10/14/2017 APrimeronFinancialStatements

APrimeronFinancialStatements
Muchoftheinformationthatisusedinvaluationandcorporatefinancecomesfromfinancialstatements.An
understandingofthebasicfinancialstatementsandsomeofthefinancialratiosthatareusedinanalysisis
thereforeanecessaryfirststepforeitherpursuit.Thereishoweveradifferencebetweenwhataccountantstryto
measureinfinancialstatements,andwhatfinancialanalystswouldlikethemtomeasure.Someofthisdifference
canbetracedtothedifferencesinobjectivefunctionsaccountantstrytomeasurethecurrentstandingand
immediatepastperformanceofafirm,whereasfinancialanalysisismuchmoreforwardlooking.

Inthisprimer,webeginwithaninventoryoftheinformationwewouldliketoobtainonafirm,andthen
examinehowaccountingstatementsattempttoprovidethisinformation,andwheretheymightfallshort.

InformationalNeeds

Beforelookingataccountingprinciplesandthedetailsofaccountingstatements,letusstartwithamuchmore
fundamentalissue.Whenanalyzingafirm,whatarethequestionstowhichwewouldliketoknowtheanswers?
Todoso,letusrevertbacktothedescriptionofafirm,fromafinancialstandpoint:

Whendoingafinancialanalysisofafirm,wewouldliketobeabletoanswerthefollowingquestions

Whataretheassetsthatthefirmhasinplacealready,andhowmucharetheyworth?
Whatarethegrowthassetsofthefirmandwhatistheirvalue?
Whatisthefirmearningonitsassetsinplace,andwhatcanitexpecttoearnonthesesameassetsaswell
asitsgrowthassets?
Whatisthemixofdebtandequitythatthefirmisusingtofinancetheseassets?

Howmuchriskisthereinthisfirm,andwhatisthecostofitsdebtandequityfinancing?

Aswewillseeinthischapter,accountingstatementsallowustogetsomeinformationonallofthesequestions,
buttheyfallshortintermsofboththetimelinesswithwhichtheyprovidethisinformationandthewayinwhich
theymeasureassetvalue,earningsandrisk.Inthechaptersthatfollow,wewillexaminesomeofthewaysin
whichwecangetbeyondtheselimitations.

HowAccountantsmeasureearnings

Thetwobasicprinciplesthatgovernhowaccountantsmeasureearningsseemtobethefollowing:

Thefirstistheprincipleofaccrualaccounting.Inaccrualbasedaccountingtherevenuefromsellinga
goodorserviceisrecognizedintheperiodinwhichthegoodissoldortheserviceisperformed(inwhole

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orsubstantially).Acorrespondingeffortismadeontheexpensesidetomatchexpensestorevenues.
Thesecondisthecategorizationofexpensesintooperating,financingandcapitalexpenses.Operating
expensesareexpensesthat,atleastintheory,providebenefitsonlyforthecurrentperiodthecostoflabor
andmaterialsexpendedtocreateproductswhicharesoldinthecurrentperiodwouldbeagoodexample.
Financingexpensesareexpensesarisingfromthenonequityfinancingusedtoraisecapitalforthe
businessthemostcommonexampleisinterestexpenses.Capitalexpensesareexpensesthatareexpected
togeneratebenefitsovermultipleperiodsforinstance,thecostofbuyinglandandbuildingsaretreated
ascapitalexpenses.

Theincomestatementiswhereaccountantsattempttomeasurehowprofitableafirmwasduringthefinancial
period.Inthefollowingtable,wesummarizethekeypartsoftheincomestatement,andsomekeymeasurement
issues:

Item AccountingPrinciples IssuesinMeasurement

Revenues Onlyrevenuesfromsalesduringthe
periodshouldbeincludedin
revenues(i.e.,notcashrevenues).
Thus,cashreceivedfromsalesmade
inpreviousperiodsisnotincluded
insales,andsalesfromthecurrent
period,evenifnotcollected,is
included.
Inthecaseofcontractwork,or
multiyearprojects,revenuescan
bepostedastheworkin
completed.
Somefirms,toinflateincomein
thecurrentperiod,trytorecordas
muchinsalesbeforetheendofthe
period.

