ASS#1 -Step 6

ACCT13017 – Assessment 1 – Step 6 My blog link: https://quynhgiaonguyen.wixsite.com/my-site-1

Step 6

Chapter 4 - Understanding the past 

KCQ1: The past as a foundation for understanding value.

After reading chapter 4, the author made me clearly understand the importance of a business's past as a foundation for predicting its future.  According to the author, trading and investing, if only based on expectations to operate, is really difficult to achieve because it is just an imagination that people think is not real and it is impossible to determine whether it really happens or not. Therefore, I think it is really necessary to review the company's past and from there we analyse based on that past to come up with appropriate strategies and choices that may happen in the future. A reason for this is that if we do not clearly understand  the company's past and make analysis based on our own imagination and expectations, which will still not be effective, leading to inaccurate future predictions. I realised that this is an important and  necessary thing to understand and make the right analysis and choices. Therefore, financial reports are not only historical but also predictive tools, they also help investors rely on and choose companies to invest in more accurately and effectively. This made me clearly realize the difference between analysis, corporate investment and normal trading. 

KCQ2: Abnormal Earnings and Restating Financial Statements

A concept that is quite new to me in this chapter is the concept of Abnormal Earnings (AE). This concept emphasizes that not all returns are meaningful from an investor's perspective. I've never heard of this concept before, I feel like it's quite difficult for me to grasp. Before, I thought a company's profits depended on whether the company did well or not, but after reading this chapter, I realized that whether a company really creates value depends on return on equity (ROE) > required return. I understand that we should not only evaluate a company based on profits, but also compare expectations and opportunity costs.   

KCQ3: Restate Two Financial Statements

I learned how to analyze financial statements by breaking things down. I find this concept very useful in helping me have a clearer view of the company's strengths and weaknesses as well as see the profits and losses. In addition, it also helps me understand the fluctuations, trends and management decisions of past business activities. In addition, business irregularities are also easier to detect, thereby helping to accurately and specifically assess the business. However,  I also wonder how they can accurately detect whether a company's profits are abnormal or normal? In addition, I also find it difficult to understand some parts of the cost and revenue analysis that are unclear. I wonder if there is any way to help standardize the "breakdown" of accounts for consistent analysis?  

KCQ 4: Separating business activities and financial activities 

Opinion Between business activities and financial activities, I feel that separating these two activities is necessary to help me and everyone else clearly distinguish between business profits and financial profits. Because if I look at the overall profit without separating it, it can easily confuse me, leading to false assessments of the business. In addition, it also helps clarify values ​​through business activities, while financial activities are related to how the business is funded.  I also wonder if financials influence business decisions making this separation more difficult to achieve? Overall, this is a realistic and specific view of business and financial activities to evaluate company performance.  

KCQ 5: Restating financial statements as an analytical tool.

 I feel a bit confused about Restating financial statements, it seems quite complicated to me and the process seems mechanical. However, it is necessary to better understand the factors that create value. In addition, when I read this section to the end, I found it quite interesting, specifically it showed me that accounting analysis is not just a simple technique but it is also about critical thinking and interpretation.  In short, through this chapter, the author helped me understand much of the necessary knowledge about financial statement analysis. It is completely different from the knowledge of financial accounting that I have learned. It provides deeper analytical thinking about businesses and how to create value. However, this chapter also has some parts that are a bit confusing and quite complicated, but overall it is really useful, helping me have a clearer view of financial statements and making investment decisions.

 Question: 

1. How to correctly determine the required rate of return in practice?

2. How do investors deal with the fact that expectations are often inaccurate if markets are based on expectations ?

3. Do investors really use abnormal earnings or is it just a theory?