Step 5 – Chapter 2 KCQs:
From my reading of Chapter 2, I understand banks have the power to request financial information when they are deciding whether to lend a firm money or not. This makes complete sense to me because I work in real estate and when a prospective tenant applies for a rental property, we request a copy of the individuals pay slips to ensure they can afford the rent. I believe this process is a smaller scale example of what banks do when firms apply for loans.
I find it slightly strange that financial institutions, such as banks, have the authority to request financial information from firms. However, there is more restrictions on what information the shareholders can request (when the shareholders own the company). Even though the shareholders may only own a small portion of the firm, I think they should be able to access whatever information they would like, whenever they would like. I feel as though I would want this right.
This chapter discusses whether accounting is a game. By asking this question, I think Martin is conveying that the figures within financial reports can be presented in certain ways to make the overall position of the firm appear more positive. He uses the word “manipulate” which makes feel suspicious and dubious of accountants. Last year at tax time, my Dad estimated his tax return on the MyTax website at approximately $500 which he was not happy with. So, he went to see the accountant – He received a tax return of over $3,000. At the time I remember thinking that the accountant must have been doing something “dodgy” because that is a huge difference. But after reading this chapter, maybe it is isn’t that my Dad’s accountant is “dodgy” but rather she is very good at “playing the game”.
I was surprised to learn that not all firms are required to produce financial information. Additionally, only those who produce general purpose financial reports are subject to legislation and requirements outlined in this chapter. However, upon reflection, I realised that my workplace does not produce any financial reports even though it is set up as a company. I wonder if Ray White Corporate produces these reports? I wonder if Ray White Corporate is the right “type” and “size” to be required to produce conforming reports.
Martin argues that there is not a rule for everything in accounting. I understand this to mean that, like in the real world, sometimes you have to make a judgement call about an issue because there is no specific written rule about it. Just like in life, there is too many possibilities and outcomes to make a straight down the line rule for everything. I don’t love this concept. I think it would be far easier if there was a rule for everything, or at least a guideline for everything. I also think this about life, I ask almost every person I meet “What is one piece of advice you would give to your younger self?”. Respondents often answers this question with their “rule” of life. I could struggle with not having a set of clear rules for everything.
Real learning is hard to put into my own words. I suppose, I would consider I really learned something if I used in in everyday life. I am not sure if that description correctly defines real learning because I struggle to think of an example relevant to myself. I need to think on this concept more.
Martin says that billions of people would kill to study at university. I love this statement because I know it is true and it is a reality check for myself. This morning my alarm went off at 5am so I could get to work by 5:30am and complete this step before I start at 9am. Even though I was tired and cranky when I woke up I tried to adjust my attitude because I know that I am lucky to have the opportunity to study when so many others don’t. I know I need to maintain this mindset if I am going to make it through the next few years of studying and working.
My understanding of accrual accounting is that business activities are recorded in financial reports when the activities or services takes place rather than when the firm is paid for the activity or service. This is important because if a “snapshot” of a firm was taken on one particular day of the year and accrual accounting was not employed the firm may not appear as though they are performing as well as which they are. My mum runs her own cleaning business, and she is paid for most jobs at the end of the month. I know she usually spends less money in the middle of the month than the beginning/end of the month because she has less cashflow then. If I took a snapshot of her business on the 15th day of the month I am sure it would not look as healthy as if I took a snapshot of her business on the 30th day of the month. I think this is a situation where accrual accounting would be helpful if applied. Without it, her business would appear to be performing under its reality at the middle of the month, and over its reality at the end of the month.
Materiality is a concept I feel familiar with. To me, material facts are information that need to be disclosed to someone in order for them to make an informed judgement about something. In accounting, what would be an example of this? At my work when a client lists their house on the market for sale with us we require them to sign a material fact disclosure. On this form they need to list anything they think could be a material fact such as previous termite activity or violent crimes committed at the property. Is it the accountant’s responsibility to disclose material facts or the client?
Step 5 – Chapter 3 (Sections 3.1 & 3.2) KCQs:
In this chapter I learned firms can design their financial reports to their own liking, meaning again that there are no specific rules. I feel as though it would make it far easier for investors to compare investment options if all firms statements were uniform. That way an investor could put the two sets of reports for two different firms next to each other and clearly see the differences between the two firms. Why couldn’t a governing body make this a rule? It would be far easier.
Glossy photos and lots of words? That is not how I was imagining the financial reports in my mind. I imagined them to be pages of numbers in black and white size 11 script. Instead the reports are used as a sneaky marketing tool to engage prospective investors and, again, positively morph the business realities of the firm.
When I read about the balance sheet, it sounds like the “snapshot” I was referring to earlier. It communicates the position of the business on one day of the year. Why wouldn’t a firm choose their best day of the year? Maybe they do? The balance sheet provides three of the five accounting elements – assets, liabilities and equity.
The Study Guide states that the balance sheet will show the information for a group of companies controlled by the parent company. I think this would mean that my company, Power Assets, will have shares in smaller companies and that all these smaller companies plus Power Assets (Parent) will be included in the balance sheet. This could make it trickier than I thought.
I am looking forward to learning more about the four general purpose financial statements because I believe it will be easier to identify and understand these statements for my own company if I have already learned what to look for and how to read them.
Make it Account 