(minus)Operating Onlythoseexpensesincurredto Accountingrulesrequirethat

Expenses(not createrevenuesinthecurrentperiod
including shouldbeincludedaspartof
depreciation) operatingexpenses.Labor,material,
marketingandgeneraland
administrativecostsarealloperating
expenses.Ifmaterialpurchasedin
thecurrentperiodisnotusedin
production,itiscarriedoveras
inventoryintothenextperiod.
Inventoryhastobevaluedto
estimateoperatingexpenses,and
firmscanchoosetovalueinventory
baseduponwhattheypaidforthe
materialboughtattheendofthe
period(FIFO),atthebeginningof
theperiod(LIFO)oranaverage
price.
(minus) Anyexpensethatisexpectedto
Depreciationand generateincomeovermultiple
Amortization periodsiscalledacapitalexpense.
Acapitalexpenseiswrittenoffover
itslifetime,andthewriteoffeach
yeariscalleddepreciation(ifitisa
tangibleassetlikemachinery)or
amortization(ifitisanintangible
assetsuchasacopyright).
researchanddevelopmentcostsbe
shownasoperatingexpensesinthe
periodinwhichtheyareincurred.
(Clearly,thisviolatestheprinciple
thatoperatingexpensesshould
onlyincludeexpensesdesignedto
generaterevenuesinthecurrent
period)
Ifassetsareleased,andthelease
qualifiesfortreatmentasan
operatinglease,thenoperating
leaseexpensesarealsotreatedas
operatingexpenses.
Finally,onetimerestructuring
chargescanqualifyfortreatmentas
operatingexpenses.
IntheUS,depreciationhastobe
basedonwhatwasoriginallypaid
fortheasset(bookvalue).Insome
highinflationeconomies,firmsare
allowedtorevalueassets.
Theaccountingdepreciationmay
bearlittleornoresemblancetothe
economicdepreciation(which
measuresthelossinvaluefrom
usingtheasset).

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Sincethevaluethatanassetloses
eachperiodissubjective,
depreciationschedulesare
mechanized.Theycanbroadlybe
classifiedintotwogroups
straightlinedepreciation,wherean
equalamountgetswrittenoffeach
period,andaccelerated,wheremore
oftheassetgetswrittenoffinthe
earlieryearsandlessinlateryears.
=OperatingIncome Whenoperatingexpensesand
(EBIT) depreciationaresubtractedfrom
revenues,weestimateoperating
income.Thisisdesignedtomeasure
theincomegeneratedbyafirms
assetsinplace.
(minus)Interest Themostdirectsourceofinterest
Expenses expensesisdebttakenonbythe
firmeitherfromadirectlender
(suchasabank)orfrombonds
issuedtothepublic.Interest
expensesalsoincludeimputed
interestcomputedonleasesthat
qualifyascapitalleases.
Iffirmshavesubstantialinterest
incomefromcashandmarketable
securitiesthattheyhold,itisusually
shownatthispoint.
=TaxableIncome Ifthedepreciationreportedisthe
taxdepreciation,nettingtheinterest
expensesfromtheoperatingincome
shouldyieldthetaxableincome.
(minus)Taxes Thesearethetaxesdueandpayable
onincomeinthecurrentperiod.
Generallyspeaking,itcanbe
computedas
Tax=TaxableIncome*TaxRate
=NetIncome Theincomeaftertaxesandinterest
isthenetincome.
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FirmsintheUSareallowedtouse
differentdepreciationmethodsfor
taxandreportingpurposes.Fortax
purposes,theytendtouse
accelerateddepreciation(sinceit
reducestaxableincomeandtaxes).
Forreportingpurposes,theytend
tousestraightlinedepreciation.
TotheextentthatR&Dexpenses
arereallycapitalexpenses,
operatingleaseexpensesarereally
financingexpenses,andaccounting
depreciationisreallynoteconomic
depreciation,theoperatingincome
canbemisleading.
Interestexpensesaretax
deductible.Theyneedtobe
subtractedouttoarriveattaxable
income.
Somefirmshavenoncashinterest
expenses.Whiletheyaretax
deductible,theyneedtobetracked
forcashflowpurposes.
Totheextentthatfirmsuse
differentapproachesfor
computation(especiallyfor
depreciation)fortaxandreporting
purposes,thetaxableincomeinthe
reportedstatementswillbe
different(andgenerallyhigher)
thanthetaxableincomeinthetax
books.
Firmsusuallyreportan"effective"
taxratecomputedbydividingthe
taxesbythereportedtaxable
income.Sincethereportedtaxable
incomeisusuallyhigherthanthe
truetaxableincome,theeffective
taxratewillusuallybelowerthan
thefirmstrueaveragetaxrate.
Ifafirmhaspreferred
stockholders,thepreferred
dividendwillbesubtractedfrom
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thenetincometoarriveatnet
incometocommonstockholders.

