ACCT13017 Assessment 1 Steps 5 and 6

Step 5: Restating income statement and balance sheet

I found it quite easy restating my financial statements and only required to look up the notes of my annual reports a couple of times. I did find myself going between operating and financial income when it came to the exchange differences on translating foreign controlled entities. I chose to class it as operating income as it is the currency exchange difference on their operations in Singapore.  I also wanted to explore what “Other Income” consisted of and discovered it was made up of government/state assistance and rental rebates.

Step 6: Chapter 4

Abnormal earnings are the balance of earnings left behind after the required rate of return of investors equity is deducted. The calculation uses return on equity which can only be calculated using figures from past financial years. Is it possible to predict what abnormal earnings will be in the future? I imagine a lot of environmental and industry factors would affect future abnormal earnings which can’t always be predicted. What factors can affect a firm’s income which in turn affects its abnormal earnings?

By restating a firm’s balance sheet between operating and financial activities we can then determine the value of Net Operating Assets (NOA) and Net Financial Assets (NFA) or Net Financial Obligations (NFO) if the firm has more debt than assets, which can assist with determining the liquidity of the firm. Are there other ways of determining the liquidity of a firm? There are many ratios we have used in past units, but which ones are best for examining our firm? It might pay for me to brush up on my knowledge of ratios so I can understand this better.

Operating assets of a firm do not need to be funded by equity investors alone. There are many ways operating assets can be acquired such as through creditors and debt. I am looking forward to analysing Academies Australasia to see how their operating assets are funded. Will this be similar to the operating assets at Townsville Cath Ed and it’s 29 schools? We receive funding from various Government agencies along with other grants available to improve schools and assist the learning our students receive. We also charge tuition fees and numerous other levies to keep schools running efficiently and to purchase assets.

When it comes to profitability of a firm it is easy to understand that the use of the profit margin ratio would indicate whether a firm is selling its goods or service at a high enough rate to cover its expenses and end with a profit. What does this mean for a firm that has a negative profit margin? How long could a firm sustain this and stay in business? It is the same concept with our daily lives and the lifestyle we lead. If we do not earn a high salary, then can we really afford to buy a luxury car? Although we could get a loan, can we afford the repayments when they are due? I would think not. A lot of people now have the means to get themselves into debt very quickly. I was shopping with my then 15-year-old and when we went to the counter to pay for her items, the sales assistant asked if she wanted to put the purchase onto After pay. I quickly said “NO”. It shocked me they would offer that to someone so young.

I understand how return on equity (ROE) is calculated and that financial leverage (FLEV) and operating spread (SPREAD) along with return on net operating assets (RNOA) can affect the return value of ROE however I am struggling put this into words. While I am analysing my firm, I’m sure this will come more naturally, and I will be able to explain my understanding of these components and the importance it has on a firm.