Gestion

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The Interpretation of
Financial Statements
BY

BENJAMIN GRAHAM
AND

CHARLES McGOLRICK
A revision of the book
by Benjamin Graham and
Spencer B. Meredith
first published in 1937

HARPER & BROTHERS PUBLISHERS
NEW YORK

THE INTERPRETATION OF FINANCIAL STATEMENTS

Copyright, 1937, by Benjamin Graham and Spencer B.Meredith
Copyright, 1955, by Benjamin Graham and Charles McGolrick
Printed in the United States of America
All rights in this book are reserved.
No part of the book may be used or reproduced
in any manner whatsoever without written permission
except in the case of brief quotations embodied
in critical articles and reviews. For information
address Harper & Brothers 49 East 33rd Street,
NewYork 16, N. Y.

Library of Congress catalog card number: 55-8556

CONTENTS
PREFACE

`

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
XV.

XVI.
XVII.
XVIII.
XIX.
XX.
XXI.
XXII.
XXIII.
XXIV.
XXV.
XXVI.
XXVII.
XXVIII.
XXIX.
XXX.
XXXI.
XXXII.
XXXIII.

PART I

BALANCE SHEETS AND INCOME ACCOUNTS
FINANCIAL STATEMENTS IN GENERAL
BALANCE SHEETSIN GENERAL
TOTAL ASSETS AND TOTAL LIABILITIES
CAPITAL AND SURPLUS
CURRENT ASSETS
CURRENT LIABILITIES
WORKING CAPITAL
CURRENT RATIO
CASH
RECEIVABLES
INVENTORIES
CURRENT LIABILITIES (NOTES PAYABLE)
PROPERTY ACCOUNT (FIXED ASSETS)
DEPRECIATION AND DEPLETION IN THE
BALANCE SHEET'
NONCURRENT INVESTMENTS (INTERMEDIATE
ASSETS)
INTANGIBLE ASSETS
PREPAID EXPENSE AND DEFERRED CHARGESRESERVES
BOOK VALUE OR EQUITY
CALCULATING BOOK VALUE
TANGIBLE ASSET PROTECTION FOR BONDS
AND PREFERRED STOCKS
OTHER ITEMS IN COMPUTING BOOK VALUE
LIQUIDATING VALUE AND NET CURRENT
ASSET VALUE
EARNING POWER
A TYPICAL PUBLIC UTILITY INCOME ACCOUNT
A TYPICAL RAILROAD INCOME ACCOUNT
A MODEL INDUSTRIAL INCOME ACCOUNT
CALCULATING EARNINGS
THE SAFETY OF FIXED CHARGES AND PREFERRED
DIVIDENDSMAINTENANCE, DEPRECIATION, AND SIMILAR
FACTORS IN THE INCOME ACCOUNT
THE TREND OF EARNINGS
COMMON STOCK PRICES AND VALUES
CONCLUSION
PART II
DEBITS AND CREDITS
PART III
ANALYZING A BALANCE SHEET AND INCOME
ACCOUNT BY THE RATIO METHOD
PART IV
DEFINITIONS OF FINANCIAL TERMS AND PHRASES

Preface
THIS BOOK is designed to enable you to read financial statements
intelligently. Financialstatements are intended to give an
accurate picture of a company's condition and operating results,
in a condensed form. Everyone who comes in contact with
corporations and their securities has occasion to read balance
sheets and income statements. Every business man and investor is
expected to be able to understand these corporation statements.
For security salesmen and for customers' brokersin particular, the
ability to analyze statements is essential. When you know what
the figures mean, you have a sound basis for good business
judgment.
Our plan of procedure is to deal successively with the
elements that enter into the typical balance sheet and income
account. We intend first to make clear what is meant by the
particular term or expression, and then to comment briefly uponits significance in the general picture. Wherever possible we shall
suggest simple standards or tests which the investor may use to
determine whether a company's showing in a given respect is
favorable or the reverse. Much of this material may appear rather
elementary, but even in the elementary aspects of the subject
there are peculiarities and pitfalls which it is important to
recognize...