How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

by John A. Tracy
Released May 2009
Publisher(s): Wiley
ISBN: 9780470405307

Read it now on the O’Reilly learning platform with a 10-day free trial.

O’Reilly members get unlimited access to books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial

Book description

How to Read a Financial Report Seventh Edition

Financial reports provide vital information to investors, lenders, and managers. Yet, the financial statements in a financial report seem to be written in a foreign language that only accountants can understand. This Seventh Edition of How to Read a Financial Report breaks through the language barrier, clears away the fog, and offers a plain-English user's guide to financial reports. The book helps you get a sure-handed grip on the profit, cash flow, and financial condition of any business.

Here's what's new in the Seventh Edition:

  • Discussion of the transition to international accounting and financial reporting standards

  • A streamlined centerpiece exhibit used throughout the book to explain connections between the three financial statements

  • An integrated section on analyzing profit, cash flow, and solvency for investors, lenders, and managers (now Part Two in this edition)

  • Reflection on financial reporting and auditing in the post-Enron era

    • "What distinguishes Tracy's efforts from other manuals is an innovative structure that visually ties together elements of the balance sheet and income statement by tracing where and how a line item in one affects an entry in another."

    —Inc.

    "An excellent job of showing how to separate the wheat from the chaff without choking in the process."

    —The Miami Herald

    "A wonderful book organized logically and written clearly. For a Fool to be an effective investor, she has to know her way around a financial statement. This book will help you develop that skill. It's the clearest presentation of many accounting concepts that this Fool has seen."

