The purpose of accounting analysis is to evaluate the degree to which a firm's accounting
captures its underlying business reality.' By identifying places where there is
accounting flexibility, and by evaluating the appropriateness of the firm's accounting policles
arid estimates. analysts can assess the degree of distortion in a firm's accounting
numbers. Another important skill is adjusting a firm's accounting numbers using cash flow
information and information from the notes to the financial statements to "undo" any
accounting distortions. Sound accounting analysis improves the reliability of conclusions
from financial analysis, the next step in financial statement analysis.