ACCT13017 - Assignment One - Step Two

Assessment 1 – Step 2 - Chapters Two & Three: How to Add and Assess a Firms Value

Chapter Two:

The first sentence of chapter two - “when you make an investment in a firm you are not buying its past” - rings so true but wouldn’t life be so much simpler if it were not the case? I am sure that we would all love to purchase shares or invest in a company knowing for certain that they will continue to flourish moving forward and you will make a grand return on your initial investment, after all - who wouldn’t want that? Looking at the past can be beneficial to us as an investor and can perhaps give us a small insight in to what the future may hold for a firm. Unfortunately though, we cannot rely on it to precisely predict what will happen in the years to come. To help us engage with this future, one of the things we need to understand is the strategy behind the company.

To me, a strategy is like a road map. It is the backbone of a business that will provide guidance on how to meet their goals, or as the study guide so nicely puts it, strategies are dreams in search of reality. Will the company inevitably meet dead ends and have to turn around and take another road to still meet their end goal? Almost certainly. No journey ever seems to be straight forward from point A to point B.

Over the past few years I have noticed that I am definitely a list/planning/strategic type person, for lack of better words. If there is something that I want to do (be it long term or short term), I will make sure that I have a strategy as to how I want to accomplish the task. I find that if I don’t have a clear goal and plan in mind then I will get lost along the way. Even though this is in no way comparable to starting a company, I find that strategizing at work is incredibly important. I have six individual tax returns and two company tax returns on my list to complete. I will break these down by their due dates, how important they are, the size of them and how long they will take me to complete, which ones will need to be reviewed first by my bosses, and the list goes on. Once I know which order I need to do them in I will set out a work plan so I can allocate my time accordingly over the following days and weeks, ensuring that I have extra time at the end to cover any queries that need to go out to the client, or any post review adjustments that need to be made.

Reading further through the study guide I came across the ‘Five P’s for strategy’ by Mintzberg, which are Plan, Ploy, Pattern, Position and Perspective. I must say, when I first read over these 5 words that strategy could be seen as, I was not entirely sure how they would even be related to strategy. However, as I read through what each of the words actually meant it became clearer. It has made me think about the different aspects to a strategy, and that developing a strategy that is only aimed at one thing would not be wise. If your entire strategy is to undercut the competition and to ensure that all of your products are cheaper than the next company, you may be missing out on other chances for business development. Instead of strategizing to grow your company and perhaps start to expand, all of your focus is going to providing your products at the cheapest possible price.

The study guide title ‘can the accounts be trusted?’ for some reason really stood out to me. To be completely honest, before I had read these last few chapters and the preface my immediate answer would have been ‘of course they can be trusted – there are so many guidelines and requirements that have to be adhered to – they must be correct’. These last two weeks alone have made me slow down and think ‘can they actually be trusted?’ and my answer now is definitely not the same as what it previously was. One example I can think of right now is manipulating the timing of when income and expenses are recorded. If a manager is relying on hitting sales targets that, if met, will ensure a large bonus at the end of the year, they may ‘creatively adjust’ when income has been received in order to meet these targets.

Not only can the financial statements and accounts be slightly manipulated, they can also not accurately reflect the realities of the business. One example of such is the use of accrual accounting, which is in essence recognising and recording income and expenses when they are incurred, not necessarily being when cash is exchanged. Accrual accounting can indicate the existence of profits in one year, even though no money has been received yet. This could result in what looks to be a profitable company that actually does not have enough cash on hand.

Can the accounts be trusted? – that question really does paint the picture, so to say, with another reason why we need to delve deeper to understand the reality of a business and that this can certainly not be accomplished while just looking at the financial statements of a company. The main point I am taking away from this chapter of the study guide is that before we really start analysing the financials of a company, we must seek to understand their background and to determine what their strategy was.

Chapter Three:

Moving on to chapter three…

I found that there were two key areas of focus in this chapter. The first point that was heavily emphasised is that there is no set way to identify the relationship between aspects of a firms financial statements and their future economic and business realities. Even though many attempts have been made to provide a suitable framework, none of these attempts have been successful in predicting the future outcomes of the business. Reading this makes me nervous to start delving into my given company, QANTM Intellectual Property. If these countless people over the last many decades have not been able to accurately provide a strategy or framework that works in engaging with the economic and business realities of a firm how am I, a university student, supposed to? I suppose that part of the answer to this is that as no one company is the same, it would be nearly impossible to have one framework that would work for everyone. This is why understanding their background and the economic environment they are in is so important.

The second focus point in this chapter is ratios, ratios, ratios. I remember learning about these ratios when I did the Business Finance unit. I actually really enjoyed learning about them and found it quite interesting. However, I think before I go too much further into this unit I will be heading back to my Business Finance notes as I really need a refresher. When I think of these ratios there are quite a few questions that pop into my mind...

1. Which ratios will need to be calculated when I am looking into valuing my given company? And if there is no evidence that ratios can assist us in predicting the future outcomes of a business, why are we calculating them at all?

2. What are some other aspects that I can look at that will give my ratios greater meaning?

When I first started my job as an undergraduate accountant in 2018, my manager decided to start me off in a bookkeeping role first. He said that this will give me a basic working knowledge of how a business runs and operates, and it will be a great stepping stone for when I ‘move up’ in the accounting world. He was absolutely right. Working as a bookkeeper has taught me the basics of a company and I have been incredibly lucky to follow one such company quite literally from the very beginning and to see their successes grow. This business I am talking about formed the same month that I started at my job. This business started off with two friends who decided that they were both great at their other jobs (in the same field) but could be so much better off (and make more money) if they worked for themselves. I have seen this company start with two friends, a small truck and an old directional drill doing small jobs within one hour of their base, to now having eight full time staff members, three drill rigs, multiple large trucks, an operating profit of $1.2 million last year (their first full year of trading) and working all over Australia. Over the coming weeks I would like to not only analyse my given company in this unit, but I would also like to analyse the company that I work with every day. I feel that I have a fairly good knowledge of the directors, the thoughts behind their decisions and the economy that they are working in. I would like to see if this will make much of a difference when analysing the financial statements.

Bring on the coming weeks.