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