ASS#2 Step 1: General Feedback

I was … surprised how quickly I became absorbed into the reading from Chapter 4: Analysing financial statements. Admittedly, the concept of restating financial statements was daunting when I began. However, I am ecstatic to report that I found this chapter very interesting and I learnt a great deal of information from the author.  In a nutshell, this chapter was challenging to understand but I enjoyed reading it enough to continue learning about the various aspects of accounting, in particular to enable me to understand (hopefully) the complexities of financial statements.

Thank you to everyone who has submitted your ASS#2 Step 1.

I am enjoying reading your ASS#2 Step 1, and we plan to have everyone’s mark available on Moodle by mid next week.

Here is your General Feedback on ASS#2 Step 1. There will also shortly be some great ASS#2 Step 1 exemplars in the Feedback section on the right-hand side of Moodle.

Step 1 was generally well handled.  Most people found reading Chapter 4 of the Study Guide to be challenging.

Relief and excitement

After a sense of relief from completing ASS#1, and perhaps after a short break, some people had a feeling of excitement mixed with a developing sense of confidence as they started reading Chapter 4:

After completing assignment one and having a huge sigh of relief it’s now time to get back into things and get started with assignment two.  The weighting of this assignment is a lot more than the first assignment and I’m somewhat excited to learn how to analyse these financial reports and delve deeper into the business realities of [my company].  I’m not only excited about analysing the financial reports of [my company], but I am positive that after studying this unit I will have a skill that I will be able to use many times in the future.

Some feelings of trepidation

For many people, as they approached reading Chapter 4 of the Study Guide, this feeling of excitement was mixed with some feelings of trepidation and fear:

Finishing assignment one and having assignment two already there and waiting was a little overwhelming. I got that initial sense of relief “ahhhh it’s done” once submitted, followed by the realisation that Assessment Two wasn’t just worth double, it was worth almost triple. That is SCARY. But nevertheless, I took a (small) well-earned break, and dived into chapter four. And my brain almost had an aneurism. I definitely found this chapter the most challenging yet.

The other [chapters] I felt as though I kind-of had a grip on them … but this one started to feel a little out of my league from the get go. I was scared and overwhelmed and stressing that I was never going to make sense of any of it enough to even reflect on my KCQ’s. It took a little while and my heart rate started to calm down when rational thinking came back (it had jumped out the window for a minute there) and I told myself “this isn’t a race, you don’t need to do everything in one sitting”. That helped me a little. I realised I needed to take my time with this chapter. This was all new to me. It’s okay that it doesn’t all make sense, that’s the point! This subject, as stated by Martin very early on, is about learning. And maybe my learning, in this chapter, is going to be a little slower.

Feelings of anxiety were present when embarking on Chapter 4. Am I ready to face this new world of analysing financial statements? Can I overcome my fear of numbers to truly derive meaning from financial statements to help me connect with a firm’s business realities? My trepidation was overpowered by my desire to learn and with my new mantra ‘financial equations are not math, they are merely logical connections between different areas of a firm’, I decided to jump in head first.

Fascinating

And quite a few people overcame their fear and concern after they delved into some of the key concepts in the reading, as they found the material and key concepts interesting:

This was the most interesting chapter of the study guide yet … I was quite fascinated when I got absorbed into the text, and I didn’t put it down until I had understood the text from start to finish.  Restating a firm’s financial statements does look rather challenging, but the author’s examples were simple to understand.

A learning task: to help us learn about financial statements

And remember, we are not learning about ‘how to restate financial statements’, although this is a skill we could take with us.  Rather, restating our firm’s financial statements is an authentic learning task (used by many analysts in our financial markets) designed to support us to look more carefully, item-by-item, at the financial statements of our (and other’s) firms, and to learn more about them.  And most particularly, to experience that financial statements and accounting are perhaps not as scary and out of reach for us as we may have thought they were before we started our unit. 

Some people found it reassuring to remind themselves that restating our firm’s financial statements is a learning task for us … an assessed learning task (we get marks for it and some feedback on it) … and doing this task is designed to help us learn more about each item in our firm’s financial statements:

It was also very encouraging to read that the purpose of me restating the financial statements for [my company] was to help me understand what each item is in the financial statements rather than the process of restating.

In this unit, we are learning by doing (with others), and a number of people are finding this is working for them to support them to learn about accounting:

I was relieved to read in section 4.3 that we are once again relying on peer feedback and discussions around how to restate the financial statements and what to do.  I have learnt that I thrive in this learning environment and learning by doing is working for me.

Lots of acronyms and confusing terms

People often found the abbreviations used to be challenging and confusing.  I have posted a glossary of terms in the Week 4 materials on Moodle, which some people found very useful.

Also, people commented on how they found it difficult to understand it all, although different people particularly liked different parts of it. This is fine and perfectly normal. As we get used to reading for understanding and developing our own personal meaning (rather than simply reproducing ‘clear cut facts’), we find understanding is a gradual process.  We do not simply ‘fully understand’ everything by reading through it.  It is just a start, and can often be a trigger for us to ask more questions as various aspects are not clear to us or as we become curious to know more about different concepts and ideas.

