Chapter 4 – Understanding the Past

When reading about restating a firm’s financial statements, the section about clearly separating a firm’s operating and financial activities triggered something in my brain which then had me thinking about doing this in a previous unit of Martin’s. I then went and looked at my company’s most recent annual report to see what their financial statements looked like and I found that they separate their operating revenues and expenses to give a gross profit, and separate financing expenses and revenues to give net financing expenses. Are we required to go further into these accounts to see what is exactly in them? Will some people’s process of restating their company’s financial statements be much more in depth than others?

I am worried that I may not have learnt (or remembered) enough from ACCT11059 and that restating the financial statements will be just as difficult this time around. However, after looking at the examples shown in tables 4.4 and 4.5 that Martin has done on Ryman Healthcare has helped me understand it better. A key concept I took from this section was how to differentiate between financial and operating; some may be clearer than others, however. The steps to restating a company’s Balance Sheet and Income Statement has helped me to better understand the process and has now given me the confidence to start restating my own company’s financial statements, thanks Martin! I may need to go over the tax benefit section again when doing it as this is something I do not quite understand after initially reading about this.

I am still getting very confused with the different formulas and calculations; RNOA, NFO, NOA, ROE, ATO… I am struggling to keep up. I often find that when I can apply these concepts, that is when I better understand them. I believe that when I can finally apply these concepts to my company, El Al Israel Airlines, I will finally understand what the author is saying.

Profitability seems to be a key concept and as I come across this, I was worried there would be yet another idea that would leave me feeling confused as another formula was about to be thrown my way. However, once realising it was about profit margin a little bit of weight was lifted of my shoulders. The idea of profit margin is something I look at a little bit at work and it is something I quite often hear from those I work with that have been in this career for many, many years. The formula for this is rather simple in comparison to the others that have arisen so far in this unit.

This chapter has made me excited to start restating my company’s financial statements. I’m glad Martin put an explanation to the restatement process in this chapter as I was feeling very overwhelmed with the process which was why I was putting off doing it. I definitely need to make a list of all the formulas discussed so far and try to thoroughly understand them.

Chapter 2 – How a Firm Adds Value

A firm’s strategy is important. A firm with a good strategy and a sense of direction is more well off than a firm with a bad strategy and no sense of direction… duh. When reading about taking a step back and looking at other factors such as its competitive environment and how well it is positioned within this environment, the key risks that may be faced and key economic factors driving its profitability made me think of the business’ that are close to home. Airlie Beach, where I live, is a gateway to adventure and tourists from all over the world come here to check out the local beaches, islands and relaxed lifestyle that is on offer here. The most predominant kind of businesses here are hospitality and tourism all fighting for tourists to choose what they have on offer and they are all competing against each other. The tourism industry here is huge which can have a potentially positive or negative influence on how well they perform, which can all come back to their strategy.

 I see strategy as a way of acting on dreams or goals that you may have instead of just sitting back and helping them. It is not necessarily doing the actions to achieve those goals, instead it is firstly working out the plan of attack. By organizing this ‘plan of attack’ this can reduce the obstacles and difficulties you may face along the way. You wouldn’t do a lot of things in life without making a plan first, so why should it be any different in business? ‘There is one thing we can do today and that is dream about doing it and what it might take to turn those dreams into reality’. I really liked this quote and I often find myself thinking and dreaming a lot as a trainee accountant and where I want this career to take me, I’ve got a few steps in mind but this section has made me consider collating an in-depth strategy. I have a long, long, long way to go.

When reading about the five P’s of strategy I questioned whether I would be able to remember what they five P’s were, let alone what they all meant in terms of strategy.

Reading further into Chapter 2, two aspects that were mentioned, which I feel may be key concepts to this unit eventually, that are left out of financial statements are whether the business has the ability to generate positive net present value investments, and opportunity cost. I thought that I may have heard of these concepts in an old unit that I have previously done with Martin, however I wasn’t sure. There are quite a few things that I feel like I should have paid more attention to previously and now they seem to be catching up with me.

