Chapter 2

Coffee in hand, I think I’m ready to start reading the 12 pages of Chapter 2 and write about it. From the get-go I was captivated as just from reading the title ‘Understanding the Game’ gave me a feeling that we are going to get into the reasoning behind what we do in accounting. Paragraph 2 in section 2.1 I found interesting due to the similarities with work. This paragraph talks about how if an individual is requesting money from a firm, they have the power to request information to back that individuals request. Now similarly, as a Compliance Officer for DHS, we act like the ‘bank’ in the above scenario. Individuals who receive welfare payments must meet certain criteria and we (as the Department) can request evidence to ensure that they meet said criteria.

Reading on, I got down to the paragraph for GAAP. Now this paragraph took me by surprise (and reading other people’s drafts, it caught them by surprise too). GAAP is the generally accepted accounting principles which accountants need to follow when preparing financial statements. So, to me I initially thought that there was no difference between GAAP and the Accounting standards. It wasn’t until I read the very next paragraph labeled ‘Accounting Standards’. From reading these two paragraphs, then re-reading them to ensure I understand what I’m reading, my basic understanding is this: GAAP is the basic principles which accountants follow when developing financial statements but they must comply with the accounting standards set by the Australian Accounting Standards Board (AASB). The AASB adopt the International Financial Reporting Standards (IFRS) set by International Accounting Standards Board (IASB). So, I always relate things back to my work, but I think its because it fits so well. At work, we have guidelines set out for when we are conducting compliance checks (this would be the GAAP) but we are bound by the Australian Public Servant (APS) Code of Conduct (this would be the AASB) which is derived from legislation (this would be the IFRS) set by the Australian Government (this would be the IASB).

Interpretation. This one single word in my eyes summarizes section 2.2 and the first 3 paragraphs. Martin outlines that there are grey areas in accounting (and life in general) and everyone encounters them. We must then draw from our past experiences and prior knowledge to help us navigate these grey areas whilst ensuring we are still compliant with the standards that have been set out for us. In other words, you and I can read the exact same sentence but have a completely different interpretation of it. It’s a wonderful yet scary thing to think of considering this doesn’t just apply to accounting but applies to everyday life. For example, someone is facing court on murder charges and the jury hear all the evidence presented. You would think that it would be a simple black and white answer of guilty or not guilty however that is not always the case. Out of the 12 jury members that hear the exact same information at the exact same time, 1 individual may interpret it in a completely different way and may then reduce the charge from murder to manslaughter.

The next two headings I want to talk about is ‘Accrual Accounting’ and ‘Other general ideas’. Now I’m not going to bore you with the long definition of accrual accounting as 90% of you have already read what Martin wrote so in summary, accrual accounting is the recording of revenues and expenses in real time regardless of when cash may exchange hands. Martin gives a great example when talking about electricity companies. They provide a service and receive payment for that service quarterly. On their books however, they will increase their accounts receivable when the service has been provided rather than when they receive money.

Moving onto Other General Ideas paragraphs, after reading it, it finally connected the dots. Accrual accounting allows the company to keep track of their finances and when it comes time to type up their financial statements, everything is there for them (using black and white facts). Under the ‘other general ideas’, it indicates that the company must then go through the data and see what is actually required to be disclosed to the public (interpretation comes into play here). A financial statement is then typed up and disclosed to the public so they can then interpret the information and decide on how the company is tracking. This ties into the ‘game’. And when I say a ‘game’, I mean a game that drives the economy and effects people’s lives directly.

See a company wants to make as much money as possible, so their financial statements need to be the sparkling diamond to draw people’s attention to it. People that want to become rich will invest money, but they need to invest in the right company to get returns. They will need to inspect and interpret that sparkling diamond to see if its genuine or a cubic zirconia. So technically (in my eyes) accounting is a game, but a game with real life consequences.

Chapter 3

So I must say, reading over chapter 3 is giving me a good feeling. See, when I read things, my brain will process one section and sometimes run off on a tangent creating pictures and scenarios in my head. This can be good at times but also annoying as I will have to re-read what I’ve just read, turning a 15 minute task into a 30 minute task. Thankfully for me though, when I’ve been reading the information from the intro right through to chapter 2, my brain was interpreting information and recalling prior experiences and past knowledge to give me a better understanding. I can proudly say that reading chapter 3 is just confirming my interpretations.

Statement of cash flows is a vital part of business and Martin explains it perfectly. Regardless of how asset rich someone or a company may be, cash in hand is the foundation on which a business will survive. Yes, assets can turn into money however it isn’t always a quick transaction (sales or liquidation of items can take time). For example, you might be one of those smart cookies that ‘mined’ for bitcoin 10 years ago, essentially costing you next to nothing. Then as of recent with the cryptocurrency boom, you became an overnight millionaire (how amazing). Only problem is though, last night you went to bed with $3 in your bank account and today your phone bill is due. Technically you are rich (asset rich) however I can almost guarantee you that your service provider won’t give two hoots how ‘rich’ you are if you don’t pay them for the service that they have provided you.

Tying into the ‘game’ of accounting, forecast dividends caught my attention. Why is this? Well to me, forecast dividends is a gamble. You are using the same information as everyone else and deciding if you invest your hard-earned cash into the company. Like a slots machine, there is something that will attract you to a company. The bright flashing lights might be the dividend payout ratio and that’s what attracts you to the company. You now have to decipher what you see, does this slots machine interest you (is the company in a field you like)? What are the jackpots sitting at (what are their profits and losses looking like)? Are you winning more than you’re losing (are you receiving more dividends at the end of the year rather than losing value)? Just like playing slot machines, investing into companies can cost you more money than they return so ensuring youOverall, I would say that the readings from chapter 2 and 3 have expanded my knowledge into understanding what I am doing for step 4. I believe that my understanding of financial statements is adequate however I know there is still a lot more for me to learn. This excites me as although the chapters are long and wordy, I know that I can gain a bucket load of knowledge to help me in the future.