Building a Foundation in Accounting for Investment 1

One of the essential things to know before starting to invest is 'accounting.' When making investment decisions, it is crucial to accurately understand a company's financial status.

Basic Understanding of Investment and Accounting

Before making investment decisions, it's crucial to understand a company's financial status and operating performance. In this case, accounting information is a useful tool for investors to evaluate a company's value and develop investment strategies.

Accounting is a system that measures and records a company's economic activities, resulting in a report called financial statements.

Financial statements provide information about a company's assets, liabilities, equity, revenue, and expenses, allowing investors to analyze the company's financial status and operating performance.

For example, investors can assess a company's growth, profitability, and stability based on indicators such as revenue, operating profit, and net income. They can also use financial ratios like the debt ratio and current ratio to predict a company's financial risk. Furthermore, they can use the cash flow statement to understand a company's funding and usage of funds.

Therefore, the ability to understand and analyze the accounting information of the company you intend to invest in plays a crucial role in investment success. Hence, building a foundation in accounting is a necessary preparation before investing.

Learning How to Read Financial Statements

The ability to interpret accounting information is indispensable in investment. To develop this ability, you must start by learning how to read the most basic material, the financial statements.

Financial statements are tables that show a company's financial status and operating performance, summarizing the company's economic activities over a certain period. The four main financial statements are the balance sheet, income statement, cash flow statement, and statement of changes in equity.

• Balance Sheet:Represents a company's financial status at a specific point in time. It is composed of assets, liabilities, and equity items, and it allows you to evaluate the size of a company's net assets and financial stability.
• Income Statement:Represents a company's operating performance over a certain period. It is composed of items such as revenue, operating expenses, operating profit, and net income, allowing you to evaluate a company's profitability, growth, and margins.
• Cash Flow Statement:Represents a company's cash flow over a certain period. It is composed of cash flows from operating, investing, and financing activities, allowing you to understand a company's funding and usage of funds.
• Statement of Changes in Equity:Represents a company's changes in equity over a certain period. It is composed of items such as capital stock, capital surplus, and retained earnings, allowing you to understand the size of a company's equity and changes in shareholder equity.

Being able to skillfully read these financial statements will help you understand a company's financial status and operating performance more accurately, which is a great help in making investment decisions.

Understanding Assets and Liabilities

In accounting, what do assets and liabilities mean?

• Assets:Generally refers to resources that are expected to generate economic benefits in the future. In other words, it is a tangible/intangible resource owned by a company that has the potential to generate future profits or cash. Typical assets include cash, inventory, buildings, and machinery.
• Liabilities:Refers to the present obligation of an entity to provide assets or services to another entity as a result of past events or transactions. In other words, it refers to the debt that a company has an obligation to repay or settle in the future. Typical liabilities include borrowings, accounts payable, and advance payments.

Therefore, the general principle is that the more assets a company has, the better, and the fewer liabilities it has, the better. However, this can vary depending on the circumstances of each company, so you need to analyze the company's financial statements in detail to make a judgment.