Chapter 1 & 3 KCQs

Hi Everyone,
First things first: DID ANYONE FIND THESE EASY? I certainly did not. My apologies, this will be a lengthy post! Thanks in advance everyone, really would appreciate feedback on this!
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I like that throughout the chapters there were exercises you could do yourself to gain a better understanding of what the author was saying. For example, where the author says in Chapter 1 “You can Google ‘Accounting software packages in Australia and NZ’ to find a long list of packages people use”. Even though it goes on to say the packages that appear after this search, I still found this a helpful little break to the lengthy read. I also find the quotes helpful to break up the chapter’s information. I found myself reading the same sentences over and over again. I think this was due to the fact that I simply do not like reading lengthy things and struggle to do so! 

Chapter 1 – A Way of Viewing Business

Everywhere you look there are businesses. Each business varies in the products and services provided, as a result there are so many different things that are to be recorded by accountants. I found this chapter to be an overwhelming introduction to the accounting of businesses.

1.1   It Is All About Reality

Key concepts:

- ‘Connecting ‘us’ to the ‘business realities’ of a firm. To me, this is about the person reading the firm’s information (i.e. us) to gain an understanding of what is actually going on once you break down this information (i.e. business realities). 

- Value in business, is key. However, what is value? Initially, I found that value arrives in all different forms, regardless of the form, it must be something that the customer cares about, the needs and desires are the value to the customer.

- Structure, each business chooses a structure that suits they’re situation, whether it be sole trader, partnership, trust or company. How do businesses choose this? Is there a checklist an advisor would run you through to see what suits? If I were to start a business, what would be the most beneficial structure to me? What things do I need to consider before deciding? 

Summary: To me this section was used to introduce the common terms used within businesses and to help the reader understand why accounting is necessary for a business, whilst at the same time to me it demonstrated that everywhere I look there are businesses, and behind every business there is an accountant.

1.2   Keeping Records

Key concepts:

- History. History of anything is essential to understand why the current method is used! Accounting is no different. I had never considered other methods that could be used to record transactions other than the double-entry accounting.

- Technological advancements, making accountants jobs easier since the 1960’s. For me, working in an accounting firm, I cannot imagine my job without a computer. However, is my job threatened by this? With technology always improving, the whole process could be automated. To me, I think this would result in an increase of audits.

Summary: To me this section was in regards to the “where did we start” and “where are we now” in regards to accounting. I found it to be heavily based on the past and future of record keeping, rather than the record keeping itself.

1.3   Two Sides to Everything

- Every transaction in relation to the business running is recorded and each one of these transactions has an account assigned to it, whether it is revenue, expenses, assets, liability or equity.

- Every transaction is made up of a debit and credit. Why is it this way? How did they arrive at this method?

- Accounting is maths and as a result, there is a formula for accounting. This formula however, is interchangeable.

Summary: This section, to me, provides the reader with the explanation of all the key terms to accounting. Journals, general ledgers, assets, equity, liability, revenue and expenses are all key terms.  The terms used within accounting mainly stem from the Latin language. I believe this provides the basis to accounting.

1.4   Five Elements of Accounting

- Value can be measured by accounting, either the value of the firm or the interest of its equity owners. This value isn’t a need or desire in this case; this value is the dollar value. Everyday people are trying to measure a diversity of things, will they every measure the value of desire or need?

- Revenue and expense determine the equity, to calculate the value of the firm.

Overall, this summary, once I had finished reading it I realised that the amount of information wasn’t as overwhelming as I had first anticipated. It states things in a variety of different ways, with a variety of examples to ensure that the foundations of accounting are drilled in our head.

Chapter 3 – Introducing Financial Statements

Financial statements: eek. Initially I was so closed minded about financial statements. I thought that because I worked in an accounting firm I’d find this a lot easier. I could not have been anymore wrong. Little did I know; that they can vary significantly. The example of meeting someone for the first time at a party is very relevant, especially where it states that you may be overwhelmed or worried.  Some financial statements are extensive, some are very minimal. Some use the common names, whilst others have variations. Nevertheless, there are common features within every financial statement. Common features such as every financial statement will have a balance sheet, income statement and changes in equity; however these change in size, names and terminology.

3.1   A View of Business at Rest

- Firstly, key thing for me: Financial statements are a part of the annual report. If I’ve found the annual report, I have the financial statements.

- Balance sheet: simply, I would say this is the financial position on one day - most commonly, 30 June. Summary: This, to me is the section that highlights the reason of including a balance sheet in the financials. It provides the overall result of how they are sitting financially at the end of the financial year (or any other date the statement is created). It puts a lot of emphasis on the balance sheet.

3.2   A View of Business at Rest

- Although the balance sheet gives the position overall, at one particular date, it does not give insight to how the firm came to this position. To me, the reader was saying that the income statement provides better explanation of how the changes occurred on the balance sheet from the previous year.

- Income statement: I would describe this as the totals of the revenue and expenses. Why isn’t this known as an ‘Income and expense statement’? Is this how the ‘profit and loss statement’ occurred?

- Statement of changes in equity: perhaps the most confusing part of the financial statements to get my head around, mainly due to the fact that it goes under different names and has many different terms involved. To me, it shows the changes made to each shareholder, partner, beneficiary, etc. If only the total equity is important to us now, what is the point of the other columns?

- Cash flow statement: this is the most uncommon statement to me. It’s not one I have frequently seen. To me, it basically states the movement of cash throughout the period. Would this be similar to a bank statement? It starts with an opening balance, shows the transactions that go in and out and concludes with a closing balance.

Summary: There is a lot more involved in the financial statements then I initially thought. To me, I believe it’s beneficial that I understand the balance sheet, income statement and changes in equity statement. Is the cash flow statement as essential as the others?

3.3   Making Sense of Financial Statements

- Ratios: Why have I never heard of this in regards to accounting? There’s a lot of history, but what exactly is it and how do I apply it? There is a lot of background information but how do you calculate it?

Summary: I found this section the most confusing to understand, from this I’m not sure what I see to be clear key concepts. There was A LOT of information, but to me, it didn’t really say anything.

3.4   The Value for Anything

- Throughout this chapter there is a large emphasis on value. What else could it say more about value? Dividends and cash flow can relate to value, that’s what else it relates to.

- Dividends are represented by a model (what a surprise).  It’s key to me, to have an understanding of the present value.

- Cash flow is also calculated through a formula, as I stated above, to me accounting is all maths. There is a right and wrong? To me, opinions are irrelevant and bias shouldn’t be present in annual reports.

Summary: I found this section to be a very theory dense. This is the section I got most lost in, there were definitions, formulas and acronyms yet I still really didn’t understand what it was trying to say.

Overall, chapter three, was far more overwhelming and theory dense than chapter one. It was a much more difficult read, where I constantly felt myself losing interest. From this chapter the main thing I took away from it is: in business everything has a value; it is an accountant’s job to measure this value using the elements.