Customer Reviews

The Analysis and Use of Financial Statements

5 star:		(9)
4 star:		(5)
3 star:		(3)
2 star:		(3)
1 star:		(5)

 

 

In order to determine whether you should buy this book, you have to understand its purpose.

It is not an Accounting textbook nor a preparation for the CPA exam.

In other words, it is not directed at the preparers of financial statements but rather at the users.

The authors do an excellent job of explaining accounting concepts in a clear and detailed manner. That explanation includes a comparison of different methods for accounting for the same transaction, a discussion of deficiencies/inconsistencies in accounting rules, etc.

Building on all this, the authors then move on to explain how to analyze financial statements - to wring insights out of the accounting data beyond the "standard" analytical tools. This is the book's real value.

This excellent book belongs in the reference library of anyone who needs to understand and analyze financial statements.

One measure of its value is that AIMR uses it as one of the fundamental textbooks for its CFA program.

After reading the reviews on this book, I feel that I must comment on the book's high quality.

In order to fully appreciate this book, an understanding must exist as to where the material fits in the financial analysis process. Clearly this book is not meant to explicitly teach readers how to build financial models; other books are available for that purpose. This book is designed to teach readers how to thoroughly read, understand, and more importantly, become an astute critic of the language of financial statements, GAAP.

I disagree that technical accounting details are not very important in analysis engagements. Rather the opposite holds true in a majority of cases: One must thoroughly understand technical accounting and the implications that it has on economic reality in order to build quality financial models. Otherwise, "junk in/junk out" models will result.

Given the highly publicized debacles that have recently occurred in the financial world, including Enron, the importance of distinguishing technical accounting from economic reality has become obvious. This book does effectively explain and build off the foundations of GAAP; however, this book is primarily focused on helping an analyst analyze and question the quality of financial statements versus how to simply prepare them. This is the big difference between this book and technical accounting textbooks.

Of course, building financial models for decisions is the end objective of any analyst. However, this book is a must read in building quality financial models and projections. Again this book is not a financial modeling textbook, nor a technical accounting manual. Rather, it is a critical bridge between technical accounting material and decision modeling material. I recommend taking the time to read this excellent book and walk across the bridge before moving on to modeling.

The authors were very successful in providing a complete coverage of every single aspect on financial statements analysis. It's the kind of book to be used on a daily basis, either as a refresher on accounting concepts or as a reference when developing sound financial analyses.

One suggestion: the authors should provide a solutions manual to accompany the book. It has many exercises and cases to be dealt with and therefore it would be interesting for the student to compare her own solution with that provided by the authors.

In reading this book, I was struck at how complicated the explanations are for what should be relatively simple concepts. The text is often abstract when describing quite concrete subjects. The flow of ideas frequently jumps from one topic to the other, which made it frustrating to read. Finally, the summaries at the end of each chapter are brief at best; it is difficult to go back to a chapter and quickly extract the key points.

Like many of us, I am stuck with the book since it is part of the CFA I curriculum. Surely there is a better financial analysis book out there.

Given the glowing rating this book has received from most reviewers, I have been somewhat disappointed with this book. My main thought is this: This is a good book for non-accountants to keep as a *reference text* since the authors' do a good job of explaining technical financial accounting matters in a straightforward way. However, I do not think this is a good book to actually *learn financial statement analysis* from.

The book tends to focus on technical accounting details while ignoring other important aspects of analysis (e.g., econometric methods, the relationship between the decision model and the nature of the analysis, etc.). It is difficult to tell what the authors see as the most important, central concepts and methods in financial statement analysis. One gets the idea that if you were to ask the authors "What are the really important concepts and methods in this book?", they would answer "Oh, it's *all* good!"

In my experience as an analyst, technical accounting details were rarely important--even when using historical financial statement data to develop financial simulation models for firms. There's a simple explanation for why this is so: An individual firm's financial statements might be "garbage," but the only reasonable way of telling this is by making inferences from the relationship between exogenous economic factors, competitors' financial results (on average), and the individual firm's results. It's about the only reasonable way to extract signals (likely economic "truth") from noisy financial statement data.

I definitely agree with previous reviewers who stated the book is poorly written: it is often both wordy and vague. Consider the (lack of) discussion on p. 332 of the important topic, R&D expenditures:

"Companies invest in ... (R&D) because they expect ... profitable future products. However, absent a resultant commercial product, these expenditures may have not value to the firm. Further, the value of any product may be unrelated to the amount spent on R&D. Due to valuation uncertainties, R&D is generally unacceptable to creditors as security for loans."

