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- This section introduces the key concepts of accounting for investors.
Its intention is to better enable investors to understand and interpret
the financial statements of businesses they might invest in.
- Accounts provide a (hopefully) objective analysis of the state and
performance of a business.
- Accounts of listed companies must be prepared according to both the
law and Generally Accepted Accounting Principles (GAAP). Listed companies
must have their accounts audited by qualified, independent, auditors
to verify the accounts conform to the law and GAAP.
- Look closely at the auditor's statement. Any hint of concern here
should be cause for alarm.
- The four basic accounting principles are accruals, prudence,
consistency, and viability.
- Accruals - Items are recorded when their income (or expenditure)
arises, not when it is actually received or paid.
- Prudence - Figures must be shown in a conservative (pessimistic)
- Consistency - Accounting methods can vary from company to company,
however, for a given company the methods used must remain consistent
from year to year. If a company changes its accounting methods,
this change must be reported.
- Viability - Accounts are prepared on the assumption that the company
will remain in business.
- Because companies can legitimately adopt different accounting methods
it is not always possible to directly compare the accounts of one company
with another. However, because of the consistency principle, it is possible
to monitor a particular company's performance over time from its financial
- Financial statements usually include letters from the chairman and
board of directors. These will usually serve to tell you what a great
job the management team have done, but can sometimes provide useful
hints as to likely future initiatives.
- The three key financial statements are the Profit
and Loss Account, the Balance
Sheet, and the Cash Flow Statement.
- Also described are some of the key financial
ratios that may be derived from these statements.