(minus)Losses(+ Theseareexpenses(orincome)not
Profits)not associatedwithoperations.
associatedwith
operations
(minus)Profitsor Changesinaccountingmethods
Lossesassociated (suchashowinventoryisvalued)
withAccounting canresultinearningseffects.
Changes
/NumberofShares Theactualnumberofshares Options,warrantsandconvertibles
outstanding outstandingisreferredtoasprimary areallequity.Justaddingthe
shares.Whenthereareoptionsand sharesthattheholdersofthese
convertiblesoutstanding,theshares optionsareentitledtoisapoorway
embeddedintheseoptionsis ofdealingwiththeclaimsthat
sometimesaddedontoarriveat theseoptionholdershaveonthe
fullydilutedshares. equityofthefirm.

=Earningsper Theearningspersharecanbe
Share computedonaprimaryorfully
dilutedbasis.

HowAccountantsValueAssets

Theassetsofafirmaremeasuredandreportedoninafirmsbalancesheet.Ingeneral,theassetsofafirmcan
becategorizedintofixedassets,currentassets,intangibleassetsandfinancialassets.Thereseemtobethree
basicprinciplesthatunderliehowaccountantsmeasureassetvalue:

AnAbidingBeliefinBookValueastheBestEstimateofValue:Accountingestimatesofassetvaluebegin
withthebookvalue,andunlessasubstantialreasontodootherwiseisgiven,thehistoricalcostisviewed
asthebestestimateofthevalueofanasset.
ADistrustofMarketorEstimatedValue:Whenacurrentmarketvalueexistsforanassetthatisdifferent
fromthebookvalue,accountingconventionseemstoviewthismarketvaluewithsuspicion.Themarket
priceofanassetisoftenviewedasbothmuchtoovolatileandeasilymanipulatedtobeusedasan
estimateofvalueforanasset.Thissuspicionrunsevendeeperwhenvaluesareestimatedforanasset
baseduponexpectedfuturecashflows.
Itisbettertounderestimatevaluethanoverestimateit:Whenthereismorethanoneapproachthatcan
beusedtovalueanasset,accountingconventionseemstotaketheviewthatthemoreconservative
(lower)estimateofvalueshouldbeusedratherthanthelessconservative(higher)estimateofvalue.Thus,
whenbothmarketandbookvalueareavailableforanasset,accountingrulesoftenrequirethatyouuse
thelesserofthetwonumbers.

Theprinciplesgoverningtheaccountingmeasurementofeachoftheseassetcategoriesisprovidedbelow,
togetherwithkeymeasurementissues.

Item Principlesgoverningmeasurement MeasurementIssues

FixedAssets Fixedassetsrefertotangibleassetswithlong Theaccounting
lives.Generallyacceptedaccountingprinciplesin depreciationofanasset
theUnitedStatesrequirethevaluationoffixed followsmechanisticrules
assetsathistoricalcosts,adjustedforany straightline(wherean
estimatedlossinvaluefromtheagingofthese equalamountiswrittenoff
assets.Thelossinvalueiscalleddepreciation. eachyear)oraccelerated.
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Itbearsnoresemblanceto
economicdepreciation.
Inthepresenceofinflation,
theuseofhistoricalcost
canresultinsignificant
undervaluationofolder
fixedassets
Theassetvaluehaslittleor
norelationshiptothe
earningpoweroftheasset.

