KCQ's - Chapter 3

Key Concepts

Please find below the key concepts I have gathered from Chapter 3.

·         A firm’s annual report is a marketing document.

·         There are four general purpose financial statements: the balance sheet, income statement, statement of changes in equity and cash flow statement.

·         A firm’s balance sheet shows its financial position on a particular day: it is a statement of the assets, equity and liabilities of a business.

·         Almost all listed companies are not just one company, but a group of companies.  This means that there is a parent company and they control a number of subsidiary companies.

·         The income statement shows the revenue and expenses and therefore the profit of a firm over a period.

·         The statement of changes in equity shows the various changes in shareholders’ equity over a period of time.

·         The cash flow statement shows the opening cash balance at the beginning of the period and the closing cash balance.

·         Ratios were used as a key part of analysis, by helping one to focus on the relationship between different items in a firm’s financial statements.

·         The equity value of a firm is the present value (PV) of expected future dividends:

Equity value = PV of expected future dividends

·         The relationship between dividends and cash flow can be expressed as:

Dividends = Operating cash flow – Capital outlays + Net cash flow from debt owners

Key Questions

Please find listed three questions that relate to Chapter 3.

1.    Why can financial statements be called a range of different names?  Wouldn’t it be easier to have the names standardized across the board?

2.    Do firms try to hinder our analysis of financial statements by using happy photos and optimistic comments?

3.    Should it be a requirement that firms disclose all of their expenses in the income statement?

Summary

As I started to read Chapter 3, I was surprised to learn that there are no specific rules governing how firms set out their financial statements, including what they call or name different items and more specifically the financial statements themselves.  I also noted that there are a range of balance dates used by different companies.  I understand that the concepts and ideas embedded in the accounting numbers are basically all the same, however I am still curious as to why the format, names, balance dates etc of financial statements are not standardized across the board.

It wasn’t until after I viewed IR’s annual reports that I realized how much content and detailed information they actually contain.  I more or less assumed that these reports consisted of a very brief summary of the firm and their financial statements.  Consequently, I deemed annual reports as boring documents filled only with numbers and limited information.  My perception has changed dramatically.  Also, what I found extremely interesting to learn is that companies use their annual report as a marketing document.  Although I didn’t consider this theory earlier, it is now very apparent when I read different firm’s annual reports.  

In Chapter 3, one of the most interesting and beneficial concepts for me to discover was ‘parent companies’.  My understanding of a parent company is that it is generally a large firm that has subsidiaries, which are wholly or partially owned separate businesses.  I work for Ergon Energy, however our ICT services are provided by a different company known as SPARQ Solutions and I have always wondered where SPARQ fits into the business model.  SPARQ is jointly owned by Ergon Energy and Energex, so does this mean that SPARQ is a subsidiary of Ergon?

Another interesting area that I really enjoyed learning more about was dividends.  As a result, I am considering buying shares and have been analyzing different firm’s annual reports to help me with my decision.  Overall, Chapter 3 emphasizes the importance of using a firm’s financial statements to help us engage with key aspects of the firm’s economic and business realities.  By seeking to understand the reading and connecting it to my prior knowledge, I have been able to make better sense of IR’s financial statements.  

KCQ's - Chapter 1

Key Concepts

Please find below the key concepts I gathered from Chapter 1.

·         Accounting is a model of each firm’s economic and business realities.

·         Firms are constantly creating and exchanging value with other firms and with individuals through various markets, which include input markets, product markets and capital markets.

·         Firms can be involved in providing services to customers, retailing products, or manufacturing products.

·         Businesses can be organized in several ways and the different types include sole traders, partnerships, companies and trusts.

·         Double entry accounting is a system of recording transactions of a firm to ensure the relationship between the different elements of the business model that underpins accounting, is kept intact.

·         Accounting uses two types of books: journals and ledgers.  A journal contains the daily transactions of a firm, whereas the ledger contains these same transactions but arranged in individual accounts.  However, in our digital age these two separate sets of books rarely exist.

·       A proprietor or owner of a firm is separate and distinct from the firm itself.  This realization introduces a duality to all transactions of a firm and these two sides or aspects to every transaction are called debits and credits.

·         The fundamental accounting equation that underpins all accounting is:

      Equity = Assets – Liabilities

·         A firm has five key elements: assets, liabilities, equity, revenue and expenses.  The relationship of the five elements of accounting can be viewed as:

      Assets = Equity + (Revenue – Expenses) + Liabilities

Key Questions

Please find listed two questions that relate to Chapter 1.

1.    Why would a business appoint a trust?  What are the advantages/disadvantages?

2.    Is it essential for all businesses to practice ‘double entry accounting’? Why or why not?

Summary

I studied Business Principles throughout high school and although I always achieved high grades, I didn’t necessarily understand the idea of accounting.  I had always thought of it as simply a process for keeping financial accounts.  After reading Chapter 1, the most significant insight for me was to discover that accounting is much more than just financial records/numbers; it’s about creating value by using quality information to connect to a firms economic and business realities. 

As I continued reading, I noted the importance of understanding the types of businesses.  I was aware that firms can be involved in providing services to customers, retailing products and manufacturing products, however I had never delved into the different ways a business may be organized.  I found sole traders, partnerships and companies to be rather self explanatory; however I am still struggling to comprehend how a trust relationship works.   

A key concept that I found to be extremely interesting was the history/evolution of double entry accounting.  I have had the opportunity to work as an accounts team member and although I practiced this method of book keeping, I never considered where or how the concept originated.  In a world of rapid change, I found it fascinating to learn that most of the accounting principles that we use today were established centuries ago.

