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Introduction to Fundamental Analysis
- The Accounting Process
- Postulates and Principles
of Accounting
* Postulates of Accounting
* Principles of Accounting
- The Financial Statements
* The Balance Sheet
* The Income Statement
* The Cash Flow Statement
* Shareholders' Equity
Statement
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The Accounting Process
Before delving into the numbers and financial
statements, you should get an appreciation of the financial process. Don’t
gloss over the accounting.
The financial statements are the mechanisms through
which the financial results of a company are reported.
Companies organize their cash receipts, cash
disbursements, purchases, sales, payroll, etc. in journals that are totaled
and posted to a general ledger. The account totals in the general ledger are
summarized in a trial balance format, which is further summarized into
financial statements. Multiple legal entities are added together for
consolidated financial statements. Footnotes are added to explain the
statements and the auditor’s report gives validity to the figures. The
attorneys and management then sign off; the reports get “Edgarized,” filed
with the SEC, press releases are issued and conference calls are made.
Luca Pacioli, “The Father of Accounting” was
born into a poor Italian family in 1445, later joined the Franciscan
monastery in Sansepulcro, Italy and became a monk. He befriended and taught
mathematics to Leonard da Vinci. One chapter in his math book, written in
1494, entitles him to a paragraph in my website, over five centuries later. His
treatise entitled “Summa de Arithmetica, Geometrica, Proportionalita,”
commonly referred to as “The Summa,” contained a chapter on the methods of
recording merchant transactions and included the practices, as well as his
ideas on double-entry bookkeeping. He died around 1520 and is considered a
great Renaissance man.
While
accounting is now automated, the concepts have not changed that much from
Luca Pacioli’s writings and ideas. The simplicity of the process of double
entry accounting, combined with the automation of the recordkeeping, has
hidden the complexities of accounting and finance. The recent high profile
accounting issues at companies across the country highlight the
sophistication and complexities behind financial statements. Furthermore,
for investors to maximize their returns, they will need to be able to read
and understand financial statements, as well as being able to implement
investment concepts and strategies.
So how does a young adult gain that level of
understanding of financial statements? One needs to understand the
underlying postulates and principles of accounting, that are the basis of
financial statements.
There are volumes of pronouncements and numerous
regulatory bodies, as well as multiple professional certifications, but it’s
all based on the underlying postulates and principles of accounting, which
are the language of business.
Click here: to review The
Postulates and Principles of Accounting:
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