Learning accounting to read earnings reportsJul 10th, 2022
Will Larson wrote this Reading a Profit & Loss statement article on his blog, which prompted me to share how I learned accounting to read earnings reports. This skill has not made me a good stock picker, but I found it helpful to understand the financial positions of my employers, which were not always in line with the narrative provided by higher-ups. This allowed me to make independent career decisions, and I hope it is a useful skill for you too.
As is the case for almost every other skill, my journey took some learning and practice. I went with the Introduction to Finance and Accounting Specialization by University of Pennsylvania on Coursera, but I think every 100-level undergrad course in the finance and accounting field works. There are also many accounting 101 books out there, although I haven’t read any and hence cannot make any recommendation.
Will’s blog post focused on the Profit & Loss statement (also known as the Income statement). In addition, I also found the Balance Sheet and the Cash Flow statement very useful. All of them are explained with examples in a typical finance and accounting course like the one above.
For practice, I spent some time going through historical earnings reports for a few public companies on EDGAR. Here are the reports I paid the most attention to:
- S-1: the go-public report that contains historical financial statements for a few years leading up to the public listing
- 10-Q: the quarterly reports
- 10-K: the annual reports
These reports usually provides year-over-year comparisons for only a single year, so I built some spreadsheets with data going back 5 or 10 years to understand longer term trends. This exercise served as a good practice to solidify my knowledge, but it could get tedious over time. Luckily I found some free tools to help:
- Stockrow provides free financial data going back 10 years. It also offers convenient deep links to 10-K and 10-Q reports on EDGAR.
- Koyfin provides free financial data going back 2 years. It does have a nicer interface though.
And that is what I want to share on learning accounting today. Hope it helps!