A Wave of Insider Trading Probes

Verifying balance sheet

Verifying balance sheet (Photo credit: s_falkow)

A Fiscally fit organization will outlast it’s lethargic competition.  As we look at the nations economy

during this recession we can see what happens when people are careless with other peoples money.

NEW YORK, NY - MAY 21:  Former Goldman Sachs b...

NEW YORK, NY – MAY 21: Former Goldman Sachs board member Rajat Gupta holds an umbrella as he leaves a Manhattan federal courthouse on Monday, May 21, 2012 in New York City. Jury selection and opening arguments began today in the trial for former Goldman Sachs board member Rajat Gupta who is being accused of insider trading with his friend, now-imprisoned hedge fund manager Raj Rajaratnam. (Image credit: Getty Images via @daylife)

Its even more evident when we look at todays large corporations.  Today the Associated Press posted a video on YouTube titled “Former Goldman Sachs Director Convicted in NYC”.  Rajat Gupta, former director of Goldman Sachs was convicted for insider tradeing.  However I will take that one step further and say he was convicted of being dishonest and for defrauding investors.  I beleive America’s Consumers are fed up with large corporations that are not transprent.

According to http://www.CNN.com “The case is part of a wave of insider trading probes over the past two-

and-a-half years that have yielded 66 indictments and 60 convictions. None of these defendants have been acquitted so far, though several cases are still pending.”

In order for any business to run properly there needs to be a system in place that collects, analyzes, and communicates the company’s financial information to others.  In their book Business Essentials Ebert and Griffin described accounting information systems as “an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports”[1].  These reports also to follow generally accepted accounting principles so everyone at the organization understands them.  These financial statements should also be easy to read by anyone outside of the organization, like shareholders, the public and regulatory agencies.

financial statements, charts only for 5 years

financial statements, charts only for 5 years (Photo credit: Mitmensch0812)

Businesses can ensure that their financial records meet the generally accepted standards in a few ways.  Businesses can hire an outside accounting firm, which comes with a host of services.  Businesses can also hire an account to work for them.  No matter which option a business chooses using financial records is imperative.

Large corporations use accounting services and even have accounting departments.  Which can seem like a daunting task, but larger firms have more financial leverage and are able to afford better services.  Small businesses on the other hand, may seem easier to keep track of because of the smaller amount of transactions, but the small business owner may not be able to afford an accountant, therefore relying on their own accounting knowledge.  Therefor anyone interested in starting a business should learn accounting.  Because this is the heart of the business this writer would go so far as to say any serious entrepreneur will learn the fundamentals of accounting.

There are three basic financial statements used in the world of business: balance sheets, income statements, and statements of cash flow.


y2cary3n6mng-ywren6-financial-statements (Photo credit: NVarchitect)

(1). Balance Sheets: The balance sheet shows the financial situation of a business in a point in time like the end of the year.  You can download a free Balance sheet template from my website Stanton Adams Consulting

a. The balance sheet shows the company’s assets which is simply a resource that can be turned into cash or liquidated.  An example of an asset is stocks or bonds of other businesses, these are considered current assets.  Another type of asset is intangible assets which are patents, or trademarks, these are considered assets because they are expected to produce financial benefits through fees paid for rights of use by consumers.  The sewing machines in a sewing factory would be considered a fixed asset because they depreciate in value.

b. The balance sheet also shows the companies liabilities.  Liabilities are moneys owed to debtors.  Like individuals businesses have bills that need to be paid.  These bills are considered a company’s debt or liabilities.  Because there are many forms of debt, the term liabilities have been broken up into two types.  Current liability refers to bills that must be paid within a few weeks’ months or within the year an example of this is money owed to suppliers, employees, and taxes due for the coming year.  Long-term liability is debts that are not due for a year or more.  An example of long-term liability is a small business loan, where the company is expected to pay interest.

c. Finally the balance sheet shows the owners’ equity.  The owners’ equity is whatever money is left over if the company sold all of its assets, then paid off all of its debt. The following example of the lemonade stand explains owner’s equity.  Let’s say Timmy wanted a lemonade stand so he borrowed $20 dollars and spent $10 to build a stand, and $10 for supplies.  He sold $50 dollars’ worth of lemonade.  Timmy’s owner equity would be $30 dollars.

(2). Income Statement: The income statement is a financial statement that shows the company’s profit and loss, so it is also called the profit and loss statement.

Ebert and Griffin believe “profit and loss is probably the most important figure in any business enterprise”[2].  The best way to find a business’s profit and loss is to subtract the businesses revenue from the businesses expenses.  The income statement is different from the balance statement because, it shows a company’s financial situation during a period of time, like during, a month, a quarter or a year.  Another difference the income statement has is that the income statement is divided into four parts, revenues, and cost of revenues, operating expenses, and net income.


Click To DownloadIncome Statement

Revenues:Money received from the sale of goods or services.  Both Service Company’s and businesses that sell goods receive revenues.  A retail business generates revenue by selling a product.  A service company like Acme plumbing generates revenue by billing customers by the hour.  As a reminder products or services sold minus any sales tax or service tax is the company’s revenue.  The taxes must be paid to the Internal Revenue Service.

Cost of Revenues/Goods Sold:The cost of revenues/goods sold is the amount of money the owner spent to produce the service or product.  If you are selling a product that is made in house you can include things like labor, and the cost of processing transactions.

When we think of business we automatically think of profit, but in order for a business to arrive at a profit many factors come into play.  Profit and revenue are different.  Revenue is a company’s gross income.  Finding out a company’s profit is different.

Gross Profit: Is as quick and easy as subtracting the cost of goods from revenue.  This is a very basic way for business owners to assess their businesses financial information.

Net Profit: Is a more in-depth, detailed financial look at the company’s sales, expenses and income taxes.  To arrive at a company’s net profit or net income as it is also called; one must subtract the businesses operating expenses and income taxes from gross profit.

Operating Expenses: The operating expenses of a company, according to Ebert and Griffin,   “are resources that must flow out of a company if it is to earn revenues” (Ebert and Griffin).  These are the outgoing payments that cover employees and strategic planning like advertising and marketing.

Operating Income: A businesses operating income is the amount we get from subtracting the operating expenses from the company’s gross profit.

(3). Statement of Cash Flow: Although the SEC only requires those businesses with publicly held stocks to issue a Statement of Cash Flow, all businesses should prepare this financial statement.  Having a Statement of Cash Flow helps business owners keep their finger on the pulse of the businesses financial ebb and flow.  A Cash flow Statement shows the businesses yearly cash receipts and cash payments.  It also shows the effects that operating activities, investing activities, and financing activities have on cash.  Therefore the cash flow statement is divided into three sections the first section is the cash flow from operations, and then comes the cash flow from investing, and finally the cash flow from financing.

Cash Flow from Operations: This first section shows main operating activities, like daily sales and purchases by the business.

Cash Flow from Investing: This section includes cash receipts and payments from buying and selling assets.

Cash Flow from Financing: This section of the Cash Flow Statement includes the cash that comes into a business from loans or from issuing stock, as well as money paid out to shareholders as dividends for stocks, or money paid out for loans.

[1]Ebert, Ronald J. and Ricky W. Griffin. Business Essentials. Upper Saddle River: Prentice Hall, 2011.

[2]Ebert, Ronald J. and Ricky W. Griffin. Business Essentials. Upper Saddle River: Prentice Hall, 2011.

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