Step 5 - 'Understanding the Game' & Introducing Financial Statements' (Chapter 2 and Chapter 3)

In all honesty after reading through all of chapter 2, I feel more at ease. For some reason I thought it was going to be an in depth reading session with descriptions of terms that I would struggle to understand however, here I am sitting at my laptop quite confident with my understandings and having the knowledge to be able to relate it back to my own personal experiences.

“You have to learn the rules of the game. And then you have to play better than anyone else”. Albert Einstein.

The attention-grabbing quotation immediately caught my attention and made my mind wonder to picturing a basketball game with the referee blowing the whistle due to players not obeying the rules. It got me thinking, is accounting like a sporting game? Is it just as easy as following a set of rules and abiding by the rule book? As I continued to read on, being an accountant, whether you’re a financial or management accountant the rules are never black or white. The same goes for a rugby game, where the referees are constantly seeking guidance from the video referee to confirm their judgment.

The first paragraph really got me thinking on how people seek to understand and gain an insight into the economic and business realities of a firm, whether that be my former work colleagues, or a company’s customers and suppliers. Let’s be honest, they’re being noisy and want to know the ins and outs of the business and generally lack the power of having full access to financial statement information. However, over time it seems that there have been rules put in place to protect companies in not having to supply information to those who lack such authority. My initial reaction to this is it seems quite fair for a company to not want to share all their confidential information if they don’t have to. And it’s extremely important for Manager’s given access to such information to be respectful of their position and remain confidential. Another example I found to be reasonable as well was banks requesting financial information from their customers prior to approving bank loans. By Banks asking for the required information, they’re completing all their checks to ensure their customers agree to a home loan etc and are in a financial situation to be able to do so.

Often, I’ve always wondered if Accountants have the power to change numbers around to suit the customer or their expected goal? I often thought, surely not. I initially thought accounting was black or white, there was always a right or wrong answer, obviously I’ve been proven wrong.

It was interesting to read that prior to the 19th century, financial statements were not for public discussion. I also found it fascinating that the company will produce one set of accounting information but be able to present the information in many different ways, for example; the company may ask the Financial Accountant to present their report differently externally compared to a Management Accountant who is presenting information internally.

I was eager to learn more about the history of accounting and discovered in the study guide that in the 1930’s in the US, there was an increase in the availability of financial statement documentation. With this change, came the introduction of the Securities Act and the commencement of the Securities and Exchange Commission. With this change, many companies were obliged to provide their financial statements to for example equity investors, who would not normally have access to such information. I’m sure this brought great stress to business owners and managers during this transition. I also found it interesting to read that not all companies followed suit, and many chose not to provide their equity investors with a lot of detailed information. Now I understand why companies developed rules that required disclosure of such information.

My next question to myself was, what rule book do Accountants have to follow? Surely, if rugby league has a rule book, I’m sure Accountants do too. Reading on I came across GAAP, which broken down means Generally Accepted Accounting Principles. Basically, lists all the rules and minimum standards accountants need to follow when creating financial statements for a company. I found it interesting that the rules vary between each country. Not only do Accountants follow GAAP, they also must comply with AASB or also known as the Australian Accounting Standards Board. Much to my relief, there are standards business’s must follow and abide and are not able to ignore.

To report or not to report? Whilst reading this, I found myself wondering down the main street of Mackay and picturing which businesses would need to comply with accounting rules. It was clear that only companies that prepare general purpose financial statements are required to comply with accounting rules. I’m not sure if the likes of the local fish shop would fall into this category, I highly doubt it.

If there’s one thing I’ve learnt during this unit, it’s that there is no clear-cut rule, it’s just simply not that easy and I understand that we cannot have a rule for everything. Which takes me to my own personal experiences as a Human Resources Advisor. Every task is varied and when working with people and dependant on the situation, the approach you take may vary each time. Whether it be, performance management plans, job interviews or employees just simply seeking advice, there is no clear-cut answer, and therefore my position requires me to make an informed and reasonable decision. Often my decisions are based on previous learnings or experiences, therefore, I’m building on my knowledge and understanding constantly. Learning without realising maybe? Getting back to learning. I find learning an essential part of everyday life. It’s being able to expand on your knowledge. This unit has made me have a greater understanding on how I learn and how I see different aspects of the world.

Company financial statements often show the reality on what is happening inside a business. It’s also made me aware that everyone has different views about what concepts and ideas would be most useful. What I learnt was that there are many ways to prepare a financial statement, I suppose it’s similar to Employment Contracts as they all vary depending on the company and their awards.

I now understand the meaning behind Accrual Accounting and the explanation provided about the Electricity Bill was easy to relate to. I found it interesting that Accrual Accounting is used for companies that want information at regular intervals and that most financial statements are prepared by using Accrual Accounting. However, I did struggle with the cash concept. How is cash managed in each business?

The example of the September 11 plane incident was a good example into explaining how general ideas and assumptions influence how financial statements are created. The what ifs that we need to consider even if the don’t take place? Would the Cornavirus be classed as an assumption? Don’t entirely understand how materiality fits in but I’m sure I will have a deeper understand throughout the term.

Lastly, I enjoyed reading about the interaction of these two key qualities: Relevance and faithful representation. Accountants can create financial statements and reports but how do we know if the information is reliable and dependable, well this is exactly the meaning of faithful representation. Why would Accountants create the financial statements only for business’ not to act upon the information? Makes sense, really. Otherwise, it’s useless information.

Got me thinking as to what information would receive a better response from a Manager. This is where the quality of relevance is more likely to influence the decisions of Managers and the information is relatable to act and verifiability encourages the firm to use the information with confidence

Overall, the game of accounting is not as clear cut as I thought it was and has still left me eager to learn more. I must admit, I have a greater appreciation for Accountants. It’s not all about using a calculator and ensuring the numbers balance.

Puzzled would be the best way to describe my mind whilst reading through Chapter 3, sections 3.1 and 3.2. The language of Accounting does not come naturally to me; however, during this unit I have taken a great interest to it and must admit I’m enjoying learning along the way. After breaking down the chapter and writing down my detailed notes, I’m beginning to have a better understanding and it doesn’t seem so daunting.

What a fantastic quote by Richard Loth to commence the chapter, my first thought was, I wonder what will be on the menu. The Annual report would have to be the one document all Business’ want to look good prior to publishing on the company website or distributing to the ‘all contacts’ address book in outlook. It’s written for an audience that consists of staff members and possibly investors. Not only is it designed to make staff feel good and be proud of the company they work for, it’s to also influence other’s behaviours.

Speaking from personal experience, at the current company I work for, the months leading up to the annual report can be stressful times in the office. With the collation of certain reports and detailed information requested from various departments of the organisation it is also a time-consuming task but of the out most importance. I remember quite clearly during my first year with my workplace, I was asked if I would participate in a group photo that was to be published in the annual report. My knowledge of annual reports then was limited, and I was amazed when I first read through it and to find the photograph that I was included in.

I didn’t realise that the Balance Sheet only showed the company’s financial position on that given ‘one day’. It’s clear to me now that the Balance Sheet is made up of the firms’ assets, liabilities, and equity.

I was also fascinated that we should only take interest in reading the group or consolidated accounts section. This makes sense, as you want to have a greater understanding on what is going on inside the group of companies that are managed by the Management of the parent company. Also known as the ‘economic entity’.