Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports

by Thomas R. Ittelson

Over 200,000 copies sold!

Thomas R. Ittelson’s master work for entrepreneurs, non-financial managers, business students, lawyers, lenders, and investors—the bestselling book of its kind, with over 200,000 copies in print—has gotten even better with this 20th anniversary edition.

Ittelson is an expert at translating complicated financial topics in an accessible way for non-financial audiences. In this book, he empowers readers by clearly and simply demonstrating how the three major accounting statements interact to offer a snapshot of a company's financial health.

This book teaches readers how to use specialized accounting vocabulary and makes accessible the structure and purpose of the three major numeric statements that describe a company’s financial condition. Each statement paints a different and essential picture—the “three-legged stool” of company reporting:


The income statement shows the manufacturing (or service offerings) and selling actions of the company that result in profit or loss during a period. It gives a very important perspective on the company’s performance, its profitability.The cash flow statement details cash into and out of the company for a period. You need money to make money. Running out of cash is bad. Duh.
The balance sheet records at the end of a period, an instant in time, what the company owns and what it owes, including the owners’ stake, called shareholders’ equity.
With two new major topic sections (nonprofit organization accounting and pricing theory for profitability) and spot color reformatting to improve comprehension, this third edition of Financial Statements is simply the clearest and most comprehensive introduction to financial reporting available. No accounting background is required.

Genres: Finance, Business, Accounting, Economics, Nonfiction, Money, Reference

320 pages, Paperback

First published January 31, 1998

Reviews

[Amir · Rating 4 out of 5]

It is not easy to write an accounting book. A lot of accounting books are written for accountants which might makes a lot of sense however a large business audience may be left behind.

Mr. Ittelson does a decent job of balancing the explanation of accounting principles and the details behind these principles without getting into too many minute details as happen in other accounting books.

In the book first section, Mr. Ittelson starts with explaining the 3 accounting statements, each with its own line items and then “ties up” the 3 statements together, while explaining the different aspects of the movements between the statements. Mr. Ittelson also explains several important financial/accounting ratios at a later part of the book.

I think business owners and readers, who are not accountant by profession, will greatly benefit from the second section of the book. In this section Mr. Ittelson is doing a superb job of explaining the construction and use of the financial statement (as well as other financial tools and statements) via a hypothetical company. Mr. Ittelson takes the reader through many of “any corporation” transactions and weaves the fictional story with real financial statements.

I believe the reader may find the second section the most beneficial part of the book, and may use it not just as a learning tool but also as a reference guide for their own business situation. One caveat to the above statement, a novice financial reader may find this section a bit overwhelming so patience is required.

I am not sure if this book fits to be the first accounting book you should read, but if you are willing to invest the time and energy you will find many insights and nuggets of wisdom in this book.

[Mohamed · Rating 5 out of 5]

I have read this book because I am in a process of educating myself about the current financial system governing this world. The outcome of this education process might directly or indirectly benefit me in my career or in my life decisions.
Life has become very complex. To guarantee a chance of having a decent life in this complexity it has become required to understand the complex tools that is embedded in this complex system. Similarly to modern computers, what we experience in this life is the front end but what governs life is the back end. In my honest opinion, understanding the financial system and how it operates would allow me to understand a portion of life complexity.

I have read two books about accounting and finance, this book has been the best and the most comprehensive so far. It explains the concepts and the elements constituting financial statements and then provides detailed scenarios on how these elements are interrelated. The detailed scenarios of the book comprehensively covers many stages an enterprise would go through from establishment to expansion and going to public, things I have not seen mentioned in the popular accounting and finance books I previously read. The comprehensiveness of the book would make it a very good reference for non-financial and non-accountant, it is a non-one-time-read book. Some of the topics covered in this book includes, but not restricted to:

* Costs vs expenses
* Risk and Uncertainty of Investments (e.g. the risks and uncertainties of expanding the business of a successful applesauce factor.)
* Discounted cash flow analysis and investment rate of return.
* Weighted Average Cost of Capital (aka WACC) and risk premiums.
* Fixed costing and variable costing.
* Standard costs, actual costs, and the costing variances.
* Volume based break-even analysis.
* Profitability and financial ratios.
* Creative accounting.
* Venture capital and leverage.
* Par value, diluted earnings and basic earnings.

