Chapter 1
I found all of the quotes throughout the document very
inspirational. The first few quotes stumped me and I had to deeply reflect on
what they meant before I could continue reading the following paragraph.
It is difficult to understand that accounting can be
classified as a ‘model’. It makes sense, although, when taking into
consideration all the concepts for the accounting process, it seems so much
more than just a model; So much more complex.
I find it hard to believe that numbers ‘create’ reality. I
do not understand this.
I think it’s exciting that business is where we can make a
difference. I have always been passionate about running my own business from a
young age. I have never thought about it from this perspective though. I also
never realised that business is so much like our personal lives. It can create
and destroy value just as we can as well as create problems and disputes can
arise, just like they can if sharing with flatmates.
I do not understand the constant referral to whether
accounting helps or hinders in business. From my understanding and from what I
have read, accounting simplifies each firms economic and business realities, so
I am confused as to why it would hinder.
Who invented the idea of double-entry accounting? Luca
Pacioli was the first to describe and publish about the concept, but do we
really know who created it? How they thought of the idea?
I am curious to know who came up with the idea of a general
journal and a general ledger. Why record transactions like this, why not in any
other way?
I am having trouble understanding why debits are on the left
and credits are on the right? Why is this necessary and if it was the other way
around, would it really have any effect on the transactions being recorded?
I found it interesting that most people of high business
status, such as business managers and CEO’s all usually have some background
knowledge on accounting. It excited me that I am studying accounting and that
there is a possibility that one day, I could have such status as the people in
this chapter.
Question 1
Why do we have
double-entry accounting? Why do we put in everything twice? Why not just once?
We have double entry accounting because it allows us to
manipulate transactions in numerous ways, as it is entered twice. Double entry
accounting usually affects two or more accounts and satisfies the fundamental
accounting equation. This method of recording transactions keeps intact the
relationship between different elements of the business. Only entering the data
once would not balance the transaction and debits and credits would not equal.
Question 2
Three assets, three
liabilities and three equity items.
Assets
1.
Cash and cash equivalents – means physical cash
either on premises or in the business’s bank account or similar accounts such
as a term deposit.
2.
Trade and other receivables – means money that
is owed by customers and expected to be received in the near future
3.
Plant and equipment – large items of significant
value to the business that are usually non-current assets, meaning that they
will not be converted to cash within one financial year.
Liabilities
1.
Trade and other payables – money that is owed to
other people or organisations that will be paid in the near future.
2.
Provisions – money that is supplied or provided.
3.
Other current liabilities – revenue that has
been received (payment has been made) but has not yet been earned. E.g.
businesses may require customers to make a deposit before they provide a sale
or service.
Equity
1.
Contributed equity – money or assets that are
invested in the business by the owner.
2.
Reserves – money that is kept in the business
3.
Retained earnings – profit of the year, less any
payments made to shareholders
Chapter 3
Again, it is interesting about the referral to humans and
financial statements. You wouldn’t ever think there would be a connection, but
after reading further, there is. Also of relevance to a real lift scenario is
the referral to food and financial statements, ‘the big plate of meat and
potatoes, is the financial statements’.
I am surprised that companies use their financial statements
as a marketing document. I never thought about them like this, but after
further reflection, it is very true.
I never understood why the balance sheet said ‘as at’
whereas, most other financial statements say for the year ended. I guess the
balance sheet is kind of like a snapshot at any date.
I don’t understand why guys are a dying breed in the older
age group. Due to the Chinese ‘one child’ law, there are more men than women in
China, so why are we worried about men becoming a dying breed. Statistics prove
that soon it will be women who there are less of.
I find it hard to believe that as long as a business has
cash it will not go broke. A business could sell all of its assets and turn
them into cash, but they wouldn’t be cash to start off with. I don’t understand
this concept.
Questions 3-1
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?
Just doing what works does not provide any consistency
throughout the ratios. The idea or framework of these ratio’s is different in
the eyes of different people and may not have a clear connection between the ratio
and the financial statements. What ‘works’ can generally be only just looking
at the numbers, instead of what the numbers mean in regards to the firm’s
performance. We can’t simply do what most capital practitioners are doing as it
may not suit the business entity. Different businesses have different items in
their financial statements. I think that each firm should be treated
differently and analysts should be experienced and ensure that they are aware
of the business’s performance and not just the numbers represented in the
financial statements.
Question 3-2
What is the benefit
of having a structure, such as the du Pont company’s framework, to help use
ratios to analyse a firms financial statements? It is any better (or worse)
than simply doing what experienced practitioners do? Why or why not?
It is beneficial to have a structure such as du Pont’s company
framework as it focuses specifically on the financial statements of the firm
and makes clear links to this through its ratio’s. Although, I am not sure
whether it is better or worse than what experienced practitioners do. Other
entity’s do not use the same figures as du Pont’s company and therefore, it
would make it harder to compare ratio’s between businesses in the same
industry. Although, I do think it is beneficial to have the ratio’s reflect the
financial statements.
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