Chapter 10

Reading a Financial Report


Looking after your investments

Using ratios to interpret profit performance

Using ratios to interpret financial condition

Scanning footnotes and sorting out important ones

Checking out the auditor’s report

This chapter focuses on the external financial report that a business sends to its lenders and shareowners. Many of the topics and ratios explained in the chapter apply to not-for-profit (NFP) entities as well. But the main focus is reading the financial reports of profit-motivated business entities. External financial reports are designed for the non-manager stakeholders in the business. The business’s managers should definitely understand how to read and analyze its external financial statements, and managers should do additional financial analysis, which I discuss in Chapter 11. This additional financial analysis by managers uses confidential accounting information that is not circulated outside the business.

You could argue that this chapter goes beyond the domain of accounting. Yes, this chapter ventures into the field of financial statement analysis. Some argue that this is in the realm of finance and investments, not accounting. Well, my answer is this: I assume one of your reasons for reading this book is to understand and learn how to read financial statements. From this perspective, this chapter definitely should be included, whether or not the topics fit into a strict definition of accounting.

Some years ago, ...

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