ACCT13017 - Assignment One - Step One

Hi everyone

Here is my first post for the term! I have attached step one of my assignment.

I find that I have really struggled with writing KCQ's in the past (and this first step has been no exception) so if anyone has any comments or feedback then I would love for you to share!

Cheers

Kayla

Assessment 1 – Step 1 – Preface and Chapter One: Focus on Reality

Introduction:

Well, we have come full circle! The first unit in my accounting degree was ACCT 11059 ‘Accounting, Learning and Online Communication’ and now my last is ACCT13017 ‘Financial Statement Analysis’, both with Martin Turner and reflecting on our KCQ’s. It feels somewhat nice to be finishing in a similar way to which we started, and I think this unit will show us all how much progress we have made not only in an educational sense here at University, but also in the ‘real world’ – wether that be running our own small business, working for a company or even purchasing shares.

Shortly after completing my first four units in this degree (ACCT11059 along with three others) I was offered a job as an Undergraduate Accountant at a medium sized accounting firm one hour from my home. My role is split between income taxation and bookkeeping for a few large companies. I have thoroughly enjoyed my position over the last (nearly) two years and there certainly have been many ‘Ah ha!’ moments. These moments have mainly come when there was something that I had struggled with in University was suddenly much clearer when you are actually doing it for a real client and not just reading a textbook. I am hoping that this unit will pull together the major points that we have all learnt over the past few years of our studies and will provide a solid foundation for our future jobs, study and life in general.

Preface:

As I was reading through the preface the main two words that really jumped out at me were ‘business reality’ and how truly understanding a firm is not just what is on their financial statements. Those two words in particular stood out as my employer often says that one of the most important things an accountant can do is really get to know and truly understand their client and their business – otherwise “the numbers on the financials mean nothing – you may as well be reading from a telephone book”. While what he says is a slight over exaggeration, I do understand what he is saying and it makes a lot of sense. There is so much more that can be learnt from a business when you can understand the background, the market that they are in and the competitive environment around them, what else is going on in the economy, and the list goes on. While I understand what my employer says, and I understand that a business is more than just what is on the financial statements, I am really looking forward to studying this unit as I know that I do not always practice this, and do not always know how to delve deeper and apply this in real world scenarios. I am excited to see how much this unit and my current job can ‘bounce off’ each other and how I can apply what I have learnt (and am continually learning) to both aspects of my life.

Chapter One:

One of the opening paragraphs in chapter one questions “whether having a background in accounting or finance actually makes it easier, or more difficult, to do financial statement analysis well”. At the moment, I think that having a background in accounting and/or finance would be beneficial and would make analysing financial statements easier. Surely if you already understand what the numbers on the financial statements are, some accounting treatments or be able to calculate basic ratios that would at least help in analysing them? However, I have a feeling that I will be re-thinking my position on this as I work my way through this unit as I’m sure there are many angles of viewing this that I have not considered yet.

To me, fundamental analysis is determining the value of a business by investigating both the qualitative and quantitative factors that surround them. It is a way to engage and connect with the reality of the business and to draw our own conclusion as to their value. Some of the many qualitative factors may include the performance and experience of the management team, the business model, and the economic environment in which the business operates. On the other hand, some of the many quantitative factors could include evaluating the income and expenses, assets, liabilities and equity and also the ratios that can be used to compare these factors both internally and with many other companies. While many of these factors would be evaluated in the same way by many different people, it is important that we take our time to form our own judgements about the truths of a business and to make our own assessments based on our findings.

Reading further into chapter one I came across the paragraph about critics saying that fundamental analysis on a listed company is a waste of time. I completely disagree with this statement and think that no matter how large or small a business is, or even if they are listed or not, should not matter and if you delve deep enough a business can always tell you so much more than what is simply on their financials.

The sentence ‘fundamental analysis is about seeking to avoid errors which many investors can make’ really highlights to me just how many people do not analyse a business as I would say a large amount of people out there do expect what has happened in the past to continue into the future. I think that this is a trap that is all too easy to fall into as it is simple - instead of having to work on predicting something that has never happened before it is far easier to just assume that things will stay the same in the future.

Reading further through Chapter one had me questioning myself about what I had previously learnt in other units and how well I really understood those prior concepts. Have I previously heard of the Discounted Cash Flows (DCF) or Return on Net Operating Assets (RNOA)? Of course. Discounted Cash Flows (from what I remember) is a method used to estimate the value of something based on future projections and Return on Net Operating Assets can measure the return on the assets that are producing income. However, do I remember how to calculate these off the top of my head or the true definitions? I’m afraid not. I can see the next few weeks being just as much about re-assessing what I have previously leant as it will be about understanding these ‘new’ ways to analyse a business.

The preface and first chapter so far have me a little worried for what lies ahead. There are so many things that I either 1. should already know and either have forgotten or never really understood properly in the first place, or 2. have yet to learn. This first chapter has shown me how important it is that we use our own judgement when looking at the realities of a business. It has also shown some of the common errors that investors make when looking towards the future of a firm (mistakes that I too have made), and made me re-think about some of the accounting concepts and frameworks (that I should have already known). While I am a bit worried, I am also excited for what this unit has in store for us all, and I am looking forward to applying these concepts in other areas of study, work and life in general.