Financial statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form, easy to understand, they include four basic financial statements accompanied by a management discussion and analysis: A balance sheet or statement of financial position, reports on a company's assets and owners equity at a given point in time. An income statement—or profit and loss report, or statement of comprehensive income, or statement of revenue & expense—reports on a company's income and profits over a stated period of time. A profit and loss statement provides information on the operation of the enterprise; these include the various expenses incurred during the stated period. A statement of changes in equity or equity statement, or statement of retained earnings, reports on the changes in equity of the company over a stated period of time. A cash flow statement reports on a company's cash flow activities its operating and financing activities over a stated period of time.
For large corporations, these statements may be complex and may include an extensive set of footnotes to the financial statements and management discussion and analysis. The notes describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements. "The objective of financial statements is to provide information about the financial position and changes in financial position of an enterprise, useful to a wide range of users in making economic decisions." Financial statements should be understandable, relevant and comparable. Reported assets, equity and expenses are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently." Financial statements may be used by users for different purposes: Owners and managers require financial statements to make important business decisions that affect its continued operations.
Financial analysis is performed on these statements to provide management with a more detailed understanding of the figures. These statements are used as part of management's annual report to the stockholders. Employees need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation and rankings. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are used by investors and are prepared by professionals, thus providing them with the basis for making investment decisions. Financial institutions use them to decide whether to grant a company with fresh working capital or extend debt securities to finance expansion and other significant expenditures. Consolidated financial statements are defined as "Financial statements of a group in which the assets, equity, income and cash flows of the parent and its subsidiaries are presented as those of a single economic entity", according to International Accounting Standard 27 "Consolidated and separate financial statements", International Financial Reporting Standard 10 "Consolidated financial statements".
The rules for the recording and presentation of government financial statements may be different from those required for business and for non-profit organizations. They may use either of two accounting methods: accrual accounting, or cost accounting, or a combination of the two. A complete set of chart of accounts is used, different from the chart of a profit-oriented business. Personal financial statements may be required from persons applying for a personal loan or financial aid. A personal financial statement consists of a single form for reporting held assets and liabilities, or personal sources of income and expenses, or both; the form to be filled out is determined by the organization supplying the aid. Although laws differ from country to country, an audit of the financial statements of a public company is required for investment and tax purposes; these are performed by independent accountants or auditing firms. Results of the audit are summarized in an audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy.
The audit opinion on the financial statements is included in the annual report. There has been much legal debate over. Since audit reports tend to be addressed to the current shareholders, it is thought that they owe a legal duty of care to them, but this may not be the case as determined by common law precedent. In Canada, auditors are liable only to investors using a prospectus to buy shares in the primary market. In the United Kingdom, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays auditors tend to include in their report liability restrict
David LeFevre Dodd was an American educator, financial analyst, economist, professional investor, in his student years, a protégé of, as a postgraduate, close colleague of Benjamin Graham at Columbia Business School. The Wall Street Crash of 1929 wiped out Graham, who had started teaching the year before at his alma mater, Columbia; the crash inspired Graham to search for a more conservative, safer way to invest. Graham agreed to teach with the stipulation. Dodd a young instructor at Columbia, volunteered; those transcriptions served as the basis for a 1934 book Security Analysis, which galvanized the concept of value investing. It is the longest running investment text published. In 1916, Dodd graduated from High Street School, a high school in Martinsburg, West Virginia, where his father was the principal. In 1920, he completed his Bachelor of Science, at University of Pennsylvania. One year he received his Master of Science at Columbia University. From 1922 to 1925, Dodd was an instructor of economics at Columbia University.
From 1925 to 1930, he became an instructor of finance. From 1926 to 1945, he was in charge of the economics courses. In 1930, he received his PhD from Columbia University. From 1930 to 1938, Dodd was an Assistant Professor there, from 1938 to 1947 an Associate Professor, from 1947 to 1961 a Full Professor. From 1948 to 1952, he was Associate Dean at the Columbia Business School. In 1961, he retired as Professor Emeritus in Finance at Columbia University. On May 17, 1984, on the 50th Anniversary of publishing Security Analysis, Michael I. Sovern, President of Columbia University, awarded Dodd a Doctor of Letters, an honorary degree, for applying financial theories with brilliant results in a competitive world of investments. Columbia President Michael Sovern bestowed the honor during Columbia's 230th commencement exercises. Dodd was a member of the following organizations: American Economic Association, Social Science Research Council, American Finance Association, New York Society of Security Analysts, Beta Gamma Sigma, Phi Gamma Delta, Alpha Kappa Psi, Phi Chi Theta.
