Chapter 3 ideas, reflections and reactions

It is true that being introduced to the financial statements is like meeting someone for the first time. At first you may know a little bit but over time as you get involved deeper you understand a lot more and understand where the numbers are coming from much the same as you will understand where a person’s behaviour or stance comes from. But unless we make that effort we will not get that far. I definitely find that myself if I am not interested in something I will not take the time. Sometimes the way I study I like to relate something to my personal experiences so that it becomes relevant to me.

 

The statement about each of us being different much like a firm’s financial statements being different is spot on. Although the layouts may be similar there are differences which at first can throw you and make comparing different firms a hard task. I find it surprising there are no set rules for the development of financial statements especially when one of the enhancing characteristics is comparability. For me comparability should not only be representative in a single firm but across all firms. The reason financial statements are provided is so users can make decisions on the allocation of scarce resources. If you cannot compare, how can you make these decisions.

 

Is the annual statement really a marketing document? I had never thought of this before. But when you step back and think about it that is exactly what it is. The annual statement normally contains some sort of dynamic cover page or some smiling faces. My company’s statements contain happy, smiling customers all through the document. It is normally printed as the feel good story of the year. The chairman’s report will highlight the statistics or ratios that show just how well the company is doing and don’t forget to mention the strict corporate governance processes in place. Wow such a model corporate citizen, how could I not give you all my money?

 

I am not an expert in annual reports but I wonder the last time a report came out that said ladies and gentlemen we are in trouble! My company’s statements use graphs to show performance continually rising over the last 4 years. I wonder why do not use these same graphs to show executive remuneration.

 

Once again a new way of looking at things that helps the understanding of key concepts. The simple balance sheet is representative of only one day. Although now I think about it, it is hardly surprising yet I had never considered this before.

 

The example of Ryman Healthcare retirement village’s names is another example of how a company can add value. To the extent that names of a village are strategic makes me wonder how we can actually explicitly trust companies. The concept of trust was raised in Chapter 1. Much the same as the way products are strategically located in the aisles of the local grocery store. Accounting requires so much judgement and allows different methods. How can I trust what I see in the “marketing documents” or the annual report/financial statements?

 

How can I check the extended accounting equation by inputting the numbers from my company’s financial statements? The figures from the balance sheet contain assets liabilities and equity after the revenue and expense accounts have already been closed off. So by adding revenue and expenses to the equation I will be left with an unbalanced equation of exactly the same amount as profit or net income. Am I missing something or this to be continued at a later stage? The only way the equation would equal is if equity in the equation represented the amount before revenue and expenses are closed off. I do not understand how this equation works at the moment.

 

Things only get worse as the reading moves onto changes in equity. This is the statement which I have had the least interaction with and I do not fully understand it. Maybe it is the case similar to meeting someone where you have formed an adverse opinion but once you get to know them you realise they are a really nice person and you get along famously with them. Hopefully working through my company’s statements through the term will get me to that stage.

 

I liked the discussion on ratios. We are very much tied to our past. As the example of the QWERTY keyboard showed in Chapter 1 we very much stick to what we know.

We tend to use what has worked in the past rather than understand the underlying concepts and link them to the individual business to develop a sense of what is happening. It was the same in my sporting days playing rugby league. We were always keen to do what someone else had done such as plays or structures. Yet we did not understand the underlying concepts and how they were related to the strengths of particular teams and not necessarily ours. Much like ratios here is not a one size fits method as each number represents something different to each company.

 

Relating back to sport the same can also be said for new ideas that “rock the boat” of common consensus. New ideas were easily shot down and players were not willing to try them unless they came from renowned coaches or star players from a higher level. We do not know why we are doing things or the underlying principles we are just doing them because they worked for someone else.

 

The same can be said for accounting ratios or practices. Those concepts or ideas too far removed from current practices are quickly shot down yet some have come back into focus many years later as possibly a better way of doing things. The wide range of theories also show value is in the eye of the beholder and each person’s reality is different from the next.