The accounting equation is the map
Assets = Liabilities + Equity. Every transaction is movement inside this equation. If something feels off, it usually violates this structure or hides where the offset went.
NYU Stern EMBA • Course Reflection
Financial Accounting Learnings
Taught by Ilan Guttman
The mental models, mechanics, and red flags I keep using beyond the classroom.
Financial accounting taught me two things at once: how numbers are produced, and how to read them without getting hypnotized by them. The most useful part was learning the linkages between transactions, financial statements, and managerial decisions.
Accounting is not just recording; it is a system of choices, estimates, and constraints that shapes what performance looks like on paper.
What this page focuses on
- - Statement linkage and timing logic.
- - Cash flow reality checks.
- - Practical signals and red flags.
The core logic I always return to
Accrual beats cash for performance
Cash tells you when money moved. Accrual tells you when value was created and consumed. Timing differences matter for revenue, expenses, and working capital.
Recognition and matching are the heartbeat
Revenue is recognized when earned, not necessarily when cash arrives. Expenses are matched to the revenue they help generate, not necessarily when paid.
The three statements, and how they talk to each other
Performance, period
Income Statement
Revenue minus expenses equals net income. The key lesson: net income is not cash.
Position, point-in-time
Balance Sheet
What the company owns and owes, plus residual value for owners. Timing differences accumulate in receivables, payables, inventory, deferred revenue, and accruals.
Liquidity, period
Cash Flow Statement
This is where great earnings meet reality. I treat operating cash flow as the lie detector.
Statement linkage I keep in my head
- - Net income flows into retained earnings (equity).
- - Cash changes reconcile through operating, investing, and financing cash flows.
- - Working capital changes explain many differences between net income and cash from operations.
Mechanics that became second nature from exercises
Debits and credits as a system
Instead of memorizing, I anchor on what increases or decreases each account and what the normal balance is.
Record transactions
Journal entries capture the first-pass economic event.
Post to ledger
T-accounts show where each amount ultimately lands by account.
Adjust for accruals and deferrals
End-of-period adjustments bring statements closer to economic reality.
Close temporary accounts
Revenue and expense accounts reset so the next period starts cleanly.
Adjusting entries I never forget
Cash flow, especially the indirect method
One of the most useful skills was building operating cash flow from net income and reconciling to cash.
Tile 1 of 6
My quick mental checklist for CFO (indirect)
Start with net income.
Practical lens: a company can be profitable and still cash-stressed if working capital expands faster than collections.
How I read statements now
- Earnings quality: does operating cash flow support net income over time?
- Concentration of assumptions: reserves, depreciation lives, revenue timing, returns, and allowances.
- Working capital signals: receivables aging, inventory build, and payables stretch.
- One-time items: separate recurring performance from dressed-up results.
Ratios that stayed useful (with context)
- Current ratio and quick ratio for liquidity.
- Gross margin and operating margin for unit economics and efficiency.
- ROA and ROE, interpreted with leverage and accounting choices in mind.
- DSO, inventory days, and days payable for cash conversion discipline.
Red flags and things to remember
Tap through the flags I use when a story feels too clean.
Tile 1 of 5
Red flag checks
If revenue grows but receivables grow faster, ask why.
What I take forward
For me, accounting is less about memorizing rules and more about building a reliable way to reason through a business.