Just in case you don't appreciate the importance of financial modeling to investment analysts, we are posting another article on the heels of the invitation to participate in the Wall Street Prep modeling seminar. A solid understanding of accounting, the ability to read and interpret financial statements, and project financial statements forward reflecting your own forecasts are key skills all good analysts have. The Wall Street Prep seminar is an excellent opportunity to develop those skills and the attached article offers some things to consider. Here are some quick comments on the mistakes identified.
Mistake 1 - using generalized accounting statements. Those of you attending our training sessions should recognize this is a point we make about the standardized Factset financial statements versus the "as-reported" financial statements available on that service (and all others like Bloomberg of CapIQ).
Mistake 2 - not understanding the reflexivity/interactivity of the three major financial statements. This is something we discuss (at a basic level) in the 1st Accounting 101 training session. In more advanced discussions we consider how companies finance growth if it requires working capital they don't have (e.g. by issuing equity of debt).
Mistake 3 - not creating apples-to-apples comparisons in time. Also discussed in the accounting session - not usually a big deal, but important to understand.
Mistake 4- not adjusting statements for distortions. More important and critical to conisder, e.g. recognizing acquisitions and divestitures will distort growth calculations, or that accounting differences like using stock-based comp or not can affect different company "adjusted" financials.
Mistake 5 - not reading the footnotes. This is a big one. The footnotes provide excellent information regarding revenue recognition policies and other practices that affect the financials and how you interpret them.
If you are really interested in accounting (and if you want to be an investment analyst you should be :)), there are more financial modeling articles in the Research Readings Folder on the CMC website - here.