A VERY DIFFERENT WAY OF LOOKING AT FINANCIAL STATEMENTS…

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Liabilities are made up of accounts payable.? Money you owe for expenses that you bought on credit, merchandise that you will sell (inventory).? Short term debt like a bank loan.? A mortgage payable on a building or a big piece of machinery.? You will pay accounts payable with today’s dollars, but you will pay the mortgage with dollars over the next 30 years if it’s a mortgage on a piece of property.? The values are really all different.

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And then you go back to the basic equation of accounting, Assets equal Liabilities plus Capital and that capital number is a conglomeration of a whole lot of different values.? Capital, for a corporation, is made up of common stock, additional paid in capital and something called retained earnings.? Retained earnings is the profit or loss that the company sustained over its lifetime less any dividends that were paid to the shareholders an that number can be the accumulation of transactions over the last 50 years or so.? And it’s made up of so many different values and estimates that the Balance Sheet values are meaningless.? So, you are adding past values, current values, and future values and estimates made by management and some dictated by the Internal Revenue Code and various other pieces of legislation over a period of an undetermined number of years.? How significant can this number be???? And that’s the balance sheet.?

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The Statement of Income is the results of the income, cost of sales, and expenses of the business over the last accounting period, which is usually the last calendar year.? So, the numbers are all current as far as the value goes unless we have another crash of the stock market like we had in 1929 in the middle of the year.

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There may also be a Statement of Equity which summarizes the changes to the capital stock and retained earnings during the year and the last statement, the Statement of Cash Flows is a conglomeration of taking numbers from all the other statements and explaining the change to cash.? BUT the most important part of the financial statement package in my opinion are The Notes to the Financial Statements.? The notes explain the basis of accounting used, the terms of the long-term debt, and other information about the assets and liabilities which give the reader information about the numbers on the other financial statements.

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So, this is accounting!!!? GAAP gives you a set of numbers that are meaningless except that you can compare them from one year to the next and see how the entity is doing.? I will bet that no one ever explained a financial statement package to you in this way.

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As I said many times, I have a different way of looking at things and I want you to know what you are looking at and the significance of the numbers and information when you analyze an investment that is being presented to you.? Rely on the Statement of Income because that statement gives you numbers that are consistent, and the value of each item is consistent throughout the statement.

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Now, if I wanted to, I could talk about projections that are presented to you in a prospectus for a potential investment, but those numbers are all guesses made by management based on assumptions that they believe to be true.? They can be wrong!!!

My name is Paul Levine, and I am a Commercial Realtor, a Real Estate Advisor, an Investment Advisor, an Income Tax Consultant, an Author, and a Residential Realtor of luxury homes in Southern California!!! I was also a University Professor for 6 ? years. So, my desire is also to teach you something and I am also hoping to learn something from you!!! You can call me at (818) 298 – 4000 after 10 AM Pacific Time Monday through Friday and, yes, even on the weekends. Or you can send an email to me at [email protected] and I will always try and answer you in a timely manner.