Chapter 3:
Introducing financial statements
After the understanding of chapter 3, I find
even more make sense about accounting isn’t just about numbers. It is to understand
how the business is running. Thought it was making sense after chapter 1, I
realize it makes more sense after specifically understood the financial
statements’ definition.
Knowing
types of business could be organized, what business could provide or what can
business do is part of knowing the business structure only. As investors, I
personally recommend to understand more on financial statement as it provides
accurate information which than make investment to be more accurate.
Annual
report is marketing document. I read it again and again and I now understand why
it is a marketing document. The reason is because annual reports are to use to
support the company so that it could attract more investor. To have more
investor to support business to grow bigger than other business this is a part
for growing in market of the industry. To be on top of the market you need to
be strong and supported. So business made annual reports to attract more
investor which than make sense than annual reports are marketing documents.
Financial
reports are included in annual reports. Annual reports also included accounting
policies, footnotes (to support financial statements) and summary of key
financial and non-financial information.
Now I
will tell you more about financial statement. Financial statements include the
five elements of accounting. They are; assets, liability, equity, revenue and
expenses. These are introduced and understood in chapter 1. One of the
statements is call balance sheet. After understanding, I know that balance
sheet is financial statement of the specific day, not annually. Usually it will
be the as same date as the end of the normal tax year in the country. We can’t
sit and wait for business to run and then get to know what is going on. We need
to know what had happened before and what is happening so we could predict future.
Balance sheet includes the assets, liability and equity of business. Which
means greater assets of business is greater value of the business. But as
investors I think it is more important about equity. This is mainly I will know
how much investors are getting paid.
Also, I
understood that company could be more than one company. Which means parent
company will have lots of subsidiary company. If I were to buy shares of subsidiary
company, I would earn equity over that specific company, not the entire equity
from what parent company earned.
So why do
we need to read more than balance sheet to understand the business? It is
mainly because balance sheet only tells you what happened a day not entire
year. Business is exchanging value every day. We need a wider statement to know
what is happening. Income statement shows me the revenue and expenses of
business. Which means this is where I will find out if the business is making
profit or losing money.
Statements
of changes in equity are also important. As I might not get some of the value
over income statement as it might be from other sources. Lastly I then need to
look at cash flow statement. It tells me what the business uses the cash for.
Now I understood that having cash is more important than anything else. As we
need cash in company to survive the everyday movement of company. Financial
statements give me an idea what I will earn of not what the owner will earn. As
this statement separate the equity and the assets and liability of the business.
I see
that we need to have a structure to support the financial analysis than just looking
at value of the statements. I must tell myself to understand the key aspects of
business and the realities of the business, not just the value.
Question 1: What is wrong with just doing what ‘works’ in
relation to analysing financial statements? There are plenty of experienced
practitioners in our capital markets. Why do we not simply find out what more
are doing and just do this ourselves? What do you think and why?
*As that is only a guess and is a very danger investment. It
is because if we just simply look at what most are doing and do whatever they
do is very brief of the knowledge that we have got. To understand the business
and to have a safe investment, it is very important to understand the ideas and
concept of company and knowing what the movement of the company is. Analysing
statement let us understand what benefit to us is and what is benefit to the
business.
Question 2: What is the benefit of having a structure, such
as the du Pont’s framework, to help use ratios to analyse firm’s financial
statements? Is it better (or worse) than simply doing what experienced
practitioners do? Why or why not?
*To be honest I fist did not understand well so I did some
research over internet to get the definition. The Du Pont’s framework is than
understood to be a method that assets are measured at their gross book value
rather than at net book value in order to produce a higher return on equity
(ROE). It is a good analysis although is a longer process as it tells me what
ROE can be affected by three things which is:
Operating efficiency,
measure by profit margin
Assets use efficiency,
measured by total asset turnover
-AND-
Financial
leverage, measured by equity multiplier
No comments:
Post a Comment