ACCT11059. An After action review.

Part 1.

I’ve arrived at the end of another section of this business diploma I’ve been working on since early 2017. The month of June saw ACCT11059 come to a close and the resulting score and performance reviews were issued.

This is the second time I’ve started this course. My first attempt saw me trying to complete the accounting and economics section at the same time, in a work location that had limited access to the internet. The time and location prevented me from completing both those courses.

In 2018, I’ve learnt a lesson or two about myself and the time I have after I’ve completed the working day. This has led to a revision in how I approach these tasks with my limiting the workload to allow for the best attempt to achieve my goals. At the least from a time expenditure view of things.

My reason for this blog is twofold. This reattempt at the accounting course didn’t yield the results I had wanted. So, I’m wanting to go over the lessons contained in it to complete a framework of the objectives and create a reference list that facilitates the execution of the skills I’ve been exposed to here.

The second reason is I have realised a thing or two about my time expenditure habits and the process I use to gain an understanding of the subject matter I’m working on. I’m thinking that if I go over this aspect of the last couple of months it’ll be beneficial as I have the bulk of this diploma in front of me.

With that said, I’ll start with an analysis of,

What I got wrong.

The restatement exercises.

This course uses an analysis of three financial statements from an existing firm to allow the student some exposure to a real-world example. The first task is transferring the figures from their allocated company’s changes in equity, income and balance sheets to an Excel spreadsheet.

The next stage in that exercise is a restatement of those financial statements that allows the student to separate the financial and operating expenses of their firm. This exercise, as a part of this course, is different from the restatement exercises that a firm may do for the purpose of correcting previous mistakes or including changes in accounting standards or laws that may be relevant to the observer.

The purpose of this course’s exercise is to allow the student to see what how the firm’s financial and operating expenses affect the firm’s outcomes. In addition to that, the final section of that lesson is a ratio analysis of the firm’s three financial statements.

It’s during the restatement exercise that I found myself exhibiting a lack of understanding about how to go about this task.  My problems were minor, but I do remember having to slowly find my way through the exercise. This for me is a sign that I don’t know what I’m doing, which to be fair isn’t unusual for a student new to the subject but I digress.

In recognising that I’d like to go through the exercise and develop a working format to conduct this exercise as it’s a skill I’d like to retain. The purpose of restating a financial statement is it allows the user to see the costs associated with the operating and financial aspects of a firm.

It’s a relatively simple exercise to conduct, the complicated aspects require an understanding of the business you’re analysing, clearly explained annual statements and of management accounting methods. I note those three factors due to the insights that knowledge of them will allow you to understand the operations of the business you are analysing.

 In understanding the nature of the business you’re investigating, you’ll gain an understanding of the market they’re in and how that business deals with the opportunities and challenges it faces. In respect to well-designed annual statements, I’ve found that a set of financials that include the use of footnotes, will be of great assistance in understanding the current and previous operations of a firm. In addition to that, the accessibility of the firm’s information via its annual statements assists the outside observer to understand what the how the business is performing.

The role of business accounting is to assist the manager in dealing with the challenges that the firm faces in the immediate and long-term. This form of accounting is different to financial accounting (which is used to inform users outside of management) and can offer insights to the realities the firm faces. In a lot of ways, it will be useful to use management accounting and an understanding of the business’s market to see the how the company has performed and assist in understanding the future decisions the firm has selected.

Now down to the detail about the mistakes I’ve made in this exercise.

The first statement we had to restate was the changes in equity. I had two notes from my assessor that notified me my of errors. They were a separation of the firm’s other comprehensive income into financial and operating income and an error in the totals not matching the previous amounts of equity this statement would show when the numbers are correct. The last factor was just a simple editing error, which reveals the obvious need to review the work before submission to assessment.

The issue with other comprehensive income for this statement contains a lesson in understanding the nature of the financial and operating aspects of a firm’s statements.

