There are no prerequisites.

Course Description

When someone asks for information about a business, they are likely to receive its financial statements. These statements quantify the results, financial position, and cash flows of a business. However, these documents only provide information at quite a high level, and so may obscure more than they reveal. The Interpretation of Financial Statements is designed to cut through this obscurity, describing a number of tools for dissecting financial statements, as well as a wealth of additional insights into the reasons for the presence of or changes in certain numbers.

The bulk of the course covers three topics, which are the interpretation of the balance sheet, income statement, and cash flows. There is also a detailed explanation of the contents and interpretation of additional public company information. You'll gain valuable insight about the accounts that make up the various line items in the financial statements, the use of applicable analysis tools, specific operational and financial issues that may be causing certain results to appear in the financial statements, and much more.


Steven M. Bragg, CPA

Steven M. Bragg, CPA, is a full-time book and course author who has written more than 70 business books. He provides Western CPE with self-study courses in the areas of accounting and finance, with an emphasis on the practical application of accounting standards and management techniques. A sampling of his courses include the The New Controller Guidebook, The GAAP Guidebook, Accountants’ Guidebook, and Closing the Books: An Accountant’s Guide. He also manages the Accounting Best Practices podcast.

Steven has been the CFO or controller of both public and private companies and has been a consulting manager with Ernst & Young and an auditor with Deloitte & Touche. He holds an MBA from Babson College, a Master of Finance from Bentley College, and a BA from the University of Maine (summa cum laude).

Course Specifics

Oct 8, 2018
There are no prerequisites.

Compliance Information

Qualifies for CA Fraud: No

Learning Objectives

Upon successful completion of this course, participants will be able to:

Chapter 1

  • Identify how the accrual basis of accounting concept functions.
  • Identify how the accounting equation concept works.

Chapter 2

  • Cite the business situations indicated by different cash levels and cash designations.

Chapter 3

  • Cite the uses of the contribution margin and days sales outstanding measurements, as well as the situations in which they can be misleading.

Chapter 4

  • Cite the industry situations in which an investment in inventory is considered to be critical.
  • Identify the reasons for different inventory turnover levels.

Chapter 5

  • Cite the calculations used for the different depreciation methods.
  • Identify the effects on profitability of the various depreciation rules.

Chapter 6

  • State the contents of the prepaid expenses line item.
  • Cite the situations that can change the balance of the prepaid expenses line item.
  • Identify the circumstances under which goodwill is considered to be impaired.

Chapter 7

  • Identify the business conditions that can alter the balances in the current liabilities line items.

Chapter 8

  • Identify the circumstances causing a change in debt classification.
  • Identify the situations in which the debt level can be considered minor.

Chapter 9

  • Cite the effects of debt-to-equity conversions on measurements.
  • Identify the contents of the book value and tangible book value measurements.

Chapter 10

  • Identify the situations that cause reliable sales.
  • Identify the types of investors attracted to rapid sales growth.

Chapter 11

  • Identify the contents of the cost of goods sold.
  • Cite the methods used to improve the gross margin percentage.

Chapter 12

  • Define the contents of operating expenses.
  • Identify the business situations that can cause these line items to change.

Chapter 13

  • Identify the situations in which net operating losses may be generated.
  • Name the techniques used to improve the net profit margin and earnings per share.

Chapter 14

  • Cite the contents of the different classifications within the statement of cash flows.

Chapter 15

  • Identify the types of audit examinations, the uses to which the margin of safety can be put, and the contents of the dividend analysis formulas.

Chapter 16

  • Cite the required contents of the different sections of the Form 10-K.