Current Currentassetsrefertoassetswithshortlives Thediscretiongivenfirms

Assets (generallylessthanayear).Includedhereare onvaluinginventoryand
itemslikeinventoryofbothrawmaterialsand consideringexpectedbad
finishedgoods,accountsreceivableandcash. debtsdoesgiveriseto
gameplaying.During
Theaccountingconventionisforaccounts periodsofinflation,for
receivabletoberecordedastheamountowedto instance,switchingfrom
thefirm,baseduponthebillingatthetimeofthe FIFOtoLIFOwill
creditsale.Firmscansetasideaportionoftheir decreasereportedearnings.
incometocoverexpectedbaddebts,fromcredit Ifinventorychangesare
sales,andaccountsreceivablewillbereducedby onlymadeforreporting
thisreserve. purposes,neitherthetrue
incomeofthefirmnorits
Cashisvaluedatfacevalue,andinventorycanbe cashflowsisaffected.
valuedusingoneofthreeapproachesthecost
ofthematerialsboughtattheendoftheperiod
(FIFO),atthebeginningoftheperiod(LIFO)ora
weightedaverage.
Financial Financialinvestmentsarecategorizedintothree Financialinvestmentshave
Investments types: anobservablemarket
value.Whentheyare
Minority,passiveinvestments:wherethefinancial recordedatbookvalue,
investmentinanotherfirmislessthan20%ofthe andthebookvalueismuch
ownershipofthefirm.Ifthisinvestmentislong lowerthanthemarket
term,itisrecordedatbookvalueandtheinterest value,itdoesseemto
ordividendfromitisshownintheincome suggestthattheyare
statement.Ifitisshortterm,itismarkedto misvalued.
market,andthegainsorlossesrecordedeach
period.

Minority,activeinvestments:wherethefinancial
investmentinanotherfirmisbetween20and50%
oftheownershipofthefirm.Here,theinvestment
isrecordedattheoriginalacquisitioncost,butis
adjustedfortheproportionalshareofprofitsor
lossesmadebythefirmeachperiod.(Equity
approach)

Majority,activeinvestments:wherethefinancial
investmentinanotherfirmisacontrollinginterest.
Here,thefinancialstatementsofthetwofirms
(incomestatementandbalancesheet)havetobe
consolidated.Theentireassetsandliabilitiesofthe
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twofirmsareconsolidated,andtheshareofthe
firmheldbyothersiscalledaminorityinterest.
Intangible Whenonefirmacquiresanotherandthe Goodwillisreallynotan
Assets acquisitionisaccountedforwithpurchase asset.Ifthebookvalue
accounting,thedifferencebetweentheacquisition measuresassetsinplace
priceandthebookvalueoftheacquiredfirmis andthemarketvaluepaid
calledgoodwill.Itisamortizedover40years, isfair,thedifferencereally
thoughtheamortizationisnottaxdeductible. isameasureofgrowth
assets.Whenfirmsoverpay
Whenfirmsacquirepatentsorcopyrightsfrom onacquisitions,goodwill
others,theyareallowedtoshowtheseassetsas mayreflectthe
intangibleassetsonthebalancesheet.The overpaymentmorethan
amortizationoftheseassetsisusuallytax anyintangibleassets
deductible. ownedbythefirm.
Thetreatmentofpatentsas
intangibleassets,when
theyareacquiredfrom
others,doescreatean
inconsistency.When
patentsaredeveloped
throughinternalresearch,
theydonotshowuponthe
balancesheet.

HowAccountantsValueLiabilities

Theprinciplesthatunderliehowaccountantsmeasureliabilitiesandequityarethefollowing:

Thefirstisarigidcategorizationoffinancingintoeitherdebtorequitybaseduponthenatureofthe
obligationcreatedbythefinancing.Foranobligationtoberecognizedasaliability,itmustmeetthree
requirements
Itmustbeexpectedtoleadtoafuturecashoutfloworthelossofafuturecashinflowatsomespecifiedor
determinabledate,
Thefirmcannotavoidtheobligation,and
Thetransactiongivingrisetotheobligationhashappened.

Inkeepingwiththeearlierprincipleofconservatisminestimatingassetvalue,accountantsrecognizeas
liabilitiesonlycashflowobligationsthatcannotbeavoided.Ifanobligationisaresidualobligation,
accountantsseetheobligationasequity.

Thesecondprincipleisthatthevalueofboththeliabilitiesandequityinafirmarebetterestimatedusing
historicalcostswithaccountingadjustments,ratherthanwithexpectedfuturecashflowsormarketvalue.
Theprocessbywhichaccountantsmeasurethevalueofliabilitiesandequitiesisinextricablylinkedto
howtheyvalueassets.Sinceassetsareprimarilyvaluedathistoricalcostorbookvalue,bothdebtand
equityalsogetmeasuredprimarilyatbookvalue.Inthesectionthatfollows,wewillexaminethe
accountingmeasurementofbothliabilitiesandequity.

