Financial Statements: Introduction, by David Article Review

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I agree with Harper (2009) on this, as well. Just scratching the surface of the financial statements will not help a person who is trying to invest in a company, because, as is often said, the devil is in the details. Something can look incredibly good on the first page and simply be terrible as one digs deeper into it. There might also be issues that a company has and that do not appear on the financial statements, but that is a risk that a lot of investors are willing to take if the financials look strong enough. Without being clear on how to examine the financial statements -- as well as what really matters to an investor and what does not -- it is possible to end up losing a great deal of money.

Knowing how to analyze financial statements does not guarantee investing success, though, and that is something that Harper (2009) could have stressed more clearly in the article. There are many people who write financial articles, and while they say that things are not guaranteed, they generally downplay that. People can lose money that way, even if they think that their knowledge will protect them. To his credit, though, Harper (2009) does say in his conclusion "Keep in mind the limitations of financial statements: they are backward-looking by definition, and you almost never want to dwell on a single statistic or metric.

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He goes on to make a very important point:

" …U.S. accounting rules are always in flux. At any given time, the Financial Accounting Standards Board (FASB) is working on several accounting projects. You can see the status of the projects at their website. But even as rules change and tighten in their application, companies will continue to have plenty of choices in their accounting. So, if there is a single point to this tutorial, it is that you should not accept a single number, such as basic or diluted earnings per share (EPS), without looking "under the hood" at its constituent elements." (Harper, 2009).

Harper (2009) makes a very good point there, because too many people look only at the bottom line, and that can be their downfall. They see that the company has made money in the past, but they do not see why, whether the company is making more money consistently, or any serious pros or cons that have appeared since the last balance sheet. With that in mind, do not focus on only one thing. The financial statement as a whole is what matters, and that is why an analysis of a financial statement must take everything into account and not look only at how much money a company has made or lost in the last quarter or even the last year......

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