ISSUES IN ACCOUNTING EDUCATION

Vol. 28, No. 1

2013
pp. 197198

American Accounting Association

DOI: 10.2308/iace-10329

Book Reviews
Michael K. Shaub, Editor
The policy of Issues in Accounting Education is to publish only those reviews
solicited by the Book Reviews Editor. Unsolicited reviews will not be accepted.
STEPHEN H. PENMAN, Financial Statement Analysis and Security Valuation, 5th
edition, International edition (New York, NY: McGraw-Hill, 2013, ISBN: 978-0-07337966-1, pp. v, 740).
I have been using Steve Penmans Financial Statement Analysis and Security Valuation in
various specialized masters courses for over ten years now. For a whole set of accounting
academics initiated to the residual income model during their own advanced studies, Penman offers
a natural textbook to accentuate the link between financial statements and valuation to their own
students. Being an accomplished academic himself, he links in his book the rich literature on
financial statement analysis research to the practical dimensions of accounting, financial, and
prospective analysis. The book adopts first and foremost a fundamental equity analyst perspective,
nevertheless closing off with a section on credit risk. The material covered is not light beer but the
real stuff; however, I have found it is well received by those who are looking to pursue a career in
accounting and finance and are wanting serious training.
The book is structured in five parts: (1) Financial Statements and Valuation; (2) The Analysis
of Financial Statements; (3) Forecasting and Valuation Analysis; (4) Accounting Analysis and
Valuation; and (5) The Analysis of Risk and Return. Nevertheless, one can easily follow different
paths; I generally start with the analysis of financial statements and performance before introducing
accounting in the valuation models. I find it easier convincing students already quite familiar with
dividend discount and discounted cash-flow models of the merits of the residual income model by
linking it to the detailed decomposition we have just done of ROE and ROA. The book adopts a
more contemporary approach to breaking down ROE that clearly distinguishes between operating
and financing activities, diverging from the classic Dupont Analysis that mixes things up.
The instructor center is quite useful with expected teaching notes, PowerPoint slides, test bank,
and chapter notes. In addition, the accounting clinics are quite appreciated by students wanting to
review their financial accounting if it has been a while since their undergraduate courses, or to
examine some issues in more detail (e.g., pensions, income taxes, equity investments, business
combinations, stock compensation).
The new edition has not undergone any revolutionary change. It includes more current
examples, exercises, and cases (I would encourage updating industry benchmarks, e.g., Table 12.2).
There has been a slight reorganization of the Financial Statement and Valuation section by
desegregating the reverse engineering material in a specific chapter which is useful as a
self-contained reference when giving students such an exercise to do, as I have always done. Last,
the revised chapter on simple forecasting should make it easier for students to cover the topic if the
course does not get into more complex models.
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Book Reviews

While the book does briefly discuss differences between U.S. GAAP and IFRS, using the book
in an IFRS environment, like I have in the U.K. and France, does require an investment. Like most
international versions of U.S. books, it remains at its core U.S. centric in its in-text examples
(e.g., Nike), or its proposed exercises (e.g., GE, IBM, General Mills) and cases (e.g., Kimberly
Clark). Further, market and industry benchmarks presented are all U.S. One needs to bring in local
examples, benchmarks, and further discuss U.S. GAAPIFRS differences to make a course truly
international.
Nevertheless, this is the perfect book for a serious course (or courses) in financial statement
analysis and equity valuation for students wanting to obtain the required tools for rigorous
fundamental analysis. The rich content is difficult to cover in a single term, although it is easy to
pick and choose relevant chapters if one does not have the luxury of two courses.
PAUL ANDRE
Professor and Co-Director ESSEC KPMG Financial Reporting Center
ESSEC Business School

Issues in Accounting Education

Volume 28, No. 1, 2013