PREFACE

International Financial Statement Analysis is a practically oriented introduction to financial statement analysis. Each chapter covers one major area of financial statement analysis and is written by highly credentialed experts. The book takes a global perspective on accounting standards and illustrates points by referencing information from a broad range of companies. International Financial Reporting Standards (IFRS) are the reference point for accounting standards. United States generally accepted accounting principles (U.S. GAAP) are discussed in comparison to IFRS. Thus, coverage of U.S. GAAP is extensive and as thorough as coverage of IFRS, but U.S. GAAP is discussed in terms of its similarities and differences with IFRS. The book well equips the reader for practice in today’s global marketplace.

The book adopts a structured presentation style, clearly explaining and illustrating each major concept, tool, or technique as it is introduced. Technical terms are defined in their first major occurrence and terminology is used consistently across the chapters. No prior accounting background is assumed of the reader. In more detail, chapter coverage is as follows:

Chapter 1, Financial Statement Analysis: An Introduction, provides an integrative perspective on financial statement analysis and a foundation for the entire book. After motivating the uses of financial statement analysis, the chapter discusses the key financial statements and other information sources relevant to financial analysis. The chapter concludes by presenting a general framework for conducting financial statement analysis.

Chapter 2, Financial Reporting Mechanics, explains how accounting systems record a company’s transactions with suppliers, customers, employees, capital suppliers, and taxing authorities and how those transactions are eventually summarized in financial statements. Understanding financial reporting mechanics enables an analyst to understand the interrelationships of financial accounts and statements and, therefore, to better assess a company’s financial performance.

Chapter 3, Financial Reporting Standards, introduces the accounting standard setting and regulatory contexts within which companies prepare their financial statements. The chapter explains the conceptual framework behind the preparation of financial statements, focusing on IFRS. Understanding that framework will help the reader evaluate the securities valuation implications of transactions and financial statement elements.

Chapter 4, Understanding Income Statements, explains the income statement, which summarizes an entity’s revenue and expenses over a stated time period. The chapter explains revenue and expense recognition principles, the interpretation of income statement elements, and the calculation of earnings per share. The chapter illustrates a range of tools for analyzing and interpreting the income statement.

Chapter 5, Understanding Balance Sheets, explains the balance sheet, which presents the financial position of a company at a point in time. The information in this chapter should help the reader to better assess a company’s ability to meet debt obligations, generate future cash flows, and make distributions to owners. The chapter explains the balance sheet’s components, alternative formats, and the measurement bases of assets and liabilities. Tools relevant for analyzing and interpreting the balance sheet are illustrated.

Chapter 6, Understanding Cash Flow Statements, explains the cash flow statement, which summarizes cash receipts and disbursements over a stated time period. After presenting the components and alternative formats of the cash flow statement in detail, the chapter discusses the linkages of the cash flow statement with the income statement and balance sheet and of the steps in cash flow statement preparation. The chapter also introduces cash flow statement analysis and interpretation. This chapter completes the overview of financial statements.

Chapter 7, Financial Analysis Techniques, builds on the prior chapters to present an overview of techniques used by analysts to evaluate the performance and financial condition of a company. The chapter illustrates the use of ratio analysis, common-size financial statements, decomposition (duPont) analysis, and analyst adjustments to reported financials. The use of financial statement analysis by both equity analysts and credit analysts is discussed.

Chapter 8, Financial Statement Analysis: Applications, consolidates and extends skills and knowledge from earlier chapters by illustrating four major applications of financial statement analysis: evaluating past financial performance, projecting future financial performance, assessing credit risk, and screening for potential equity investments. An overview of analyst adjustments to reported financials often used in such applications concludes the chapter.

Chapter 9, Inventories, begins a series of chapters that take a more detailed look at important accounting topics. For merchandising and manufacturing companies, inventory is an important asset and inventory cost flow is a major determinant of net income. This chapter presents the major issues associated with accounting for and analyzing inventories.

Chapter 10, Long-Lived Assets, discusses topics related to long-lived (noncurrent) assets, such as accounting for tangible and intangible assets; depreciation of tangible assets; amortization of intangible assets with finite useful lives; accounting for asset retirement obligations; accounting for the disposal of long-lived operating assets; impairment of long-lived assets; and asset revaluation.

Chapter 11, Income Taxes, explains the issues that arise because of differences between a company’s reported financial statements and accounting reports prepared for income taxes.

Chapter 12, Noncurrent (Long-Term) Liabilities, discusses accounting for debt, debt covenants, and leases, and introduces pensions and other postemployment benefits.

Chapter 13, Employee Compensation: Postemployment and Share-Based, explains such issues as accounting for defined-benefit pensions and executive stock options. These means of compensation need to be understood by analysts because they can have substantial effects on a company’s financial position and performance.

Chapter 14, Intercorporate Investments, provides an overview of the accounting-related issues arising from the investments companies make in other companies. The chapter covers the classification of intercorporate investments and for each type explains the accounting issues relevant to the analyst.

Chapter 15, Multinational Operations, presents two major topics: the accounting for foreign currency denominated transactions that arise in international trade, and the translation of foreign currency financial statements of overseas subsidiaries into the parent company’s currency for the purpose of preparing consolidated financial statements.

Chapter 16, Evaluating Financial Reporting Quality, deals with evaluating the accuracy with which a company’s reported financials reflect its operating performance and their usefulness for forecasting future cash flows. Besides illustrating a generally applicable framework for evaluating financial reporting quality, the chapter introduces concepts and techniques used to interpret reported financial results.

Chapter 17, Integration of Financial Statement Analysis Techniques, uses cases to illustrate the application of the financial statement analysis framework introduced in Chapter 1 and referenced throughout the book. The cases demonstrate the effective use of financial analysis in decision making.