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The Basics of Understanding Financial Statements by Mariusz Skonieczny

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Investors beware ! Research financial statements and read the financial news often.

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Due diligence counts when making an investment !

May 23, 2012

by JSMaresca
posted in Cafe Libri: Reviewing Books & More

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The Basics of Understanding Financial Statements by Mariusz Skonieczny
is a good primer on how to read financial statements with an eye toward
ascertaining the financial well being of the company. The author begins the
presentation by explaining that managers of publicly traded companies
communicate with shareholders about the success or failure of a business
operations through the prism of financial statements.

The presentation provides examples of simple balance sheet, income statement
and cash flow statements. The more complex concepts of comprehensive
income and accumulated other comprehensive income are not explained.
In addition, municipal accounting statements are not referenced. The financial
statements presented show losses with a minus sign instead of a bracket.

Comprehensive income is the sum of net income and other items that are not on
the income statement because they haven't been realized. These types of items include
unrealized holding gains or losses from available for sale securities and foreign currency
translation gains or losses. These items are not part of net income per se. They are important
enough to be included in comprehensive income. Resultingly, the financial statement user
has a more expansive portrayal of the organization as a whole. Items included in comprehensive
income, but not net income are reported under the accumulated other comprehensive income
section of shareholder's equity.

Comprehensive income (CI) attempts to measure the sum of all operating and financial events
that have changed the value of an owner's interest in an enterprise. The amount is measured on a
per-share basis to capture the effects of dilution and options. CI negates the impact
of equity transactions where the owner would be indifferent. i.e. dividend payments,
share buy-backs and share issues at market value.

Comprehensive Income (CI) is calculated by reconciling the book value per-share from the
start of the period to the end of the period.

Shareholders' Equity, beg. of period (per share)
- Dividends paid (per share)
+ Shares issued (premium over book value per share)
- Share buy-backs (premium over book value per share)
+ Comprehensive Income (per share)
---------------------------------------------------------------------------
= Shareholders' Equity, end of period (per share)

The author explains the necessity of putting cash to work or returning it to the
shareholders in the form of dividends or share buy backs. The presentation on
accounts receivable is pertinent because some companies report increments in
sales yet uncollectables rise disproportionately. Generally, a company earns more
in proportion to the number of fixed assets owned; however, obsolescence can
be a major factor in some companies and industries. A prime example would be
cell phones. The newer models are lighter with much greater functionality.

The author explains that low gross profit margins may result from cutting
prices to remain more competitive. Another important aspect is to
analyze the sources of cash to determine whether or not the source is
from increased selling or the sale of fixed assets, borrowings or the
issuance of stock.

The Basics of Understanding Financial Statements by Mariusz Skonieczny
is a good introduction to financial statements for novice investors.
This book alone is not enough. There are other factors which impact the
purchases of stock; such as, market variability measurable by the VIX index
and intermarket events like the difficulties Greece is having with its large
debt.

Even a top stock like Apple can lose up to 40% of its value in a
major or unforeseen market downturn. Novice investors must be aware of these
market influences. Traditionally, portfolios can be protected with
stop loss orders or the artful use of covered calls by more sophisticated
investors.

Article first published as <a href='http://blogcritics.org/books/article/book-re...asics-of-understanding/'>Book Review: <i> The Basics of Understanding Financial Statements </i> by Mariusz Skonieczny</a> on Blogcritics.