Assignment 1: Step 5

Chapter 2 & Chapter 3

Chapter 2

I have never stopped to think about the financial information of firms (and who and how it can be accessed) other than during the brief news broadcasts we hear every-so-often regarding big business tax evasion, fraud, and embezzlement or inside-trading cases. Truth be told I have no real idea what any of those criminal activities entail, although I assume it’s something along the lines of The Wolf of Wall Street? It’s highly interesting to me, none-the-less. I adore the Albert Einstein quote regarding learning the rules to play the game – and my answer to your rhetorical question, Martin, about accounting being a game? I think it is – just like everything – and some can play much more skillfully than others. I certainly assumed that each individual country would have its own sets of rules and standards (and governing bodies) when it comes to the rules surrounding financial statements. I am not surprised to hear that the GAAP in Australia is thousands of pages long – I knew there was a reason people thought accounting was tedious!

Learning about accounting standards has really brought home the fact that I would never want to be an account – math’s AND complex rules?! Not the profession for me. I’m not really enjoying learning about all the different entities that set different financial reporting rules – there are so many different acronyms here and I’m really getting quite confused. Basically, my understanding is that if you are listed on the stock exchange in Australia (and you produce general-purpose financial statements – which is required if you are a reporting entity) you will need to produce financial statements that adhere to the (voluminous and complex) standards put forth by the range of bodies previously outlined. This applies to firms and government entities alike. Okay – that of course makes sense to me, just don’t ask me what each of those acronyms stand for …

You can’t have a rule for everything in accounting – just like in life. Rather, one must bring together their own personal knowledge, experience and skill to sail through unchartered waters – an experience which we are all familiar with in both our personal and professional lives. It is therefore useful to have a conceptual framework to help guide such processes – such as what is provided by the AABS. Now that I think about it, this framework sounds especially important in our digitized world, with so many new businesses and ways of making money for companies that previously never existed. I’m (surprisingly) grasping the concept of accrual accounting quite easily – we record transactions when the VALUE is exchanged between a firm and its customers or clientele.  Likewise, the notion that financial statements should present information that is relevant, and should provide be a faithful representation are simply enough for me to understand. Once again, these two characteristics are not something I have ever though that a financial statement should have – but then again, I have never given thought to financial statements before this very moment. Following this, I also easily understand the qualities of comparability, verifiability, timelessness and understandability. What a nice change to understand concepts clearly! To be honest, I won’t deny that I am feeling a little bit overwhelmed – Chapter 2 was a lot of information to cover, but now I feel like I really do have a grasp on the ‘rules of the game’ – well, as best a grasp that I can have in my second week of university.

Chapter 3 (3.1 & 3.2)

As I start this new chapter I would like to point out how helpful it is to have key concepts hyperlinked (cheers Martin)! This really helps assist my learning, especially as it’s a sort of ‘call to action’ and a type of passive interactive learning. AND, I’m a millennial – we see a link, we click on it. I fin the ability to instantly read the same information (only explained in a different way) is super helpful. It’s like having a friend next to you in class who is able to present a concept to you in another set of words (maybe using a prose that is more familiar) often helping push your own understanding over the line.  I love that 3.1 outlines the reality that a firm’s annual report is a marketing document. This is something that (although might be obvious for business owners or managers) does not simply occur as common sense to most people. A firm using their annual report as another opportunity for good publicity and positive marketing makes perfect sense – after all, there’s quite a few people I’m sure they’d like to impress. A few paragraphs in and I’m already feeling more business savvy today!

I was expecting the issue of our firm also being the parent to a range of other subsidiary companies. I have previously wondered how this works and I am glad that we are shedding some light on it in this chapter. Surprisingly I understand everything quite easily, however I’m glad that instructions to ignore the ‘parent’ accounts and to instead focus on the ‘group’ or ‘consolidated’ accounts is outlined – this is a simple mistake I could have seen myself making with my total lack of experience in this area. Further to that, the explanation for how non-controlling interests is described on a balance sheet is also helpful and beginning to make things much clearer for me – and, to my surprise, from what I now know – the relationship between subsidiary companies and their parent firms is becoming much more digestible for me. Before beginning this chapter, this was a particular area I thought I would have trouble comprehending – and if I’m completely honest – it’s the only part of the process that I had even faint familiarity with (on a superficial level at least).

As I begin 3.2, I’m glad that I finally have a practical context to place a saying I use far more than necessary – ‘the bottom line.’ The idea that revenue less expenses is a firm’s income for a period is not new to me, although I am glad Martin confirmed this for me (imagine if the one thing I was certain on turned out to be incorrect). I’m surprised to learn that firms are able to set out their financial reports how they please – I assumed that it would all be very ridged in its creation – even possibly a ‘paint by numbers’ scenario where different information for each firm must be entered into the exact same pre-made layout of a report. I think I assumed this based on my own interpretation of accounting and finance in general being such ‘by-the-rule-book’ type of industry. It surprises, and almost concerns me, that this is not the case. Maybe light will be shed on this topic in future chapters, but wouldn’t the unconformity of financial reports be a disservice to all who intend to read such reports? From possible investors (if they can’t easily make sense of what they’re reading, why bother to continue reading?) and taxation and other related government departments, and least of all, concerned employees who want to know how their employer is tracking. Chapter 3.2 has been exceptionally helpful in understanding the role and intention of each statement in the annual report.