KCQ’s on Chapter 1 and Chapter 3

CHAPTER 1 – ‘A Way of Viewing Business’

When reading Chapter 1 – ‘A Way of Viewing Business’, the first thing I absolutely loved is that every chapter started with a quote relating to the theme. I think it’s a great approach and keeps the reader’s brain active. I also like the author’s style of writing – it’s engaging and personal, he brings examples from his own personal life, such as the list and pictures he took himself of businesses in his hometown, or how he taught himself to touch-type when doing his Law degree. I also liked that with every statement or fact comes an example, which makes it so much easier to understand. For example, the author stated that “many businesses can mix up different ways providing services, retailing products and manufacturing products” – at first I didn’t really get that, but when he brought an example of hairdressers selling hair products, I understood it. I understood that business is about so much more than just numbers, and how business can be organised as a sole trader, meaning that it only has one owner, and that a business can be also organised as a partnership where there is more than one owner. I also understood about business being organised as a company which is separate from its owners, but business organised as a trust got me a little bit confused. It’s interesting though that about half of the directors of listed Australian companies have accounting backgrounds – there must be a reason for that!

It’s unbelievable how double-entry accounting has been around for a long-long time and we’re still following the principles of it! I mean, how did they even come up with that? But as the author stated – “Ideas are Powerful”. It’s also funny that Luca Pacioli is usually referred to as the ‘Father of Accounting’ even though he didn’t invent the system of double-entry accounting, he was just the first one describing it in a published book. What a fun fact to know! I also found amusing that we still call accounting ‘Bookkeeping’ even though there’s barely any ‘books’ involved. I also didn’t know that the keyboard we use now was first designed for typewriters, and it’s designed like that so the metal arms that held each letter of the typewriter wouldn’t hit each other and get tangled. Even though some people might find it boring or even pointless, I find that it’s great that the whole chapter isn’t all about accounting and its principles but it also talks about the history of it and fun facts that you would never think of!

When looking more into the ‘accounting’ side of the chapter, I felt like I'm already understanding more about what is going on in a business – especially in the business where I work at! When reading about software packages - in the list I found the one that my business uses as well! When reading about journals and ledgers – I recognised them as well and instantly knew what they were, I just never used to know that they are called ‘journals’ and ‘ledgers’. The business I work at also hires staff to enter data, and then we use the firm’s accountant to complete the financial statements and tax returns captured in the accounting package. I’ve actually been taught how to bring the books to the ‘trial balance’ stage, I just didn’t know it was called ‘trial-balancing’! How exciting! See, I’m starting to think that this UNI education might really pay off! The ‘real-life’ involvement really helps me to understand better of what I’m reading and vice-versa. The poor company I’m working for though…

Proprietorship got me very confused at first – but when reading the section again as well as discussing the entity concept in class, I got it – the activities of a firm are kept completely separate from those of the firm’s owners, and the purpose of double-entry accounting is not only to check the accuracy of the entry of transactions, but it’s rather a way of looking at business - to be aware that the proprietor or owner of a firm is separate and distinct from the firm itself. Kind of confusing and kind of boring, but it’s important and I got it. I think.

Accounting equation was something new to me and I didn’t really understand it at first, but when turning the page (as you do when reading) I was introduced to the five elements of accounting which made the Accounting equation make a little bit more sense! I also realised that a firm’s value is changing day-by-day and even moment-by-moment, which was a bit of a surprise to me. But it kind of makes sense due to everything that’s going around in the world – when everything is changing in the world moment-by-moment then it is obvious that the realities of business have to change, affecting the value of a firm.  Reading about the elements of accounting was a little bit boring and to understand them better, I had to read them over and over. I can’t say I understand all of them fully, but at least I know now a little bit more about them – Assets, Liabilities and Equity provide the measure of the value of a firm and of the interests of its equity owners, whilst Revenue and Expenses relate to something the firm has done to create or destroy value during a period of time. That also helps to understand the extended accounting equation a little bit better, which in turn helps us to understand the economic and business realities of firms. It’s kind of sad that I find everything that’s significant in accounting, kind of boring, but I’m sure than when I’m starting to understand the concepts better, it will get more interesting. I hope.

Even though, being completely honest – I first thought that accounting is about numbers and data and everything boring, the first chapter has proved me wrong! I also like that it encourages us not only ‘learn’ the key ideas underlying accounting, but to UNDERSTAND them. Without ‘learning’ how to ‘learn’ our UNI degree won’t give us anything. Throughout the first chapter, introducing a way of viewing business and bringing real-life examples, the author managed to engage me in the world of accounting for a good hour and a half (I’m a slow reader) without falling asleep – a surprisingly enjoyable read!

