Chapter 4 Getting technical

Analysing Financial statements

The chapter read was interesting, in that I began with the thought that it would be more technical then previous chapters which it was. Referencing the glossary was helpful it moments of doubt. The first curiosity arose with the discounting of Cash flow measuring the current cost value of future monies being calculated now. That the decision making about investment is measured in real time but additionally through time as well. The concept wasn’t completely foreign however it was made clearer through links. It is being more apparent that the further into the course work I am finding the more art to accounting than science. There are many equations that are still rather straight forward but the reasoning behind why the equations are made are interesting to watch unfold and be linked together. I however prefer big picture concepts first rather than the leading of linking one idea into another. I am enjoying the mixture of theory and practical application even though I am not yet grasping all the concepts and how the all link together. Restating financial statements seems to be all about the simple rearranging the past figures to simply be further comparable to current ideas to allow for better future decision making. Further along in the chapter it became clearer as to why one would do such a task. In order to create balance in decision making. Another question arose regarding the measuring of Free Cash Flow and my curiously in the measurement of investment value of return. In understanding the value of the equity within the firm and perhaps the purpose of the restating is finding the equivalent process to build the clearest picture to measure to some accuracy future growth. My interest is in how manipulating equity being displayed differently differently at a time to cost potential on expected returns changes our decisions. The balancing of opportunity cost and economic profit and when to enter and exit a market and while I may be able to do a calculation how do I interrupt the results. The same rational was applied for me when applying for university. The cost of time needed to complete the course measured to the value gained and the potential it may create for me. It is still a risk that it may not work out the intended way and I feel that it is the reasoning of decision making that I value in accounting equations of decision making. What return I get for the amount I commit and what potential return I could have had in making a different decision in the use of my time. This chapter explores the balances between several ideas that are often both competing but separate as well in their own right.

The idea that a firm adds the most value to shareholders through its operating activities and its projections was dauting. The short hand of equations between Net operating assets and operating expenses was confusing I’m sure the practical application will clear it up for me. I am hoping the future material will support the learnings of this chapter. This separation of operating and financial cost is to measure potential value but in not forgetting the importance of financial activities as well. It was interesting that the categorising of the assets and liabilities of a firm and is traced back to the influence of the banking sector in the early development of the financial statements. I wonder why the industry hasn’t just created new norms of practise rather than the process of restating the financial documents. Restating appears to me to be the mapping of risk and return based of previous decision making of the firm. Reading further it is good to note that the matching of cash flow is never possible and that there is always parts of the discussion that requires further decision making and reason to that decision making within the industry norms. Following through the reading the information regarding tax shields and the secondary gain from paying interest and how it is equated back to the financial side of the operations was a learning I didn’t expect. That the tax benefits that is calculated as an off set to the cost of finance and not left within the origins of operational costs. This was interesting in the application of such a decision that the secondary gains of borrowing creates cost benefit.

Profitability and efficiency as this section began, I became excited again I feel it should be the leading part of the chapter it tells you the reasons for all the restating. The confusion as to why you would need to restate the financial documents became clearer. The technical acronyms and terminology of the previous sections make more reason to the bigger why. I think the action part of the accounting would have drawn in better learnings around the restating process if this section was first. I realised that much of the processes being explained are operational until this functionality of how the decision making of accounting can be manipulated to through turning information into knowledge. Using discernment to balance between net profit from sales in dollar value verses the dollar amount made on capital investment. This is fascination I have within accounting and the reason I felt I missed in earlier study attempts in book keeping. The frustrating parts as to why you would break into operating and financial sections was made clearer to measure economic profit and potential capital gains more clearly. This had given a clear why that the measurement of growth and capital gains is more easily quantified. Through the changing and restating of financial data. Now to the practical application.