Table of Contents

Chapter 1 – Overview of the Financial Statements

Learning Objectives


The General Ledger

The Accrual Basis of Accounting

Costs versus Expenses

The Balance Sheet

The Income Statement

The Statement of Cash Flows

Interactions between the Financial Statements

Financial Statement Footnotes

Interpretation Tools

Ratio Analysis

Horizontal Analysis



Chapter 1 – Review Questions

Chapter 2 – Interpretation of Cash and Investments

Learning Objectives


The Interpretation of Cash and Investments

Natural Cash Balance

Relevance of a Low Cash Figure

Restricted Cash

Events Triggering Changes in Cash

Sources of Cash

The Impact of Sales Growth on Cash

Sufficiency of the Cash and Investment Balance

The Liquidity of Investments

The Return on Investment

Analysis Conclusions

Chapter 2 – Review Questions

Chapter 3 – Interpretation of Receivables

Learning Objectives


The Interpretation of Accounts Receivable

Inherent Profit Margin

Age of the Trade Receivables

Age of the Other Accounts Receivable

No Allowance for Doubtful Accounts

Reliability of the Allowance for Doubtful Accounts

No Allowance for Other Accounts Receivable

Amount of Bad Debts Recognized

Analysis Conclusions

Chapter 3 – Review Questions

Chapter 4 – Interpretation of Inventory

Learning Objectives


The Interpretation of Inventory

Relative Importance of Inventory

Age of the Inventory

Reality of the Ending Balance

Type of Costing System Used

Ownership of the Inventory

Reliability of the Reserve for Obsolete Inventory

Amount of Obsolete Inventory and Inventory Adjustments Recognized

Analysis Conclusions

Chapter 4 – Review Questions

Chapter 5 – Interpretation of Fixed Assets

Learning Objectives


The Interpretation of Fixed Assets

Depreciation Method

Existence of Depreciation

Sufficiency of Depreciation

What is Being Capitalized

What is Being Derecognized

Proportion of Sales to Fixed Assets

Cash Flow Support of Fixed Assets

Proportion of Repairs to Fixed Assets

Analysis Conclusions

Chapter 5 – Review Questions

Chapter 6 – Interpretation of Other Assets

Learning Objectives


The Interpretation of Prepaid Expenses

Nature of the Account Contents

The Increasing Account Balance

The Impact of Sales Growth on Prepaid Expenses

The Interpretation of Goodwill

Goodwill Impairment

Goodwill Amortization

Analysis Conclusions

Chapter 6 – Review Questions

Chapter 7 – Interpretation of Current Liabilities

Learning Objectives


The Interpretation of Current Liabilities

Days Payables Outstanding

Changes in Payable Days

Sales Tax Payables Issues

Dividends Payable Issues

Wages Payable Issues

Income Taxes Payable Issues

Warranty Liability Issues

Unearned Revenues

Analysis Conclusions

Chapter 7 – Review Questions

Chapter 8 – Interpretation of Debt

Learning Objectives


The Interpretation of Debt

Financial Leverage

Debt-Equity Ratio

Interest Coverage Ratio

Relative Size of Debt

Seasonal Borrowings

Line of Credit Usage

Shifts from Long-term to Short-term Debt

Conversions from Payables to Debt

Conversions from Debt to Equity

Debt Forgiveness

Permanent Debt

Offshore Cash

Analysis Conclusions

Chapter 8 – Review Questions

Chapter 9 – Interpretation of Equity

Learning Objectives


The Interpretation of Equity

The Book Value Concept

Tangible Book Value

Book Value per Share

Changes in Retained Earnings

Negative Retained Earnings

Appropriated Retained Earnings

Treasury Stock Usage

Number of Shares Authorized and Outstanding

Analysis Conclusions

Chapter 9 – Review Questions

Chapter 10 – Interpretation of Sales

Learning Objectives


The Interpretation of Sales

The Trend of Sales

The Quality of Sales

The Reliability of Sales

The Timing of Revenue Recognition

Revenue at Gross or Net

Orders versus Sales

The Presence of Sales Discounts

The Trend of Sales Returns

Analysis Conclusions

Chapter 10 – Review Questions

Chapter 11 – Interpretation of the Cost of Sales and Gross Margin

Learning Objectives


The Interpretation of the Cost of Sales and Gross Margin

Gross Margin Analysis

Contribution Margin Analysis

The Inventory Build Concept

Direct Materials Changes

Obsolete Inventory Changes

Scrap Changes

Direct Labor Changes

Factory Overhead Changes

Freight In Changes

Analysis Conclusions

Chapter 11 – Review Questions

Chapter 12 – Interpretation of Operating Expenses

Learning Objectives


The Interpretation of Operating Expenses

Horizontal Analysis

Strategy Impact on Operating Expenses

Research and Development Costs

Payroll Tax Wage Cap Issues

Commission Fluctuations

Non-Cash Operating Expenses

Rent Subleases

Supplies Expense and the Capitalization Limit

The Fixed Nature of Compensation in Operating Expenses

The Public Company Impact on Operating Expenses

Analysis Conclusions

Chapter 12 – Review Questions

Chapter 13 – Interpretation of Other Income, Taxes, and Profits

Learning Objectives


The Interpretation of Other Income, Taxes, and Profits

Implications of Interest and Dividend Income

Implications of Gains/Losses on Asset Sales

Effects of Interest Expense

Implications of Taxable Income

Effective Tax Rate

Net Profit Margin

Deflated Profit Growth

Core Earnings Ratio

Earnings per Share

Manipulation of Earnings per Share

Analysis Conclusions

Chapter 13 – Review Questions

Chapter 14 – Interpretation of Cash Flows

Learning Objectives


The Interpretation of the Statement of Cash Flows

Overview of the Statement of Cash Flows

The Direct Method

The Indirect Method

Examination of Cash Flows from Operating Activities

Examination of Cash Flows from Investing Activities

Examination of Cash Flows from Financing Activities

Cash Flow Return on Sales

Analysis Conclusions

Chapter 14 – Review Questions

Chapter 15 – Other Analysis Topics

Learning Objectives


Financial Statement Audits, Reviews, and Compilations

Audit Opinions

Working Capital Analysis

Quick Ratio

Working Capital Productivity

Breakeven and the Margin of Safety

Dividend Performance

Dividend Payout Ratio

Dividend Yield Ratio

Analysis Conclusions

Chapter 15 – Review Questions

Chapter 16 – Additional Public Company Information

Learning Objectives


The Form 10-K

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosures

Item 5. Market for Company Stock

Item 6. Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A)

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Analysis Conclusions

Chapter 16 – Review Questions

Review Question Answers and Rationales



Final Examination

Answer Sheet

Course Evaluation


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