At the time of his death, various editions of the book he coauthored, Security Analysis, had sold over 250,000 copies. From 1917 to 1919, he was in the US Navy during World War I. From 1921 to 1922, he was Research assistant for an economist at National Bank of Commerce, New York. In 1928, he advised private clients on investments. From 1950 to 1958, he was Limited partner, Newman & Graham Ltd.. From 1958 to 1959, he was General partner, Graham-Newman & Co.. The phrases "Graham and Dodd," "value investing," "margin of safety," and "intrinsic value"—all biblical to value investors—are used interchangeably when referring to an approach to investing. Despite the onset of modern portfolio theory in the late 1950s—a theory that peaked throughout the 80s, gaining Nobel recognition in 1990 —Value Investing proved to be a formidable style that defied MPT; the University of Chicago was at the center of MPT while Columbia has been the Mecca for Value Investing for 7½ decades. Many cracks in MPT are now well established, whereas the basics behind Graham & Dodd’s approach to Value Investing are as valid today as when they were first introduced.
Value Investors see securities as either priced under-priced, or over-priced. In contrast, MPT proponents insist that, by definition under the efficient-market hypothesis, a realized price of a stock is the correct price. Value investor purists reject the usefulness of capital asset pricing model, in part, because it wrongly extrapolates historical volatility as a proxy for risk. For example, if equity prices of a company fell 75%, assuming the underlying fundamentals of the company were solid, an MPT practitioner would view it as volatile. Therefore, value investors see MPT metrics—such as standard deviation, beta and the Sharpe ratio —as inadequate and misleading. Columbia resisted de-emphasizing Value Investing during the throes of the MPT renaissance, but the appeal of MPT seemed to be part of a larger movement, thrusting finance aspects of business education into higher echelons of academia. During about a 25-year period, published research and articles in leading journals of the value ilk were few.
Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you taught that the world was flat." Shortly after the death of David Dodd in 1988, Bruce Greenwald, a star professor at CBS, took a keen interest in Value Investing. He found the overwhelming success of Value investors difficult to dismiss. At the same time, reliable data that fortified Value Investing was solidifying, while MPT was showing some flaws. Professor Greenwald invigorated the academic aspects of what many in ivory towers erstwhile treated as a vocational discipline. MPT pundits argue that the Warren Buffett's long-term record is a statistical three- to five-sigma event—that is, his success is probable, but not replicable with certainty, yet the success of numerous other investment funds and practitioners who applied value investing theories weakened assertions attributing success to chance
Accounting or accountancy is the measurement and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494. Accounting, called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors and regulators. Practitioners of accounting are known as accountants; the terms "accounting" and "financial reporting" are used as synonyms. Accounting can be divided into several fields including financial accounting, management accounting, external auditing, tax accounting and cost accounting. Accounting information systems are designed to support related activities. Financial accounting focuses on the reporting of an organization's financial information, including the preparation of financial statements, to the external users of the information, such as investors and suppliers.
The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system. Accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are audited by accounting firms, are prepared in accordance with accepted accounting principles. GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board in the United States and the Financial Reporting Council in the United Kingdom; as of 2012, "all major economies" have plans to converge towards or adopt the International Financial Reporting Standards. The history of accounting is thousands of years old and can be traced to ancient civilizations; the early development of accounting dates back to ancient Mesopotamia, is related to developments in writing and money. By the time of Emperor Augustus, the Roman government had access to detailed financial information.
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe. With the development of joint-stock companies, accounting split into financial accounting and management accounting; the first work on a double-entry bookkeeping system was published by Luca Pacioli. Accounting began to transition into an organized profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880. Both the words accounting and accountancy were in use in Great Britain by the mid-1800s, are derived from the words accompting and accountantship used in the 18th century. In Middle English the verb "to account" had the form accounten, derived from the Old French word aconter, in turn related to the Vulgar Latin word computare, meaning "to reckon"; the base of computare is putare, which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think."The word "accountant" is derived from the French word compter, derived from the Italian and Latin word computare.
The word was written in English as "accomptant", but in process of time the word, always pronounced by dropping the "p", became changed both in pronunciation and in orthography to its present form. Accounting has variously been defined as the keeping or preparation of the financial records of an entity, the analysis and reporting of such records and "the principles and procedures of accounting". Accountancy refers to the occupation or profession of an accountant in British English. Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing and accounting information systems. Financial accounting focuses on the reporting of an organization's financial information to external users of the information, such as investors, potential investors and creditors, it calculates and records business transactions and prepares financial statements for the external users in accordance with accepted accounting principles. GAAP, in turn, arises from the wide agreement between accounting theory and practice, change over time to meet the needs of decision-makers.
Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006 reports on performance in 2005—on an annual or quarterly basis about the organization as a whole. This branch of accounting is studied as part of the board exams for qualifying as an actuary; these two types of professionals and actuaries, have created a culture of being archrivals. Management accounting focuses on the measurement and reporting of information that can help managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis, are not required to follow the accepted accounting principle. In 2014 CIMA created the Global Management Accounting Principles; the result of research from across 20 countries in five continents, the principles aim to guide best practice in the d
Security Analysis (book)
Security Analysis is a book written by professors Benjamin Graham and David Dodd of Columbia Business School, which laid the intellectual foundation for what would be called value investing. The first edition was published in 1934, shortly after the Wall Street crash and start of the Great Depression. Among other terms and Dodd coined the term margin of safety in Security Analysis. Security Analysis was published by McGraw-Hill, written by David Dodd and Benjamin Graham in the early 1930s, when both authors taught at Columbia University's business school. Writes The New York Times, "it was intended as a common-sense guide for investors but turned out to be a thick textbook that went through five editions and sold more than 250,000 copies." Economist Irving Kahn was one of Graham's teaching assistants at Columbia University in the 1930s, made research contributions to Graham's texts for Security Analysis. The work was first published following unprecedented losses on Wall Street. In summing up lessons learned and Dodd scolded Wall Street for its focus on a company's reported earnings per share, were harsh on the favored "earnings trends."
They encouraged investors to take an different approach by gauging the rough value of the operating business that lay behind the security. Graham and Dodd enumerated multiple actual examples of the market's tendency to irrationally under-value certain out-of-favor securities, they saw this tendency as an opportunity for the savvy. In Security Analysis, Graham proposed a clear definition of investment, distinguished from what he deemed speculation, it read, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."A number of financial terms were coined in the book. For example and Dodd coined the term margin of safety in Security Analysis, it is not known or by whom. However, it or phrases equivalent were certainly first used in connection with the theory of value investing as developed by Graham in Security Analysis in 1934. In The Intelligent Investor, Benjamin Graham describes a Benjamin Graham formula he used to value stocks.
The formula as described by Graham in the 1962 edition of Security Analysis, is as follows: V = EARNINGS × V = Intrinsic Value EARNINGS = Trailing Twelve Months Earnings 8.5 = P/E base for a no-growth company g = reasonably expected 7 to 10 year growth rate Where the expected annual growth rate "should be that expected over the next seven to ten years." Graham’s formula took no account of prevailing interest rates. The book represents the genesis of corporate finance. However, by the 1970s, Graham stopped advocating a careful use of the techniques described in his text for security analysts in selecting individual stock investments, citing that "in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that limited extent I'm on the side of the "efficient market" school of thought now accepted by the professors." Graham stated that the average manager of institutional funds could not obtain better results than stock market indexes, since "that would mean that the stock market experts as a whole could beat themselves — a logical contradiction."
Regarding portfolio formation, Graham suggested that investors use "a simplified" approach that applies one or two criteria to security prices "to assure that full value is present," relying on the portfolio as a whole rather than on individual securities. "The Superinvestors of Graham-and-Doddsville" is a 1984 article by Warren Buffett promoting value investing, based on a speech given on May 17, 1984, at the Columbia University School of Business in honor of the 50th anniversary of the publication of Security Analysis. Using case studies, the speech and article challenged the idea. Buffett brought up 9 investors whom he considered direct protege of Graham and Dodd, using their finances argued that "these Graham-and-Doddsville investors have exploited gaps between price and value," despite the inefficiency and "nonsensical" nature of the pricing of the overall market. Buffett concluded in the 1984 article that "some of the more commercially minded among you may wonder why I am writing this article.
Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I've practiced it. There seems to be some perverse human characteristic; the academic world, if anything, has backed away from the teaching of value investing over the last 30 years. It's to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, those who read their Graham & Dodd will continue to prosper."The CFA Institute in 2012 wrote that "The roots of value investing can be traced back to the 1934 publication of Benjamin Graham and David Dodd’s classic, Security Analysis. Graham disseminated his views to the general public in the regarded book The Intelligent Investor; the influence of Graham’s methodology is indisputab
Benjamin Graham was a British-born American investor and professor. He is known as the "father of value investing," and wrote two of the founding texts in neoclassical investing: Security Analysis with David Dodd, The Intelligent Investor, his investment philosophy stressed investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, buying within the margin of safety, activist investing, contrarian mindsets. After graduating from Columbia University at age 20, he started his career on Wall Street founding the Graham-Newman Partnership. After employing his former student and future manager of Berkshire Hathaway, Warren Buffett, he took up teaching positions at his alma mater, at UCLA Anderson School of Management at the University of California, Los Angeles, his work in managerial economics and investing has led to a modern wave of value investing within mutual funds, hedge funds, diversified holding companies, other investment vehicles. Throughout his career, Graham had many notable disciples who went on to receive substantial success in the world of investment, including Buffett, who described him as the second most influential person in his life after his own father.