It’s always useful to have access to the details behind the numbers in an annual statement. And as acknowledged previously this is where footnotes will assist the user in this exercise. In my study example, however, this item on the list didn’t include a footnote to reveal what those amounts were attributed to. That said the title of the amounts in this statement was called “the exchange differences on the translation of on foreign operations” that may be subsequently reclassified to profit or loss.

In my example, I simply noted that as an operating expense and labelled as such in my restatement. And as I’ve acknowledged I was marked as wrong for doing so. In response to that, I see the need for a little investigative work to understand why.

The company I was analysing is catering to markets across the globe. This where the foreign exchange differences will come into the equation. So how does one go about understanding the nature of those numbers attributed to those exchange differences? Are they operational or financial factors?

The first point I looked at was the title in the annual statements for these amounts. It states they’re attributable to foreign operations. Which is why I allocated them to operating costs in my restatement. At the time in looking into the financial statements further, I didn’t define those expenses as a financial cost. The explanations I’ve obtained from my own research post this exercise, show that while these amounts are attributable to operations, the parent firm as the accounting entity for reporting purposes, may at some time recover those amounts into the accounts where the parent company is based.

This is where the exchange differences can appear. Those differences will come into reality due to fluctuations in exchange rate differences at the time those amounts are realised at the time of their conversion to the entities functional currency.  A firm’s functional currency is the currency of where the entity’s primary economic environment in which it operates.

But does this change the nature of that amount from operational to financial? As a base premise, I didn’t believe it did. The purpose of the exercise was to simply separate the functions of the amounts in the statements to operational and financial factors.

The only way I can see the amount having a financial aspect is to find a separation of the amounts due to operations and amounts that account for the interest the firm may earn on the interest accrued in the entities accounts. This would account for a financial aspect of those amounts, that would need to be recognised in order to discern where the incomes are generated.

To try to add a little detail to what I’m hinting at here, we see with the revenue amounts, in a firm’s income statement, as having a portion of revenue as financial income. This amount will be due to income generated by interest on cash reserves the company may hold at the time the firm’s accounts are tabulated. In addition to understanding those amounts, in my company’s situation, those amounts are attributable to foreign currency reserves. The time difference between the income and the accounting for that income could include an increase in that amount due to interest payments on those reserves.

In addition to that fluctuations in exchange differences at the time of reporting will play their part in influencing the amounts hence their potential position in profit or loss.

In light of that analysis, I believe I can see what my assessor was directing my attention to regarding the separation of the financial and operating amounts in the OCI amounts. If the accounting for these amounts is properly attributable to reserves and any possible interest earned on them over time and the influence of exchange differences this changes the nature of that amount from an operational consideration to a financial one. The separation of those amounts requires information on the nature of these amounts, while obviously originating from operations, becoming over time to a financial asset for the firm’s accounts. In not realising this amount as a financial asset and seeing it as an operational one, is where I believe I was wrong.

A little advice for me, from me: look a little closer at the details next time. You goof.

Understanding Key Cost Relationships.

Chapter Six gave us an introduction to costing via the p.o.v of a manager. I personally didn’t think the subject would be as complex as it turned out to be but that ain’t a bad thing.

If I was to try to describe the purpose of this chapter I would say it sought to describe the separate concepts used in costing the production cycle of a firm.  It sought to describe, to put it metaphorically, the parts of a machine or two or three different machines. Those machines being the methods of establishing a system of costing for the business’s operations.

The main concept I’d say I took from this exercise was that the costing systems used by business’s are a means to understand and control the expenditure and establish a price for the product or service being produced. This process will also allow the development a profit margin to be added to the equation.

As for the restatement exercise,  I can only say thank you to the course coordinators for having the YouTube demonstrations for us to follow.

My statement was pretty straight forward to complete with the income statement being the only section I had dramas finishing. I had an entry under other comprehensive income that appeared to state an amount twice which I’ve assumed was a subtotal/total. I honestly can say the only way I finished that part of the exercise by following Maria’s example line for line and discovering that I’d included that OCI amount twice.

