Where they came from
Luca Pacioli codified double-entry bookkeeping in 1494 (see double entry and accrual accounting). Mandatory public statements came after the 1929 crash: the US Securities Act of 1933 and Exchange Act of 1934 required audited reports. International harmonization led to the IASC in 1973 and the IASB in 2001; Korea required K-IFRS for listed companies from 2011.
The five statements
Statement of financial position (assets = liabilities + equity), statement of comprehensive income, statement of changes in equity, cash flow statement and notes (IFRS Foundation, n.d.). Non-cash items such as depreciation mean profit and cash differ.
Ratios and research
Track margins and ROE, leverage and liquidity, free cash flow, and valuation via P/E and P/B. Beaver (1966) and Altman (1968) showed ratios predict failure; Ball and Brown (1968) proved earnings news moves prices; Sloan (1996) found accrual-heavy profits fade; Piotroski (2000) built a nine-signal F-score.
A practical reading order
- Check the audit opinion.
- Line up 3–5 years of revenue, operating profit and operating cash flow.
- Profit up but cash flow negative? Look at receivables and inventory.
- Read contingencies in the notes.
Mismatches like these are classic clues to accounting fraud.
FAQ
- What should I read first?
- The audit opinion, then multi-year trends in revenue, operating profit and operating cash flow.
- Why can a profitable firm run out of cash?
- Accrual accounting books sales on credit as revenue before cash arrives.
Sources reviewed: 2026-11-02
References
- IFRS Foundation. (n.d.). IAS 1 Presentation of financial statements. The international standard that defines a full set of statements.
- 금융감독원. (n.d.). 전자공시시스템 DART. Korea's free electronic disclosure system for company filings.
- Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159–178. First evidence that earnings announcements move stock prices.
- Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71–111. Ratios such as cash flow to debt predict failure.
- Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. The Altman Z-score for bankruptcy risk.
- Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289–315. The accrual anomaly: cash-backed earnings persist more.
- Piotroski, J. D. (2000). Value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research, 38, 1–41. The F-score built from nine statement signals.