Other such disciples were Bert Olden, Irving Kahn and Walter J. Schloss. In addition, Graham's thoughts on investing have influenced the likes of Seth Klarman and Bill Ackman. Graham was born Benjamin Grossbaum in England, to Jewish parents, he moved to New York City with his family. After the death of his father and experiencing poverty, he became a good student, graduating as salutatorian of his class at Columbia, he declined an offer to teach English and philosophy, choosing instead to take a job on Wall Street, where he started his Graham-Newman Partnership. Early on, Graham made a name for himself with "The Northern Pipeline Affair, " involving John D. Rockefeller, his first book, Security Analysis, with David Dodd, was published in 1934. Security Analysis and The Intelligent Investor, published in 1949, are his two most acclaimed books. Warren Buffett describes The Intelligent Investor as "the best book about investing written." Graham exhorted the stock market participant to first draw a fundamental distinction between investment and speculation.
In Security Analysis, he proposed a clear definition of investment, distinguished from what he deemed speculation. It read, "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. Graham distinguished between the active investor; the passive investor referred to as a defensive investor, invests cautiously, looks for value stocks, buys for the long term. The active investor, on the other hand, is one who has more time and more specialized knowledge to seek out exceptional buys in the market. Graham recommended that investors spend effort to analyze the financial state of companies.
When a company is available on the market at a price, at a discount to its intrinsic value, a "margin of safety" exists, which makes it suitable for investment. Graham wrote. By that he meant that the stock investor is neither right nor wrong because others agreed or disagreed with him. Graham's favorite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder's door offering to buy or sell his shares at a different price; the price quoted by Mr. Market seems plausible, but it is ridiculous; the investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn't mind this, will be back the following day to quote another price; the point is that the investor should not regard the whims of Mr. Market as determining the value of the shares that the investor owns, he should profit from market folly rather than participate in it. The investor is best off concentrating on the real life performance of his companies and receiving dividends, rather than being too concerned with Mr. Market's irrational behavior.
Graham was critical of the corporations of his day for obfuscated and irregular financial reporting that made it difficult for investors to discern the true state of the business's finances. He was an advocate of dividend payments to shareholders rather than businesses keeping all of their profits as retained earnings, he criticized those who advised that some types of stocks were a good buy at any price, because of the prospect of sustained stock price growth, without a good analysis of the business's actual financial condition. These observations remain relevant today, his contributions spanned numerous fields, one of, fundamental value investing. According to The Snowball, after his son's death, Graham had an affair with the deceased's girlfriend Marie Louise "Malou" Amingues and used to travel to France to visit her, he separated from his wife, after she refused his offe
Break-even abbreviated as B/E in finance, is the point of balance making neither a profit nor a loss. The term originates in finance but the concept has been applied in other fields. In economics and business cost accounting, the break-even point is the point at which cost or expenses and revenue are equal: there is no net loss or gain, one has "broken even." A profit or a loss has not been made, although opportunity costs have been "paid" and capital has received the risk-adjusted, expected return. In other words, it´s the point in which the total revenue of a business exceed its total costs, the business begins to create wealth instead of consuming it, it is shown graphically as the point where total cost curves meet. In the linear case the break-even point is equal to the fixed costs divided by the contribution margin per unit; the break-even point is achieved when the generated profits match the total costs accumulated until the date of profit generation. Establishing the break-even point helps businesses in setting plans for the levels of production which it needs to maintain be profitable.
The accounting method of calculating break-even point does not include cost of working capital. The financial method of calculating break-even, called value added break-even analysis, is used to assess the feasibility of a project; this method not only accounts for all costs, it includes the opportunity costs of the capital required to develop a project. In nuclear fusion research, the term "break-even" refers to a fusion energy gain factor equal to unity; the notion can be found in more general phenomena, such as percolation. In energy, the break-even point is the point where usable energy gotten from a process equals the input energy. In computer science, the term refers to a point in the life cycle of a programming language where the language can be used to code its own compiler or interpreter; this is called self-hosting. In medicine, it is a postulated state when the advances of medicine permit every year an increase of one year or more of the life expectancy of the living, therefore leading to medical immortality, barring accidental death.
In soccer, the break-even requirement was adopted by UEFA with the purpose of prohibiting clubs from spending more money on transfers than they earn as businesses, i.e. revenue per each fiscal year excluding donations from sponsors or advertisers. In the film industry, breaking means grossing twice as much as the cost of the film