Okay, so it has taken me a while to get as far as the second page of this chapter. It was difficult to understand until I watched a lecture online regarding this text and the concepts became somewhat clearer. I found with this section of the study guide particularly, that I am having problems grasping the definition he has provided as for me, they are not clarified enough. I found this chapter to have increased vitality in comparison to those read previously, but many questions still arose.
“Yet to predict the future we need to start with the past”. These exact words stood out to me as it becomes clear that this concept is something the author is trying to prompt us in thinking. He has mentioned this persistently over the past 4 chapters but the question that arises for me at this point is how restating a financial statement can actually help this situation?
Q- How can breaking return on net operating assets (RNOA) be broken down into efficiency? How can such a term be given a number value exactly? This particular part of the sentence at the bottom of page 1 intrigued me as I look forward to investigating this further as I read on.
Here it is, the point where I really began feeling slightly overwhelmed based on the various abbreviations that has been used to describe the key concept. To me, thinking of transfer of value within a firm gives an insight into my jobs and how houses must be valued in order for a home loan application to proceed. The criteria to which real estate agents value a property is concluded through a series of criteria and benchmarks and I can see how this applies additionally to accounting. A property is an asset to its owner, although put forward in the sales process it is simply measured in order for this value to be transferred between buyers and sellers.
Q- It is mentioned that the amount of free cash flow a firm generates will be affected by a firms decision about how much to invest into its operating assets each year- What sort of decisions are these based on? How can a firm decide how much?
Q- What is the discounted cash flow approach again? With so many concepts and models I am struggling to initiate an understanding for each of these individually.
I am also trying to decipher how change in net operating assets is the same as capital outlay. I understand what capital outlay is in respect to investments, but when the equations is put to me in terms of the symbol of delta, it become lost. Equations and I (yet again) do not agree.
KC- Forecasting Free Cash Flow (FCF)
In reference to table 4-2 and my prior insight into the importance of cash (regardless of how careless I can be with my physical money (coins and notes), initially I would have myself chosen the company with greater cash-flow than operating income. This is based on my acquisitions on how cash for a firm can affect its assumption of going-concern and how Oldfield’s was faced with cash-flow issues due to this. I was surprised to read that it was not a good measure of a firm’s performance. Although, in regards to this consolidated group, I can see the approach the author is trying to take as Oldfield’s are still going strong with great net investments. It is these net investment and assets that provide a clearer illustration on the firm’s true value so I would now like to know why the director of Oldfield’s had such high regards to cash-flow at the time.
This is something I am familiar with as I studied the principles of economics last year here at CQU. I found however, that I needed to refer back to my old textbook in order to be able to define the concept more clearly in terms of accounting. From the accounting perspective, the only true part of the equation I understood at firm was the word ‘opportunity cost’ as we focused on these a lot last year. Why hasn’t the author clearly defined what these are however at first? From my personal insight, it makes me think about the amount of money I spent on textbooks this semester. The opportunity costs of this move would be that alternative ways to which I could have used my wages- whether it be buying hair products or even simple leisurely activities like going out for dinner. If I come from the approach the author is demonstrating, the costs outlaid for these resources for me, contain a more beneficial investment and use of capital than my other options. Theoretically, my degree can be considered an asset as it holds future value as a business student and knowledge worker as oppose to the monetary loss I could have made in buying hairspray and conditioners for example.
Q- What does commodity mean?
KC-A Conceptual View of a firm
The concept behind the negativity of net financial obligations in figure 4-1 reminded me of the debt-buy back occurred for Oldfield’s Holdings. They bought back debt from their financial institution at a discounted rate in order to decrease their financial obligations. I didn’t realise until now that this is the opposite of net financial assets in such terms. Relating this theory back to the author’s company was where I lost my understanding. The author asked the question on- Where this money came from when referring to the cash flow needed to meet obligations but when it came to formulating the net transactions with net investors as $46.5m ($46.5m-$3.0m) I was unsure on how the $3 million figure came about in the equation. I know it’s the net expenses that were paid to the debt investors but for it to be used to calculate the firm’s financial obligations is where I got confused. On a side note however, figure 4-1 modelled a very good illustration in overviewing the key concept. If the author was to use more of these in future chapters, I believe my understanding in the accounting journey would be much more structured and beneficial.
KC- Statement of Changes in Equity
Seeing the example that the author has included in this text of re-stating the equity statement has actually given me a greater sense of determination (even excitement) in beginning the second step of assignment 2 and to analyse and restate Oldfield’s financial statements. From here, all I can say is- How lucky am I that Oldfield’s have combined the comprehensive income in its consolidated income statement?
Q- In the Ryman Healthcare statement of changes in equity- why were there 2 columns for each year? This was my original question but now I look at this table again, I can see this is an interesting method the author took in being able to calculate the total using the sum formula in excel. Doing the spreadsheet in this way meant that the totals were not affected by the sub-amounts in each category.
Q- What is Fair value movement of interest rates swaps? This is an area covered also in the health care company’s statement of changes and it intrigues me into wanting to know further information. Is this what they would call financial because it relates to loans and interest rates? I know for my company however, that they also received interest from outside parties which I presumed were clients so I believe I will be putting these into operational income for the firm.
KC- Restating the Balance Sheet
I find it interesting that the most common terminology on a firm’s balance sheet is net financial obligations in oppose to net financial assets. I must admit restating cash did worry me slightly when I realised the small percentage of cash flow that Oldfield’s actually. Due to the influx in cash I can see was caused by the debt-buy back and the selling of entities, a larger percentage of the firm’s cash and equivalents was proportioned to sales. Unlike Ryman Health Care’s cash-flow, Oldfield’s $373 000 000 worth of cash flow and equivalents for the 2014 fiscal year as an example, is actually proportioned to 67% of sales revenue. To me, it shows that Oldfield’s may be struggling and restating my balance sheet with separation of cash between conducting operations and financing need occur. It is what this cash-flow involves that prompted deeper thinking for me. This scares me a little.
