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Understanding Company Financial Statements

a book by RH Parker

  • members of a company are its owners (shareholders if a public company)
  • annual report from the board of directors (agents) to the members
  • audit: give an opinion to members on whether accounts show a fair and accurate view
  • GAAP is prevalent in UK/US and anglo-saxon countries. EU has IASB
  • GAAP accounts are not tax accounts, depreciation can be accelerated for tax to incentivize investment
  • cash is not earning due to accrual accounting

US/UK GAAP objective is "fair and true" financial statements while tax might allow accelerated depreciation to incentivize investment, which is not prudent. Slower depreciation in GAAP also leads to deferred tax. In contrast, German accounting must follow tax accounting.

Revenue Recognition Rule - unearned revenue - lifo: less tax - fifo bigger inventory

  • FAS123R: stock grant needs to be expensed in IS
  • Impairment of Goodwill: exceptional adj to net income or buried in the SG&A
  • earnings recognized in different tax jurisdictions can lead to any tax rate incl negative. -FASB142 goodwill depreciation is no longer done, ASC350 goodwill tested annually for impairment

Analysis of Statements:


  • revenue growth
  • expense growth
  • operating income growth


  • Cash growth
  • Debt growth

Definitions proposed by the author:

  • Payable turnover = net sales / avg(acct payable)
  • Inventory turnover = COGS / avg(total inventory)
  • Receivable turnover = revenue / avg(acct receivable)
  • cash cycle = payable turnover + inventory turnover- receivable turnover

Alternatives of ROIC:

Author proposes the definitions below, without describing when one would be preferable to the other:

  • ROIC = (net income-dividends)/(total capital)
  • ROIC = nopat / adj assets
  • nopat = net operating earning before amz, interest, after tax
  • adj asset = asset - cash - (current liab - st debt and accrued liab)