书评

I took a break from my series of book reviews on the financial crisis to review a book on an unrelated topic (My next book review will be back to the financial crisis). My latest book review isHow to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John Tracy. The book was brought to my attention after a leading value investor (I do not recall which one) recommended it as a great book on analyzing financial statements. I also researched the book a little and found many positive comments about it.

The author Dr. John Tracy wrote this book several years ago, but updated it in 2009 to reflect changes in current accounting law. John Tracy has authored many other books on accounting. Dr. John Tracy is currently retired; he is a CPA and was a professor of accounting for many years.

Overall, I thought the book was definitely a valuable read. I majored in accounting in a University where graduates have the highest CPA pass rate in the country (not to brag) I took many courses in accounting. I frankly found most of the information I learned to be completely useless. What is great about John Tracy’s book is despite the book not being too lengthy he can teach you more about balance sheets than you will learn by taken many account courses. You can learn a lot more useful information about balance sheets by reading John Tracy’s book than by reading several lengthy accounting text books.

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. However, Dr. Tracy notes that customers do not like price increases so a business must weigh its strategy carefully.

He also shows that even a small decrease in sales prices can wipe out all of a company’s profits, whereas a very large decrease in sales volume would be needed to bring a company into the red. This would explain why a deflationary recession is far worse than a recession caused by a decrease in business volume, yet which is not deflationary.

Some other things I should mention about the book. The author discusses analyzing privately held companies and why you should be more skeptical (unless audited by CPA firm) when analyzing them. The author also discusses the pros and cons between FASB and IASB. Dr. Tracy also explains how easy it is for a company to “massage the numbers” in a legal manner. The lesson: always be skeptical and conservative when reading financial statements. The author discusses the pros and cons of private companies conducting audits, and the limitations audits provide in the face of fraud.

My only complaint about the book is that the author did not delve enough into the balance sheet. I have think balance sheets are the most important of the financial reports, others will disagree so maybe I am biased. As I noted above, the author does a good job of showing the interconnection between the balance sheet and income statement. However, I wish the author devoted more time to the balance sheet itself. However, if you are a cash flow investor you will enjoy the book more because Dr. Tracy devotes much of the book to the cash flow statement.

The book could also use more detail. However, I think the author does a great job explaining financial statements in a concise manner. I am not sure if the author added more detail that it would enhance the book’s substance.

I would definitely recommend the book for people with little or intermediate knowledge of accounting. As I noted above you can really learn more from the book, than from reading many lengthy accounting textbooks. I think Dr Tracy also offers valuable insight that could benefit readers who are more knowledgeable about accounting.

To purchase the book on Amazon.com click on the following linkHow to Read a Financial Report: Wringing Vital Signs Out of the Numbers

My next book review will be Mr. Market Miscalculates: The Bubble Years and Beyond by James Grant. Following that I will be reviewing On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by former Treasury Secretary Henry Paulson. I am very interested to hear Hank Paulson’s account of the financial crisis. The book was just released on February 1 and is already #10 best seller.

Disclosure: New FTC guidelines just released in December 2009 require me to disclose I have a material connection because I received a free copy of the book to review.