Financial Statements

Ittelson wrote this as an introduction to financial statements for people with no accounting background, and it has been through several editions.

The distinguishing method is the middle section. Ittelson takes a hypothetical company from formation through product development, manufacturing, sales and expansion, and records each of the thirty-three transactions on all three financial statements simultaneously, showing after every entry how the balance sheet, income statement and cash flow statement each change and how they remain connected. The reader sees directly why the statements articulate: why net income flows to retained earnings, why a sale on credit increases income and receivables but not cash, why buying inventory consumes cash without affecting income, why depreciation reduces income without consuming cash, and why a profitable company can run out of money.

The first section explains each statement's structure and each line item. The third section covers ratio analysis, break-even analysis, the difference between cost accounting for inventory valuation and for decision-making, and the specific distortions to watch for.

The book teaches no advanced material: it does not cover consolidation, deferred tax, leases, derivatives, pensions or the accounting standards themselves. It is a primer and does not pretend otherwise.

Its value is that the transaction-by-transaction construction produces genuine understanding of the relationship between the three statements, which most introductory treatments assert rather than demonstrate. Anyone who works through the middle section will not thereafter confuse profit with cash, which is the single most common error among non-financial managers.