Inthefollowingtable,wesummarizehowaccountantsmeasureliabilitiesandequity:

Item Howitismeasured MeasurementIssues

Current Currentliabilitiesrefertoliabilities Ingeneral,currentliabilitiesshouldbe
Liabilities thatwillcomedueinthenextyear. recordedatvaluesclosetothetrue
Itincludesshorttermdebt,accounts value.
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andsalariespayable,aswellaslong
termdebtcomingdueinthenext
year.Theseamountsreflectthe
actualamountsdue,andshouldbe
fairlyclosetomarketvalue.
LongTerm Thiscanincludebothlongterm
Debt bankdebtandcorporatebonds
outstanding.Accountantsmeasure
thevalueoflongtermdebtby
lookingatthepresentvalueof
paymentsdueontheloanorbondat
thetimeoftheborrowing,usingthe
interestrateatthetimeofthe
borrowing.Thepresentvalueisnot
recomputed,however,asinterest
rateschangeaftertheborrowing.
OtherLong Therearethreeprimaryitemsthat
Term gointothis.First,ifleasesqualify
Liabilities fortreatmentascapitalleases,the
presentvalueofleasepaymentsis
shownaslongtermdebt.Second,if
afirmsdefinedbenefitpensionplan
orhealthcareplanisunderfunded,
theunderfundingisshownasalong
termliabilitiy.Third,ifafirmhas
managedtodefertaxesonincome
(forinstance,bytheuseof
accelerateddepreciationand
favorableinventoryvaluation
methods),thedeferredtaxesis
shownasaliabilitiy.
PreferredStock Preferredstockgenerallycomes
withafixeddividend.Insome
cases,thedividendiscumulatedand
paid,ifthefirmfailsonits
obligations.Preferredstockis
valuedonthebalancesheetatits
originalissueprice,withany
cumulatedunpaiddividendsadded
on.Convertiblepreferredstockis
treatedsimilarly,butitistreatedas
equityonconversion.
Common Theaccountingmeasureofequityis
Equity ahistoricalcostmeasure.Thevalue
ofequityshownonthebalance
sheetreflectstheoriginalproceeds
receivedbythefirmwhenitissued
theequity,augmentedbyany
earningsmadesince(orreducedby
losses,ifany)andreducedbyany
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Wheninterestratesincreaseafterlong
termdebtisissued,thedebtreportedon
thebookswillbehigherthantheactual
marketvalueofthedebt.Thebook
valuewillbelowerthanmarketvalueif
interestratesdecreaseafterthedebtis
borrowed.
Whendebtisissuedinaforeign
currency,thevaluehastobeadjustedto
reflectchangesinexchangerates.
Whendebtisconvertible,thedebtis
shownatbookvalue.Whenitis
converted,itistreatedasequity.
Theselongtermliabilities,unlikelong
termdebt,arenotinterestbearing.
Whiletheymayrepresentliabilitiesin
thebroadestsense,theabsenceofacash
flowclaimimpliesthatweshouldbe
cautiousabouttreatingitasdebt.Itis
alsonotclearwhatclaimstheseclaim
holderswouldhave,ifthefirmfailedto
meetitsobligations.
Accountantshavehistoricallytreated
preferredstockasquasiequityoreven
asequity.Theyresttheirargumentson
thefactsthatpreferredstockholders
cannotforceafirmintodefault,andthat
ithasnofinitelife.Toafinancial
analyst,preferredstocklookslikevery
expensive,unsecureddebt.
Whencompaniesbuybackstockfor
shortperiods,withtheintentof
reissuingthestockorusingittocover
optionexercises,theyareallowedto
showtherepurchasedstockastreasury
stock,whichreducesthebookvalueof
equity.Firmsarenotallowedtokeep
treasurystockonthebooksforextended
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dividendspaidoutduringthe period,andhavetoreducetheirbook
period. valueofequitybythevalueof
repurchasedstockinthecaseofactions
suchasstockbuybacks.Sincethese
buybacksoccuratthecurrentmarket
price,theycanresultinsignificant
reductionsinthebookvalueofequity.
Firmsthathavesignificantlossesover
extendedperiodsorcarryoutmassive
stockbuybackscanendupwith
negativebookvaluesofequity.

