Chapter 3- Key Concepts

I'm reading this chapter at 5'o'clock in the morning and wishing that I had read more of this before viewing my firm's annual reports. Here, the chapter is covering some simple, yet slightly confusing concepts of accounting (at least for this time of the morning) that are important to my analysis of Oldfields Holdings. The author states in his introduction that when it comes to financial statements, "It is very difficult to remember anything unless we are interested in it and it means something to us personally" So very true. I put off reading my firm's statements for days. I didn't understand it at first, I lost interest quickly and it all became a bit overwhelming. It was a 'party' I definitely didn't look forward too!

I would have never thought of something with the plain title 'annual report' as a marketing document but when I look back at my own company's reports, I notice the happy couple painting and the bright colours on the cover. Maybe it is trying to represent a bright future for Oldfields? The annual report (and the directors statement alone) took considerable mention to the various strategies that will increase the future value of the business; how the business will grow as an asset to its investors in 2015.

Balance Sheets
Balance sheets are a concept I am familiar with from previous years of study, although I failed to recognize that they are only based on one day of business operations. If balance sheets were not prepared regularly, imagine how overwhelming a balance sheet and financial statement would be to comprehend. My company for example is 80 years old, and this short-term representation of accounts on the balance sheets, I understand, provides more information about the current state of finances than a long term report. Oldfield's has seen dramatic variations to its assets and liabilities over the past 4 years alone, so to identify with these accounts for the entire period of the business life (after all my company's various endeavors) would be difficult. Establishing profit and loss would be of no benefit to equity investors as the information would provide no measure of true value. I know from personal experience in my workplace for example that banks request banks statements from clients that establish there current account balances up until a particular time. It gives them an idea of what current monetary assets exist during that period, as no value can be placed on the past balances in order for customers to be accepted for loans. It wouldn't be logical.

The footnotes at the bottom on this section are a very helpful tool in recognizing how various areas of the annual report are a reflection of these business processes throughout the year. I had an issue with understanding some key terms, particularly 'Trade and Receivables' when reading the balance sheet but have now gained in depth knowledge of how the accounts receivables are impacting the accounting aspect of Oldfields Holdings (As seen in my Company KCQs). I realise Martin was right in saying no two financial reports are the same, and nor do they have to be. Every company has a different background and underlying policies regarding their reports and terminology which is why annual reports don't follow a distinct set of financial standards when compiled. For some reason, my thought processes used these footnotes to give this sense of realisation.

Separation of Entity's and Consolidation
Consolidation and Parent Entity's was important to me as it was crucial in the readings of my company's reports. In my definition, it is the acquisition of various companies into one in the compilation of assets, equity, liabilities and operation accounts in a financial statement.  As my firm's financial statement is produced as a compilation of numerous entities that make up 'Oldfields Holdings' I found understanding this key aspect of the annual report quite interesting and fundamental as subsidiary organisations have shares in my firm, and in the recent financial year the group has disposed of three.

From a personal perspective, during the recent cyclone in Rockhampton, I was lining up at the registers in Bunnings (the queue was long!) to purchase some cookware to help us last without electricity. Another customer behind me commented, "Wesfarmers must be racking in millions after today's sales." which I can now connect with the need to consolidation. Coles and Bunnings are owned by this parent company, Wesfarmers which I learnt in recent years is Australia's largest public companies and retailers. With the numerous franchises of Bunnings alone, the amount of customers they transact with (especially through the peak of natural disasters so it seems), and the market value they are gaining, it is not hard to understand the extensiveness of this entity's accounts alone. For me, recognition can now be made through the amount of company's in our local area alone whose financial reports are likely to be compiled this way as a more comprehensive view of a financial position.

Statement of Changes in Equity 

So lost! I am struggling to get my head around the statement of changes in equity and I am particularly concerned with the opening balances. Although I understand how it flows, I am overwhelmed with how it will need to be formatted in the finance statement spreadsheet.

Question-  When it states, Balance as at (insert date), do I class this as the opening balance for each financial year or the closing? When I input each value, the total using the excel formula, does not add up to the same amount as is stated in the annual report which is a bit of a concern. 

However confusing and nerdy the state of changes in equity can be, the importance of such a statement is clear. Firms are always exchanging value in markets to add value to equity. As I reflect on my firm, there was an increase in the investors section of the equity statement over the latter 12 month period and I found this to be a key concept of chapter 3. For Oldfield's, additional investors reflected an increasing of its markets to different customers in 2011. My firm was definitely not as boring as Barry Humphries dancing with his mother all night. When your at work each day, doing recurring activities, you don't notice the incurred changes as much as I found when viewing my company's reports. Taking a step back it can be seen that industries are always on the move; introducing new products and making investments into new ventures which then creates an increase in the value of equity. In agreement with the author, equity is more than just a left over amount, it provides the heart of a business.

Also, the many terms that relate to this statement are unfamiliar to me, particularly the term ' Comprehensive income' which sparks the question, "what activities can 'other Comprehensive income' include?" In my firm's annual report, this change in equity was classified as 'A comprehensive Income Statement' and 'Other Comprehensive Income' was mentioned, although no-where did it state was income this involved.

Ratio 
After all the mention of Greek mathematics, ratios are still hard to decipher for me as I struggled to establish a clear definitions from the readings. I found the author dragged on the ideas Greek history to a point where I lost my grasp for the concept. Although, I can see why ratios are important however. They are used in comparison processes to systematically analyse and compare businesses in same or similar industries as well as different aspects of a business' finances over a given time frame. Without ratios, it would be somewhat operose for a company to establish where it sits in the market. Oldfield's uses Gearing ratios and interest cover ratios to establish the firm's financial statements, as well as mentions of Return on Investment when referring to the sales of dividends. Gearing ratio I learned, compares the owners equity to the borrow funds of Oldfields, and for 2014 this was 48% of total capital in comparison to previous years. Using this ratio, firms are provided with a measure of financial leverage in demonstrating the degree to which a firm's activities are funded by an owner's funds as opposed to bank loans which helped Oldfields establish the need to increase capital.  No matter how complicated the ratio equations are found to be, they are required to identify these strengths and weaknesses of a firm and note to owners how businesses are performing throughout the years.

