The first three parts focus on the limitations of financial statements, and the fourth is a survey of techniques for use in forecasting and analyzing.From this standpoint, the best kind of financial statement is not one that represents the corporations condition most fully and most fairly, but rather one that produces the highest possible credit rating and priceearnings multiple.And to complicate matters, the authors show that much of what transpires in the industry is perfectly legal, even when it seems that it should not be.
Companies regularly designate expenses as extraordinary, nonrecurring, or unusual to give the impression that they are one-time events that should not be part of future net income projections. Nearly half (230) recorded unusual items in all eight years of that span. Analysts need to be aware of these situations and be prepared to distinguish between truly one-time events and those that are merely designated as such by the statement issuer. In theory, publicly traded companies are required to hire highly trained auditors to validate their financial statements annually. This requirement is supposed to assure investors that the statements have been prepared in compliance with generally accepted accounting principles. Auditors, after all, are paid by the company issuing the statements, and they can push only so far without losing business. Given the observed gap between theory and practice in financial reporting, users of financial statements must provide themselves with an additional layer of protection through tough scrutiny of the numbers. It provides a broad survey of techniques for use in forecasting and analyzing, as well as a discussion of the limitations of each. Fridson and Alvarez recognize that these are the most important functions of an analysts job, but they also acknowledge that predicting the future is irreducibly challenging. For example, in the conclusion of Chapter 13, Credit Analysis, they write, In the end, credit analysts must equip themselves with all the tools described in this chapter yet not be made complacent by them. Reference books about accounting, while valuable for their insights, are seldom this enjoyable to read. This book is different because the authors seamlessly integrate fascinating real-life examples and instructive fictional scenarios into each chapter to illustrate their points. Financial Statement Analysis Textbook Series Of StoriesAlthough mostly unrelated, the series of stories draws the reader in, creating a unique literary experience that is part detective novel, part finance textbook. A seasoned analyst, however, will undoubtedly be more familiar with the issues the authors discuss and thus may not find the book quite as valuable. But for anyone with a passing interest in the subject, or for new analysts still learning the trade, Financial Statement Analysis is an amazing resource. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the authors employer. We promote the highest ethical standards and offer a range of educational opportunities online and around the world. If you continue to use this website without changing your cookie settings or you click Accept below then you are consenting to this.
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