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Understanding Financial Statements improves your ability to translate a financial statement into a meaningful map for business decisions. The material covered in each chapter helps you approach financial statements with enhanced confidence and understanding of a firm’s historical, current, and prospective financial condition and performance. The Eleventh Edition includes new case studies based on existing companies and enhanced learning tools to help you quickly grasp and apply the materials. Fraser and Ormiston presents material in an engaging fashion that helps readers make sense of complex financial information, leading to intelligent (and profitable!) Decision-making.
Financial Statements: An Overview; The Balance Sheet; Income Statement and Statement of Stockholders’ Equity; Statement of Cash Flows; The Analysis of Financial Statements
Readers interested in learning more about Financial Statement Analysis, Investments, Personal Finance, and Financial Planning and Analysis.
PREFACE TO THE ELEVENTH EDITION
Major changes have been incorporated into this eleventh edition of Understanding Financial Statements in order to continue improving the usefulness of the text for professors, students, and readers of the material. We have made many of the revisions in response to specific requests and comments from users of the text.
New to this Edition
• Learning objectives have been added to all chapters.
• Chapter 1 now includes a section on the characteristics, assumptions, principles and basis of accounting.
• Chapter 2 has an expanded section on types of long-term debt.
• Four new cases have been added to each chapter; spoiler alert: look for Facebook in Chapter 5.
• International accounting rules (IFRS) are discussed in relation to relevant topics in each chapter, and Chapters 2–5 include a comprehensive case of an international firm (Hydrogenics, a Canadian company).
• The test bank has been completely revised, and problems with solutions have been added to the website.
As always, our intent is to present the material in a way that helps readers make practical sense of complex financial information, leading to intelligent (and profitable!) decision-making.
Our preface to previous editions has included an update on our children, all of whom are now grown-up and leading interesting lives of their own, so our feature this year is of the new member of the team, Aileen’s granddaughter, Katelyn.
While our children have all supported this work through its various iterations, Katelyn has responded to Understanding Financial Statements in a unique manner that should certainly encourage interest in our book.
Lyn M. Fraser
Chapter 1 provides an overview of financial statements and presents approaches to overcoming some of the challenges, obstacles, and blind alleys that may confront the user of financial statements: (1) the volume of information, with examples of specific problems encountered in such areas as the auditor’s report and the management discussion and analysis section as well as material that is sometimes provided by management but is not useful for the analyst; (2) the complexity of the accounting rules that underlie the preparation and presentation of financial statements; (3) the variations in quality of financial reporting,
including management discretion in some important areas that affect analysis; and (4) the importance of financial information that is omitted or difficult to find in conventional financial statement presentations.
Chapters 2, 3, 4, and 5 describe and analyze financial statements for a mythical but potentially real company, Sage Inc., which sells recreational products through retail outlets in the southwestern United States. The specifics of this particular firm should be helpful in illustrating how financial statement analysis can provide insight into a firm’s strengths and weaknesses. But the principles and concepts covered throughout the book apply to any set of published financial statements (other than for specialized industries, such as financial institutions and public utilities).
Because one company cannot provide every account and problem the user will encounter in financial statements, additional company examples are introduced throughout the text where needed to illustrate important accounting and analytical issues.
Chapters 2 through 4 discuss in detail a basic set of financial statements: the balance sheet in Chapter 2, the income (earnings) statement and statement of stockholders’ equity in Chapter 3, and the statement of cash flows in Chapter 4.
The emphasis in each of these chapters is on what the financial statements convey about the condition and performance of a business firm as well as how the numbers have been derived. Appendix 3A discusses and illustrates issues that relate to the quality of earnings—and thus the usefulness—of financial reporting. The chapter contains a step-by-step checklist of key items to help the analyst
assess the quality of reporting, and real-company examples of each step are provided.
With this material as background, Chapter 5 covers the interpretation and analysis of the financial statements discussed in Chapters 2 through 4. This process involves the calculation and interpretation of financial ratios, an examination of trends over time, a comparison of the firm’s condition and performance with its competitors, and an assessment of the future potential of the company based
on its historical record. Chapter 5 also reviews additional sources of information that can enhance the analytical process. Appendix 5A shows how to evaluate the xii Organization of the Eleventh Edition
segmental accounting data reported by diversified companies that operate in several unrelated lines of business.
Self-tests at the ends of Chapters 1 through 5 provide an opportunity for the reader to assess comprehension (or its absence) of major topics; solutions to the self-tests are given in Appendix B. For more extensive student assignments, study questions and problems are placed at the end of the chapters. Cases drawn from actual company annual reports are used to highlight in a case-problem format many of the key issues discussed in the chapters.
Appendix A covers the computation and definition of the key financial ratios that are used in Chapter 5 to evaluate financial statements.
Appendix B contains solutions to self-tests for Chapters 1 through 5.
Appendix C presents a glossary of the key terms used throughout the book.
The ultimate goal of this book is to improve the reader’s ability to translate financial statement numbers into a meaningful map for business decisions. It is hoped that the material covered in the chapters and the appendixes will enable each reader to approach financial statements with enhanced confidence and understanding of a firm’s historical, current, and prospective financial condition and performance.