ACCT13017 ASS#1 Step 2 General Feedback

Hi

I am enjoying reading your ASS#1 Step 2.

We are laying important foundations for our analysis of our firm’s financial statements in our unit:

I believe that in these first few weeks, the interactions and insights we develop are going to be imperative for success in this unit overall for the term.

Quite a few people have practical experience of the important role strategy plays in business:

“At work I have assisted a qualified builder who decided to begin operating under his personal ABN…I helped him determine if he would focus on renovations or new residential builds. This involved assessing the qualifications required for each, understanding the risks involved in each, reviewing the potential income earnt from each and knowing the market demand for each. Once the tradie identified if they were going to do renovations or new residential builds, they were able to develop a business strategy…it was decided to provide value to a niche market in Mackay who would like high quality renovation work. Thus, the strategy involved having the necessary qualifications, sourcing quality materials, providing the expertise for what is required to overhaul an area and providing value for money.”

Some understood that discerning a firm’s strategy is key to forming judgements about how a firm may add value in the future:

“What I did find particularly interesting about strategy was that it provided an answer to the question I had raised last week from chapter one; How could I trust my own judgements in relation to financial statements? As outlined in Chapter two, understanding a business’ strategy is critical for understanding how a business plans to add value in the future. The strength of business strategy and whether the market, environment, business conditions and potential risks support achieving such a strategy, provides the basis on which I can begin to develop my own judgements of the business.

And many were pleased to have the Mintzberg 5 P’s of Strategy approach to help consider our firm’s strategy:

“I … feel as though I have something of a ‘framework’ which I can now use to assess Altium’s business strategy going forward:

“Strategy is all about how a business plans to add value in the future. That is precisely what investors are interested in so it makes a lot of sense that understanding a business’ strategy is … a key part of analysing the financial statements. Certainly publications such as ‘Simply Wall Street’ find strategy relevant in assessing prospective share purchases as I discovered when investigating [my firm]. Whilst I am still somewhat uncomfortable with assessing the strength and achievability of [my firm’s] strategy, I can see how and why this is critical to making judgements on the true value of a business given it provides the ‘plan’ the business has for creating future value.”

Most people were a little bit surprised about how much of a firm’s activities and value can be left out of a firm’s financial statements:

“…financial statements are just numbers and they leave out information about the reality of a business. Surely not? Accountant’s spend hours preparing these beautifully presented pieces of information; how can they not provide the full picture? … I understand that not all the realities of a business can be translated into the profit and loss and balance sheet at year end. You can’t put a true dollar figure on the perfectly located store front a retail business has. You can’t put a true dollar figure on the long-standing staff members who go above and beyond for a firm. Regardless, these are key aspects of a firm which create value and will contribute to a firm’s ability to generate positive NPV going forward … [and] you cannot put a true dollar figure on what a disgruntled employee can do to a firm in terms of causing drama and having poor work standards.”

And many people appreciate we need to be critical concerning our firm’s accounts and its accounting treatments of major items:

“[W]e need to consider … that financial statements may not provide a true reflection of the economic and business realities of a firm … we must be aware of the accounting treatments being used to create the financial statements. The completion of a financial accounting theory subject recently has provided me with a body of knowledge of how accountants can be motivated out of self-interest to be creative and thus, the information they produce can become quite subjective. Based on learning from that prior subject I would not say that every accountant will act in such a manner, however I can certainly understand why this is a key consideration in terms of financial statement analysis. I personally believe that someone with little accounting knowledge who is trying to complete financial statement analysis might find this concept challenging. For example, if you were reviewing assets an understanding of the way different measurement models affects their values would provide great benefit to conducting the analysis.”

Some people are considering the idea that ratios (that is, aspects of the financial statements) cannot predict the future:

“I found it very surprising to see that … there is no valid evidence supporting the usefulness of ratios. In practice I have applied ratios on multiple occasions. For example, once I have finalised a Financial Statements and Tax Return job, I review the Gross Profit Margin ratios as a comparison to the prior year. However, the key difference between my use of ratios and the study guide is – past and future. I use the ratios to help explain any differences in revenue and net profits between two financial years. This helps validate that nothing has been missed in the current year. Whereas, the study guide argues that ratios (based on past information) are not useful for predicting the future value of a firm.”

And a key, central idea in Chapter 3 of the Study Guide is that we need to use the financial statements to help us connect with the economic and business realities of our firm; and to forecast these economic and business realities and then connect these to forecasts of our firm’s ratios or key accounting drives and thus to its future performance:

“The study guide highlights that we will use ratios within frameworks to connect our analysis of financial statements to the existing economic and business realties of a firm. This KCQ is confusing and has generated numerous questions for me. I thought that we had decided that ratios were not useful? What are the existing realities of the firm? How will these ratios form part of frameworks? How will this connect our analysis together? I really hope that as the unit progresses these questions are addressed because this just makes my head spin in circles.”

And many people saw that dividends are a transfer of value between a firm and its equity investors (and not a source of value):

“In chapter three it is clearly illustrated that the value of dividends paid to equity investors does not represent the value of equity the investor holds in the firm. A dividend is just a transfer of earnings. This provided a solid foundation for understanding why the equity value of a firm can’t necessarily be represented by the present value of future dividends.”

And most people are starting to consider the two frameworks we will use in our unit: the Discounted Cash Flow (DCF) and Economic Profit frameworks:

“…cash flows or economic profit can be used in place of dividends to determine the value of a firm. As I read through the various formulas and logic for these determinations, I did feel overwhelmed. I believe their usefulness will become visible as I begin applying them to my company in the coming weeks!”

Make sure you do not miss the videos that help give you an introduction to theoretical basis for the DCF framework:

… and for theEconomic profit framework:

All the best

Martin

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