Guide to Financial Reporting and Analysis

Guide to Financial Reporting and Analysis

Guide to Financial Reporting and Analysis

Guide to Financial Reporting and Analysis


Navigate A Sea of Financial Complexity

Due to the intricacies of contemporary business transactions, the numerous standards issued by the Financial Accounting Standards Board (FASB), and the vast variety of accounting and disclosure practices with their ever-changing terminology employed by reporting companies, financial statements and related disclosures have become very complex. This complexity can impede the work performed and the decisions reached by all users of financial statements-especially equity and credit analysts. Guide to Financial Reporting and Analysis is designed to remedy this situation by offering practical, user-friendly guidance. Through the use of contemporary financial statement examples, extant generally accepted accounting principles are explained and their application is demonstrated. Here are indispensable resources, including:

• Comprehensive, point-by-point summaries and glossaries provided with each chapter

• Hundreds of examples of contemporary financial disclosures taken from actual, highly recognizable companies

• Thorough information on how reporting and disclosure rules impact reporting practices-and the implications these practices have for analysis

• Goes beyond anecdotes and integrates throughout relevant findings from the financial reporting and analysis research literature

... and much more, to help working professionals gain clarity and begin making better-informed decisions today by taking advantage of the rich treatment offered in this timely, much-needed guide.


The complexity of modern-day corporate annual reports has increased markedly in recent years. Over the past 20 years, we have seen significant increases in the absolute length of these documents and in the number of annual report pages devoted to an ever-expanding collection of required footnote disclosures. The growing complexity of annual reports is in large measure attributable to a rapidly changing business environment and the increased complexity of business itself. These changes have been met by a torrent of new financial accounting standards from the Financial Accounting Standards Board (FASB). In recent years, the FASB has issued numerous new standards with far-reaching accounting and disclosure-related consequences in such areas as pensions and postretirement benefits, taxes, investments, business segments, comprehensive income, financial derivatives, and proposals on accounting for mergers and acquisitions. Numerous other new standards are on the drawing board.

Financial analysts, both on the credit side and the equity side, as well as others responsible for evaluating financial performance and financial position, are on the front line and feel the brunt of this combination of a rapidly changing business environment and a dramatic increase in new accounting standards. Ultimately, their job is to determine corporate earning power. However, the financial statement guideposts they have for that purpose are ever changing, almost defying interpretation. For example, some analysts with whom we have worked have gone so far as to say that the approach they use with current income tax disclosures is often to simply skip them, hoping the accounts involved are not important. While we hope such an approach to analysis is the rare exception, we fear that it may not be.

It is in this atmosphere of rapid change and increasing complexity that Guide to Financial Reporting and Analysis was written. Our objective is to provide clarity and guidance—to help analysts navigate the maze of modern-day financial reports and enhance their ability to use financial statements effectively in formulating knowledgeable recommendations for action. Because the Guide's focus is on financial analysis as well as financial reporting, the implications of financial reporting practices for analysis are considered to be of equal importance. Consistent with this emphasis, the book uses the assessment of financial quality, an approach to financial analysis whose value is widely recognized, as its organizing theme. In this way, the importance of reporting practices on financial analysis is continually highlighted.

In keeping with the financial quality theme, the financial analysis component of the book is integrated throughout the entire book, as well as emphasized in separate chapters devoted to the income statement, balance sheet, and cash flow statement. In the income statement chapter, net income is recalculated to derive a . . .

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