Chapter 1 and Chapter 3

Chapter 1

Key Concepts

·      Double-entry-accounting is used throughout the accounting world and had been around since 1494.

·      Thought that this chapter was good and easy to relate to as I have lived close to Yeppoon and have some knowledge of all the businesses that have been discussed in this txt. Being able to relate to the txt was good as it gave me a visual image, which really drew me into reading more.

·      Throughout my working career I have worked in many different place, some of them large and some small. What I have taken on bored from my experiences is that all companies are relatively the same. They all strive for the same goal of having great service and quality goods, if all the company’s can achieve these goals it results in repeat business from customers.

·      The five elements of accounting:

Assets – Include any equipment that is used by this company.

Liabilities – Includes any start up cost (borrowing money).

Equity – This is Assets- Liabilities= Equity.

Revenue – This is the money made by the business after selling products.

Expenses – Means actually buying products that you will be selling.

Key Questions:

·      Why do we have ‘double entry accounting’? Why do we put everything in twice? Why not just once?

Double-entry-accounting is used throughout the accounting world and had been around since 1494. It is used because every entry into an account then in turn requires a corresponding and opposite entry into a different account.

·      For your firm, identify three Assets, three Liabilities and three items of Equity. Describe what each item means!

Assets-

1.     The actually hearing devices that are sold to people, for example the Nucleus 6.

2.     The research equipment used to discover all this new technology.

Liabilities-

1.     Borrowing money to fund all this research and to build a new head quarters.

2.     Having to pay the staff their wages, including overtime and bonuses.

Equity-

1.     The money made from each hearing device sold.

Chapter 3

Key Concepts

·      When a business is setting up there financial statement there are no set rules that have to be followed. This essentially means that every business could have a different layout and format for the same document. So if you where to compare two different companies they may have the same information but it is just listed under something different.

·      The firms annual report can be used in several different ways, these ways range from lifting the spirits of the employees and make them think they are doing a good job. Also to highlight to the investors that everything in the company is going well and they should invest with them.

·      The financial statement is usually comprised of the balance sheet, income statement, statement of change in equity and cash flow statement. These documents are the real numbers that should be taken into consideration when looking to invest in a company.

·      Footnotes have been associated with balance sheets to keep the layout of the document clean and easy to read. These footnotes will elaborate on the information in the balance sheet, this will give further insight into the information. I like the use of footnotes as it makes the balance sheet much easier to read and understand. If there were too much information in one document, it would be hard to get information out.

·      We touched on this a bit in a lecture as well, but the parent company is head company. This parent company is the ones that investors will buy shares in, rather than buying shares in the group company. The parent company is the majority owner of shares and usually owns somewhere between 51 to 100% of the shares.

·      I think that the balance sheet is pretty easy to get a handle on as it is just made up of raw data that has been collected every day.

·      The income statement seems pretty straightforward to me, as it is just comprised of the revenue and expenses of the firm. So to me, the income statement is pretty easy as it is just revenue – expenses = the firms income for a certain period of time.

Key Questions:

·      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 the answer to this question is that we have to keep thinking outside the box rather than staying between the lines and doing the bare minimum. For instance there would still only be a finite number of ratios in the world today if it wasn’t for Alexandra Wall, who produced seven more ratios for 981 firms. This makes me believe that we have to keep expanding on thing instead of being happy with the way it is now. If we took on board the philosophy of just using what we have then the human race would be at a stand still, with no more advancements in any field. I believe this is why we must keep thinking a bit different and create new stuff rather than just doing what works.

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

The use of the Du Pont Company’s framework will assist people when they are doing ratios. The purpose of this structure is to, through the use of ratios, understand how a business is performing. Experience practitioners are still using just standard ratios to calculate the business effectiveness. This really just means that the theory of a structure still has not take effect in every aspect of accounting. So to answer the question, I believe that the framework Du Pont set out is effective but it still isn’t really needed. So I think it is good and bad having the Du Pont framework.