This blog covers the general topic of financial markets.

How to Read a Financial Report

first posted: 2023-12-02 08:07:24.158461

a book by John A Tracy, 7th edition, 2009

I put the synposis of the book below:

Part I - Components and connections in Financial Statements

  • starting with cashflow: explain why incoming and outgoing cashflow can be due to investment, not expenses
  • the 3 financial statements: present IS,BS,CS
  • profit isn't everything: how accumulation of debt or scarcity of cashflow can be a concern

The following concerns detail the analysis:

  • sales revenue and account receivable: monitoring days of receipts
  • cogs and inventory: monitoring days of inventory
  • inventory and account payable: monitoring cash conversion cycle
  • operating expenses (or SGAE) and account payable (IS to BS liability)
  • operating expenses (or SGAE) and prepaid expenses (IS to BS asset)
  • income tax expense and its liability (from IS to tax payable in BS liab to CS tax payable increase in operating cf)
  • net income and retained earnings. EPS
  • cashflow from operations: the most complex portion, as accruals and amortizations need to be undone
  • cashflow from financing and investing
  • footnotes to financial statements: auditors often require a footnote to provide clean check, hence essential disclosure there

Part II - Financial Statement Analysis

  • impact of growth and decline on cashflow
  • financial statement ratios
  • profit analysis for business managers

Part III - Reliability of Financial Reports

  • accounting and financial standards
  • accounting methods and massaging the numbers
  • audit of financial reports in the post enron era
  • parting comments


Unlike the CFA book, this book never mentions that for 75% of the companies, the Cashflow Statement and Balance Sheet do not articulate. Similar lack of articulation between Income Statement bottom line, the comprehensive income vs variation of Equity reported in the Balance Sheet is observed on most statements but not tackled here.