Financial Statements

They say the language of business is accounting. If that is the case, most people who invest in businesses do not necessarily speak the universal language of business. As I have a degree in accounting, I may have an advantage over many when it comes to speaking this, at times, foreign language. But I recently found a well written and easy to understand book on financial statements. The book is rather dry, but then again this is accounting we are talking about, and it is difficult to make the subject riveting. But the author does an excellent job of explaining what financial statements are and how to read them properly.

I got the book from Amazon several months ago and just got around to reading it in the past week or so. I will have a link to the book as I am going to list it on my “Recommended Books” section of the website. If you have not seen that part of the site, I highly recommend checking it out as I have listed several books that I have found to be good and have come in useful I furthering my education and knowledge on personal finance.

But back to financial statements and the language that is accounting. Now many people have been exposed to the concept of accounting in high school or basic accounting courses in college, and that is a good start to understanding financial statements. But this book is written from the perspective that the reader does not know accounting. And even if you have a solid knowledge of the topic, the book is still worth reading as it reinforces concepts that you already are aware of.

So what is so important about knowing how to read and interpret financial statements? Well, they tell a great story of how a business is doing and gives us insights into where it may be going. This is why they say the language of business is accounting. But to speak the language you do not need to be a scholar to understand these statements and invest with the best of them. After all, Warren Buffett, for the most part, reads annual reports to make some of his most important decisions. And in these reports, the company writes a narrative about the operations, sales, expenses, and other relevant topics that are then backed up by the presentation of the company’s financial statements.

Interpret them becomes so important

This is where being able to read them and interpret them becomes so important. After all, many companies are extremely profitable when one looks at their sales figures alone. But does that mean that they make a profit on the bottom line? Not always and by being able to read the financial statements, you will be able to see what the problems may be and how severe they could be. After all, just because a company has strong sales if they do not control their expenses, they will be left with little or no actual profits for the investor.

The book does an excellent job at explaining the three major types of financial statements: Balance Sheet, Income Statement, and Cash Flow, and once you know what these three statements contain and how to read them the whole world of investing opens up for you. The book details how each statement could and does interact with others. The effects one may have on the others and details how to read them starting at the beginning and working their way through to the end.

Essential to understanding

The book also teaches you how to use these statements to calculate some key ratios that are essential to understanding the health of the company. And in turn, these ratios will assist you in deciding if you want to then invest in the company and how it may compare to others that are similar and the industry it competes in as a whole. And you can even gain a sense of the value of a company if you know how to read these statements to see if it is selling at a fair price when compared to its assets or earnings.

As I said, the book is well written and extremely easy to understand. I cannot recommend it enough for someone who wants to understand the business better and become a better investor who is going to be knowledgeable about what is behind the numbers of a company. While it is by no means a total cure to someone not knowing and understanding accounting enough to read and interpret financial statements this book will teach you the basics behind the science that has made many people extremely wealthy by investing.

The book is titled “Financial Statements,” and it is authored by Thomas R. Ittelson and it is available on Amazon. If you would like more information on the book visit my Recommended Books section or click the following link, Financial Statements.