The only thing I regret about this book is reading it on Kindle.
I highly recommend the book to non-finance and non-accountants interested to know about accounting and finance, investors, and the individuals interested in understanding the surplus value generated by the capitalist mode of production.

[Ramil Karimzada · Rating 5 out of 5]

I have had a serious difficulty to understand the way financial statement is constructed and how different elements are connected to one another in it. After reading through this book, now everything is clear to me. Every element in a financial statement is perfectly explained based on the vivid examples by author, which ease the comprehension process of the whole concept into you.

[Alaeddin Hallak · Rating 5 out of 5]

I loved how it ties all basics you need to know about accounting, valuation, and capital budgeting into one concrete case study. I came out with a lot more confidence in understanding company's fundamentals through its financial statements, and this will help immensely in value investing.

[Tai Nguyen · Rating 4 out of 5]

Great for non-finance types who want an interesting and applicable approach to financial reporting without going into details as in Accounting 101 classes. You get to understand the concepts of financial reporting, how the 3 statements are connected and most importantly what all the numbers and jargon really mean to a business. All are delivered in simple language with a good sense of humor of the author.

Also great for finance types who want a quick but thorough revision of financial reporting.

"This accounting and financial reporting stuff is not rocket science."

[محمد عبد التواب · Rating 5 out of 5]

It's not that easy to make a boring and non intuitive subject like accounting, interesting to read and go through like a story you don't want it to finish, yet you can't stop yourself from being nosy and want to finish the book in one setting.
The book walks us through different company stages and how this affects its financial statements without the intricacies of the accounting discipline. It focuses on the intuitive effect of business transactions on the current financial situation of the company so you can know whether the company is a goid position ir if it's very weird to be in this situation and more analysis is needed to figure out the situation.
This comes very handy when you're a value investor and you want to know the ins and outs of the company's you are/will be invested in without just relying on going narratives.

[Fengyang Song · Rating 5 out of 5]

The best book I have read in explaining very clearly what each line item on the financial statements mean. For example, how do they link to one another, and most importantly, how do we interpret these numbers.

Reading this book back to front was a joy, and this speaks volumes on a traditional dry topic for most people.

[Từ Đọc Đến Viết · Rating 5 out of 5]

Một cuốn sách rất hay và dễ hiểu cho những người ngoài ngành, không hiểu về tài chính doanh nghiệp, báo cáo tài chính hay nghiệp vụ kế toán. Cuốn sách được xây dựng từ những định nghĩa căn bản trong việc lập báo cáo doanh nghiệp đến việc lấy ví dụ về một công ty giả định với những giao dịch từ khi thành lập công ty để người đọc dễ hiểu và dễ áp dụng. Điều quan trọng là cuốn sách khiến cho những người không có kiến thức cơ bản về tài chính như mình cảm thấy hứng thú và đọc hết cuốn sách mà không cảm thấy nhàm chán.

[Abhishek · Rating 5 out of 5]

Finance, Biology and neuro sciences are the very definition of the dry subjects in my opinion. One cannot read a line or two on these subjects without stumbling upon some obscure jargon, making them quite inaccessible for the layman.
So when I picked up this book I was first dismayed by its volume as I thought that it was going to be those books which I pick but never finish.
But I was amazed, as the author took us on the journey to prepare all the three statements of a company from scratch. Pages are built up on the previous pages and suddenly you start to see the light. So moving to the good and the bad parts:
Pros:
1. The chapters progress in a story book style, making the material interesting as well as accessible to the general public.
2. The financial statements are build up in a step by step manner as the title suggest. So you understanding picks up one step at a time, giving you the real understanding of the numbers.
3. The financial statements are clearly marked on each page under "Previous value" , "Transaction" & " New Value". This helps in keeping track of the changes. Personally I worked on Microsoft excel while going thru the transactions, which helped me in algebraic functions quickly.
4. The author moves straight to the point, cutting any unnecessary jargon and clutter.
5. The three major financial statements balance sheet, Income or profit and loss statement & cash flow statement are taken simultaneously. This helps the reader to observe where the affect of any particular activity is reflected on all the statements at a single place.
6. The problems are presented as statements basis which an explanations and financial statement updates are provided.

Cons:
1. Its not really a con but the style of the book is not good for just picking up and opening at a random page. This book needs to be finished from first page to the last. So if you are not a financial expert and you just want to know inventory calculation, your jumping in that section will not help much if you never read the previous pages.

