ACCT11059 Accounting, Learning and Online Communication.

ASSIGNMENT STAGE 2 (ASS#2) RESTATED

FINANCIAL STATEMENTS & RATIOS

Emma Bowkett

Table of ContentsNo table of contents entries found.

2

STEP 1: CHAPTER 4 KCQ’SBeginning with the introduction in the study guide with a consider equity investments. As Martin says in the guide, there was a writer who wrote about predicting the future. He said that if we fail to understand the past, indeed if we are wrong about the past, we are unlikely to be able to predict the future very well. And this is so true. If we are unable to understand a firm’s financial statements how are we expected to know what direction a firm is heading in. As seen later on in the study guide about investment into a company and how far that investment goes, you need to be able to read the financial statements like a book and see the story of the business and try and predict the future.

The topic of ‘value’ in a business follows. There are two frameworks mentioned that help with looking at the value. The first one is the discounted cash flow and the second is the economic profit. The discounted cash flow (DCF) doesn’t really have a definition in the study guide so I did a quick google and came to the definition of it being a method of assessing investments taking into consideration of the interest that would be accumulated. The guide doesn’t go into detail of economic profit until later.

At the first mention of operating and financial activities of a firm I was intrigued as to what this meant. I haven’t really thought about the different accounts that I was entering in my spreadsheet until now. The reason for restating financial statements isn’t just to put the different accounts in another way it is also about looking at the firms past and trying to understand how things came about.

RNOA is mentioned next, this means return on net operating assets. This is in relation to the profitability and efficiency concept. I also like how you described the analysis of RNOA as ‘subtle, creative and active endeavour’. Also, as soon as you mentioned the glossary I printed that bad boy out. This helped so much going through this chapter because there are so many concepts I need to learn.

The question I kept thinking about whilst reading the guide was ‘where does value come from?’ I learned that equity investors transfer value back and forth and don’t create value. I also learned that free cash flow (FCF) is also a measure of the transfer of value within a firm’s operating and financial activities as martin describes it. I find this concept confusing and will have to have a read over the text book again. The amount of cash flow a business has will depend on a few things. For starters the amount the firm invests into operating assets each year and the amount of value there is. As operating assets increases the value and cash flow decreases majorly. This makes sense because a firm will continue to obtain new assets under the assumption that the price of assets will be lower than the capital achieved.

Finally, as I keep reading I find where the value of a business comes from. The value is for equity investors and is made by earning a return on net operating assets (RNOA) greater than the opportunity cost of capital. When the guide mentions opportunity cost it means that there are other options the capital has, where it goes and how it is used. Basically, firms gather capital and try and get more return to make up for the money lost to buying assets. I think of it as a circle especially because value gets transferred through the business and the equity owners.

3

Moving onto how to restate financial statements. Separating the operating and financial statements and inserting them again but under different headings and in a different order so they appear differently. The guide also says to not restate cash flow statements because there is no point there is no information on the value of a business in this statement that we need. Martin refers to it as a kinder egg. The financial statements are on the outside as the chocolate and the operational are on the inside as the toy. Although this is a good analogy it didn’t really explain a lot to me. Operating activities of a firms are its interactions with products input markets, consumers and suppliers. Operating activities include making decisions on how/ what to do when adding value. Financial activities of a firm are its interactions with capital markets, equity and debt investors. This includes decisions about the structure of a firm financially.

Next in figure 4.1 there is a view of firm from an operational and financial perspective. It shows the operating revenue and operating expenses on the left side; NOA and the NFA on the right side which is not used in operations. If a firm’s liabilities are too great and are more than its financial assets then the net financial assets will be negative. And if a firm is efficient then it adds value through operating activities. I wasn’t too sure of what ‘clean surplus’ means. The textbook described it as if all earnings in a firm are included in the income statement that is a clean surplus. But I’m not sure what to do if I have clean surplus, if I still have separate the statement into financial and operational?

There is also an important paragraph on page 8 that is basically a map into how to restate financial statements and goes through in depth on how to do it. So, I will definitely copy that paragraph and have It in front of me when doing this.

As I was reading how martin has restated his statements of changes in equity. I don’t understand any of it. I find it very confusing and complicated. Also, the fact that everyone’s companies are different is going to make it much harder to get help from everyone but some people may have the same names on some accounts.

There are three statements to balance. The balance sheet the income statements and the statement of changes in equity. I find the accounts in all these statements are vastly different so it will be a different challenge every statement which I am looking forward to.

A concept briefly touched on is overdrafts. This is the money that is used in-between getting income from customers. This money can also be found in cash registers not only in overdrafts.

