Fundamental Factors A fundamental analyst makes investment decisions based on the "fundamentals" of the corporation, including the company's product lines, outlook, management, market share, etc. These qualitative aspects of the company are generally not measured by numbers, so fundamental analysts use quantitative analysis to examine the company's financial results. The analyst will examine the financial statements of the company, including the: Income statement; Balance sheet; Statement of changes to retained earnings. Cash vs. Accrual Accounting This section covers basic financial statement analysis. There are 2 methods of accounting for transactions. Small businesses and individuals typically use the "cash accounting" method. Cash account records transactions on the date payment is received or made. Thus, sales are not recorded until payment is actually received; expenses are not recorded until the date the check is written. Cash accounting does not show "accrual items" such as accounts receivable and accounts payable on the firm's balance sheet. Similarly, cash accounting does not show inventory on a firm's balance sheet, because it is expensed as payment is made. Accrual accounting is typically used by larger businesses and by business that are audited, since accrual accounting is required under GAAP - Generally Accepted Accounting Principles. As examples:

Accrual accounting recognizes revenue based on the date the sale is made; not when payment is received. As of the date of sale, the revenue is shown on the firm's income statement and an account receivable for this amount is shown on the firm's balance sheet. When payment is received, the account receivable is relieved, but this has no effect on the already recognized revenue. Accrual accounting recognizes expenses based on the date the liability is incurred; not when payment is made. As of the date of receipt of a bill, the expense is shown on the firm's income statement and an account payable for this amount is shown on the firm's balance sheet. When payment is made, the account payable is relieved, but this has no effect on the already recognized expense. When comparing cash versus accrual accounting, cash accounting recognizes both revenue and expenses later than does accrual accounting.