2. The author should encourage the reader to write on notebook or work on an excel sheet along with him so that every thing gets imprinted in a reader's mind.

3. The style of book is awkward. The financial statements are presented first and then question and explanations are provided. The reverse format would have been better.

[Adrian · Rating 5 out of 5]

A total must read for anyone that wants to :
- start a business
- get some accounting basics
- invest in the stock market (my case)

I knew there is alot more to company valuation then reading bloomberg news , checking the P/E ratio , ROI and Growth.

This book provides you with the building blocks of starting a business and of course by learning how to build , one learns to evaluate one business worth.

Impressive diagrams , schematics and comments. This book brings you in ~300 pages from zero to hero in thr field of finance , accounting , management and investing.

The author treats the financial statements in depth , taking all items one by one and discussing , explaining the intricate relationships betweeen them.


It is a shame books of financial tycoons such as Buffett/Lynch and all those "startup gurus" get all the media while this hidden gem is barely noticeable.

Masterpiece !

[Manoj · Rating 5 out of 5]

For those with a non-finance background yet needing to understand the the financial statements line by line, I recommenced this book before anything else. Simple to read and well written.

[Hoon Wee · Rating 5 out of 5]

Ever since I studied quant investment, I knew that someday I should do studies how to read and analyze financial statements.

And a few days ago, I picked up this book - not because of the investment purpose, but because I am currently planning my own business and was curious how to use financial statements.

The book has five chapters (at least for the 3rd edition, not sure for previous editions), but at the higher level it can be divided into *three parts*. **The first part** introduces basic terms and knowledge that readers should know before proceeding to the following chapters. **The second part** shows how a company's financial statement is being changed over trade by trade. **The last part** shows how we should use it to establish the decisions with the quantitative analysis. The last part includes some mathematical formulas, but it won't hurt your brain so much (if you're interested in investments, you should be a good friend of math anyway).

The book does a fantastic job explaining all these contents. Also, I like that it touches on a good level of detail about the subject - not too deep to get overwhelmed, nor too shallow for feeling it was a waste of money to buy this book. No wonder it became a bestseller in the financial category on Amazon.

I highly recommend this book, especially if you're a finance newbie who just started to feed your money-brain.

[Archit · Rating 3 out of 5]

1. For a non-finance person, this book will serve well.
2. For a finance professional, it's not very impactful. Instead the following books can be read:

[Yoav Aharony · Rating 4 out of 5]

Just like the name states, this book help explain the calculations and the process behind creating financial statements for a company/organization, with easy-to-understand examples.

The writing style of this book is very basic, and the repeated examples over the subjects really gives the vibe of a high school textbook. You can feel that the author really cares that the reader -which probably don't know anything about so called "accumulated depreciation", "PP&E" and all the other confusing terms- will truly and fully understand this financial materials and will be able to use them in order to create his own statements.

Almost half of the book is filled with those "exercises", where the author shows us how those financial terms which we have just learned are put into practice at various stages for the company, and there again, he tried to simplify it as much as possible, by repeating the term's definition or putting the complete statement in the following page in order to see the final result right next to the process which led to it. However, at some point in the book those "exercises" just felt too repeating too and I wasn't gaining any new information

[Kulwinder Rajpal · Rating 4 out of 5]

This is one of the best books out there to explain financial accounting in a simple manner. It covers all the basic concepts related to financial statements via a detailed introduction to the various terms and types of financial statements. Then it explains them with an example of a start up and a series of transactions that show how accounting changes with the changes in business. It also shows you how a financial statement could look like and what parameters are to be looked at while evaluating a business. At the end it also shares some light on concepts on NPV and IRR linking the concepts to throw some light on good business decisions. It may not cover everything that you would find in a modern financial report of an institution because that’s entirely a matter of perception but it’s certainly a good book to start learning basic accounting.

[Peter S · Rating 3 out of 5]

3 stars because its such a boring topic and it could have definitely been done better. However, this book is helpful in a few ways. I now have a clear understanding of..

1. The three financial statements. I understand what they say, how to read them, and the vocabulary that accompanies them.

