Assignment 2- Restated Financial Statements

Using Accounting for Decision making T1, 2016

ACCT11059

Martin Turner

Zac Beveridge

9th May 2016

ContentsStep 1: Analysing Financial statements.................................................................................................3

Step 2: Restating Financial Statements- Slater and Gordon Lawyers....................................................5

Step 3: Products and/or services...........................................................................................................6

Step 4: Feedback...................................................................................................................................7

Step 1: Analysing Financial statements Like previous chapters I found Chapter four to be quite a good one. Although there were a

lot of new concepts it felt as though I connected and the further into detail I got the easier

the notions became. The bad thing about this chapter is the length, it took me a very long

time to read through it and I think that’s because I didn’t know a lot of the stuff in here and

that may have contributed to the length in which it took. I think the main message that

Martin is trying to convey is although businesses rely heavily on profits that’s not necessarily

how you determine the success of a business and I believe that is an extremely valid point. A

chunk of this chapter was calculations and this confused me, “why do we need so many

calculations?” I figured that the only real calculations involved with businesses in adding

and subtracting liabilities but this goes a further and once I got reading it made a lot of

sense. My favourite thing about this chapter, along with all the rest, is the structure in which

the readings follow; it’s all in order and everything used (calculation wise) has been

previously mentioned and the further in depth you go into the calculations I can guarantee

you’ve used this somewhere else in the chapter… they all link. The main question I had for

the first part of this chapter was, “Why are balance sheets so important for the success of a

business?” It didn’t take long for me to figure this one out. A balance sheet is the business,

it’s the economic standard and performance of a company and without it you can very

easily lose track of the financial information of a business. I had no idea as to what a

restated financial statement was but with a few simple words it started to make sense, ‘like

putting together the parts of a watch or constructing a cabinet from various pieces of wood’,

so in other words it’s just another way of doing it but with more precision.

“How do firms ‘add value’ to equity investors?” this question had me stumped from the

word go but once I got reading the concept was actually quite clever ‘All that equity

investors receive from a firm are dividends. It is simply a transfer of value between a firm

(which the equity investors already own) and its equity investors’ the last sentence best

described this for me and made me understand the best, basic definition. Furthermore,

another concept which grabbed my attention was free cash flow; when you think of free

cash flow you think of money flowing in and out of a business so the question I asked myself

was “is free cash flow as simple as I think?” and the answer to this was yes and no. The

definition I had in my mind was a very simplistic version, ‘free cash flow (FCF) represents

the cash that a company is able to generate after laying out the money required to maintain

or expand its asset base’ (Investopedia, 2016). As I continued to read through this chapter it

became obvious to me that there are a lot of smaller details that are all equally important to

a business as the last.

The most challenging thing about this chapter, as mentioned earlier, were the calculations.

A conceptual view of a firm, this section had me stumped, “what do all these letters stand

for? Are they acronyms?” Yes they are and they were really simple (e.g. Free Cash flow-FCF,

Net Financial Asset- NFA etc.) and once I understood this the chapter slowly but surely

started to become easier. Hand-in-hand with the calculations was economic profit and once

the calculations became clear than the concept of economic profit was simple. In my eyes,

economic profit if the measure of success of a business and capital is the primary source; in

saying this, the business has to risk it to become successful. “What is the difference

between income statements and balance sheets?” I don’t think I’m the first to ask this

question, but I believe the two are very similar yet quite different, both are as important as

each other and associate like a well-oiled vehicle. The best definition I could find for the two

is as follows, ‘the cash flow statement simply shows the company's cash activities,

the balance sheet illustrates a company's book value, and the income statement shows how

assets and liabilities are used. The balance sheet shows the company's assets, liabilities and

shareholder equity’ (Investopedia, 2016). This explained to me the differences and

similarities of the two and finally I obtained the basic difference of an Income statement and

balance sheet.

Finally, although this chapter was challenging and I firmly believe that it has given me a lot

of vital information. I like how is made mention to a lot of everyday occurrences for an

everyday business and I felt as though I could link with what martin was saying. Initially, I

struggled with this chapter but once I read through it I felt as though I could tackle the

world, I really enjoyed the accounting tips… they’re ones that I will keep embedded for a

long time. Overall this was a brilliant chapter and the concepts and ideas were very well

explained.

