Finance with a review of accounting

NYSE and Nasdaq

Go to a newer more detailed version of lessons 1 to 4

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Problems of vocabulary and of definition
Google accounts
A brief tour of the NYSE and the Nasdaq


Problems of vocabulary and of definition

Non rigorous terminology
In accounting as well as in finance, unfortunately many names float around, for the same concepts

  • net profit, net income, net margin, bottom line
  • gross margin, gross profit
  • capital employed, funds employed, funds invested
  • long term borrowings (with or without bonds), long term loans, long term bank account
  • clients, client paper, IOU, debtors, accounts receivable
  • financial charges, interest charges, interest
  • etc.

Worse: many concepts, with the same name, are defined differently by different people

  • for some people ROCE is profit before interest and taxes divided by capital employed
  • for others it may be profit before interest and depreciation, but after taxes, divided by capital employed
  • for some people equity does not include preferred stocks (which are very close to bonds...)
  • etc.

Learn the most standard definitions
What you should do is learn one name and one concept, and then the other ones will be easy to understand and to keep in mind.

Hard double-entry writings, but soft techniques
Furthermore, accounting is a set of soft techniques. The value measurements are not hard and fast. The ratios are crude. We are not in physics where we can write equations which describe phenomena precisely, and which hold true over a long period of time. It has often been said that economics, to which accounting belongs, is closer to sociology than to hard sciences. In truth, the monitoring of a ratio, the denominator of which changes all the time, requires calculus. And it is because this situation was met all the time in astronomy that calculus was invented in the XVIIth century. If, with the various variables properly defined, you write mx" + kx = 0 and solve this equation, you describe very precisely the movement of a simple system with a spring. It is so precise that it was used to construct clocks and wristwatches until 30 years ago. And these clocks kept the time quite satisfactorily for weeks or months. But it is not possible to proceed like this in economics because the real situations we would like to model are too complex to lend themselves to such solutions, a bit like modelling precisely the behavior of a person or a social body is hopeless, yet psychology and sociology are "softly" predictive about people and societies, and are quite useful.


Google accounts

Let's look at the accounts of Google:


All firms present their accounts a bit differently. So, at first, it always requires some effort to find one's bearings in the figures.


Comments on Google accounts:

  • the growth of Google revenue, over the two years we have, was 270% per year
  • the line "cost of revenue" is close to our COGS. Sometimes, firms include depreciation in this line
  • the line "operating income" is exactly the same as our line "profit before interest and taxes"
  • Google has essentially no financial charges, because it has essentially no debt
  • the tax rate is fairly high. Only studying Google annual report and 10K form (filed at the Security and Exchange Commission) will provide an explanation
  • the goodwill line: when a firm A acquires entirely a firm B, and incorporates the assets and liabilities of B at their value in B's records, into its own assets and liabilities, if A paid more than the net worth of B to B's owners, the difference goes into a line called "goodwill" on the asset side of A's accounts. So we see that Google purchased a few firms.
  • Google has no inventory
  • the Short Term financial assets became very big in 2004, because Google sold stocks in an IPO (Initial Public Offering, see article) in the stock market and received a large amount of cash. This cash was parked into ST securities, for future use.
  • in 2004, Google also has $427 million of cash and assimilated
  • the "normal capital" of Google is the line "common stock", which is tiny. This reflects the value of Google stock, in 1998 or 1999, when it was founded. Most of the equity comes from premium prices for the sale of new stocks later (for instance the IPO). Explanation: when the initial stocks of a firm were issued at, say, $1 apiece, the firm recorded in its "common stock" account, the number of stocks multiplied by $1. Let's look now at a sale of new stocks, a few years later:  the firm sells new stocks at, say, $10, because its stocks are very attractive, it will record $1 x number of new stocks in the "common capital", and $9 x number of new stocks in a line "premium" or "capital surplus"
  • the cumulated retained earnings, in 2004, are $591 million
  • the long term liabilities are tiny
  • the current liabilities are essentially "payables" to creditors (we are not told here who they are, trade suppliers, state, etc.)
  • Google has no cash problem (its current ratios are way above 1)


Note that these accounts of Google are astounding. Google is one of the stars of the Nasdaq.

Exercise: Use the excel document given with this lesson to follow precisely the explanations given above. Ideally, prepare by yourself the excel treatment of Google accounts, to present them like we studied before.


Comments on Google stock price performance.



A brief tour of the NYSE and the Nasdaq

Go on Yahoo finance and see what were the evolutions over the last few years of these two stock markets.


Go to lesson 5