? Financial statement analysis is an important tool for professional investors and corporate finance executives. ? Financial Statement Analysis provides detailed, fresh information on evaluating financial statements in today's volatile markets and complex economy.

Preface to Fourth Edition xi Acknowledgments xv PART ONE - Reading between the Lines CHAPTER 1 - The Adversarial Nature of Financial Reporting 3 The Purpose of Financial Reporting 4 The Flaws in the Reasoning 8 Small Profits and Big Baths 11 Maximizing Growth Expectations 12 Downplaying Contingencies 18 The Importance of Being Skeptical 20 Conclusion 24 PART TWO - The Basic Financial Statements CHAPTER 2 - The Balance Sheet 29 The Value Problem 30 Comparability Problems in the Valuation of Financial Assets 32 Instantaneous Wipeout of Value 34 How Good Is Goodwill? 35 Losing Value the Old-Fashioned Way 38 True Equity Is Elusive 40 Pros and Cons of a Market-Based Equity Figure 41 The Common Form Balance Sheet 43 Conclusion 45 CHAPTER 3 - The Income Statement 47 Making the Numbers Talk 47 How Real Are the Numbers? 52 Conclusion 77 CHAPTER 4 - The Statement of Cash Flows 79 The Cash Flow Statement and the Leveraged Buyout 81 Analytical Applications 86 Cash Flow and the Company Life Cycle 87 The Concept of Financial Flexibility 99 In Defense of Slack 104 Conclusion 106 PART THREE - A Closer Look at Profits CHAPTER 5 - What Is Profit? 111 Bona Fide Profits versus Accounting Profits 111 What Is Revenue? 112 Which Costs Count? 114 How Far Can the Concept Be Stretched? 116 Conclusion 117 CHAPTER 6 - Revenue Recognition 119 Channel-Stuffing in the Drug Business 119 A Second Take on Earnings 123 Astray on Layaway 127 Recognizing Membership Fees 128 A Potpourri of Liberal Revenue Recognition Techniques 131 Fattening Earnings with Empty Calories 132 Tardy Disclosure at Halliburton 138 Managing Earnings with Rainy Day Reserves 141 Fudging the Numbers: A Systematic Problem 143 Conclusion 147 CHAPTER 7 - Expense Recognition 149 Nortel s Deferred Profit Plan 149 Grasping for Earnings at General Motors 154 Time-Shifting at Freddie Mac 157 Conclusion 159 CHAPTER 8 - The Applications and Limitations of EBITDA 161 EBIT, EBITDA, and Total Enterprise Value 162 The Role of EBITDA in Credit Analysis 166 Abusing EBITDA 169 A More Comprehensive Cash Flow Measure 171 Working Capital Adds Punch to Cash Flow Analysis 174 Conclusion 176 CHAPTER 9 - The Reliability of Disclosure and Audits 179 An Artful Deal 180 Death Duties 183 Systematic Problems in Auditing 184 Conclusion 189 CHAPTER 10 - Mergers-and-Acquisitions Accounting 191 Maximizing Postacquisition Reported Earnings 191 Managing Acquisition Dates and Avoiding Restatements 195 Conclusion 197 CHAPTER 11 - Is Fraud Detectable? 199 Telltale Signs of Manipulation 199 Fraudsters Know Few Limits 201 Enron: A Media Sensation 201 HealthSouth s Excruciating Ordeal 210 Milk and Other Liquid Assets 217 Conclusion 221 PART FOUR - Forecasts and Security Analysis CHAPTER 12 - Forecasting Financial Statements 225 A Typical One-Year Projection 225 Sensitivity Analysis with Projected Financial Statements 237 Projecting Financial Flexibility 242 Pro Forma Financial Statements 245 Pro Forma Statements for Acquisitions 246 Multiyear Projections 253 Conclusion 263 CHAPTER 13 - Credit Analysis 265 Balance Sheet Ratios 266 Income Statement Ratios 275 Statement of Cash Flows Ratios 280 Combination Ratios 283 Relating Ratios to Credit Risk 290 Conclusion 304 CHAPTER 14 - Equity Analysis 307 The Dividend Discount Model 308 The Price-Earnings Ratio 313 Why P/E Multiples Vary 316 The Du Pont Formula 324 Valuation through Restructuring Potential 328 Conclusion 334 APPENDIX - Explanation of Pro Forma Adjustments for Hertz Global Holdings, Inc./DTG 335 Notes 341 Glossary 353 Bibliography 367 About the Authors 369 Index 371