Step 2: Restating Financial Statements- Slater and Gordon LawyersInitially, I knew this was going to be the most challenging part of the assignment and I

wasn’t disappointed. After reading chapter four I felt as though I had enough ammunition to

tackle the restated financial statement of Slater and Gordon Lawyers but once I got into it I

realised this was far from the truth. I was fortunate enough to contact a friend who is in the

Accounting field, James, he was quite busy but gave me as much help as he could. I am not a

huge fan of posting and asking for help online, I’d much rather a face-to-face chat although

this wasn’t the case; I was in serious need of some help as I didn’t really know where to start

and the forum of ASS#2 proved to be my saviour (as seen below). I understood most of this

but I had some trouble trying to finish it off so I contacted a relative who, fortunately, is in

the accounting industry and she gave me some advice. From this I was able to make sure all

the calculations were accurate and placed beneath the adequate heading. I labelled each

heading as acronyms so it became quite easy when I was calculating the final sums, I could

tell the different between each heading (E.g. OE and OR- Operating Expenses and Operating

Revenue) and I found this was a big help and steadied my confusion.

IssuesI found this a very challenging part of the assignment, at times it got very frustrating and it

was extremely time consuming but once it was complete I felt as though I could walk out

and become an accountant, very rewarding! The hardest part was getting all the calculations

to add up and work correctly; through tireless formulas and analysis I finally worked out a

way of doing it and it was quite simple. Having a look at other companies restated financial

statements really helped me (as Slater and Gordon lawyers didn’t have one) and I was

fortunate enough to obtain one off my relative, which helped me to determine the actual

difference between a normal financial statement and a restated one. I was reading through

the study guide and there was one major thing that helped my cause when restating

financial statement, it said not much has to be changed from the original statement and

then I finally realised that I was overthinking the task. So, I was staring blankly at my

computer screen when two things helped me to move forward with this task: a small

sentence in the study guide that says not much has to be changed and an example from a

local business. This somehow made my mind click and I’m yet to confirm how, but all I know

is that I felt a great sense of accomplishment when I finished restating my company’s

financial statement.

Peer Forums

Step 3: Products and/or services

Table 1- Slater and Gordon Services

Family Law Criminal Law Conveyancing Selling Price (S) $350 $400 $150Variable Cost (VC) $150 $300 $80Contribution Margin (S-VC) $200 $100 $70

Table one (1) shows the 3 prominent services that Slater and Gordon Lawyers provide. Each service

has a variable selling price as it’s determined by the longevity, people involved and severity of the

case. With law the only basic fee is the consultancy fee, along with everything else the selling price

and be a lot higher than what is shown. Furthermore, the variable cost is determined by, as

mentioned earlier, people, time and type of case. As well as this, all the contribution margins are

different and this is because some are more popular than others, for example, Slater and Gordon

may only get 100 cases of criminal law in a year and 200 family law cases in a year, as well as this,

the location and demographic can also affect the margin.

Restraints can be a problem for every business, in the case of Slater and Gordon their major one is

availability of specialised staff. If staff are away or there is a large spike in a particular area of law

than the company can go into overdrive, for example, the company has 100 staff employed, 50 in

family law, 40 in criminal law and 10 in conveyancing and there is a spike in criminal law (60 cases)

and a decrease in family law (5 cases). This can causes restraints as the firm only has limited

resources. They can fix this restraint by taking note of the contribution margin from previous years

which gives them the information as to what field one should specialise in and hence hire them.

Finally, it can be confirmed that contribution margins and constraints are a major part in the success

of a business. They help to determine how much of a product/service a business should supply and

which type they should supply.

Step 4: FeedbackFeedback from:Feedback to:

Comments

Step 1: KCQ’s

Step 2: Restated Statement of Changes in Equity Balance Sheet Income Statement Commentary and discussion with others

(Note: You may wish to give some comments on their Excel spreadsheet)

Step 3: Identify three products/services Estimate selling price, variable cost & CMs Commentary – CMs Constraints – identify and commentary

Step 4: N/A

OVERALL ASS#2

References

Investopedia. (2016). Free Cash Flow - FCF. Retrieved from Investopedia: http://www.investopedia.com/terms/f/freecashflow.asp

Investopedia. (2016). What is the difference between an income statement and a balance sheet? Retrieved from Investopedia : http://www.investopedia.com/ask/answers/101314/what-difference-between-income-statement-and-balance-sheet.asp