Financial Statement Analysis

The goal of financial statement analysis is to shed light on the true financial condition of a company so realistic valuations can be determined for investment, lending, or merger and acquisition purposes. This important process has become increasingly complex over the years as corporate financial statements have become more difficult to decipher. But with Financial Statement Analysis, Third Edition, you’ll learn how to handle the practical challenges that are part of this business.

In Financial Statement Analysis, Third Edition, leading investment authority Martin Fridson returns with NYU Professor Fernando Alvarez to provide the analytical framework you need to scrutinize financial statements, whether you’re evaluating a company’s stock price or determining valuations for a merger or acquisition. This fully revised and up-to-date Third Edition offers detailed, fresh information that will allow you to evaluate financial statements in today’s volatile markets and uncertain economy.

This definitive guide to the analysis and use of financial statements arms investors, money managers, bankers, and financial analysts with:

• Information that will allow you to "read between the lines" of financial statements and help you get past the biased portrait of a company’s performance as represented by its financial statements
• Guidelines on how to interpret balance sheets, income statements, and cash flow statements
• A solid understanding of the lifeblood of the capitalist system–profits–and how earnings can be exaggerated or even fabricated
• Tips for maximizing the accuracy of forecasts and a structured approach to credit and equity evaluation

With expanded coverage that includes merger accounting, pension issues, integrity of audits, and the addition of valuable new case studies, Financial Statement Analysis, Third Edition teaches analysts and professional investors new techniques for understanding and interpreting financial statements that are designed to conceal more than reveal.

Filled with real-life examples and expert advice, this comprehensive guide will motivate you to undertake genuine, goal-oriented analysis instead of simply going through the motions of calculating standard financial statement analysis. Pick up Financial Statement Analysis, Third Edition and you will acquire all the insight and professional know-how you need to find the facts behind the fiction of most corporate financial statements.

In Financial Statement Analysis: A Practitioner?s Guide, Third Edition (New York: John Wiley & Sons, Inc., 2002), Martin Fridson and Fernando Alvarez detail a number of gimmicks that companies have employed, including:

• Booking deliveries of computer software to resellers as sales, despite undisclosed agreements permitting the return of unsold merchandise for refunds.
• Helping managers to achieve their annual sales targets by announcing a price increase, effective January 2, to induce customers to order before year-end, even though the hike puts the company out of line with the competition.
• Taking credit for volume-based rebates from suppliers before purchases of merchandise reach the level needed to qualify for the rebates.

Surprisingly, to many readers, the slipperiness depicted in Financial Statement Analysis is not limited to penny-stock companies or high-flying initial public offerings. A number of the book?s case studies involve widely respected Fortune 500 corporations. The authors quote an official of one such company who freely admits that when a division is in danger of missing its quarterly profit goal, management tries to make an acquisition in the waning days so that it can count the unit?s earnings for the entire period.

Fridson and Alvarez do not merely describe and deplore opaque financial reporting practices. They document a number of cases in which analysts successfully anticipated stock and bond price shocks, using financial ratios and publicly available information from outside the statements. The authors also provide practical advice on making financial projections. (Extra Credit, The Journal of Global High Yield Bond Research)

Financial Statement Analysis, by junk bond guru Martin Fridson, is my No. 1 pick for those at an intermediate level. Fridson does a great job of explaining the various forces at work in corporate financial statement preparation, and also has valuable insights into issues such as pro form a income statements and revenue recognition practices. - Street.com

Praise for Financial Statement Analysis

A Practitioner's Guide

Third Edition

"This is an illuminating and insightful tour of financial statements, how they can be used to inform, how they can be used to mislead, and how they can be used to analyze the financial health of a company."

-Professor Jay O. Light

Harvard Business School

"Financial Statement Analysis should be required reading for anyone who puts a dime to work in the securities markets or recommends that others do the same."

-Jack L. Rivkin

Executive Vice President (retired)

Citigroup Investments

"Fridson and Alvarez provide a valuable practical guide for understanding, interpreting, and critically assessing financial reports put out by firms. Their discussion of profits-'quality of earnings'-is particularly insightful given the recent spate of reporting problems encountered by firms. I highly recommend their book to anyone interested in getting behind the numbers as a means of predicting future profits and stock prices."

-Paul Brown

Chair-Department of Accounting

Leonard N. Stern School of Business, NYU

"Let this book assist in financial awareness and transparency and higher standards of reporting, and accountability to all stakeholders."

-Patricia A. Small

Treasurer Emeritus, University of California

Partner, KCM Investment Advisors

"This book is a polished gem covering the analysis of financial statements. It is thorough, skeptical and extremely practical in its review."

-Daniel J. Fuss

Vice Chairman

Loomis, Sayles &Company, LP

Praise for Financial Statement Analysis

A Practitioner’s Guide

Third Edition

"This is an illuminating and insightful tour of financial statements, how they can be used to inform, how they can be used to mislead, and how they can be used to analyze the financial health of a company."

–Professor Jay O. Light

Harvard Business School

"Financial Statement Analysis should be required reading for anyone who puts a dime to work in the securities markets or recommends that others do the same."

–Jack L. Rivkin

Executive Vice President (retired)

Citigroup Investments

"Fridson and Alvarez provide a valuable practical guide for understanding, interpreting, and critically assessing financial reports put out by firms. Their discussion of profits–‘quality of earnings’–is particularly insightful given the recent spate of reporting problems encountered by firms. I highly recommend their book to anyone interested in getting behind the numbers as a means of predicting future profits and stock prices."

–Paul Brown

Chair–Department of Accounting

Leonard N. Stern School of Business, NYU

"Let this book assist in financial awareness and transparency and higher standards of reporting, and accountability to all stakeholders."

–Patricia A. Small

Treasurer Emeritus, University of California

Partner, KCM Investment Advisors

"This book is a polished gem covering the analysis of financial statements. It is thorough, skeptical and extremely practical in its review."

–Daniel J. Fuss

Vice Chairman

Loomis, Sayles & Company, LP

PART I. READING BETWEEN THE LINES.

Chapter 1. The Adversial Nature of Financial Reporting.

PART II. THE BASIC FINANCIAL STATEMENTS.

Chapter 2. The Balance Sheet.

Chapter 3. The Income Statement.

Chapter 4. The Statement of Cash Flow.

PART III. A CLOSER LOOK AT PROFITS.

Chapter 5. What is Profit?

Chapter 6. Revenue Recognition.

Chapter 7. Expense Recognition.

Chapter 8. Applications and Limitations of EBITDA.

Chapter 9. The Reliability of Disclosures and Audits.

Chapter 10. Mergers-and-Acquisitions Accounting.

Chapter 11. Profits in Pensions.

PART IV. FORECASTS AND SECURITY ANALYSIS.

Chapter 12. Forecasting Financial Statements.

Chapter 13. Credit Analysis.

Chapter 14. Equity Analysis.

Bibliography.

Glossary.

Notes.

Index.