Financial Statement Analysis: A Practitioner's Guide

According to the author's introduction, the goal of "Financial Statement Analysis" is to "acquaint readers who have already acquired basic accounting skills with the complications that arise in applying textbook-derived knowledge to the real world of extending credit and investing in securities." It succeeds admirably in this purpose. By using case studies drawn from real world situations that illustrate how even a basic analysis can reveal problems before it's too late, the book is a cogent, topical, and valuable reference for any user of financial statements.Part 1 sets the stage by positing the adversarial nature of financial accounting. Unlike the textbook approach, in which rational companies disclose audited statements in order to convey impartial data about their financial condition, "Financial Statement Analysis" begins with the proposition that the producers of financial statements have motives other than those suggested by traditional texts. Although you would find few people who would argue against this proposition today, it is still valuable to be reminded of the potential agency issues facing corporate officers and auditors.Part 2 provides an intoduction to the financial statements, devoting a chapter to each. The main emphasis here is on helping the analyst develop judgement. For example, the balance sheet chapter provides insights into problems that arise from the difficulty of assigning a value to an asset, while the income statement chapter details the many pitfalls of pro-forma earnings. Throughout, the authors note critical issues to consider that go beyond the numbers.Part 3 discusses the thorny problem of profits. Beginning with the simple formulation that "profit = revenue - costs," the authors discuss the myriad of complexities that arise in distinguishing real, economic profits from accounting profits. The first chapter discusses various tools used to manipulate the revenue recognition process; diverse examples include a software company, a lay-away program at a major retailer, and memberships at a health club. The next chapter discusses expense recognition using a similar framework. Perhaps the most interesting chapter in this section discusses the role of auditors. In light of the Enron fiasco, which post-dates this book's publication, the discussion is prescient and will no doubt need to be expanded in future editions! Part 4 ties the previous sections together to illustrate how to use your new found scepticism to make forecasts. The first chapter provides a step-by-step illustration of how combine an existing set of statements with your assumptions about the future to produce your own forecasts. Each projected statement (income, cash flow, and balance sheet) is accompanied by a line-by-line description of relevant issues (economic, historic, etc...) to consider. The chapter also discusses how to construct a sensitivity analysis under varying assumptions. Unlike the previous chapters, this one provides a

This book by Martin Fridson, stands out for the real-world flavor it brings to the subject of Financial Statement Analysis. The book talks about the motivations of financial statement issuers (not necessarily clarity and accurate representation of financial condition), and urges readers to not blindly trust financial statements but look between the lines. Agreed, such an outlook can be built up only through constant practice and experience, but this book helps the reader get a head-start.

In this environment, on the heels of the dot-com meltdown, and the implosions of Enron, Worldcom, and their ilk, a fresh look at financial statement analysis and what that can mean to an investor, is timely. The book is extremely well written and highly readable, unlike most texts I have seen on the subject. The detailed exercises are relegated to a separate workbook, making it an easier read for those who want to simply glean some new insights.It is, in fact, a fast read, and the fresh, real-world case examples add new dimensions to the topic. There are, of course, detailed reviews of the basic financial statements, but also detailed discussions about these statements in light of M & A and other notable events in the life of a firm. One of the most interesting chapters included a detailed discussion of the EBITDA, which the PR machines have tried to paint as a true indicator of profitability.This is a valuable resource to anyone who needs to analyze financial statements for professional reasons, but is straightforward enough to engage the reader who may only wish to better understand the companies in which he or she is considering investing.

This isn't your typical 'finance' book. This book was easy to read - had relevant and practical examples showing the key things to look for when analyzing financial statements. I also liked that it highlighted the trouble spots - places on the financial statements where companies can make badnumbers look all right. Overall, I'd recommend this book to anyone wanting to learn how to analyze financial statements.

Dr. Alvarez and Mr. Fridson's book is a MUST READ not only for every finance professional...but for the average investor as well. By the use of real-life examples and fascinating stories, the authors present a compelling behind-the-scenes look at the world of corporate finance, and how financial statements can often deceive. In today's post-Enron world, this book is a must-have for anyone who dabbles in the market, even on a part-time basis. What I enjoyed most about Financial Statement Analysis-a Practioner's Guide is the tone of the book...rather than your standard dry academic tome, the authors inform us through interesting stories, and speak WITH us rather than AT us. I find their approach extremely effective, given that this is the first finance related book I've ever read that didn't put me to sleep (I actually had a hard time putting it down). As a financial professional, instructor and investor, I've applied many of the lessons taught in this book, and have begun recommending it to all of my classes, clients and colleagues. As such, I highly recommend it to anyone that is read for an eye-opening look at the world of corporate finance.