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Trading basics
Created Jun 12, 2020

Created by Eric Raymund Rex Sylvester

Tags Trading

Accounting
Accounting is the formal collection, analysis and reporting of financial and
non-financial data about a company to various end user

Some of the financial and non-financial accounting are mandatory

The company is required to releas it priodically (quartely)

There are three types of accounting

 Financial accounting -

 Provides information about the company to the people outside

 This assist public for decision making

 This is for valueation purpose by equity investers and investement

banks

 This communicate with outsiders with financial statemente.

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  Managerial accounting-

 Provides information abut the company within it and used for

decision makeing inside the comapany.

 This is used to discuss the product cost,profitability and priceing

,introducting and discontinueing productsand capacity planning for
production volumes

 There is no fixed format and they are audited

 Tax accounting -

 is the estimation of taxes to be paid and the complience with tax

discloser.

MEANING : ACCRUAL - Increasing something over a period of time

Accural accounting
Transaction are recoganise on financial statement as and when the primay
economic event occures rather than when the actual flow occurs

MEANING : Primamary economic event - is the transfer of control of an

economic resource from one party to another party.

👆This gives rise to two major financial statement

 The income statement (profit and loss statement)

 The balance sheet - its a financial statement that reports a companys

assert , liability and shareholders equity.

MEANING : An equity investment is a money that is invested in a company by

purchasing shares of that company in the stock market

Rules of accural accounting

 Revenus recognition means that a company can report revenue that it has
earned through delivery of service or product, can measure this revenue
and is reasonably sure of receving this revenue.

 Matching cost to revenue means that expenses directly related to

revenue are recognized in the same period as the revenue are recogized.

 This includes the expenses that are not directly recoganised as revenues
but are recoganise as expenses over a time period the benifits are realised

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 Accural accounting says that we do not require cash to record a transaction

Advantage odf accural accounting

Under accural accounting the financial statements provide timelier and more
decision-relavent information.

Disadvantage
Accural accounting is based on jugements and estimates and so less reliable
than cash flow.

This leads to earning as a matter of opinion for this resone financial

accounting is guied by well specified rooms

The balance sheet

This captures the financial position of a company as of a particular date.

This is of three parts -

 Asserts -

 Assert represent the resource owned by a company and are used to

generate future economic benifits in the form of either higher cash
inflows or lower cashout flows

 Examples:

 Cash and equivalents

 Inventory

 Property , plant and equipment

 Intangible asserts like patents and trademarks

 Classification of asserts

 Current assert - current assert are those asserts that are expected
to be converted to cash,sold or consumed within a year

 Non-current arrert - Any assert that is expected to be converted

to cash ,sold or consumed after one year is categorized as a non-
current asset

 Liability -

 Liability represent a companys economic obligation to outsiders

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  These outsiders have claims against the companys asserts.

 Examples:

 Account payable Current liability)

 Short-term borrowing and Current liability)

 Long-term debt (non-Current liability)

 Long-term lease (non-Current liability)

 Classification of liability

 Current liability - expected to be paid within one year

 Non current liability - expected to be paid after one year

 share holder equity

 This part shows how much a company owns,what if owes and how
much shareholders invested in the company.

 This represents the companys owners claims on the companys total

assert

 Consist of

 Owners investment in the company

 as well as Aggregate undistributed profit called retained earning.

Balance sheet gets its name because

Assets=Liability+Equity
Assets -represent how the company uses its resource
Liability and shareholders equity - represents where the company gets its
resources from.

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 👆 NOTE - This may vary from country to country depending on local
accounting rules.

Assets

https://s3-us-west-2.amazonaws.com/secure.notion-static.com/005dbe
bd-74e64e9d-b8eb-822e45a7656d/financial_statement_of_amazon_20
15.pdf

👆 This is the financial statement of amazon 2015

Current assets
Cash and cash equivalent : 15,890 Million USD

👆This includes currency,coins,checks recived but not yet depositedchecking

accouts,petty cash,saveings account,money market account ,short term highly
liquid investment with less than 3 months or the time of purchase.
At the end of December 2015 amazon has cash and cash equivalent of 15.8
Billion USD

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 Marketable securities : 3918 Million usd
This includes investment in various types of financial securities like
stockes,bonds.They are not liquid as cash and cash equivalent.But may be
converted into cash easyly

Inventories : 10,243 Million USD

Inventories includes all raw matrials that the company has bought, all work in
progress, as well as finished goods.

Account receviables : 6423 Million USD

That all the money a company client owe it.
The customer may given a few days to pay.The client is extended credit for a
fixed amount of time
The value of the sale is recorded as account receviable.

Adding all four components gives the companies total assert

Company total current asset=Cash and cash equivalent + Marketable

securities + Inventories + Account receviables

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 Amazons total current asset is 36474

Non-current assets

Property and equipment(PP&E): 21,838 Million USD

This includes all land building, machinery

Goodwill : 3,759 Million USD

This includes non-physical assests such as patents, trademarks

,copyrights,goodwill and brand recognition

Liability
Current liability
Account payable : 20397 Million USD

This is how much the company owes its vendors and suppliers for products
and services that they have already provided or delivered. Servies the
company has purchased on credit. These are expected to be paid of at the
end of the year.

Accrued expenses : 10384 Million USD

These are expenses that the company has incurred but has not yet recevied an
invoice for.
Examples: wages, interest and utilities

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 Unearned revenue : 3118 Million USD

This is how much customers and clients have paid in advance for the
companies product o services.This is a liability until it delivers the promised
product or service .

Companies liability = Account payable + Accrued expenses + Unearned

revenue

Non-current liability

Longterm debt : 8235 Million USD

This includes loans and bonds all which are due to be paid after one year.

Shareholders equity (Net worth)

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 It represents the total equity interest of all the companies shareholders. It
mainly includes preferred equity,common equity,treasury stock and retained
earnings

Common stock
Shareholders having common equity have voting rights and are the companies
owners.
They have right to select board of directors which then appoints who then
appoints different CXOs who in turn manages the day to day operations of the
company.

The value of these shares is 500 million times 0.01 $.

Additional paid-in capital

When the common share are sold to the share holders the shares are sold at
higher value than its par value. The company gets it in the form of cash.

Amazon has additional paid in capital of 13 billion USD.

Treasury stocks
It represents common stock that a company buys back from common
shareholders or were authorized but was never sold to shareholders.

Preferred stocks

It is the investment in the company by preferred stock holders. This means the
company should pay the dividends before it can pay any dividends to the
common stockholders . They don't have any voting rights in the company.

Amazon does not sell any preferred stocks in 2015.

Retained earings

This is an aggregate of undistributed profits across all years .The profits

should be distributed to shareholders both common and preferred as
dividends. Any part of the profits that is not paid out as dividends is added to
the valance sheet as a part of retained earnings.

Amazon have retained earnings of 2.55 billion dollar in 2015.

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 Adding all this amazon has 13.3 billion share holder equity.

Income statement

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