Nov 5, 2014 What you will learn from reading Chapter 3 of “Why Stocks Go Up and Down”
Hello. This is Bill Pike with the third in this series of podcasts discussing what each chapter of our book, Why Stocks Go Up and Down, brings to investment education.
Chapter 3 builds on Chapter 1. New terms are added to the balance sheet as we watch JMC buy raw materials, build mousetraps, sell mousetraps, pay interest on its loan, and more. We also see the accounting as a company employee earns wages for both building mousetraps and for doing administrative work. A lengthy example shows the step by step changes in each balance sheet account as a result of the company’s activity. We believe the basic accounting presented here provides a better understanding of the balance sheet and income statement. This in turn, better prepares readers for Chapter 4, which covers many ratios investors use to interpret the data on financial statements.
In Chapter 3, we also learn the terminology of loans, interest, and principal repayments. This will prepare readers for the detailed chapters on bonds (Chapters 8 – 11).
Excerpt
The company’s employee received $120 in wages, of which $80 was attributed to time spent building traps and $40 was for time spent talking to new stores which were considering carrying JMC’s mousetraps. Thus the $40 is considered Selling, General, and Administrative expense (SG&A). Of the $80 attributed to building mousetraps: $60 was attributed to building traps that were sold in the month of March; $15 of the $80 was attributed to traps finished but not yet sold; and $5 of the $80 was attributed to time spent on traps that were partially completed at the end of the month.
end of excerpt
Our book does not bog down on accounting, but, as stated earlier, walking through some basic accounting goes a long way to helping readers understand financial statements
At this point, we are three chapters into the book, and there is still no publically traded stock. But be patient, our company “goes public” in Chapters 5 & 6. Yes, it takes two chapters to cover the fundamentals and details that are relevant to going public,, and to investments in general.
This is Bill Pike. Excerpts and comments about the other chapters will be posted over the next few weeks. If you want a preview of what is covered in the book immediately, or for more investment education, please visit our website at www.whystocksgoupanddown.com and click on Contents.
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