Be an accountant

It’s not difficult to become an accountant. In my 15 years as an accounting professor, I’ve had the good fortune to help prepare thousands students for the accounting profession.  Many of them probably never considered accounting until they started to study it. Careers in accounting provide tremendous job satisfaction, high salaries, and comfortable job security. […]
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Transparency

Accountants like to talk about transparency, the principle that financial statements should give a clear and accurate portrait of a company’s performance. Accounting is important because you need a transparent view of your business’s performance.  What are your sales?  Your expenses?  How profitable is your company?  What assets do you own?  How much cash do […]
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Finding a good accountant

Finding someone you can trust. Studies show that accountants are often a business person’s most trusted advisor. Your accountant will have access to your most personal financial information.  Be careful. This is where the Certified Public Accountant can help.  The highly-respected CPA credential indicates that the holder has passed the challenging CPA exam and is licensed in […]
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Extraordinary gains and losses almost never happen

Extraordinary gains and losses are gains and losses that are considered both unusual and infrequent. Unusual, in the sense that you wouldn’t have reasonably expected this event to happen.  Infrequent in the sense that you don’t expect this event to happen again.  US Generally Accepted Accounting Principles (GAAP) are highly restrictive about extraordinary items; these […]
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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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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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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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