The book explains the logic of financial statements, and how we use them to analyse companies in economic terms.
The approach is very different to previous books, and it brings a remarkable amount of order and simplicity to what can look like a complex subject. This book is essential reading for practitioners and students, and for anyone who wants to use and understand financial statements.
To give economically meaningful measures of profitability and capital structure would require a balance sheet that is complete in assets and liabilities, and is measured at current values, and income that is measured comprehensively. These requirements of data integrity provide the organising principle for the book. The book contains a concise review of the two dominant accounting systems – US GAAP, or Generally Accepted Accounting Principles, and IFRS GAAP – and considers how they perform against this framework. It explains how GAAP is evolving, and it examines the likely impact of the financial crisis on the future direction of GAAP.
The book covers a number of topics that are important in practice, but get little attention elsewhere. These include the analysis of growth; the reasons why companies fail; how business model innovation affects reported financial performance; the effect of the company’s accounting model on its reported cash flow, and the vulnerability of measures like EBITDA.
The book investigates the main problem areas in accounting – the incompleteness of balance sheets; the treatment of intangible assets; ‘off-balance-sheet financing’; the tension in GAAP between historic cost and current or ‘fair’ value accounting.
The book examines the ways in which companies present their income numbers to achieve a favourable look, and it explains how we can detect creative accounting.