Wednesday, February 10, 2010

Book Review: How to Read a Financial Report

I haven't read How to Read a Financial Report but this review of it is favorable. Sounds like it may provide a convenient way to learn accounting in general and how to interpret financial statements.

One weakness of the book may be that it only spends a small amount of time on managerial accounting.

From the review:
John Tracy discusses at length the connection between the balance sheet and the income statement. He believes many accountants do not appreciate the connection between the two. He devotes a large segment of the book to the relationship between operating expenses and accounts payable, inventory and accounts payable, cost of good sold and inventory and other interconnections between the two financial reports.

Dr. Tracy devotes a short segment of the book to managerial accounting, I especially enjoyed this segment. Although, as Dr Tracy himself notes he could write a separate book regarding managerial accounting alone, in the few pages he writes about managerial account he provides readers some valuable insights. He asks what is better a 5% sales increase or a 5% price increase. In the fictional company used by Dr. Tracy a 5% price increases profit before fixed expenses by 22.3% whereas a 5% sales would increase the number by only 5%. This is because there are variable expenses that rise with increases in sales volume i.e. sales commission, cost of goods sold. Many managers will focus on increasing sales just to gain market share even if it would be more profitable to simply raise prices.


Maybe Dr. Tracy will write a good book on managerial accounting at some point. This one's probably still worth checking out.

Adam

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