Accounting Explanations in the Media (and Books)

Thomas Ittelson’s creatively titled booked Financial Statements brilliantly and concisely explains why the language of accounting is not at all boring on the very first page of his book:

But why is it all so boring, you as? Well, it’s only boring if you do not understand it. Yes, the day-to-day repetitive accounting tasks are boring. However, how to finance and extract cash from the actions of the enterprise is not boring at all. It is the essence of business and the generation of wealth.

Not boring at all.

In his introduction he then cites a quote from Gordon B. Baty: “If you don’t speak the language of accounting or feel intuitively comfortable with the accounting model, you will be at a severe disadvantage in the business world. Accounting is a fundamental tool of the trade.”

Cash flows as defined in The End of Accounting:

Cash flows are inherently different from earnings. They simply are the difference between cash received during the period from customers and paid to suppliers of services: vendors, employees, utilities, and more. Cash flow is a much simpler metric, more straightforward and easier to compute than earnings. It is, in essence, a “lemonade stand” measure: By the end of the day, your profit is total receipts from thirsty drinkers minus the cost of concentrates, ice and assistants’ (often below minimum wage) pay.

The End of Accounting by Baruch Lev and Feng Gu takes a rather negative approach to exploring the logic supporting accounting, but in the process also offers some great explanations. As it relates to building financial models, understanding how financial statements relate to one another is paramount, and in this way the book is very helpful:

By the structure of accounting procedures, what affects the income statement also affects the balance sheet, and vice versa. The immediate expensing of R&D, for example, depresses earnings (income statement) as well as assets and equity values (balance sheet). For better or worse, accounting is a closed system.