The balance sheet explained

A Balance Sheet lists a company’s assets, liabilities, and owners” equity at a given point in time.  It follows the accounting equation and will help you understand a company’s solvency and liquidity. Assets = Liabilities + Owners’ Equity. The Balance Sheet is sometimes called the Statement of Financial Position.  The name “balance sheet” comes from the fact that a […]
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Earnings per share

Earnings per share is perhaps the most followed accounting figure by investors.  It is so important that they refer to it as “the bottom line.” Earnings per share (“EPS”) is calculated by dividing a company’s net income by the average number of common shares outstanding during the period.  The resulting number represents how profitable a […]
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Stockholders’ Equity

Stockholders’ equity is the owners’ share of a corporation.  It is the value of the corporation’s assets less the value of its liabilities. Corporations issue stock certificates, which represent equal shares of ownership.  For example, if ten people hold one share of stock each, then they each own 1/10 of the corporation.  Suppose the corporation issues five […]
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Liquidity and the current ratio explained

Liquidity is your ability to pay debts in the short-term (usually over the next 12 months). To calculate liquidity, use the current ratio, calculated by dividing current assets by current liabilities (these both appear on the balance sheet). As a general rule, a current ratio should exceed one, so that current assets exceed current liabilities.The […]
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An abundance mentality

The abundance mentality says that we can all prosper together. Your prosperity contributes to mine and my prosperity contributes to yours. I wish more of the world thought this way.  We are all familiar with the stereotypical rich businessman who has built a fortune on the backs of poor people.  The political rhetoric of “99% […]
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Solvency explained

Solvency is a company’s ability to pay its debts. You can quickly measure solvency by comparing a company’s assets with its liabilities.  If liabilities exceed assets, then the company is probably insolvent. Regrettably, the balance sheet does reliably measure the value of assets. Many assets are measured at historical cost.  If you paid $200,000 for a piece […]
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Do you know your whales and high-rollers?

There’s much ado these days about Zynga.  I love Zynga’s model of selling “virtual” products which just happen to be costless.  It’s equivalent to selling bottled water or canned air. Another interesting aspect of Zynga is the whale phenomenon.   A small population of Zynga’s customers account for the vast majority of its revenues.  In Zynga’s case, […]
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Goodwill explained

In business parlance, goodwill is friendly, helpful or cooperative feelings or attitude.  The accounting definition is quite different, and the source of much confusion. Goodwill, an asset on the balance sheet, is additional value recorded when one company acquires another.  It is measured as the difference between the purchase price of the acquisition, and the […]
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