Anyway, that said here’s a copy of my Step 2 and 3 for a review.

I just need to organise the feed back for Step 4 to complete this part of the unit.

Assignment 2 Step 2

Altium

KCQs from the Step Two.

Value exchange.

The exchange of a services or good for a consideration, usually in the form of money.

Cost objects.

Are parts of the firm that have their costs attached to them formally so a manager can observe the overall or specific costings of the firm.

Cost structures.

This is a management accounting concept that seeks to attribute a framework of fixed and variable costs that are incurred in the production or service process. This method is used to assist the firm with developing prices.

Direct and Indirect (Overhead) costs.

Direct costs can be clearly linked to the object. Indirect costs and a general cost of the operation associated with the object but not directly discretely connected to the item.

Job costing.

A method used to assess the costs of a total product due to its isolated nature. If an item has can be separately identified, its costs can directly be attributed to it, thus you can define the costing of that job.

Process costing.

This method of costing will assess the costs of each phase or process in the production cycle and have the product “collect” the costs as it continues along the manufacturing chain.

Product costs.

These are the costs attached directly to the product. An interesting detail to appreciating this concept from an accounting point of view is that the product costs are not viewed as an expense until the product is sold. These costs are viewed as asset before sale.

Period costs.

This concept is names the costs incurred of a time-period during a production cycle. They are indirect costs that are incurred as a part of the production phase and are attached when the product requires that costed “period” for its production cycle. I would assume that a firm could include in its production scope a series of production periods that separately costed to allow for a finer focus on the expenses incurred by the firm.

Functional based costing systems.

This type of costing method combines both direct costs with an estimate of the production cycle’s indirect costs to define a total for that production cycle.

Activity based costing systems.

This form of costing seeks to attribute variable costs to various activities included in the production scope. As the product requires the activities required to complete the product the value of that activity is attached to that product.

Overhead absorption rate.

Total overheads of a production department divided by the level of activity.

Absorption (Full) costing.

A method of costing that includes both variable and fixed costs to the product or service

Variable costing.

Variable costs are cost that vary with level of activity associated with the job. Variable costing is an appreciation of the variable costs of a product or service.

Fixed costs.

Fixed costs are the associated with a product or service that don’t not vary with the period that the job occurs within.

Cost-Volume-Profit analysis.

Can be used to model the business scenario to assess the break-even point required to cover the costs and assess the profits possible by including other information about the levels of interaction with the product or service and the customer.

Break-even point.

Defines that amount of sales revenue where you make no losses and no profits.

Contribution margin.

CM=Sales-Variable costs. The proportion of sales not consumed by variable costs.

Business judgements.

On page seven, regarding the apportioning of indirect costs “The difficulties usually revolve around apportioning indirect costs to products because the links of indirect costs to products are, well, indirect and require us to make some business judgements in attaching them to our products”. On the question of business judgements, are there generic questions a manager would ask in quantifying those judgements?

Chapter Four. Analysing financial statements.

Introduction.

One aspect of this course I find I struggle with is the KCQs that we’re required to develop from our readings of the chapters that make up our study guides. I certain this is why Martin makes use of the exemplar concept to guide the uncertain in this course.

I’m certain there’s plenty here in the team that don’t have this issue and their efforts are well worth the time taken to observe there work. One I’ve found is Evan Spurway’s blog. From my understanding he has a background in the subject matter for this course and has generously demonstrated a meant going over the KCQs. I found his work to be helpful as his understanding of the subject and approach to blogging offers us all a useful frame-work to reference as we all go through he exercises for this course.

With that I mind I’m going to try something a little similar with my assignment two and see if my work can improve on that front.

Chapter 4-KCQs.

Capital markets.

