Idea, Reflections and Reactions - Ch. 2&3

Before starting this subject, I was unaware that the public were able to gain access to certain businesses financial information. I have always thought financial reports were confidential within the business and even then, for certain eyes only.

There are different regulatory bodies that regulate general purpose financial statements in every country but are all very similar to Australian rules. I always assumed that accounting was very black and white, I never imagined that accounting would have so many grey areas.

Generally accepted accounting principles (GAAP), are only the minimum number of rules when preparing financial statements and once again, vary from country to country. These rules only apply to a firm when providing financial statements to outside parties not internal financial documents. I would have thought all financial documentation, whether internal or external should all be presented the correct and same way.

GAAP is collected information that is constantly changing from various entities such as Accounting Standards Board (AASB), Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX). Until reading this chapter, I have never heard of the Australian Securities and Investments Commission so after some research I have now made myself familiar with this organisation. I know understand that they regulate corporate, markets, financial services and consumer credit within Australia.

Accounting standards set within Australia are set by the Australian Accounting Standards Board (AASB). The AASB adopts the standards from the International Financial Reporting Standards (IFRS Standards) developed by the International Accounting Standards Board (IASB). 140 countries adopt the IFRS. If there is International Financial Reporting Standards, why does accounting differ slightly from country to country? Is it due to language or cultural difference possibly economic traditions?

There are three main accounting bodies in Australia – CPA Australia, Chartered Accountants Australia and New Zealand (CAANZ) and Institute of Public Accountants. I am interested in what these three represent, why do we need three? What is the difference?

When firms record transactions in their financial statements it is when their economic substance occurs which is not always when cash will change hands. This is subjective to business to business which is another grey area I have found interesting.

Key characteristics a firms’ financial statements typically possess are relevance and faithful representation. Other qualities important to understanding financial statements are comparability, verifiability, timeliness and understandability.

The four general purpose financial statements are balance sheet, income statement, statement of changes in equity and statement of cash flows. I was intrigued to learn that a balance statement can only show the financial position for a firm on the very day it is created. At the end of a period (in most cases a year) the revenue and expense accounts are emptied and balanced into a profit and loss account. The following period revenue and expense begins with a zero balance.

If a business goes broke or into liquidation is it because it has run out of cash. I assumed there would be more involved than that e.g., the selling of assets but due to cash being liquid this does make sense now.

After reading these sections of the textbook the basics are beginning to make more sense. I still have much to learn and understand and will continue researching until all my questions become clear.