So far, we have learned that we must adjust the financial statements to make their results more representative of reality and to put companies in the same industry on a level playing field before we judge and select companies whose stock and bonds we will buy.
We have learned how to do this process to the income statement by doing the following steps:
1 - eliminate nonrecurrent items from single year analysis, but include them in long term analysis.
2 - exclude deductions or credits arising from the use of contingency and other arbitrary reserves
3 - place the depreciation (or amortization) allowance and the inventory valuation on a basis suitable for comparative study
4 - adjust the earnings for the operations of subsidiaries and affiliates to the extent they are not shown
5 - as a check, reconcile the allowance for Federal income tax with the reported earnings
Now, it is time to put this into practice. We cannot effectively perform these tasks without practice, so, to begin practicing, you can order company reports free of charge from http://mreports.ar.wilink.com/
Now we will move on to the balance sheet...