Q1. What is double entry accounting? Why do we have to put in everything twice?
- This concept is based on the duality principal. There are two actions within the business for every transaction. You could look it as there are two sides to every coin, e.g if a business buys an oven, it is a decrease in expense (credit) and also an in increase of assets (debit).
Primarily double accounting is used to ensure every transaction is recorded in the right place!
Q2. Identify 3 assets, 3 liabilities and 3 items of equity, in regards to your firm.
Assets:
1.
Plant and equipment: large items which are (usually) non- current assets and have significant value. (meaning that they will not be converted to cash within one financial year.
2.
Trade and other receivables: meaning money which is owned by customers, is expected to be received at some point in the near future.
3.
Cash & cash equivalents: meaning cash in the business's bank account or physical cash located on the premises.
Liabilities
1.
Salary: Greencross employs over 1,200 dedicated vets, nurse and support staff.
2.Trade and other payables: money that is owned to other organisations/people, which will be paid in the near future.
3.Other current liabilities: revenue that has been received but has not yet been earned.
Provisions: money that is provided or supplied.
Equity
1.Reserves: money kept in the business
2.Retained: earningsprofit of the year
3.Contributed equity: money/assets invested in the business by the owner.
Chapter 3 Questions!
Q.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 of are doing and just do this ourselves? What do you think and why?
The way that I understand it, there is no real consistency throughout the ratios in doing what works. Similarly, as everyone is different, everyone interpret's concepts differently, therefore the idea/framework of these ratios may not share a clear connection between the rations and financial statements. Instead of looking at the actual meaning of the numbers in regards to the firm's performance, what works can ideally mean just looking at the numbers. Each business if different therefore each business will have different items in their financial statements. Hence, why we cant simply do what most capital practitioners do. As to my understanding, since each business is different, each business should be treated differently therefore analysts should be experienced in regards to being aware of the business's performance, not just seeing the numbers as 'numbers'.
Q3-2 What is the benefit of having a structure, such as the du Pont company's framework, to help use ratios to analyse a firms financial statements statements? It is any better (or worse) than simply doing what experienced practitioners do? Why or why not?
Having a structure like du Pont's company is beneficial because their framework focuses on the financial statements of the firm and makes clear links to this through it's ratios. I do not know if it is better or worse than simply doing what experienced practioners do, but as every business is different, so it could be more beneficial than others to have the ratios reflect the financial statements.
