How to Read a Financial Report, 10th Edition

1ARMING YOU WITH ESSENTIAL KNOWLEDGE

In past editions of this book, Chapter 1 dove right into the critical concept of gaining a clear understanding of how businesses produce and consume cash. In fact, we opened with this all-important statement:

Savvy business managers, owners, lenders, investors, and analysts pay a significant amount of attention to cash flows. Cash flows represent the heartbeat and pulse of every business, and without producing a steady heartbeat and healthy pulse of positive cash flows, a business would soon most likely end up on life support—or worse yet, die.

For this edition, I felt that I should begin by providing an explanation of the primary differences between what constitutes a financial report and the purpose and role of financial statements. While I touch on the elements of preparing financial reports, the primary focus of this book is how to read and understand financial statements, which make up the nerve center of the financial report. (Do not fret, as I will get to the critical concept of cash flows in Chapter 2 and again in Chapter 5.)

What Is a Financial Report?

To start, it would be helpful to clarify the difference between the purpose and function of financial statements and a company’s financial reports. In this context, I am referring to publicly traded companies and other large businesses that are required, by regulatory bodies such as the SEC, or by third parties such as a large lender, to issue quarterly or annual financial ...