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2020 | Buch

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Reading Between the Lines of Corporate Financial Reports

In Search of Financial Misstatements

verfasst von: Jacek Welc

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book provides a digestible step-by-step guide to reading corporate financial reports, drawing upon real-life case studies and examples of corporate collapses and accounting scandals, and applying practical tools to financial statement analysis. Appealing to a range of practitioners within corporate finance including investors, managers, and business analysts, this book is the first to specifically address the challenges facing those who are not professional accountants and auditors when examining corporate financial reports.

Corporate financial reports are used widely by managers, investors, creditors, and government agencies to examine company performance and evaluate potential risks. However, although seemingly an invaluable source of information for managerial decision-making, financial reports are often based on rough simplifications of a very complex reality. With no way of avoiding deliberate manipulations and fraudulent activity, these statements cannot be relied on completely when selecting stocks or evaluating credit risk, and therefore poor analysis can lead to potentially disastrous investment decisions.
The author suggests that in order to effectively interpret corporate financial reports, we must 'read between the lines' to accurately assess a company's economic performance and predict its long-term viability.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Most Common Distortions in a Financial Statement Analysis Caused by Objective Weaknesses of Accounting and Analytical Methods

Abstract

Even financial statements which are prepared in a full compliance with the effective accounting regulations may not be entirely reliable or comparable (in time or between various firms), since they are prone to objective weaknesses of accounting methods.

Jacek Welc

Chapter 2. Other “Distortions” in a Financial Statement Analysis Caused by Objective Weaknesses of Accounting and Analytical Methods

Abstract

Most accounting standards permit using several alternative methods of accounting for inventory flow. The most popular of them are first-in-first-out (FIFO), weighted-average and last-in-first-out (LIFO). The former two are allowed by both IFRS and US GAAP

Jacek Welc

Chapter 3. Deliberate Accounting Manipulations: Introduction and Revenue-Oriented Accounting Gimmicks

Abstract

One of the most serious problems of contemporary accounting is a temptation faced by corporate managers and accountants to abuse a leeway and huge load of subjective judgments, which are embedded in accounting standards (such as IFRS or US GAAP), in order to manipulate reported numbers. Such manipulations are typically aimed either at artificially inflating (i.e. overstating) reported profits or at achieving smoother time-series patterns of reported financial results.

Jacek Welc

Chapter 4. Deliberate Accounting Manipulations: Expense-Oriented Accounting Gimmicks and Intentional Profit Understatements

Abstract

According to most accounting standards, inventories are reported in a balance sheet at their historical costs (e.g. a cost of purchase or cost of manufacturing). Consequently, in normal circumstances, when inventories can be sold with positive margins (i.e. at prices above their historical costs), carrying amounts of inventories do not reflect their current recoverable values. However, when the recoverable values of inventories (i.e. the amounts for which they could be sold in the market) fall below their current book values, the inventories should be written down to their estimated recoverable values. Such inventory write-downs reduce their carrying amounts in balance sheet, with a corresponding loss recognized in income statement (usually reported under an item labeled as “Other operating expenses / losses” or similarly).

Jacek Welc

Chapter 5. Evaluation of Financial Statement Reliability and Comparability Based on Auditor’s Opinion, Narrative Disclosures and Cash Flow Data

Abstract

This chapter is the first of several chapters which deal with tools of evaluating financial statement reliability and comparability. In this book the terms “reliability” and “credibility” of financial statements are used interchangeably. Accounting numbers are deemed reliable if they may be relied upon, i.e. if they present a fair and true picture of a given company’s performance. In that sense the reliable financial statements may be also described as credible.

Jacek Welc

Chapter 6. Problems of Comparability and Reliability of Reported Cash Flows

Abstract

As was stated in the preceding chapter, one of the crude symptoms of unsustainability of reported operating profits is their growth at the pace which significantly and/or repeatedly exceeds the pace of growth of operating cash flows. Accordingly, corporate cash flows constitute a standard tool used as a check on credibility of earnings reported in an income statement.

Jacek Welc

Chapter 7. Evaluation of Financial Statement Reliability and Comparability Based on Quantitative Tools Other Than Cash Flows: Primary Warning Signals

Abstract

Chapter 5 presented three tools useful in evaluating reliability and comparability of corporate financial reports. Two of those tools (auditor’s opinion and narrative disclosures in financial reports) had a qualitative nature, while the third one was based on quantitative accounting inputs (i.e. relative changes of cash flows and accounting earnings).

Jacek Welc

Chapter 8. Evaluation of Financial Statement Reliability and Comparability Based on Quantitative Tools Other Than Cash Flows: Additional Warning Signals

Abstract

Some businesses are featured by non-negligible share of deferred revenues in total liabilities. Deferred revenues reflect amounts of money (coming from sales of products or services), that have been already collected from customers, but in which case a revenue recognition (in income statement) is postponed to future periods.

Jacek Welc

Chapter 9. Techniques of Increasing Comparability and Reliability of Reported Accounting Numbers: Selected Simple Tools

Abstract

As was shown in the previous chapters, there are many factors which may dramatically reduce reliability and comparability of reported corporate financial data, including reported cash flows. Some of those factors are entirely objective and unrelated to anyone’s deliberate manipulations (i.e. they stem from weaknesses of accounting methods themselves, which always offer only an imprecise simplification of a complex economic reality), while in other circumstances distortions or biases of reported numbers may result from an intentional application of some techniques of aggressive or fraudulent accounting.

Jacek Welc

Chapter 10. Techniques of Increasing Comparability and Reliability of Reported Accounting Numbers: Some More Advanced Tools

Abstract

The first section of this chapter presents analytical adjustments aimed at mitigating the distortions stemming from significant non-controlling interests. Then, adjustments for the effects of long-term contracts (accounted for with the percentage-of-completion method) will be demonstrated. The chapter closes with an illustration of an analytical technique aimed at increasing data comparability on the ground of financial statement disclosures related to deferred tax assets and deferred tax liabilities.

Jacek Welc

Backmatter

Titel: Reading Between the Lines of Corporate Financial Reports
verfasst von: Jacek Welc
Verlag: Springer International Publishing
Electronic ISBN: 978-3-030-61041-8
Print ISBN: 978-3-030-61040-1
DOI: https://doi.org/10.1007/978-3-030-61041-8