Cash Flow Statement 

Cash may be something that we use on a daily basis, but for a business it can be critical. The cash-flow statement can provide the ultimate bottom line for a business as it gives insights to the liquidity/solvency of a firm as well providing evidence of the inflow and outflow of transactions from that period.  No matter how much loss a business is making, it is the fear of running out of cash that has the greatest impact on going-concern. I think of net-cash in terms of borrowing money from a bank (definitely my background of working for finance broker coming out). Firms can have  non-current liabilities that include borrowings and overdrafts from the banks that can provide funding but without proof of this cash as an on-going asset, the chances of refinancing loans is almost nil. I find this important as my company has been facing issues of cash flow in the past fiscal year. To meet the challenge, Oldfield's have had to negotiate terms of a debt buy-back with their principle lender to continue operating. Alike our bank accounts, once its gone its gone which is why so many businesses in our local area have been forced to close. The retail outlet, 'Ally Fashion' for example was appearing to be doing well in our local shopping center. There was always frequent traffic in-store but this wasn't enough of a financial circumstance to avoid closure. For these reasons, I am in complete agreement with author, no other asset on our balance sheet has the same negotiability as cash. Money does not lie. 

Shares and Dividends 

I'm familiar with the concept of dividends to an extent as I studied shares in grade 12 and have now established its role in a company such as Oldfields Holdings. Non-controlling assets for example was an item in my the firms equity statement and with the company operating as a part of the Australian Share Market, regular dividends are paid to these shareholders each year based on the companies dispensations. Oldfields is now standing at 0.076 per share with 82.18 million shares in total which impacts the distribution of equity for the firm, and in turn the companies value because stockholders equity to a corporation is what owner's equity is to a sole proprietorship.

The decision of dividends paid to shareholders laying ultimately on the board of directors is an interesting concept. Investors rely on figures and future forecasts to decipher a good investment when the bottom line is based on company policy.This is probably because we rely on the discounted dividend model (Equity value = PV of expected future dividends) and prefer money in our pockets today, rather than those we would like to receive in future earnings. However, if profits were to drop as did Oldfield's, the price of shares would be less value to investors regardless of whether the board decided to increase the proportion of profits that is to be distributed to non-controlling assets. A 50% increase in proportion paid may look good on paper, but in my opinion the forecasting of future value of shares is not as reliable as it seems. This is especially so for companies such as the group I studied whose financial position is clearly unstable and revenue levels alternate regularly.

Question- There could also be an increase in the amount of shareholders for the company. Couldn't this lessen the amount of equity transferred between each?

Question- Does the price of shares in the share-market affect the dollar amount of dividends distributed or are these only used in calculation of the purchasing and selling of stocks?

Additionally, I found it intriguing that firms repurchase shares from equity investors in share-buy packs. I always thought that dividends were only sold between various outside share-holders once the initial purchase is made and the only relationship companies had with them is through the payment made annually. This would simply be due to my only experience of shares being my dad receiving his annual dividends statement from Aurizon and The Commonwealth Bank each month and classifying the amount as an income to deposit into the bank.

However, by repurchasing outstanding shares, a company aims to reduce the number of shares on the market in order to increase the value of shares still available (reducing subsidiaries) or to eliminate threats by shareholders who may be looking for a controlling stake. To me, its a control mechanism used to improve equity value for a firm. I feel this is similar to my company engaging in a debt-buy back arrangement which I mentioned previously. Oldfield's holdings bought back its debt from Westpac bank for a substantially discounted amount in order to reduce the debtors fixed obligations on a 'once and for all' basis.

Question- Would the commissions the owner of my workplace receives from the banks for the home loans be considered a dividend?

Dividend/Cash-flow Equation
Expression of a dividend in this way is definitely a stretch of my basic understand of dividends as mentioned above. When the concepts of Operating cash flow, capital outlays, and net cash flow from debt owners are brought together I become lost in understanding. My reaction to these equations was the same as the fundamental accounting formula from chapter 1. I can grasp aspects such as the definition of operating cash flow for example, but when they are interconnected to calculate dividends and transactions for a company, my mind becomes a blur.

Particularly,  I would like to gain more knowledge on the measure of EBITDA as it relates directly to sections of my firm's cash-flow statement. For Oldfield's, these figures decreased from $929,720 in 2013 to $777,396 in 2014 and affected the equity value of a firm. Although, I cannot establish why and would now like to take further research.

Question- What does the term 'amortisation' mean? 

In saying that, it is not hard to see why cash flow and dividends have this relationship. Operating cash flow for example, is accounting for any of the external activities of a business that raises a company's capital, and in turn, repays the investors which can include debtors and other entities to which the value of equity needs to be transferred. The inputs and outputs of cash within a firm's accounts indicate how financially strong the business is and how likely the dividends are going to be paid. Negative cash flow activities including paying out these dividends to equity investors and these negative flows can reach a point where a company is forced to borrow more, or enter liquidation.

For Oldfield's, I noticed that according to the director's report in 2014, the group had missed an annual payment of dividends to non-controlling interests (with the amount paid in the previous year being  $148, 512). I am now wondering if this is a result of the decrease in net-cash indicated by the cash-flow statement with direct relations to the concepts in the dividend/cash-flow equation. Clearly, this is an acquisition I need to work on.