CHAPTER 3 – ‘Introducing Financial Statements’

I loved that the chapter started with an analogy, comparing the introduction to the financial statements of firms to Sarah meeting Chris at a party – so clever and amusing to read!
I also never even thought of looking at my firm’s annual reposts as a marketing document – but now, after reading this, I can totally see where the author is coming from!
It was good reading about everything already seen in the Annual Reports – the Annual Reports and its contents started to make so much more sense now. For example, I thought that the Annual Reports were the same thing Financial Statements, but reality Financial Statements are a part of the Annual Reports that contain the data we entered into our spreadsheets for our assignment!

The reading also confirmed that the balance sheet shows a firm’s financial position on a particular day – just one day, which made me a little bit more confused about my spreadsheet. Each year (from 2011-2014) my balance sheets said a different date - they went from 29^th of June to 1^st of July, so I wasn’t sure what to insert to the header of my spreadsheet. I ended up just putting in the Balance Date provided in our ‘Find your company’ Excel file – hopefully that will be alright. Another thing I found enjoyable in this chapter, is the way the author presented the information – slow and steady. Since there was quite a lot of info to take in, he didn’t start talking about the key concepts right away, but rather introduced the topics so the reader could get used to them. And then later on he explained the concept in a more detailed matter, providing more information and elements of it. I also liked that he explained the scary concept of footnotes as sources of further information that relate to a specific item and that we can refer to as we wish – not so scary but rather helpful!

The ‘group’ and ‘parent’ part got me a little bit confused at first – also when doing our firm’s spreadsheets we had to look at the ‘group’ statements. Nevertheless I don’t think my annual report even contained the ‘parent’ statements – at least I couldn’t find them. What I got out of it though, is that ‘parent’ is the actual company itself, and the ‘group’, is a group of companies? I’m curious to look into that a little bit more, since I feel that this will be a beneficial factor to know in the future. Even though we didn’t use the Cash Flow statement in our spreadsheets, it was good to look into and try to understand what it is and what it does – basically it shows the opening cash balance at the beginning of the period, cash inflows and outflows during the period and the closing cash balance. It’s not the most exciting thing to read about, but that might be because we couldn’t ‘play around’ with it in our assignment.

I hadn’t even heard about IOU’s before and would’ve never guessed that it stands for “I-Owe-You”. It’s also interesting to read that the idea of Ratios – key part when analysing a financial statements, is adopted from Ancient Greeks! How did they even come up with stuff like that? But I suppose that’s how it works – people just come up with things, just as Thomas Edison came up with the electric bulb and Alexander Bell invented the telephone. I didn’t know anything about Euclid’s Elements before either – the BEST mathematics text ever written. Probably that’s why I haven’t heard of it before.. It makes me feel so uneducated though, but I suppose that’s what I’m at UNI for – to educate myself and read about new (well not so new) and interesting things such as Euclid’s Elements. When reading about financial statements and analysing them - I found beneficial that even though the author provided all the requisite information on different approaches, he also recommended his favourite and justified his opinions. I also appreciate that he encourages us look outside of the box - to use a firm’s financial statements to help us engage with key aspects of our firm’s economic and business realities.

I found the concept of dividends a little bit confusing and overwhelming. The value of an equity investment in a firm is the present value today of the expected future dividends of a firm? I mean, how is that not confusing? Apparently dividends are everything that a share of a company actually gives us regardless how its price may fluctuate over time? I always thought the changing price over time matters, but obviously not. Isn’t dividends just forecasts, expectations? And can’t they change when, for example, the board of directors decides to increase the proportion of profits the firm pays to equity investors as dividends? Hopefully I’ll adopt a better understanding of this concept in the future, at the moment it’s just making my brain hurt. The reading got even more confusing when moving on from the dividends to cash flow. And yay, some more equations! So when d = C – I +F, then d=dividends, C= operating cash flow, I=Capital outlays and F=Net cash flow from debt owners. I liked that the author defined each part of the equation, explaining what it is and bringing examples, which made the equation a little bit easier to understand. Moving on to Free Cash Flow, the reading stated that it is equal with C-I, so we were able to change the form of the equation to d = FCF + F. Examples brought by the author about his own and his children’s experiences with FCF and dividends clarified my huge cloud of confusion a little bit. I will get it one day, I promise – just have to take baby steps to get my mind around it. I also found out what EBITDA stands for – ‘earnings before interest, tax, depreciation and amortisation’, which I came across with in my firm’s annual reports a lot of times. It’s great to get an answer to a question just as easy like that! Reading really does pay off, haha!

Even though the few last pages were kind of confusing containing an enormous amount of information, I still found the chapter enjoyable and enlightening, especially the parts regarding the financial statements. I sure do wish that I would’ve read this chapter before I started constructing the KCQ’s and the spreadsheets on my firm’s annual report – it all makes so much more sense now! Not complete sense, but still a lot more sense.