The next few paragraphs were really daunting when the author started to discuss Ryman Healthcare and terms such as Return on equity, for example. I was excited to know whether these were the types of calculations we were going to be doing for our own companies to help us better understand them. Learning these sorts of things really interest me as it is quite different to the tasks I do daily at a small public practice firm. I researched this so I could understand what it meant and this is what I found: when you divide the net profits of a business by the shareholders equity, this will give you the return on equity to allow you to determine just how much profit was earned for every dollar invested by its shareholder… I hope this is somewhat correct.

In terms of accrual or cash accounting, I have only ever understood how this can affect a business from a GST perspective. I have never taken the time to understand what affect the method of accounting would have overall when reporting at year end and how this may look to other people on the financial statements.

My understanding of this chapter is not quite all there yet however the key concept that I took from this chapter is that before we start analysing a firm’s financial statement’s we must understand the background of them and their strategy. After all, we can look at the numbers on their financials but if we don’t take a step back and really understand them, those numbers could mean anything. We need to know whether those numbers are negative or positive, if they are improving or if they are getting worse in comparison to others.

Chapter 3 – Many Ways to Assess Value

One of the first things I found interesting from history is that from around the 1890’s, it was only around then that the separation of current and non-current assets and liabilities on the balance sheet became a ‘thing’; I had just assumed that this was always the case.

Reading further, I was finally becoming aware of just how much ratios play an important part in the analysis of firms. One thought that did come to mind through the discussion of ratios and the history, is how many ratios are there exactly? And with all of these, how do we know which ones will tell us what we want to know? Is this what we will learn along the way in this course?

I was feeling overwhelmed when the paragraph about forecasting dividends, cash flows or earnings came along. These are just very few of quite a lot of methods and approaches that we can utilise to help us understand the business realities of a firm which is quite obviously a very key concept that I have taken from this chapter. The author states that we will need to take time to understand these methods that we will be using, and I am already aware that this will take me longer than I anticipated.

After re-reading and applying it to real life businesses I do work for, I was able to understand the concept of free cash flow (FCF) and I knew this is something I needed to understand before the end of the chapter as it was mentioned in Chapter 1 as one of the frameworks we will be looking at. I’m sure the equations following the paragraph regarding free cash flows are a very important concept to learn but it is something I am really struggling with.

From this chapter I have figured there are many ways to assess the value of a firm and this has somewhat changed as the years have progressed. I have become even more aware just how complex this unit will become so I will hopefully understand some of these elements soon.

So I’ve just logged on to find out my company is El Al Israel Airlines… I’m not sure whether to be worried or not. I have never heard of this airline before and I’m not sure whether it being a foreign company will have a negative effect on me completing this assignment… However I am sure Martin wouldn’t have picked this company if he knew it would be impossible.

EL AL Israel Airlines

After a quick Google and a look at their website I have found out some things about them:

– They are the only commercial airline that have equipped their aircraft with missile defence systems to protect their planes from surface-to-air missiles (ummm… cool, right?)

– In addition to the above, they are considered to be one of the world’s most secure airlines due to their safety procedures

– Their most obvious main business activity is the air transport of passengers and cargo, however, El Al Israel Airlines have many subsidiaries which means they also engage in the sale of duty free items, the production and supply of food for airlines (including the Company), provision of security services, provision of ongoing and overall maintenance to its own aircraft as well as aircraft of other airlines at Ben-Gurion Airport and the management of travel agencies all around.

– They currently have 43 aircraft in operation

Articles and other interesting finds

Their website provides some really interesting articles about them. The first article I found was the following:
– https://www.elal.com/en/About-ELAL/About-ELAL/News/Pages/Tax-Pool.aspx
El Al Israel Airlines have provided their customers with a taxi pool service that allows them to find other passengers travelling with El Al Israel Airlines to allow them to share rides between the airport and wherever they are staying to reduce the cost of their travel expenses. They are the first airline in the world to do this and this begun just this year.

I have had a quick glimpse of their annual report for 2018 which provides a lot of in depth detail about the company and information about the company that is relevant to that reporting year (a mere 255 pages long). Their report date is 31 December of each year. Hopefully once I look at it a bit better I can make sense of it and it shouldn’t be too difficult putting them into the spreadsheet provided for the assignment.

This is what I have managed to find out after a brief look. Once I have found some more articles and information about my company I will be sure to post them!