I think they mean this: Firms make investments since they expect economic returns on them, but return on R&D expenditures is usually very unpredictable. (Whew. I'm glad they told me! Now I won't feel stupid when talking to other analysts.) The authors then proceed immediately to a summary of accounting standards on R&D expenditures. (This is financial statement analysis?)

It's not clear either that the purpose of presenting a cohesive view of financial statement analysis is served by the sometimes excessive references to empirical research by accounting academics. A cynical reader might suspect this is done to ingratiate the book with accounting professors who will make it the required text for their course!

In the end, I think the book fails to explain fundamental concepts and methods of analysis by which specific information is derived from financial statements for input to specific decision models. What's the antidote? Get Fridson (Wiley) and Bergevin (Prentice-Hall): Nice straightforward books that really explain how to do financial statement analysis.

For CFA level 1 I used this book instead of the assigned FSA book. The reason is simple. It's very well written! Even if you are not confident in your accounting background knowledge, this is all you need for FSA.

This book and its accompanying CD is a valuable resource for those seeking a fundamental understanding of financial statements, their usage and signifcance. The chapters are well organized and walks the reader through various aspects of financial analysis. This book lays the foundations of fundamental analysis.

On the filp side, the language could be a little difficult to interpret at times (more Harvardish or Yaleish than common English)and can be a little uninspiring. The authors assume that readers have a basic understanding of accounting which can throw off some readers. But I guess if someone is seeking to get their feet wet in financial analysis, it is safe to presume that he or she will atleast have the basic knowledge in accounting.

Overall, this is a very good and useful book with neumerous real world examples of financial analysis at play. As I have mentioned before, this book lays down the foundation for fundamental analysis. I would recommend this book to all those who are currently persuing a career within the finaicial industry or corporate finance as analyst or aspire to become one - This book is a must read for you.

OK folks, here's a contrarian review of this book. Consider it an opinion which "balances" other reviews presented in this book review section. Here goes.

Webster defines the word "slog" as "to plod one's way perseveringly especially against difficulty; to plod heavily".

What an apt description of the effort required to read this book!

If you're engaged in the CFA curriculum, this book comes as a recommended (practically required) textbook. That's unfortunate because this book's various authors are inconsistent in making the material readable and understandable.

Yes, the book is comprehensive. Chapter topics include: Accrual Concept, Analysis of Cash Flows, Ratio and Financial Analysis, Analysis of Long-Lived Assets, Analysis of Income Taxes, Analysis of Financing Liabilities, Leases and Off-Balance-Sheet Debt, Pensions, Intercorporate Investments, Multinational Operations, and Business Combinations. Great stuff to know - practical matters to understand and master.

However, this book presumes a solid understanding of intermediate level accounting, and provides little or no review of these concepts before delving into the topical material. It makes learning more challenging, and when time is of the essence, that's problematic. So I found myself "slogging" through the course material in an effort to learn Level II material.

Supplemental reading is often required to make up for what the authors fail to teach effectively. Here's a tip: Schaum's Intermediate Accounting II has an excellent chapter #10 on Pension Accounting which will benefit you in your studies. Likewise, I have found other Schaums's Outlines to be very instructive and beneficial (consider reading my other reviews).

The CFA Institute would do well to consider recommending other Financial Analysis textbooks to cover the same material - a book that is more readable and user-friendly. One that's more engaging rather than one which requires heavy plodding!

The book requires solid knowledge of accounting so not recommended for beginners. Do not expect long explanations and illustrations. They just give some basic examples and generally they don't provide journal entries. It is not an accounting book! Don't be scared if first time there are parts that are not clear as the chapters are interlinked. Give it another chance.

I agree with the more critical reviewers. I'm reading the book for the CFA curriculum and the (mandatory) assignments taken from it are a real pain. The ideas are introduced in the most difficult way possible, the graphical presentation and examples chosen only add to the confusion and in my opinion a reader who does not already have a solid grasp of accounting will simply be unable to follow. By comparison, the other accounting chapters from the CFA curriculum, by different authors, are written in a much more comprehensible (and stimulating) style.

I do not deny that the authors have a profound knowledge of the subject - but this is not enough in order to write a useful textbook. Clarity in presentation and didactical style are also essential, and the authors are unfortunately not very inspired in both items.I hesitated between rating the book with one or two stars but in the end I decided for one star - why be indulgent with authors that are experts in their subject matter but are unwilling (unable?) to put up the extra effort needed in order to keep a reader interested and motivated?

Here's an appeal to the CFA institute - keep the subjects in the curriculum but change the textbook. For instance, "Intermediate Accounting" by Spiceland et alia might be an alternative - it's also quite difficult and demanding but at least the student will be given a fair chance to understand - not just memorize and muddle through- the contents.