    —Selena Maranjian, The Motley Fool

    Table of contents

    1. Copyright
    2. PREFACE TO THE SEVENTH EDITION
    3. I. COMPONENTS AND CONNECTIONS IN FINANCIAL STATEMENTS
      1. 1. STARTING WITH CASH FLOWS
        1. 1.1. Importance of Cash Flows: Cash Flows Summary for a Business
        2. 1.2. What Does Cash Flows Summary NOT Tell You?
        3. 1.3. Profit Cannot Be Measured by Cash Flows
        4. 1.4. Cash Flows Do Not Reveal Financial Condition
      2. 2. THE THREE FINANCIAL STATEMENTS
        1. 2.1. Reporting Financial Condition, Profit Performance, and Cash Flows
        2. 2.2. Income Statement
        3. 2.3. Balance Sheet
        4. 2.4. Statement of Cash Flows
      3. 3. PROFIT ISN'T EVERYTHING
        1. 3.1. The Threefold Task of Business Managers: Profit, Financial Condition, and Cash Flows
        2. 3.2. One Problem in Reporting Financial Statements
        3. 3.3. The Interlocking Nature of the Three Financial Statements
        4. 3.4. Connecting the Dots
      4. 4. SALES REVENUE AND ACCOUNTS RECEIVABLE
        1. 4.1. Exploring One Link at a Time
        2. 4.2. How Sales Revenue Drives Accounts Receivable
        3. 4.3. Accounting Issues
      5. 5. COST OF GOODS SOLD EXPENSE AND INVENTORY
        1. 5.1. Holding Products in Inventory Before They Are Sold
        2. 5.2. Accounting Issues
      6. 6. INVENTORY AND ACCOUNTS PAYABLE
        1. 6.1. Acquiring Inventory on the Cuff
        2. 6.2. Accounting Issues
      7. 7. OPERATING EXPENSES AND ACCOUNTS PAYABLE
        1. 7.1. Recording Expenses Before They Are Paid
        2. 7.2. Accounting Issues
      8. 8. OPERATING EXPENSES AND PREPAID EXPENSES
        1. 8.1. Paying Certain Operating Costs Before They Are Recorded as Expenses
        2. 8.2. Accounting Issues
      9. 9. A UNIQUE EXPENSE: DEPRECIATION
        1. 9.1. Brief Review of Expense Accounting
        2. 9.2. Depreciation Expense
        3. 9.3. Accumulated Depreciation and Book Value of Fixed Assets
        4. 9.4. Book Values and Current Replacement Values
        5. 9.5. Intangible Assets
        6. 9.6. Accounting Issues
      10. 10. ACCRUING THE LIABILITY FOR UNPAID EXPENSES
        1. 10.1. Recording the Accrued Liability for Operating Expenses
        2. 10.2. Bringing Interest Expense Up to Snuff
        3. 10.3. Accounting Issues
      11. 11. INCOME TAX EXPENSE AND ITS LIABILITY
        1. 11.1. Federal and State Income Taxation of Business Profit
        2. 11.2. Accounting Issues
      12. 12. NET INCOME AND RETAINED EARNINGS; EARNINGS PER SHARE (EPS)
        1. 12.1. Net Income into Retained Earnings
        2. 12.2. Earnings per Share (EPS)
        3. 12.3. Accounting Issues
      13. 13. CASH FLOW FROM OPERATING (PROFIT-MAKING) ACTIVITIES
        1. 13.1. Profit and Cash Flow from Profit: Not Identical Twins!
          1. 13.1.1. Changes in Assets and Liabilities That Drive Cash Flow from Operating Activities
        2. 13.2. An Alternative View of Cash Flow
        3. 13.3. Accounting Issues
      14. 14. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
        1. 14.1. Rounding Out the Statement of Cash Flows
        2. 14.2. Seeing the Big Picture of Cash Sources and Uses
        3. 14.3. Accounting Issues
      15. 15. FOOTNOTES TO FINANCIAL STATEMENTS
        1. 15.1. Financial Statements—Brief Review
        2. 15.2. Why Footnotes?
        3. 15.3. Two Types of Footnotes
        4. 15.4. Management Discretion in Writing Footnotes
        5. 15.5. Accounting Issues
    4. II. FINANCIAL STATEMENT ANALYSIS
      1. 16. IMPACT OF GROWTH AND DECLINE ON CASH FLOW
        1. 16.1. Setting the Stage for Cash Flow Analysis
        2. 16.2. Cash Flows in the Steady-State Case
        3. 16.3. Cash Flow Growth Penalty
        4. 16.4. Cash Flow Reward from Decline
        5. 16.5. Red Ink and Cash Flow
        6. 16.6. Final Comment
      2. 17. FINANCIAL STATEMENT RATIOS
        1. 17.1. Purpose of Financial Statements
        2. 17.2. Overview of Financial Statements
        3. 17.3. Debt-Paying Ability, Liquidity, and Solvency Ratios
          1. 17.3.1. The Current Ratio: Test of Short-Term Solvency
          2. 17.3.2. The Acid Test Ratio (Quick Ratio)
          3. 17.3.3. Debt to Equity Ratio
          4. 17.3.4. Times Interest Earned Ratio
        4. 17.4. Return on Sales and Return on Equity Ratios
        5. 17.5. Earnings per Share (EPS) and Price/Earnings (P/E) Ratios
          1. 17.5.1. Earnings per Share (EPS)
          2. 17.5.2. Price/Earnings (P/E) Ratio
          3. 17.5.3. Market Cap
        6. 17.6. Final Comments
      3. 18. PROFIT ANALYSIS FOR BUSINESS MANAGERS
        1. 18.1. First, a Word about Managerial Accounting
        2. 18.2. Classification of Operating Expenses in Management Profit Reports
        3. 18.3. Comparing Equal Percent Changes in Sales Prices and Sales Volume
    5. III. RELIABILITY OF FINANCIAL REPORTS
      1. 19. ACCOUNTING AND FINANCIAL REPORTING STANDARDS
        1. 19.1. Importance of Financial Reports
        2. 19.2. Moving Toward International Financial Reporting and Accounting Standards
        3. 19.3. A Fly in the Ointment
        4. 19.4. Do Private Companies Need Separate Standards?
        5. 19.5. Stock Options
        6. 19.6. Unfinished Business
      2. 20. ACCOUNTING METHODS AND MASSAGING THE NUMBERS
        1. 20.1. Chapter Preamble
        2. 20.2. Choosing Accounting Methods
        3. 20.3. Massaging the Numbers
        4. 20.4. Business Managers and Their Accounting Methods
        5. 20.5. Consistency of Accounting Methods
        6. 20.6. Quality of Earnings
        7. 20.7. Restatements of Financial Reports
      3. 21. AUDITS OF FINANCIAL REPORTS IN THE POST-ENRON ERA
        1. 21.1. Opening Comments
        2. 21.2. Why Audits?
        3. 21.3. Certified Public Accountants
        4. 21.4. Are Audits Required?
        5. 21.5. Clean Audit Opinion
        6. 21.6. Do Auditors Discover Accounting Fraud?
        7. 21.7. Reading the Auditor's Report
        8. 21.8. Post-SOX
      4. 22. PARTING COMMENTS
        1. 22.1. Basic Questions and Answers
          1. 22.1.1. Are financial reports reliable and trustworthy?
          2. 22.1.2. Nevertheless, are some financial statements misleading and fraudulent?
          3. 22.1.3. Is it worth your time to compute financial statement ratios?
          4. 22.1.4. Why read financial statements, then, if you won't find information that has been overlooked by others?
          5. 22.1.5. The financial statements and footnotes of large public companies would take several hours to read carefully. What's the alternative?
          6. 22.1.6. Is there any one basic litmus test for a quick gauge of a company's financial performance?
          7. 22.1.7. Do financial statements report the truth, the whole truth, and nothing but the truth?
          8. 22.1.8. Does its financial report explain the basic profit-making strategy of the business?
          9. 22.1.9. Does the market price of a public company's stock shares depend directly and only on the information reported in its financial statements?
          10. 22.1.10. Does the balance sheet of a private business tell the market value of the business?
          11. 22.1.11. Do books on investing and personal finance refer to financial statements?
        2. 22.2. A Very Short Summary

    Product information

    • Title: How to Read a Financial Report: Wringing Vital Signs Out of the Numbers
    • Author(s): John A. Tracy
    • Release date: May 2009
    • Publisher(s): Wiley
    • ISBN: 9780470405307