Financial Statement Analysis, 5th Edition

Preface to Fifth Edition

This fifth edition of Financial Statement Analysis, like its predecessors, seeks to equip its readers for the practical challenges of contemporary business. Once again, the intention is to acquaint readers who have already acquired basic accounting skills with the complications that arise in applying textbook‐derived knowledge to the real world of extending credit and investing in securities. Just as a swiftly changing environment necessitated extensive revisions and additions in the second through fourth editions, new concerns and challenges for users of financial statements have emerged as the third decade of the twenty‐first century unfolds.

A fundamental change reflected in the third edition was the shift of corporations' executive compensation plans from a focus on reported earnings toward enhancing shareholder value. Stock options became a major component of corporate leaders' pay. In theory, this new approach aligned the interests of management and shareholders, but the concept had a dark side. Chief executive officers who were under growing pressure to boost their corporations' share prices could no longer increase their bonuses by goosing reported earnings through financial reporting tricks that were transparent to the stock market. Instead, they had to devise more opaque methods that gulled investors into believing that the reported earnings gains were real.

To adapt to the new environment, corporate managers became far more aggressive in ...