC) which provides billing services to UK
medical consultants. I went to their website and found a whole lot of pricing
and information in regards to what they offer.
Contribution Margins are the difference between what a
products cost (variable and fixed costs) for the cost of the end product.
Contribution Margins are calculated using this equation:
Contribution Margin (CM) = Sales (S)
– Variable Costs (VC)
An example is with the general service fee. This service
will sell for $250, after subtracting the variable costs ($100), I am left with
a contribution margin of $150.
The variable costs for this service can include:
- Size of the practice and how it operates – every practice will be different
so this must be considered when doing this service for them.
- Labour costs – how hard does every consultant
work?
The fixed costs are costs that will not change with
the increase or decrease in production of the service. These can include:
- Administration, advertising material;
- Lease of storage facility charges
- Rent
The contribution margins are all a
little different from one another because the costs from each service are
different. From the reading, the main reasons for differences in similarities
are because variable cost vary when the level of activity of sale changes. The
reason why my firm produces a range of services with different margins is
mainly due to the quality of service. A general set up fee service has the
lowest variable cost as there are limitations to what the service offers. In
saying that, the emergency secretarial cover has a lot of extra benefits that
the general set up fee wouldn’t have. This allows the variable fee to increase
thus differing the contribution margins. The company needs to have a variety of
services and not just have the highest contribution margin. This is so it can
cater for a large amount of clients and adhere to their specific wants.
Constraints
– identify & commentary
When I sat down to consider what
constraints the company might have. I found it to be very difficult. However, I
did think of a few constraints. Firstly, there is inaccuracy of the bills. If a
client has errors in their bill, this could create a lot of hassle for the
practice and unnecessary drama. From this, it could lead to a drop in profit
for the company. Also, it is important to consider growing market demand. How
many other medical billing companies are growing out there that are going to
slowly liquidate this one? They may offer more services at a competing price.
The last constraint is a very strange one but there could be an increase in
health. If a lot of patients do not have health problems, there is no reason to
bill them then is there? In all honesty, we need patients to have health
problems so the practice has a business and therefore, this company does.