Having said that, as we experience learning for understanding and developing our own personal meaning, we may sometimes find ourselves having sudden flashes of new insights … those ‘ah hah!’ moments. These are exciting moments in our learning, and quite a few people are starting to experience these ‘light bulb’ moments in their learning about accounting.

As you worked through the restatements of your firm’s financial statements many found the concepts we are studying together made more sense as you applied them to your firm.

Knowing how to understand financial statements may be useful

And maybe knowing something about financial statements and having skills to use them to connect with what has really been going on in a firm may take some of the ‘gambling’ out of investing, or at least skew the odds a little bit in my favour:

The statement “firms are alive and we are buying outcomes of their future business activity” really stood out to me. That’s quite scary, when you think about it. If you don’t have much prior knowledge of the firm or their business realities, it’s a lot like gambling. By investing money in a firm, you’re gambling on their future business activity, trusting that they’re going to create good outcomes. It makes perfect sense that … to do this more confidently, you should understand the past of a firm, where they have come from and how they have gotten to their current financial standing. And that’s where the analysing of financial statements comes into play. If analysing financial statements will help to give insight to better predict the future, and better predict whether or not our investment into a firm will have a positive or negative outcome, then that is the most logical course of action. Otherwise, investing money in a firm with which we know nothing about? I might as well take my money to the casino and gamble on a game I’ve never played or heard of, that might have terrible winning odds, almost ensuring I’ll lose all of my money.

And people communicated many great developing insights. For example, what is the benefit of ‘looking at the past’, which is what our financial statements tell us:

Yet to predict the future we need to start with the past- Machiavelli.  I remember being told as a child to not worry about the past because you can’t change it but to concentrate on the future.  After reading this statement I began to think about the different behaviours my child displays and how I can predict precisely what she is about to do because of past behaviours.  I guess this is the same with accounting. When you have a look at the past and have analysed the business realities then you are better equipped to make informed decisions about whether you should or should not become an equity investor in a firm.

Operating and financial activities

A central key concept in the reading is the difference between operating and financial activities of our firms (we will need to be clear on this distinction to be able to restate our firm’s financial statements, as we will be separating a number of items into operating and financial items):

The concept of seeing a firm as having separate operating and financial activities makes a lot of sense. Separating these from each other and understanding what is associated with each helps to give a clearer picture of the economic and business realities of a firm. Diagram 4.1 … really helped me. Looking at a picture as opposed to reading paragraphs of text (with big words I’m still getting accustomed to) … was a good simplified reinforcement of what all of the text meant. It also got me to start considering what this meant for me? What were my ‘operating’ and ‘financial’ activities? I realised I did this with my weekly/monthly budgeting without really realising. I generally have two columns – one which outlines my bills and weekly living expenses (or ‘operating activities’ as such) and one which is my different savings accounts for different goals (house deposit and travel account – or ‘financial activities’). It also got me to start considering what this meant for my company?

It makes sense to separate a firm’s operating activities from its financing activities. Figure 4-1 was a great visual that enabled me to get a better understanding of how the operating activities are separate but still linked.  There is a flow and a transfer between the operating and financing activities through the cash flow from operations (C) and capital outlays (I).

What is accounting exactly?

And quite a few people have come to the realisation that accounting is not ‘just about numbers’ or ‘mathematical equations’ that lead to clear ‘right’ and ‘wrong’ answers. Rather, accounting is full of judgements; and how do I feel about making judgements?

My original misconceptions of this subject were that it was going to be mathematical equations with the outcome of being right or wrong. I’ve quickly come to the realisation that this is not the case. I feel like I will struggle with restating my own firm’s financial statements because I don’t have confidence in my own judgements when it comes to accounting.

…but something that has definitely stuck coming to the end of this chapter is that financial equations aren’t technically maths. I’ve come to the realisation that they’re the connections between different areas of a firm. I’ve also come to the realisation that by restating a firm’s financial statements, it will paint a clearer picture of the firm’s economic and business reality. Or at least I think so (I haven’t done it yet). Wish me luck please… I’ll need it! One more thing…. I’ll be using Chapter 4 as my bible!!!!

*Repeat mantra ‘financial equations are not math, they are merely logical connections between different areas of a firm’*

And as we study accounting we can learn about ourselves, and also change as a person:

As I felt I had a keen grasp of what accounts go where when restating the financial statements, I was then disheartened to see some of the more difficult components of the process as I continued on through the study guide. Of course everything cannot be just black and white, once again we are faced with shades of grey when it comes to accounting. I generally like shades of grey … however I’m finding when it comes to accounting I much prefer the clear cut, straight down the line answers, which I initially presumed was a core component of accounting – how wrong was I!