The nature of capital markets is forward-looking. The focus of these markets is the provision of funding for market ventures with the view of making a return on these financial assets i.e. shares, bonds etc.

Understanding the past, predicting the future.

When we speak of accounting frameworks or structures being used to understand the economic and business realities of a firm, what are the components of those frameworks? And what do those frame works illustrate? Is it actually what the business is doing or do they reveal how this accounting frame works were used in the past?

Discounted Cash Flow (DCF).

Is an economic profit framework that allows the assessment of the present value of future profits by de-rating the future profits of a project or venture. A common derating factor is known as the Weighted Average Cost of Capital. The factors included in WACC include the costs of the firm’s financial operating costs which when applied to the expected profits is utilised to ascertain if a project or venture is worth while. It has limitations as the usefulness of the formula is only a good as the data used within it.

Separating operational and financial operations.

Is done to define the key accounting drivers of a firm’s economic profits and cash flow.

Return on Net Operating Assets (RNOA).

Is an internal management accounting ratio used to define the profitability of the firm’s equity investments. To view a firm’s RNOA, its net income before tax is divided by its total assets. In formulaic terms RNOA = OI/NOA.

Free Cash Flow (FCF).

We read in Chapter Four Analysing Financial Statements, that “free cash flow (FCF) is a transfer of value within a firm. It is a transfer of value between a firm’s operating and financial activities. Free cash flow (FCF) is driven by two things: cash flow from operations (C) and net cash invested into a firm’s operating assets (I)”.

By observing the FCF of a firm we can see what how investment in its operational assets base is affecting its earnings growth.  This will offer the investor an indication of what the business is doing to add value to the entity in the case for consideration of future earnings growth.

The formula for FCF is FCF=C-I.

Operating Income after Tax (OI).

Where the Operating Revenue (from the business transactions) has the Operating Expenses (rent, wages, insurances, payments to suppliers etc.) subtracted from it giving us Operating Income.

OI=OR-OE.

Economic Profit.

This one was interesting for me as it included an economic term “opportunity cost” when referring to the factor (cost of capital) to be subtracted from the RNOA in order to calculate economic profit. And this is where the difference in accounting profit and economic profit are revealed. Accounting profit, generally speaking, looks at revenue minus the costs of doing business. Economic profit inserts the opportunity cost factor into that equation. When using this calculation you can see if the business is making money on the costs it incurs while doing business. This result will confirm the belief in the investor’s consideration of the opportunity cost of their equity in the business.

Another interesting factor is the requirement to know what the firm’s operating assets are for this equation. I can see now why the restatement exercise is being utilised in this course.

Net Financial Assets.

Are a result of a business’s transactions with the financial markets.  They are seen as a store of value to the firm as they provide capital for the operations of the business but in the case of a lack of profitability i.e. the firm not covering the expenses incurred in securing these assets they then become an obligation known as the firm’s Net Financial Obligation (NFO).

Net Operating Assets.

Are assets that earn revenue for the firm net of the costs of doing business related to the firm’s operations.

OI=OR-OE.

Genuine equity.

Some firms will include (in their SoCiE) forms of equity that are actually liabilities. The example in Chapter Four of preference shares, which command dividends from an investment, that have a payment priority being included in the Changes in Equity which

Profitability.

In simple terms: The ability to generate a percentage of income (that remains after expenses are paid) when compared to alternate investments.

Efficiency.

Again from Chapter Four we read that, “Efficiency is how well net operating assets (NOA) in a business are being used to generate sales or turnover (turnover is another word for sales)”. To understand this concept we look at the product of the firm’s operating assets and sales generated in dollar terms.

Concluding thoughts.

I’ve found it more useful to go over the specific concepts contained in this chapter as there’s a lot of information contained in this one. So much so that I don’t believe that I’ll have a solid understanding of the use of these ideas until I get the opportunity to use them elsewhere.

I found while reading this chapter that my questioning of just what these analytical methods would offer, left me asking more questions than I had time to research. I have to admit I’m guilty of over thinking the subject while completing the KCQs for this reading.