To start my new blog off (I did have one for a previous subject with Martin but who knows what happened to that), I have copied my draft for Assignment 1 Step 1 below.

Preface

The preface has made me excited about this unit as it will hopefully allow me to go beyond just completing financial statements. It will not only allow me to analyse financial statements to be able to understand them, but to dig even further into them, to be able to use them to make conscious decisions about a firm.

When the author mentions some of the elements we will be looking at such as cash flow and economic profit, for example, I felt confused and worried about the unit ahead. When it stated that it draws on all the units I have previously completed it made me question how much of my study I didn’t really understand or didn’t retain… scary.

From reading the preface, I have come to the conclusion that ACCT13017 Financial Statement Analysis will be one of the most important units I will have completed throughout my degree as it is an integral topic in the accounting profession.

Chapter 1 – Focus on Reality

From Chapter 1, I have already come to realise the importance of financial statements; not only should you know how to complete them, but you should also understand them. You should understand why figures within financial statements are the way they are and try to understand what affect this can have on the entity and potential investors.

From the first paragraph, I agreed with section about Warren Buffett. Although I have not quite done what we are about to learn and develop within this course, what he says about ‘you should seek to connect with the intrinsic value of a firm; what you think it is worth, independently of what investors as a whole may think it is worth at any point in time’ makes total sense… After all, he is a successful investor so surely his opinion on engaging with the economic and business realities of a firm should be considered.

To begin with, I was unsure what fundamental analysis is and from reading further it seems to be quite complex. When reading a bit more, I was worried about the concept of building my own judgements and ideas as this is something I haven’t had to do in relation to accounting before; I wasn’t sure how tricky this would be. I believe one of the key concepts that should be noted early on is the statement about avoiding errors – “Psychological studies suggest that when we predict the future we can often mistakenly expect what has happened in the past to continue too far into the future”. I believe this is a very important statement and sets a tone for the rest of the unit as we delve into being able to analyse an entity’s financial statements, to connect to realty, so that we can have the ability to avoid making common errors.

When the author discusses avoiding common errors and predicting the future, I resonated with this. Predicting the future by only looking at and relying on what has happened in the past is something that I have been guilty of and I do hear it quite a lot whether it be from people around me or even clients in the firm I work at.

Another obvious key concept is the frameworks. When the author started discussing frameworks that we can use to analyse financial statements such as the discounted cash flow (DCF) and the discounted economic profit frameworks, I was unsure whether these were covered in previous accounting units… This prompted me to go back and have a look and if so, to revisit these before Week 3 when they are to be discussed. Something I am not sure of and am yet to find out is whether these are the only frameworks or are there more?

Out of the sections that discuss economic profit and free cash flow, initially economic profit was the one that seemed to confuse me more out of the two. I was confused about what a few things meant, for example, return on net operating assets (RNOA). Free cash flow made a bit more sense, but this is still something I am interested in finding more about. After reading both sections again, free cash flow and using the examples in the tables helped me understand it a bit more, however, I was still struggling to understand economic profit. I will need to focus on these two more as they are the very key concepts to this unit.

When ‘efficient market hypothesis’ was mentioned as being one of the aspects that will challenge our understanding of finance theory, I did some research to try and learn about this myself as I had never heard of it before. What I gathered from this is that no matter how much you analyse a firm prior to investing in shares, for example, this does not give you a competitive edge over other investors because all known information about those shares is factored in already… Whether this is correct or not, I am sure I will find out.

At the end of this chapter, another question I asked myself was whether there is a right or wrong answer when determining the value of a firm? Is it possible that someone else can determine something completely different to me? The content from Chapter 1 was eye opening and I’m not sure whether to feel nervous or excited about the semester ahead.

My name is Kadiesha and I am currently studying a Bachelor of Accounting and am in my final semester of study. I currently work full-time as a Trainee Accountant in Airlie Beach, Whitsundays.

In my spare time I enjoy getting out on the water on my jet ski, going to Whitehaven Beach for the day, spending time with my partner and visting family in Mackay.

I am excited to get this semester underway, not only because it is my last one, but I feel like this subject discusses important concepts that are integral in the world of accounting. I am interested to know what company I get allocated, to learn about them and what they do!