Before we get into financial reporting books for investors, let’s take some time to discuss what financial reporting is and why it matters.
If you invest in the stock market, you probably know that companies report earnings on a quarterly basis. That’s the window of opportunity investors have to understand how companies are doing. One way to do it is to look at the financial reporting produced by those companies and analyze them.
When we look at those financial reports, we see lots of buzzwords, though — things like balance sheets, income statements, earnings per share, and revenue, amongst others.
But how many of us really understand those terms and topics? And how much of it should we know?
For investors looking for long-term investments or those pursuing value investing and looking for bargains, picking the right companies is the key to success. However, many retail investors lack the skills to be able to interpret those financial numbers.
What Types of Financial Statements Are There?
There are four key types of financial statements that are important to understand:
- Income Statement;
- Balance Sheet;
- Statement of cash-flow;
- Statement of changes in equity.
Investors use these financial reports to assess the health of a company. Professional investors use that information to make good investment decisions, and so should retail investors.
The 5 book recommendations below offer clear explanations of those financial statements. Each of those books does it with a slightly different angle, catering for different needs. However, they all allow investors to understand:
- The objective of financial reporting;
- What is financial analysis;
- What is financial reporting;
- The different types of financial statements;
- The purpose of the different financial statements;
- Step-by-step guides to understanding how to read and create financial reports.
Top 5 Books to Understand Financial Reports
Here is our list of the best financial reporting books with a brief summary of each.
1. Accounting Made Simple: Accounting Explained in 100 Pages or Less
by Mike Piper
This is a short book that presents a high-level introduction to accounting. The book is divided into two parts.
The first part talks about financial statements. It goes into detail about the accounting equation, balance sheets, income statements, statement of retained earnings, cash flow statements, and financial ratios. These are key concepts in order to be able to read any financial statement produced by listed companies.
Furthermore, the second part of the book explains Generally Accepted Accounting Principles (GAAP). It details what GAAP is, the difference between debits and credits, cash versus accrual, depreciation of fixed assets and amortization of intangible assets.
This is a great introductory book that clarifies the terminology and the basic principles of accounting and financial analysis.
2. Warren Buffett Accounting Book: Reading Financial Statements for Value Investing
by Stig Brodersen
Warren Buffett Accounting Book, by Stig Brodersen, teaches us four main lessons:
- Two methods for calculating the intrinsic value of a company;
- What is the discount rate and how does it work;
- Detailed instructions on how to read an income statement, balance sheet, and cash flow statement;
- How to calculate important ratios to properly value any business.
More than an accounting book, it offers an interesting take on how to understand financial reporting and analysis from the perspective of value investing. It not only teaches the basic principles but also explains them with examples.
3. Financial Shenanigans, Fourth Edition: How to Detect Accounting Gimmicks and Fraud in Financial Reports
by Howard M. Schilit, Jeremy Perler and Yoni Engelhart
Financial Shenanigans is a book that will give you the tools you need to spot deceptive financial reporting.
This book will go through the most shocking frauds and financial reporting offenders in history and give investors the tools they need to spot these practices.
Readers will be able to:
- understand the tricks companies used to exaggerate revenue and earnings;
- how management manipulates cash flow;
- the usage of misleading metrics to fool investors about their financial performance; and
- how companies use acquisitions to masquerades a deterioration in their own business.
This is an advanced book that will give you tools to analyze companies at a much deeper level and therefore stay away from investments that could potentially bring you financial harm.
4. Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean
by Karen Berman
Financial Intelligence is an accessible, jargon-free book that allows investors to understand the nuances beyond the numbers in financial statements.
Furthermore, the book teaches the basics of finance together with stories of real companies.
Some of the topics covered include the peculiarities of income statements, how to read balance sheets, how to interpret cash reserves, learning what numbers really tell and how to calculate return on investment.
If you are either running a business or thinking of investing in one, this book is a must-have.
5. Financial Statements, Third Edition: A Step-by-Step Guide to Understanding and Creating Financial Reports
Financial Statements, by Thomas Ittelson, is a step-by-step guide to understanding and creating financial reports.
This book was originally released in 2009, but there will be a new release in 2020.
It’s a book that translates complicated financial topics in an accessible way for readers without a background in finance. The book focuses on how the three main accounting statements interact to offer a snapshot of the companies financial health.
The new release includes new topics around non-profit organization accounting and pricing theory for profitability.
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These are our top five financial reporting book for investors in 2021.
These books enable investors to better understand financial reports in order to make better investment decisions.
They offer key insights to analyze the data provided by listed companies, cut through the noise, and really understand their performance.