I’ll close off this blog post with another paragraph lifted from Chapter Four, “If you remember anything from this book, remember this relationship between profitability and efficiency. In many ways, it is at the heart of how we make sense of and analyse financial statements. Understanding this relationship and maximizing the interaction between profitability and efficiency is one of the keys to success in any business“.

A seemly simple bit of advice but as we know there’s a lot more behind that door than it looks.

 

Step Four. Altium’s Annual statements.

Well, here’s my step four, for this assignment. It was interesting to go over this exercise again and see how familiar I was with the entry of the data. It definitely wasn’t as difficult as it was the first time round. And thankfully there didn’t appear to be any mistakes with the numbers in Altium’s financials that I could detect.

I hope there isn’t any but all the same, if any of the team on this course can go over them (if you have the time, lol) and conduct a quick scan and see if there’s anything out of place. That would be helpful.

There was a part of the spreadsheet that I left me asking questions. There’s a section of Altium’s income statement that describes; items that may be subsequently reclassified to the profit or loss.

They were listed as exchange differences and other comprehensive income for the year, net of tax. Two separate items but only one was used in the equation. I wasn’t sure which to use. There wasn’t any notes to suggest which one would be used and why, which left me guessing that they were the same as the totals where the same for each item, for each year.

I’m not sure at this stage if I’m correct, if anyone else is onto what they’re doing, please let me know.

Any way, here’s my Step Four, for anyone to have a look at,

Altium

Cheers.

 

Altium. Again.

I’m part way through writing my thoughts on the company I’ve been given for this course.

I’ve given the subject a little more effort this time and though I’ll maintain my original thoughts about the company being a great example of an Australian success story it’s been interesting reading more about their history and…

 revisiting a set of financials!

Oh, the memories.

Or lack there of.

Maria’s presentations are going to be ultra helpful when it comes to the Excel exercise.

Any way, here’s a draft of my Assignment 1 Step 2-3 for you all to have a look at. Feel free to offer any advice or questions you may have, they’ll be appreciated.

I’ll add my favourite blogs when I get a chance to have another look through what the rest of the team has been working on.

“I get knocked down but I get up again”. And hopefully don’t fall over…again.

Here’s the first one of the many that are part of this course. I think by now we’re all aware of the use of blogs and FB to facilitate communications between the people working on this course.

I’ve previously studied other units, that are part of the CG01 Diploma of Business studies and I think that the inclusion of blogs and FB is an effective use of those tools to allow communication between the students in this accounting course.

I’ve previously failed the basic econ subject but successfully passed the marketing section of this diploma. The other course managers didn’t use this means to facilitate class interaction. It’s not a big issue but I honestly believe that the use of those platforms is helpful, especially as a DST student.

Like I’ve said before on this blog, I’ve got previous form with this course. I failed due to other reasons. It’s another story that doesn’t feature any relevant detail useful to the focus on this course. But that said, it is interesting visiting the material and seeing how much I recall about this subject.

The issue of effective learning is something that CQU and Martin seem to be aware of and I think that may seem obvious as failing on that point, is failing the exercise full stop.

The division between lower and higher levels of learning and understanding, that Martin laid out in the introduction paper we’ll reference, was an interesting look at the concept. My personal take is you’ve learnt a subject when you are competent at using the skills you’ve acquired.

Going over the accounting equations was good to do as well. I can’t honestly say that I would remember them all but then again I’m not using those skills elsewhere so that’s to be expected.

Anyway, feel free to have a read of my initial writings on the Intro and Chapter One. And all the best to the other students, I believe the course material and exercises are informative and the last few weeks will challenge you. I’m speaking from experience here.

DO NOT go it alone, it’s freaking painful.

Make use of the FB page and blogs as there will be students that have insights that will be useful to your success with this course.

Assignment 1 Step 1