The ‘certainty’ of numbers

Quite a few people like numbers, maths and the apparent ‘certainty’ working with numbers can give:

Many aspects of this chapter involved calculations and I am probably going to be called nerd but I really enjoy seeing how things work and how they can be de-constructed to give insight and understanding. These calculations are more confusing than half of the maths equations I did throughout high school. The letters can be overwhelming but with the help of the handy glossary everything can make sense and I can love maths again. In regards to how operating and financial activities interact with each other, it can be seen as FCF = OI – ∆NOA. What does this mean? In other words, free cash flow is equal to comprehensive operating income after tax minus the change in net operating assets. Yay, it’s in English now and we can see the transfer between operating and financial!

Restating financial statements

And as we head into restating our firm’s financial statements, some people are definitely getting the idea of what is involved from the reading. The first statement we will restate is the Statement of Changes in Equity, which helps us to slip into the groove of doing this (it is usually by far the easiest financial statement to restate); and it can also help us to see that all the financial statements are inter-related:

The statement of changes in equity is the key financial statement that connects with the income statement and balance sheet. So I found it good to check total figures in the changes of equity with other statements. For example, the total comprehensive income in the changes of equity, if correct, will match up with the total comprehensive income in the income statement. The other comprehensive income will be separated into financing and operating and then placed under headings, other operating comprehensive income, and other financial comprehensive income. The rest of the changes in equity statement is related to shareholders, therefore, this section is placed under a heading called transactions with shareholders. Seems easy enough right? The most important thing to remember is before restating, separating between operating and financing needs to happen.

And then there is restating our firm’s balance sheet:

For the balance sheet, the aim of the game is to separate operating and financial assets and liabilities while clearly identifying net operating assets and net financial assets.

And then, finally, there is restating our firm’s income statement. This may be the most difficult financial statement to restate (it is worth 8 marks):

The next statement that needs to be restated is the income statement. Now that it’s the third statement, I am seeing a pattern occur. That restating is literally just separating operating and financing activities. It is starting to sound easier than it actually is. Why does the income statement have additional steps? Just when I thought it was going to be okay, the income statement needs more attention. Tax needs to be allocated to operating and financing. Okay, but how do I do this? Easy. Find out the tax rate for the country the firm is from and then you have struck gold. To put it into perspective, the greater the profit the more tax you have to pay and vice versa. Tax is affected by both operating and financing due to borrowings and interest. I had honestly never thought about tax that much when it came to financial statements; obviously I knew it was there, but did not know where. To allocate tax to operating or financial activities we must calculate how much tax the firm would have paid on operating activities if it had no financial assets or liabilities and then doing the same to adjust the net financial expenses or income. The tax benefit needs to be calculated using:

Tax benefit = net interest expense x tax rate of the firm

One last additional thing that needs to be done in the income statement is to calculate comprehensive operating income after tax and net financial expenses after tax. After this everything is done; three financial statements are restated. Let’s just hope everything is correct! New things can be scary to experience at first but after a while, I am sure it will all come together without any issues.

Developing confidence

Chapter 4 to me has been by far the most in-depth reading I have done so far. Perhaps this is because I have changed my learning style and find the reflections one of the most helpful ways to work through the assignments and grasp the key ideas. Bring on restating – I feel like I have the ammunition required to tackle the task ahead of me!

And while many are feeling quite a bit overwhelmed after reading Chapter 4, and some are reaching for a Panadol, there is a sense of developing confidence among many that we might just be able to give this a really good shot:

After reading this chapter and trying to understand all the different concepts, calculations, instructions, and acronyms it’s now time for me have some Panadol because my head is hurting.  There were parts that I felt I gained knowledge from but there were also many components where I believe I will gain a better understanding when I restate the financial reports of [my company].  I am sure I will have several ‘Ah hah’ moments along the way.  I am extremely thankful that Martin gave us step by step instructions on how to restate the financial reports as well as putting it into practice himself with Ryman Healthcare, as I will be constantly revisiting these steps in the coming days as I restate the financial reports of my firm.

And still with fears of trepidation, at the end of reading Chapter 4 people prepared themselves to head into the world of starting to analyse and make our own sense of the financial statements of our firm:

My initial trepidation was felt throughout much of chapter 4. But that hasn’t diminished the excitement I feel to finally commence the analysing of financial statements. With the assistance of my peers and my desire to achieve, nothing in ACCT11059 is impossible.

And as we head into the world of restating our firm’s financial statements, remember that analysing financial statements is a little bit like boogie woogie … the boogie is the left hand – steady, solid, regular rythmn (with a strong hand on the detail) – with the woogie in the right hand – lots of flair and style dancing around creatively, but always in time with the boogie. And, of course, there can at times be some ‘fancy foot work’ involved in analysing our firm’s financial statements.

We look forward to reading more of your ASS#2 as we head further into our unit and as we together explore more of the (possibly exciting) world of accounting in the coming weeks.

Regards

Martin

April 2018

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