FREE BOOKS: A Student's Guide to Analysing Corporate Reports

In practice, an accounting student will be more used to putting together sets of accounts than analysing them. Whilst most firms will have some sort of review to ensure that accounts “look about right”, this is likely to be fairly limited (from job time pressures if nothing else). As a result, it is easy for students to fall into the trap of learning ratio formulas by rote without fully understanding what they mean. When it comes to exams, this lack of interpretational skills loses marks, and may cause an otherwise bright student to fail. In this book, Paul Robins attempts to address this shortfall, and does an admirable job of doing so.

The book is divided into eight chapters, the last taking up nearly half the book and consisting of example questions and answers culled from ICAEW and CIMA examination papers. The other seven chapters all follow the same format, having a brief introduction at the start and a more detailed summary at the end. Unlike many books, these do not form a “You will learn – You have learned” pair but serve distinctive and useful purposes. The first two chapters introduce the subject and the overall format of financial statements to be analysed. In chapters three to six we cover the actual analysis itself, divided into such subjects as profitability analysis and the use of non-financial information. Chapter seven then gives a complete worked case study covering the overall approach to exam questions which is then followed up in the chapter eight examples.

It would have been easy for the opening chapters to have been condescending, explaining in simple terms concepts that students at this level should know well. It is very much to the author’s credit that he manages to avoid doing this. The language used is moderately technical, though not unduly so, and these sections serve very much as a refresher on the fundamentals important to analysis instead of teaching from scratch. These also serve the purpose of making the book accessible to intelligent lay readers seeking to find out more about evaluating reports themselves. With the introductions clearly stating the content, there is also the option for readers confident in their base knowledge to skip these chapters entirely. They are not so long as to render them arduous and I would recommend against this action.

But where this book really shines is in the detailed analysis chapters that follow. Each chapter covers a specific area of analysis with the links between various ratios (such as Return on Capital Employed being Profit Margin times Asset Turnover) included as required. Where there is more than one way of calculating a particular ratio, the various methods are described, with a caution about consistency to allow comparison of results. This equips students well for dealing with differing scenarios where the information available may make the use of a particular method difficult. The reasons for using individual ratios are highlighted and their appropriateness for different situations explained. For example, when deciding between current and quick ratios, the reason for the quick ratio (some current assets may not be easily convertible to cash) is made clear. Where appropriate, reasonable values for specific ratios are covered, but the limitations of such values are also mentioned (such as a quick ratio of less than one normally being bad but not necessarily a concern for a retail establishment with high stock turnover).

All the analysis is performed with an actual set of financial statements, again based on an ICAEW exam question.  Having explained the analysis being performed, the author applies it to this data and comments on the results. These comments go beyond simply stating the obvious interpretation (such as a rise in asset turnover indicating more profit is being generated from funds invested) but also include the potential pitfalls (if turnover is unchanged this may simply be due to depreciating asset values). It is these caveats that give this book the most value. By showing consideration of these other factors in an examination, especially when narrative information gives further indicators, a student is likely to pick up more credit and thus extra marks. Saying that asset turnover has fallen and this is bad is basic interpretation. Noting that large asset purchases have been made at the year end (and that these will cause asset turnover to drop as they will not have generated any turnover yet) is exam-passing technique. The same principles are applied to the case study and worked example answers in chapters seven and eight.

The book is not entirely without flaws. The outside edges of each chapter are separately coloured, as in other Kaplan books. Without this colouration showing in the contents list as well, this is of limited usefulness, though the width of chapter 8 makes it easy to spot. I would also question the need to repeat the example information at the beginning of each chapter. This doesn’t eliminate paging back and forth entirely (even if it limits how far you have to go) and so looks like padding. It would be far better to have this information in one easy to locate place or, ideally, as a pull-out the reader can have alongside the book. The index also has significant problems. For many of the entries, the references are not in numerical order and often repeat the same page numbers over and over again.  I would also question the value of an index for a book on this subject that includes “Ratio” (with forty-one entries) as a reference term. In this instance, the contents list should be more than enough and I would recommend eliminating the index entirely.

If you are a student struggling with corporate report analysis then this book is a godsend. Even if you are fairly confident in your skills this is still worth a look. The highlighting of pitfalls in interpretation and the detailed worked examples make it worthwhile for all accounting students. Furthermore, this book is perfectly suited to non-accountants with an interest in the subject matter. Whilst not dumbed down, the content is clear enough that detailed accounting knowledge is not vital. The only things holding it off a top mark are the flaws mentioned above, and none of those actually affects the technical content. If you want to know more about this subject, either as student or lay-person, consider this an unreserved recommendation.

Dear Gina, I would appreciate if you forward me a copy;

Arthur KALIISA

P O Box 31808, Kampala

UGANDA

This is a good guide to anyone who needs to analyse company accounts / reports. It is particularly aimed at students but would be a useful resource to anyone needing to interpret company accounts.

The book covers the overall structure of financial statements, analysing profitability, liquidity and gearing, efficiency analysis and investor based analysis.

The book also includes some useful case studies along with questions and answers to aid the readers understanding.

I found this book to be clearly written and most useful.