Archive for November, 2009
The Nature of Financial Statements no comments
To apply the insights gained from the conceptual overview of the business system, we must now look for available information that will:
• Allow the manager or analyst to track the financial condition and operating results of the business.
• Assist in understanding the cash flow patterns in more specific terms.
In the process of financial/economic analysis, a variety of formal or informal data are normally reviewed and tested for their relevance to the specific purpose of the analysis. The most common form in which basic financial information is available publicly, unless a company is privately held, is the set of financial statements issued under guidelines of the Financial Accounting Standards Board (FASB) of the public accounting profession and governed by the U.S. Securities and Exchange Commission (SEC). Such a set of statements, prepared according to generally accepted accounting principles (GAAP), usually contains balance sheets as of given dates, income statements for given periods, and cash flow statements for the same periods. A special statement highlighting changes in owners’ equity on the balance sheet is commonly provided as well.
Since financial statements are the source for a good portion of analytical efforts, we must first understand their nature, coverage, and limitations before we can use the data and observations derived from these statements for our analytical judgments. Financial statements reflect the cumulative effects of all of management’s past decisions. However, they involve considerable ambiguity. Financial statements are governed by rules that attempt to consistently and fairly account for every business transaction using the following conservative principles:
• Transactions are recorded at values prevailing at the time.
• Adjustments to recorded values are made only if values decline.
• Revenues and costs are recognized when committed to, not when cash actually changes hands.
• Periodic matching of revenues and costs is achieved via accruals, deferrals, and accounting allocations.
• Allowances for negative contingencies are required in the form of estimates that reduce both profits and recorded value, usually affecting shareholders’ equity or special set-asides.
These rules leave reported financial accounting results open to considerable interpretation, especially if the analyst seeks to understand a company’s economic performance and to establish the basis for shareholder value results. It’s common practice among professional analysts to adjust the data reflected on financial statements for known accounting transactions which do not affect cash flows, and to make assumptions about the economic values underlying recorded asset values.
Gain the Knowledge to Succeed over the Long Run no comments
You have to have knowledge to succeed. Most new investors and traders enter this field expecting to immediately become successful. However, many have spent tens of thousands of dollars and many years in college learning a specific profession and still do not make much money. To be successful, you need to start your journey on the right path, which will in- crease your chance of reaching your final destination: financial security. To accomplish this goal, learn as much as you can about low-risk trading techniques and increase your knowledge base systematically.
Successful traders have an arsenal of trading tools that allows them to be competitive in the markets. I have used the word arsenal purposely. I believe that as an investor or trader, you need to recognize that each and every day in the marketplace is a battle. You must be ready to strategically launch an attack using all the resources in your arsenal. Your first weapon—knowledge—will enable you to make fast and accurate decisions regarding the probability of success in a specific investment. Is it incongruous to suggest that trading is war and also that to trade successfully one must reduce one’s level of stress? I believe not. The most composed and well-armed opponents win wars. The same is true for traders. In most cases, winners will be more comfortable (less stressed) regarding their ability to win. Knowledge fosters confidence. If you are well armed, you will be confident as you go off to fight the battle of the markets. Increased confidence leads to lower stress and higher profits.