Step 5 – KCQ’s Chapter 2 & Chapter 3 (Sections 3.1 and 3.2)
Chapter 2
As mentioned in my Step 1, I felt optimistic about reading this chapter as I’m all about rules and processes.
Reading through the chapter, my first question was who or how was it decided that financials would become available to people outside a firm? The financial position of someone is private information to me. For example I don’t want everyday people to know how much I earn at work or spend on food each week. But after taking a more in-depth thought about this I realised that there are people outside of the firm who are investing their hard earned cash so to me it seems only fair that these investors have access to company’s financials to determine if they should invest their money.
One of the concepts I found interesting was that there are two different aspects of accounting, financial accounting and management accounting. I have seen within my work place what our internal accounting looks like on the balance sheet. I had never considered that this could potential be presented differently to outside parties. My initial thoughts on this is that you would only present something differently to hide information you didn’t want others to know.
In the chapter, generally accepted accounting principles were described as the rules of the game. But in the same paragraph it is mentioned that not all of the rules are written. If all of the rules are not written, how are firms able to know if their financial statements are correct? Additionally how would the Australian Securities and Investment Commission enforce that the rules are complied with? Perhaps this will be answered upon further reading.
Accrual accounting is something I have familiarity with through my workplace, therefore I believe I have an understanding of this concept. For example, cars are washed and the gardens are watered every day. Even though the water has been used, it is not paid for until three months later when the local council sends the bill and the cash is handed over. Rather than three months of water usage being costed into one month, an estimate is made at the start of the month about how much the cost of water will be for that one month. This amount is then expensed in that month.
The concept of materiality gave me a different view about not every rule being written. To me it seems that the person who prepares a company’s financial statements has a quite a weight on their shoulders. They are making judgements about whether something may or may not affect a decision made by another person. I do not believe you can be held accountable for another person’s decision, so I think this is one of the grey areas in accounting.
Reading about the quality and faithfulness of information made me feel concerned. It was a bit alarming to read that financial information can be presented in a difficult way to understand. I actually thought back to my own firm’s financials and how I found out about the $8.9 million notice of demand. How is someone to know if the financial information they are reading is faithful? Does reading multiple firms statements give you knowledge to know this? Or is it trusting that firms are honest in their financials?
One of the key qualities mentioned was timeliness. I experienced the importance of this concept whilst completing step 3 of the assignment. I uploaded my draft to Studosity and within only a couple of hours I had exceptionally detailed feedback sent to me. Receiving the feedback in such a short time enabled me to correct some grammar errors on my other assignments.
After reading chapter two I am left thinking that there are a lot grey areas in accounting. The rules are not written, decisions are made on the assumptions of others and financials are not always the reality of a firm.
Chapter 3
I strongly agree that a firm’s annual report is a marketing tool. Whilst reading my firms report I really felt like they were selling themselves to and to be honest they did a really good job.
I cannot understand why a balance sheet would only be produced once a year. Perhaps one of the other statements are more valuable to use on a regular basis? I didn’t find an answer as to why it is only ran once. Maybe when I get to know the balance sheet a little more I’ll find the answer. My firm has a substantial amount of footnotes on their balance sheet. About three quarters of the items listed have footnotes. There is a lot of information to read but I guess this is where knowing what information is of value to you helps to eliminate what you don’t need to read.
I was glad to see that comprehensive income and other comprehensive income were included in this reading. I was glad because whilst watching the ‘how to enter your financials’ video in Moodle I didn’t quite grasp what the difference was. My firm had other comprehensive income from the re-measurement of pension plans in the UK. In simple terms other comprehensive income is income or in some cases losses, from activities a firm is not normally engaged in.
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