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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Introduction to Fundamental Analysis Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions

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



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.

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