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 meet by a torrent of new financial accounting standards from the Financial Accounting Standards Board (FASB). In recent years, 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, of course, proposals on accounting for mergers and acquisitions. Numerous other new standards are on the drawing board.
Financial analysts, both on the credit side and 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 both 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 sustainable earnings base. In the chapter devoted to balance sheet analysis, reported balance sheet amounts are revised to more financially meaningful measures of assets, liabilities and shareholders?? equity. Finally, in the cash flow chapter, recommendations for identifying sustainable and recurring sources of cash flow are provided.
Guide to Financial Reporting and Analysis is anchored in the real world. It is written using examples drawn from hundreds of contemporary corporate annual reports. These are companies informed readers will recognize. Our findings and recommendations, compiled from these examples, are supplemented with extant research findings drawn from the relevant literature.
We wrote Guide to Financial Reporting and Analysis for financial analysts. However, any reader of financial statements will find the book to be not only interesting and informative but also a helpful reference source for future use.
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