Study Guide Questions

Chapter 1
Q. Why do we have double entry accounting? Why do we put everything in twice? Why not just once?
A. Double entry accounting is important as it gives us the true picture of a transaction that occurs. If transactions aren't recorded twice, it would only give us a partial look into what has occurred. Did we pay cash? Did we put it on credit? Did we trade something? Without double entry accounting, we wouldn't be able to tell.

Q. Identify three assets, three liabilities and three examples of equity for C.banner International?
A. Assets:
          Inventories- For C.banner, this includes inventories of raw materials, work in progress and finished               goods.
          Prepaid lease payments- This is the amount that the company has paid in advance for their lease.
          Pledged bank deposits- Deposits that are pledged to the bank as securities of C.banner's notes                     payable (accounts payable)
     Liabilities:
          Trade payables- Amounts that are outstanding for trade purchases. C.banner's Annual Report                       mentions that these are usually due within 90 days of purchase.
          Deferred revenue- This amount is due to C.banner's customer loyalty program, so I am assuming they           run some of rewards program similar to Flybuys or Myer One etc.
          Other payables- Includes accruals, advances from customers, payroll payable and other general                   accounts outstanding.
    Equity:
          Share capital- capital generated from the purchase of shares
          Reserves- money that is there to meet any unexpected costs, as well as future upkeep costs. Pretty               much the savings account.
          Equity contributed to owners of company- belongs to those with a controlling interest, rather than                 minority shareholders from subsidiary companies

Chapter 3
Q. 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 most are doing and just do this ourselves?
A. In my opinion, what works for me is not necessarily going to be what works for you. I know personally that I like to develop my own way of doing things, as I know I do a better job if I am doing it in the way I feel comfortable. If we just copy what others are doing, how do we grow from this? How do we make advances? An example is the bankers using the balance sheets for financing. Someone realised that it was important to classify assets into current and non current. If people just went on auto pilot to do what the person before them does, we won't get breakthroughs like that.

Q. What is the benefit of having a structure, such as the du Pont company's framework to help use ratios to analyse a firm's financial statements? Is it any better (or worse) than simply doing what experienced practioners do? Why or why not?
A. I think that the du Pont framework is a good idea when analysing financial statements. The use of ratios, in my opinion gives a clearer picture of the business's success. For example, if two businesses both make the same profit, but Business A only has half the assets of Business B, the ratio will tell us that Business A is generating more profit from less. But if we didn't know that Business B had twice the assets, one would assume both businesses are equally performing.

Chapter 4
Q. Why should we bother restating a firm's financial statements? What benefit could there be in simply rearranging the elements of a firm's financial statements?
A. The main advantage of restating a firm's financial statements would be the chance to pick up any errors that may have occurred. What you don't notice in one may just not line up when done again. It would also need to be done if a company changes the way it reports through the year, and in that case the previous financial statements would need to be put in a format that is comparable to the new one.

To be continued... :)