Investors use financial statements to obtain valuable information used in the valuation and credit analysis of companies. This makes it important to understand how business accounting is done and which principles guide financial statement preparation. Knowledge of accounting helps investors determine an assetꦜs' value, understand a company's financing sources, calculate profitability, and estimate risks embedded in a company's balance sheet.

Critically Important﷽ in Perfo💦rming Investment Analysis

Understanding a company's classification of its assets, liabilities, and valuation methods in 澳洲幸运5开奖号码历史查询:financial accounting is paramount in investment and credit analysis. For example, according to U.S. 澳洲幸运5开奖号码历史查询:Generally Ac𝐆cepted Accounting Principles (GAAP), the asset value is, for the most part, b൩ased on historical cost and does not reflect its market value. Therefore, obsolete equipment with positive book value may be worthless if the company attempts to sell it. Also, the value for a certain class of assets is based on management's judgmentꦜ and may not reflect its true economic value.

For instance, if the value of the company's goodwill is based on unrealistic assumptions, the management may have to ♈take a large earnings charge in the future. Investors who have a strong knowledge of business accounting can be ahead of the curve by identifying such problems early on.

Learning How a Com🎐pany Finances Their Operations

Another question that business accounting helps answer relates to the mix of debt and equity used to finance a company's operations. The ability to identify debt and equity is crucial in determining the company's value since the 澳洲幸运5开奖号码历史查询:debt-to-equity ratio is commonly used in measuring a company's idiosyncratic risk. Although most information on debt and equity comes from the 澳洲幸运5开奖号码历史查询:balance sheet𓂃, certain debt items require further digging and deep knowledg✱e of business accounting.

For example, companies often choose to lease property instead of buying it. Under the U.S. GAAP, 澳洲幸运5开奖号码历史查询:operating leases are not required to be included as a liability. However, operating lease payments are akin to de𝐆bt payments, and in🐼vestors may wish to treat the present value of operating leases as debt.

Accurately Estimating Profitability and Risks

Profitability is the cornerstone of ratio analysis and investment valuation. Financial analysis is based on the company's future earnings, and most earnings predictions use current profits as a base. Investors with a strong grasp of financial accounting can quickly decipher whether certain line items on the 澳洲幸运5开奖号码历史查询:income statement are non-recurring and ar🎀e not expected to occur in the future.

Estimating uncertainty or risk of assets is one of the most important steps in investment valuation. Although financial statements do not est🗹imate risk directly, they provide many useful disclosures in the notes, which help identify risk. Investors with strong accounting backgrounds use a company's financial reports to identify key risk areas that can point to potential losses in asset values. Also, investors use financial statements to calculate financial ratios that as✤sist in estimating a company's liquidity and default risks.

Finally, investors may need to posse꧅ss extensive knowledge of different accounting standards to compar🃏e companies from different countries. Although accounting principles gradually converge across the globe, differences still persist and complicate the comparability of financial records.