HowAccountantsMeasureProfitability

Whiletheincomestatementallowsustoestimatehowprofitableafirminabsoluteterms,itisjustasimportant
thatwegaugetheprofitabilityofthefirmisintermsofpercentagereturns.Therearetwobasicgaugesusedto
measureprofitability.Oneistoexaminetheprofitabilityrelativetothecapitalemployedtogetarateofreturn
oninvestment.Thiscanbedoneeitherfromtheviewpointofjusttheequityinvestors,orlookingattheentire
firm.Anotheristoexamineprofitabilityrelativetosales,byestimatingaprofitmargin.

Thefollowingtablesummarizeswidelyusedaccountingprofitabilitymeasures,withmeasurementissuesthat
comeupwitheach.

Measure Definition Remarks

Returnon EBIT(1taxrate)/ Ifoperatingincomeisused(ratherthanaftertax
Capital (BookValueofDebt+ operatingincome,thisbecomesapretaxreturnon
BookValueofEquity) capital
Thebookvalueofcapitalisusedasameasureof
capitalinvestedinthefirm.Totheextentthatthe
bookvalueisnotareasonableestimateofthisvalue,
thereturnoncapitalwillbemisestimated.

Returnon EBIT(1taxrate)/ Thedistinctionbetweenassetsandcapitalliesin

Assets (BookValueofAssets) currentliabilities,sincethelatterdoesnotincludeit.
Infinance,thereturnoncapitalcanbecomparedto
thecostofcapitalbutthereturnonassetscannot.

Returnon NetIncome/Book Thisbecomesameasureoftheprofitabilityofthe

Equity ValueofEquity equityinvestedinthefirm.
Afirmcanincreaseitsreturnonequitybyraising
netincomeorloweringthebookvalueofequity.
(Thelattercanhappenwhenstockisboughtback)
Insomecases,thebookvalueofequitycanbecome
negative(afterextendedlosses).Thereturnon
equitycannolongerbecomputedforthesefirms.

NetMargin NetIncome/Sales Thismeasurestheaverageprofitearnedbyafirmon

adollarofsales.
Sinceitisafterfinancialexpenses,itwillbelower
forhighlyleveredfirms.

Operating EBIT(1taxrate)/ Thisratio,sinceitisbaseduponincomepriorto

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Margin Sales interestexpenses,ismuchmorecomparableacross

firmsofdifferentleverage.

HowAccountantsMeasureLeverage

Accountantsmeasureleverage,notsurprisingly,usingtheirbookvaluemeasuresofdebtandequity.Inthe
followingtable,wesummarizethemostwidelyusedratiosformeasuringleverageinaccounting.

LeverageMeasure Definition Remarks

Debt/Capital BookValueofDebt/(BookValue Boththeseratiosaredesignedto
ofDebt+BookValueofEquity) measurethedegreeofleveragethata
firmhas,butbothwillbeheavily
influencedbyhowdifferentbook
valueisfrommarketvalue.
Ingeneral,sincethemarketvalueof
equityismuchhigherthanbookvalue
ofequityforfirms,whilethemarket
Debt/Equity BookValueofDebt/BookValue valueofdebtiscomparabletobook
ofEquity value,theseratioswilloverstate
leverage.
Finally,theseratioswillbeaffectedby
whatgetsdefinedasdebt.Thus,
operatingleaseswillnotshowupas
debtandaffectleverage.

CashFixed EBITDA/CashFixedCharges Theseratiosmeasurethecapacityofa

ChargesCoverage firmtomeetitscashflowobligations.
Ratio Totheextentthattheratiosarelow,
and/orthereisvariabilityinthe
earnings,afirmsdefaultriskwill
increase.
Notethatthefixedchargesdonot
InterestCoverage EBIT/InterestExpenses includediscretionaryexpensessuchas
Ratio capitalexpenditures,whichmightbe
essentialtothefirmslongterm
survival.

InSummary

Financialstatementsremaintheprimarysourceofinformationformostinvestorsandanalysts.Whilean
understandingofeverydetailandFASBrulemaynotbenecessary,itisimportantthatthebasicsbeunderstood.
Thisprimerattemptstoexplainthebasicsoffinancialstatementsandthegenerallyacceptedaccounting
principlesthatunderlietheirconstruction,andthevariousfinancialratiosthatoftenaccompanyfinancial
analyses.Aslongasthereisarecognitionthatfinancialstatementsandfinancialratiosareameanstoanend,
whichisunderstandingandvaluingthefirm,theyareuseful.

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