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Key1 Accounting is not a four-letter word

Accounting is not a four-letter word. But to listen to many people faced with trying to understand what’s presented in corporate annual reports, you might think so.

It doesn’t have to be that way. Accounting is simply a system for recording and measuring the results of economic activity. It has proved durable because it is useful. Don’t be intimidated just because you have not yet learned all the secrets. Managers, investors, and other stakeholders employ financial statements---the product of applying the rules of accounting---to monitor company performance, estimate returns on investment, establish business valuations, and decide whether to extend credit.

Those who run businesses must plan in advance using budgets. They set product prices, and decide whether to buy a part from a supplier or make it internally. All these activities and many more, depend on interpreting accounting numbers.

Indeed, business is built on a foundation of numbers. The blueprint for understanding how a company is constructed---what has happened to it, when it happened and whether it can happen again---lies in the financial statements.

In this volume, I assume only that you are basically familiar with the workings of a business. The manual will be most useful for someone who has not been initiated into the mysteries of accounting, or for those who learned the rites long enough ago that memory has faded. After reading this book, you will grasp accounting terms and concepts that were previously obscure. You can then decipher the financial statements that once seemed to be written in hieroglyphics.

Throughout the keys, I refer to actual firms’ financial reports, and provide World Wide Web addresses (URLs) for finding this information online. I recommend that you make frequent reference to these sites, as they will illuminate points in the text and deepen your understanding. You will appreciate what the income statement, balance sheet, footnotes, and other disclosures reveal by practicing speaking their language.

At the waning of the twentieth century, there is doubt in some circles that the numbers in financial statements have much meaningful relation to stock prices. Other experts wonder, in an era when Internet companies like Amazon.com are worth billions on paper despite not having earned a dime, if earnings are still useful for valuation. What we can say with certainty is the practice of accounting, and the use of financial information, have the strong imprimatur of time. The customs of accounting date back to before the Roman era. I predict they will be with us at least as long again.