Accounting #1 - Introduction

[black_samvara]

artiodactyl: having an even number of toes on each foot. Not related, but interesting to me nonetheless.

**Acronyms summarised at the end.

The introduction was very comforting, I have been trying to have no expectations because most of the (many) CPAs I have worked with haven't had much personality overlap. I was concerned this would be a really challenging course to get into. The assessment is broad and has a test, team and peer assessment component as well as an exam (I like this model).

We started off by workshopping the kind of qualities we wanted financial reports to have and came up with: Understandable, Comparable, Relevant, Honest, Reliable, Accurate and Consistent. All fine qualities and as it turns out, the same kind of things valued by the IASB.

• We then talked a bit about how to value a company, and what are the 'bits' that make up a company - some of them very hard to measure (eg: the name 'Nokia' - what is it worth?)
• We also talked about how reliable and relevant don't always go together (eg: most reliable price of your house is what you paid for it 10 years ago, most relevant is current market price)

How to measure/ensure financial reports are reliable:

• Auditors (independent ones who don't get offered positions on the Board shortly after)
• Accounting standards (Australia uses the AASB and IASB (over 100 countries), United States uses US GAAP)
  • Accounting Standards may be Rules based or Principles based. eg: Method for calculating depreciation for earth moving equipment could be 'lose 10% of value per year' or it could be 'depreciate over useful life of vehicle'. The latter is more flexible but you have to work out what a useful life is.
• Accounting interpretations (Australia uses UIG - Urgent Issues Group or IFRIC - International Financial Reporting Interpretations Committee for when the standards can be used in multiple different ways.
• Regulatory Bodies (Australia has ASIC)

What is Accounting? '...the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information'

There are two fields of Accounting:

• Managerial: in which reports are internal facing and unregulated
• Financial: in which reports are external facing and regulated

Who uses Accounting information: investors, potential investors, management, employees, trade unions, lenders, governments, suppliers, competitors, buyers, financial advisors, the media, students :p

• Something that hadn't previously occurred to me in this context, when I buy something expensive one of the things I am evaluating is the financial success/stability of the company who made it. I'm not going to buy something with a five year warranty unless I'm reasonably confident the company will be around in five years.

Sources of information about companies:

• Company releases: things like annual reports and financial statements, issued by companies (can be biased, propaganda)
• Industry releases: things like Australian Chamber of Commerce and Industry's Systematic Approach to Retaining Apprentices (unregulated)
  
• Economic Release: things like the reserve bank discussing interest rates.
• Advice: will vary depending on the knowledge/training of the individuals
• Tips & Rumours: high risk and has the additional exciting possibility of being illegal (insider trading)

Which is why we love financial statements for their narrow scope, but audited reliability.

Side note:

1. Reporting can put a heavy burden on a company, changes to reporting standards even more so.
2. Reporting is always of PAST information, it's useful, but not always timely enough to use to make decisions

Different stakeholders have different needs, standard financial statements resolves these, ah, conflicts.

A General Purpose Financial Report has five components:

• Statement of Financial Position or Balance Sheet aka Financial Position (how large is the firm in terms of resources controlled, what kind of resources, how much cash do you have, how much cash can you get quickly, are you in debt and by how much, how much cash do you owe/are owed, how hard is it to borrow more cash, can you meet debts, how much have the owners invested)
• Statement of Comprehensive Income aka Financial Performance only or a SOCI and an Income Statement - all non-owner changes to equity (what are your total sales, how profitable are you, is there a profit trend, what is your safety margin for recurrent costs)
• Statement of Changes in Equity - all owner changes to equity (who bought shares)
• Statement of Cash Flows (how much cash was generated and where did it come from, how much cash was used and how was it used, how much cash do you have at the end of the financial year)
• Notes: trying to explain all of the above :p

Accounts produce reports, analysts analyse them.

AASB: Australian Accounting Standards Board
ASIC: Australian Securities and Investments Commission
CPA: Certified Public Accountant
IASB: International Accounting Standards Board
US GAAP: Generally Accepted Accounting Principles (United States) This entry was originally posted at http://samvara.dreamwidth.org/451099.html, where there are
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