There are more steps involved when restating the income statement; expanding on the ‘other comprehensive income’ and adding nothing that is not already in there. Allocate tax to the operating and financial activities; this is all outlined in the guide with different equations for the tax benefit. Finally calculating a firms comprehensive operating income after tax (OI) and its net financial expenses after tac (NFE). The income statement looks way more in depth than the previous two and I can tell ill need a helping hand at some point in this process.

Moving onto economic profit. This breaks the statements down and can make it easier to understand. Things like RNOA cost of capital and NOA are needed to calculate the economic profit. It shows the performance of the firm. Profit marginalization also shows the performance of the firm. And profit marginalization (PM) is when a firm marks up products from the original price it bought them from before it sells them. PM is also more volatile compared to ATO which is asset turnover. I was surprised by this because I though pm would be more stable over time.

4

My final thoughts through this chapter. It was very detailed and contained a lot of information to process, I didn’t really absorb it all just yet but this chapter will definitely need a re-read. The glossary helped me out so much through this chapter because there are so many acronyms. I find understand how to do the restatements hard so I’m going to have to start them soon so I know I have enough time to finish them if I get snagged on something I have enough time to find help. But overall, I really enjoyed reading this chapter of the textbook and I found it very interesting and packed with knowledge. Thank you, Martin, again for another learning experiences 😊

5

STEP 2: CHAPTER 6 KCQ’SThis Chapter was very confusing for me and I don’t fully understand the concepts covered. The chapter covered overhead costs, indirect and direct costs. Firstly, making sense of costs; setting an objective for the future will motivate the firm.

Attaching costs to cost objects is very important for managers and businesses so that they can start to predict the future expenditures and costs etc. In a business using the past costs can help to initiate a starting point at predicting the expected costs for that annum. Martin describe a cost structure as fixed and variable costs that a business ‘incurs’. When recording the accounting background of cost structures, the costs need to be recorded when the products are sold usually named (cost of products sold). I had never thought of it this way but now that martin has mentioned it is kind of like a light goes off in my head and I understand everything. The process of attaching costs to products sold I understand.

Next concept described is direct costs and indirect costs. Starting with direct costs, describes as being easily locatable, and clearly linkable to objects. Whilst on the other hand in-directs costs are the opposite, they are hard to locate and link to products. These costs can also be called overhead costs (indirect costs). I don’t fully understand what these costs are and how to identify them but I understand the difference between them

Product and period costs are defined next in the chapter. Product costs are the costs that are distributed the production, manufacturing and cost of materials etc of product and all the costs leading up to the sale of the product. The period costs are everything else for example the staff and building etc. This is pretty easy to remember an easy to understand this one.

A concept I don’t quite understand at all is production and service departments. The textbook says and I quote “all the costs of service departments (their direct and indirect costs) need to be apportioned to the various production departments”. I really don’t understand how martin has described this at all. There is a little diagram but I still do not understand that at all.

Functional based costing system is up next. I also do not have a clue what is going on with this one, I don’t get it at all how Martin has described this. They appoint systems apportions to indirect costs (only assuming or estimating the relationship between the cost and how they have occurred), this is also called a cost centre. That is my understanding of it although I’m not entirely sure what that exactly means. I will need to research that more to understand it.

There is an equation in the study guide for the overhead apportioned rate:

totaloverheads of a production departmentlevel of activity

Pre-determined overhead abortion rates: they are based on the relationship between the total overhead costs of production and the level of activity. Managers apply this rate frequently to keep track of costs in a business although it can take a little time for overheads to be calculated sometimes. Some can also be seasonal like

6

heating. if the overheads are not calculating there will need to be an estimate put in place. I understand about the overheads of the business being put in place and the estimates and the examples and so on.

Activity based costing (ABC) systems is the next key concept mentioned; there are two methods of attaching costs to products in ABC systems. There are absorption costing which attaches both direct and indirect costs to products and there is variable costing where only variables costs are attached to the product. Variable costing can change depending on the activity in the business. The ABC systems seems a lot clearer to me than the functional based costing system. I just cannot seem to understand the way Martine explains everything.

Careats is the second last concept that martin mentions. Cost-volume-profit (c-p-v) analysis is the relationships of costs, volumes of activity and profits. This I understand as well as it is not a concept but a relationship between parts of concepts.

Lastly is the fixed and variable costs. I understood these easily and the equation that came with it as I remember that from high school. Foxed costs being the ones that won’t change with activity but carriable costs are the one that will change like the amount sold etc.

y= f (x )

X =variable and y = fixed costs.

Within this equation there is a breakeven point where the revenue equals costs. From this point forward there will be profit.

7

STEP 3: RESTATING FINANCIAL STATEMENTS

Restated Financial Statements

8

STEP 4: PROVIDING FEEDBACK

9