Income Statement = profitability
Balance sheet = assets, liabilities, and equity
Cash flow statement = cash movements

2. Ratio Analysis

3. The major equations/mechanisms of modeling of finance, including NPV, IRR, ROI. I wish more had been said about Monte Carlo Analysis and Real Option Analysis.

Overall good book to read in an evening to passively learn about financial statements. Probably not good if you want to make ledgers and translate them into balance sheets, income statements, and cash flow statements.

[202 unknown · Rating 3 out of 5]

Tựa Việt: Báo cáo Tài chính - Hướng dẫn từng bước hiểu và lập báo cáo tài chính.

Mình k thấy cái hay của sách với tư cách cựu sv kế toán. Các thuật ngữ được dịch k thống nhất với các thuật ngữ được dùng hiện tại ở VN gây khó khăn. Chuẩn mực kế toán Mỹ có những điểm khác VN. Người dịch mình e là k có hiểu biết về luật pháp và chính trị Mỹ bên cạnh kế toán, nên khúc cuối dịch vài sự kiện liên quan đọc hơi chán, dù chỉ là điểm trừ nhỏ so với tổng thể.

Nên có một ai đó người Việt viết về kế toán VN bán cho độc giả Việt sẽ tốt hơn.

[Patrick · Rating 4 out of 5]

This is a really good book for review. I am going back into a business degree and Its been several years since I have had accounting. This book acted as a great refresher and it is laid out in a very logical manner. I would say that you might wanted to consider the printed version vs the kindle version. Because of the layout of the book and the type of subject matter, it does not lend itself to be easy to read on the kindle.

[Ornella · Rating 5 out of 5]

A great book on understanding financial statements and key financial terms for investment. Definitely a good start for people who have zero knowledge or forgot about finances of an enterprise. Also a good primer for beginner value investors. I will read it again, to review the main messages of the book. This should present a knowledge primer allowing me to move to more challenging books suck as The Intelligent Investor.

[Ben Donahower · Rating 4 out of 5]

Useful book, limited examples

This was a useful book in understanding several forms and accounting. if I had a challenge it was that it followed a manufacturer, Appleseed partners, so the examples were all related to this business. For continuity sake that was great but it also left me wondering if there were examples in a service business would have been more relevant to me.

[Kissimon István · Rating 5 out of 5]

It's a highly useful book that benefits both beginners and professionals. For beginners, it presents the basics in an understandable and readable manner. Professionals can also find it helpful as a recap. If I had access to such textbooks during my student years, my grades would have improved significantly. Therefore, I recommend this book to anyone interested in accounting.

[Dr. Cock'n Ballz · Rating 3 out of 5]

Fine book. Comprehensive and for beginners. What makes this book special is the author walks you through a few years operation of a business, and shows the statements along the way. Not a page turner... but useful. And a real good summary of broader business topics at the end.

I recommend it.

[Rob Weir · Rating 5 out of 5]

If you find yourself needing to have a conceptual understand of financial statements, what they tell, how they are put together, and how they can be interpreted, it is hard to go wrong with this engaging, approachable book.

[shubham · Rating 4 out of 5]

This book will bring clearity about how the 3 financial statements are linked to each other. Use of easy language and example of a newly established company makes this an interesting read for non-accounting personnel..!!!

[Dean Lewis · Rating 4 out of 5]

The best book that explains the way to develop accounting entries to set up an initial set of financial statements. Clearly based on current accounting definitions and commonly held accounting conventions. Written to pull a reluctant reader along.

[Shifu Fong · Rating 5 out of 5]

best financial statements book i have ever read

It is so easy to understand
This book is good enough for some one like who just to know more about the financial statement analysis to invest in the stock market

[Minh Khue · Rating 5 out of 5]

Một cuốn giáo trình cơ bản về tài chính doanh nghiệp. Cách thức đọc, hiểu các báo cáo tài chính : Bảng cân đối kế toán, báo cáo kết quả hoạt động sản xuất kinh doanh, báo cáo lưu chuyển tiền tệ cùng một số khái niệm khác về tài chính, đầu tư. Sách trình bày dễ hiểu cùng với nhiều ví dụ sinh động.

[Stevewilliams27 · Rating 4 out of 5]

well presented, easily digestible, but very much an intro

[roundface · Rating 5 out of 5]

Great entry level book, very clear and easy to read.

[Mark · Rating 3 out of 5]

Basic and simple to understand.