This post originally appeared on ThinkingAboutMoney.com on June 15th 2006
What a treat for investors or business owners! I wish I had this book when I started my first business – it would have certainly sped up my learning process at the time. And for investors who want a good solid background on reading financial statements, it’s hard to imagine a better introduction.
“Financial Statements” by Thomas Ittelson does a spectacular job of introducing the three basic types of financial statements to beginners, while providing an easy to read refresher to those who might be a bit rusty on the topic.
The book begins with an in-depth review of income statements, cash flow statements and balance sheets, showing how they relate to each other. This section also includes an introduction to the basic principles of accounting.
The strongest part of the book is the second, where the author walks you through a year in the financial life of a fictional company. A wide variety of transaction types are covered from initial raising of equity, to asset purchases, to hiring, and ultimately to manufacturing and booking income. Careful attention is paid to the process of handling inventory and dealing with cost of goods (and the entire manufacturing – sales – income cycle), including the difference between fixed and variable costs. The author even discusses several approaches for determining a business’s value for possible sale (though he does discard the discounted cash flow method as being too complex).
There is enough information here for someone starting a business to handle their own bookkeeping (with practice and perhaps a bit of hand holding by a friendly CPA at first to answer specific questions). Certainly enough to understand what the bookkeeper and accountant are doing and speak with them intelligently about the state of the business.
The third part of the book is especially important to investors, covering common ratios for evaluating the health of a company and discussing techniques that can be used to “cook the books” or otherwise bias financial reports. This part of the book is all too short. It left me convinced that there was a lot more to learn in this area.
If you are comfortable creating and reading financial statements, this is not the book for you. But for everyone else, I highly recommend it. The book is clear, well written, and breaks complex topics into simple steps that are easy to understand.
See more: “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson