Basics of Accounting
- Accounting Defined: Accounting is the process of recording, summarizing, and analyzing the financial transactions of a business or organization.
- Key Terminology:
- EBIT: Earnings Before Interest and Taxes. This provides a measure of a company's core operations without the costs of the capital structure and tax expenses impacting profit.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This measures the company's overall financial performance.
- Accounts Receivable (AR): The amounts owed to a business for goods or services provided on credit.
- Accounts Payable (AP): The amounts a business owes to suppliers, vendors, or creditors for goods or services received, but not yet paid for.
- Basic Accounting Equation: Assets = Liabilities + Stockholders Equity. This represents the balance of what a company owns, owes, and the invested capital.
- Three Financial Statements:
- Income Statement: Showcases yearly changes, EBIT, and net income.
- Cash Flow Statement: Reflects the company's cash position, EBITDA, and the ability to pay debts.
- Balance Sheet: Presents assets, liabilities, and stockholders' equity.
- Linking the Financial Statements: Net income from the income statement goes to the top of the cash flow statement. The available cash at the bottom of the cash flow statement goes to the top of the balance sheet.
- Finding Company's Financial Statements: Company financial statements can be found on SEC EDGAR or BamSEC. They are disclosed in the form of 10-K (annual report), 10-Q (quarterly report), and 8-K (important event notification) filings.
This week covered the basics of accounting, fundamental to understanding business transactions, financial statements, and a company's financial health.