Cash and cash equivalents for my company included overdrafts and borrowing to help with financial operations of the business. In my first opinion, the term ‘overdraft’ put into a restated cash-flow statement sparked concern as it was added to the total borrowings, and therefor obligations, the company has. However, the use of this facility is clearly beneficial I participated in some active learning in terms of these over-drafts in order know further on how these affect the cash-flow statement in this way. It found that the financial institution used by Oldfield’s, Westpac, provide an overdraft as a positive aspect of a business’ transactions account in reference to how it gives a company ‘extra cash’ for its investment.. Oldfield’s Holdings have a large span of time between when they hire out scaffolding to their clients, and when they wait for the dollar in return for the services which places pressure on cash out-flow. Without the use of the over-draft to facilitate its obligations, the consolidated group would be in further debt than previously known and/or placing pressure of their credit funds. In relations to the restating of the balance sheet, this would be another reason why cash and equivalents is so high.
Q- Are net financial obligations the same as net financial liabilities?
KC- Allocating tax to the operating and financial components
Q- Is there a set percentage the government sets out for tax for companies each fiscal year or is it calculated to a threshold like income tax for individual taxpayers is? This question is something that I would like to increase knowledge on but no-doubt as I read further, I will discover an answer.
When Oldfield’s negotiated the debt-buy back with their debtor, I can relate to this as I noticed their tax amount was increased as they repurchased their debt for half price, thus reducing their amount of borrowings. I also noticed that my company had what they called a remission of interest. I’ve learnt that this can also increase a level of income a business receives based on taxable dollars as they government remits interest charges on tax in a suitable circumstance. I agree with martin’s allocation of tax as an expense for a company but I can also note in my mind that certain situations can cause alterations to how this comes about. Tax is a negative perception in the eyes of a business but there are ways to re-establish the relationship between how much is paid and the amount of interest that is charges. It was my insight into Oldfield’s that re-confirmed the author’s explanation of the tax and profit/income relationship. However, although to me this all seems straight-forward, it is the calculation of these figures that throws my attention span each time. I am struggling to understand how the tax benefit is calculated which prompts concern on how I will calculate the tax when I restate my income statement for my firm.
KC- Profitability and Efficiency
This section excites me given my prior question about how efficiency can be given a number value for a firm. When the author refers to his son in terms of wanting to pull things apart in order to see how they work, it remind me of a primary school friend I had who was in the same position. He too, would struggle to put these items back together once he found out how a computer worked for example. Metaphorically speaking however, I think this is going to be me when I attempt step two. It worries me to think that I may have problems in putting together the accounting components when I am restating each financial statement.
Arghh, ratio. Previously, I know I have mentioned that I understand exactly how important this concept is to a business and the determination of relationships between figures. However, I won’t deny my sense of disinterest when it comes using these for analysis. My baby niece who is 4 months old now has grown a lot in the past months, my parents business has grown and developed in the past year also so I can relate to the illustration and metaphorical element of growth the author is portraying for the NOA of his company. In business terms, I can see how important recognition of this as using figures from Oldfield’s to calculate such this as tax benefit or net operating assets differs vastly over the 12 month periods as my firm has engaged in various changes in the selling of entities, investments and over-seas developments that in-turn affect the value of equity and profits its gaining. My question at this moment is- can my firm be considered efficient based on its changing figures? I can see that managers tend to be judged on the operating results of their company so in the case of Oldfield’s I am wondering how significant this ratio would be on the sensitivity of the assumption of going-concern and how efficient a company where profits and incomes have been influence by debt-buy backs and increased borrowings. Something I have not though about since chapter 2 until now.
Martin’s need to average the NOA is completely understandable once I get my head around the concept. You would have no idea particularly on the extent to which leverage has played in the returns generated each year as they can change vigorously with a combination of environmental factors. I think of this in terms of the pineapple farm down in Yeppoon which lost an extensive amount of crop during the recent cyclone that landed. This disaster happened at the beginning of this year but in terms on fiscal statements, this would be half way through a financial year and thus affecting NOA. Companies can’t necessarily plan for this to happen but a detrimental drop would thus occur in the calculation of RNOA for the firm.
Q- I cannot find my firms cost of capital (WACC) which confuses me a bit. How relative is this to assignment 2 as it is now arising a concern for me?
Profit margins are something that I feel comfortable about grasping, or so I thought. Although, I tend to confuse this term with mark-ups as they produce similarities in the way goods are sold in retailers.
Q - How does the economic cycle affect the margin and how firms can have an excess of about 10%? Economic cycle is something I feel the author should have drawn upon more in explaining this area of accounting. I learnt that economic cycles under my definition is reference to different stages of economic growth for a country. This could be influenced by such things as interest rates or unemployment. I know that for Oldfield’s it was the interest rate that affected profitability for a firm but I would like to know further on how this concept can relate back to my calculation of a margin for any company. I am now somewhat intrigued by this influencing factor.
In Summary, it is not hard to see where the author is coming from with predisposing the importance of re-stating these financial statements. At first, I was apprehensive of how significant such a task actually is but by ‘pulling apart’ the different components, it is now not hard to understand why. My initial reaction to the chapter has significantly different from my final thoughts. Although, there are some underlying queries that still overwhelm my full grasp of the key concepts. It was chapter 4 that sparked the most questions so far in my accounting journey but I am still excited, and intrigued in learning and understanding more as I complete this assignment.