I feel that Chapter 1 really emphasizes the importance of double entry accounting and that equity owners of firms are separate to the firm itself.  My understanding is that when using the double entry system, every business transaction is recorded in two accounts.  One account will receive a ‘debit’ entry and another account will receive a ‘credit’ entry.  To illustrate, if Integrated Research paid $20 000 cash for a delivery van, the asset Delivery Vehicle will increase with a debit and the asset Cash will decrease with a credit.

Even though I have practiced the extended accounting equation in previous subjects, I had never attempted to understand why the formula works.  Charles F Kettering summed it up perfectly, ‘there is a great difference between knowing and understanding: you can know a lot about something and not really understand it’.  By acknowledging two relatively simple principles, that is assets, liabilities and equity provide a measure of value and revenue and expenses represent the changes in value, I have gained a much greater understanding of accounting.  Overall, I have found that by personally engaging with these reading, I am better able to connect with IR’s economic and business realities.

KEY CONCEPTS

Please find below the key concepts I have gathered from IR’s annual report.

• IR achieved an annual profit after tax result of $9.1 million – marginally up against the prior year result of $9.0 million.

• Profitability in the first half was down 23% as a result of the delay in key service provider licence contracts.  The second half was much stronger with profit growing 16% in this period as the key licence contracts were completed.

• Revenue for the year was $48.9 million, an increase of 1% over 2012.

• Integrated Research was selected as the 2013 Avaya DevConnect Technology Partner of the Year, the only company to be awarded this title. 

• IR’s consulting services business grew for a fourth consecutive year, with revenue increasing 35% to $4.5 million as customers increasingly look to extend their Prognosis solutions.

• The company continued to focus on expanding its capabilities and improving productivity.  The number of staff at the end of 2013 was 200 (2012:186).

• Total expenses were $38.3 million, up 2% against the prior year with a higher investment in research and development.  The major development issue that occurred during the 2013 financial year was on Prognosis 10 which is set to be released during the first half of the 2014 financial year. 

• The company’s balance sheet remains in a strong position with $14.8 million in cash and cash equivalents as a result of continuing strong cashflow from operations.

FINANCIAL SUMMARY

In millions of AUD (except earnings per share)

Year ended 30 June	2013	2012	% Change
Revenue from licence fees	26.6	28.9	↓ (8)%
Total revenue	48.9	48.6	↑ 1%
Net profit after tax	9.1	9.0	↑ 0%
Net assets	30.0	29.2	↑ 3%
Cash at balance date	14.8	12.0	↑ 23%
Americas revenue	34.4	31.9	↑ 8%
Europe revenue	6.9	7.2	↓ (3)%
Asia Pacific revenue	7.5	8.7	↓ (14)%
Earnings per share (cents per share)	5.4	5.4	↓ (0)%

Integrated Research reported a solid performance for the financial year to June 2013.  Although competition exists in the software and services industry, IR remains focused on sustaining its competitive advantage through continuing innovation that comes from its research and development program.  The company’s growth strategy is to create, sell and support Prognosis based products and services that deliver profitable growth from existing markets and customers, as well as creating new profits that open new markets.  The company’s pipeline is strong and the fundamentals of its key markets are sound, as it continues to produce world class products that manage the performance of its customers’ Unified Communications, Payments and IT infrastructure.  

KEY QUESTIONS

Please find listed five questions that relate to the areas of IR’s Annual Report that I had difficulty understanding.  Any knowledge/information you can provide would be greatly appreciated.                                                    

1. What is ‘divestment of other non-current financial assets’?                                                          
2. What are ‘derivative financial instruments’?                                                                                    
3. What is ‘hedging’ or the 'hedge relationship'?                                                                                                                               
4. Why do annual reports include the numbers of meetings of the Company’s Board of Directors and the numbers of meetings attended by each director?                 
5. In the Director’s Report, it mentions ‘officers who were previously partners of the audit firm’.  What does that mean?

BLOG RATER

Please find below my top three blogs, including links.   

1.  Evelyn De Lange’s Blog

The blog Evelyn has produced for Saunders International would be my personal favourite.  I feel that she has provided quality information, in a clear and concise manner.  Her page is easy to navigate, with a great layout that is visually pleasing.  I have benefited considerably from reading Evelyn posts, as not only were they inspirational, but they helped me to better understand my own company.  To view Evelyn’s blog, please click on the link below.

http://evedelange.blogspot.com.au/

2.  Megan McCormick

The blog Megan has produced for Amcom Telecommunications is incredible.  I feel her posts contain exceptional content that is articulate and clear.  I find Megan’s material to be extremely interesting, fresh, relevant and of high quality.  The design and layout of her blog is astonishing, yet still simple and easy to navigate.  I commend Megan on her development and understanding of accounting and believe that her insights have helped me considerably with my own learning.  To view Megan’s blog, please click on the link below.

http://meganelouise.blogspot.com.au/

3.  Iris Onvlee

The blog Iris has created for Aristocrat Leisure is remarkable.  She has posted an extensive amount of information that is very informative and relevant.  I find her blog fascinating/interesting, with an impressive design and believe that the quotations and motivational images on her background are a fantastic idea.  To view Iris’ blog, please click on the link below.

http://irisonvleeacct11059.blogspot.com.au/

NEWS AND EVENTS

If you would like to view Integrated Research's latest news and events, please click on the link below.

http://www.ir.com/News_and_Events/Latest_newspage__1429.aspx

FUTURE GROWTH

As I looked more specifically at the future growth of Integrated Research, I found an article titled 'One Tech Growth Stock At A Crazy Cheap Price'.  I found the information in this piece very beneficial, as it discussed various areas of future growth in IR.  Would you buy shares in Integrated Research?  To view the article, please clink on the link below.  

http://www.fool.com.au/2011/09/13/one-tech-growth-stock-at-a-crazy-cheap-price/