Praise for Financial Statement Analysis FOURTH EDITION "I love this book. It helps to develop the questioning mind—the mind of a financial detective. It teaches the art of skepticism and critical thinking. Readers go beyond definition and calculation and learn interpretation." —Philip L. Cooley, PhD, Prassel Distinguished Professor of Business, Trinity University "Over my decades of involvement with high-yield bonds, Marty Fridson has been the leading speaker of truth. As he so accurately states in Financial Statement Analysis, the credit investor is required to engage in a game of cat-and-mouse with company management's intent on minimizing their cost of capital by putting a positive gloss on their financial statements. The Fourth Edition of Marty's terrific book is the bible on how to detect and deal with these efforts." —Howard Marks, Chairman, Oaktree Capital Management "Financial Statement Analysis is a unique text; it combines great academic work with numerous real-life examples to form a highly useful reference for equity investors, debt holders, and investors who straddle both asset classes. Whether you are an investor, an investment advisor, or a teacher, Financial Statement Analysis will prove very valuable." —Margaret M. Cannella, former head of Global Credit Research, J.P. Morgan and Adjunct Professor, Columbia Business School "Marty has seen it all! He has had a front-row seat to see the birth, death, and rebirth of the high-yield bond market . . . several times over! In the Fourth Edition of Financial Statement Analysis, Marty clearly demonstrates that despite the enactment of Sarbanes-Oxley in 2002, and other attempts to curtail abuse of the system, one needs a critical analytical eye to be certain that management is not trying to obfuscate the truth. The case studies provide excellent and timely examples of some of the techniques that companies have used to mislead investors." —Edward Z. Emmer, former global head of Corporate and Government Ratings and Equity Research, Standard & Poor's "Those who read financial statements without understanding the strategic context in which they are written will land on the losing end of the gripping episodes with which bond-market legend Marty Fridson illustrates in the Fourth Edition of his classic reference, Financial Statement Analysis. And all of us who depend on the markets sending capital to its best use should hope that investors read this book first." —David Musto, Professor of Finance, the Wharton School of the University of Pennsylvania "This book rightly urges resolute skepticism when inspecting financial statements. Its great value, though, is in the plain-spoken stripping down of real-world and illustrative examples that show how to see past the numbers to the practicalities and incentives behind them—and so help analysts and journalists alike ask the right questions." —Richard Beales, Assistant Editor, Reuters Breakingviews

"Financial Statement Analysis: A Practitioner's Guide is a well-organized, thorough exploration of the challenges facing practitioners who rely on financial statements to make investment and lending decisions. Reference books about accounting, while valuable for their insights, are seldom this enjoyable to read. This book is different because the authors seamlessly integrate fascinating real-life examples and instructive fictional scenarios into each chapter to illustrate their points. For anyone with a passing interest in the subject, or for new analysts learning the trade, Financial Statement Analysis is an amazing resource." —Christopher Shayne, CFA, Director of Product Operations for Enterprise Risk Solutions at Moody's Analytics "Any book that reaches its 4th edition (updated to 2011) should be good. That's true in spades for Financial Statement Analysis. Fridson and Alvarez have written a classic. It should be required reading and a constant reference source on the bookshelf of any investor intending to buy individual company stocks or bonds." —Canadian Financial DIY blog "In the 1990s, Benjamin Graham's Security Analysis served as [Value Partners’] reference book, but since then they have been using Martin Fridson's Financial Statement Analysis: A Practioner's Guide." —excerpt from The Value Investors: Lessons from the World's Top Fund Managers by Ronald Chan, Bruce C. N. Greenwald (Foreword)