Chapter 1 & 3 - Questions

Question 1.1

What is double entry accounting? Why do we have to put everything in twice?

~ Double entry simply does not mean that only two accounts are affected. For every transaction entered in the accounts, total debits must equal total credits. Everything must be recorded twice to show the increase and decrease of the affected accounts. 

For example: If stock is purchased; the cash at bank account would decrease, the inventories account would increase, and if GST is applicable to the purchase then this account would also be affected.

Question 1.2

Identify three assets, three liabilities and three items of equity in your firm's spreadsheet. 

Assets
Property, plant & equipment: large items bought by the business that has significant value.
Inventories: items held for sale in the ordinary course of the normal operations of a business.
Trade and other receivables: money that is owed to the business by customers from sales.

Liabilities
Borrowings: the amount that has been borrowed from other parties and is owed by the business.
Trade and other payables: money that is owed to another business from purchases.
Current tax payable: amount of tax to be paid by the business.

Equity
Dividends: a sum of money paid regularly by a company to shareholders out of its profits.
Share-based payments: payments given to employees on the basis of share or equity of the company.
Capital: money placed into the business by the owner.



Question 3.1

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? What do you think and why?

When analysing financial statements we can not just do what 'works'. Every person has a different way of understand what the figures mean and where they come from. We cannot simply just follow what practitioners are doing as every business in the world is different and so is their financial statements. Some people may be more skilled at reading financial statement for companies about clothing or retail as opposed to those about automotive products because that is what they are familiar with.


Question 3.2

What is the benefit of having a structure, such as the du Pont company's framework, to help use the ratios to analyse a firm's financial statements? Is it any better (or worse) than simply doing what experienced practitioners do? Why or why not?

Du Pont's company's framework is highly beneficial to many businesses as it solely focuses on the financial statements and it very easy to understand and read.