The Essentials of Finance and Accounting for Nonfinancial Managers

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  • Edition: 2nd
  • Format: Paperback
  • Copyright: 3/15/2011
  • Publisher: Amacom Books

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As a department manager, the last thing you want to think about is numbers. But the truth is, that's the only thing your executives and senior managers are thinking about so it's crucial to understand key financial information like balance sheets, income statements, cash flow statements, budgets and forecasts, and annual reports. With over 40,000 copies sold, The Essentials of Finance and Accounting for Nonfinancial Managers has long provided readers with insight into the financial fundamentals. It demystifies the role accounting and finance play in a corporation, demonstrates how financial decisions reflect business goals, and shows how managers can connect corporate financial information directly to their own strategies and actions. Now revised to reflect new accounting and financial standards, the second edition includes: * Strategies for getting your share of the budget* New case studies and practice sessions* An explanation of Sarbanes-Oxley and its relevance to nonfinancial managers* How to manage cash flow in tough times* Fraud detection tools* An expand ed glossary including up-to-the-minute business concepts and terminology* And more

Author Biography

Edward Fields has taught the American Management Association's course "Fundamentals of Finance and Accounting for Nonfinancial Managers" for nearly 30 years. He is a consultant on strategic and financial issues for many corporations. He lives in Old Bridge, New Jersey.

Table of Contents

Introductionp. 1
Organization of the Bookp. 3
Additional Backgroundp. 8
Accounting Definedp. 9
Generally Accepted Accounting Principlesp. 10
Financial Analysisp. 11
Some Additional Perspectives on the Planning Processp. 13
Understanding Financial Information
The Balance Sheetp. 19
Expenses and Expendituresp. 22
Assetsp. 23
Important Accounting Concepts Affecting the Balance Sheetp. 30
Liabilitiesp. 36
Stockholders' Equityp. 37
Total Liabilities and Stockholders' Equityp. 40
Additional Balance Sheet Informationp. 41
Analysis of the Balance Sheetp. 44
The Income Statementp. 55
Analysis of the Income Statementp. 60
The Statement of Cash Flowsp. 64
Sources of Fundsp. 65
Uses of Fundsp. 68
Statement of Cash Flowsp. 71
Financial Practice Reviewp. 71
Analyzing the Statement of Cash Flowsp. 71
Generally Accepted Accounting Principles: A Review and Updatep. 75
The Fiscal Periodp. 76
The Going Concern Conceptp. 76
Historical Monetary Unitp. 76
Conservatismp. 77
Quantifiable Items or Transactionsp. 77
Consistencyp. 78
Full Disclosurep. 78
Materialityp. 78
Significant Accounting Issuesp. 78
The Annual Report and Other Sources of Incredibly Valuable Informationp. 83
The Annual Reportp. 84
The 10-K Reportp. 104
The Proxy Statementp. 106
Other Sources of Informationp. 107
The Securities and Exchange Commissionp. 108
Analysis of Financial Statements
Key Financial Ratiosp. 113
Statistical Indicatorsp. 113
Financial Ratiosp. 114
Liquidity Ratiosp. 116
Ratios of Working Capital Managementp. 119
Measures of Profitabilityp. 128
Financial Leverage Ratiosp. 135
Using Return on Assets to Measure Profit Centersp. 142
Assetsp. 143
Revenuep. 145
After-Tax Cash Flow (ATCF)p. 146
Return on Assets: Its Componentsp. 146
Overhead Allocationsp. 153
Problems That Arise from Cost Allocationp. 153
What About the IRS and GAAP?p. 156
Effect on Profits of Different Cost Allocation Issuesp. 156
Decision Making for Improved Profitability
Analysis of Business Profitabilityp. 167
Chart of Accountsp. 169
Fixed Costsp. 169
Variable Costsp. 170
Development of Fixed-Cost Estimatesp. 170
Development of Variable-Cost Estimatesp. 170
Breakeven Calculationp. 172
Variance Analysisp. 181
Return on Investmentp. 189
What is Analyzed?p. 189
Why are These Opportunities Analyzed So Extensively?p. 190
Discounted Cash Flowp. 192
Present Valuep. 195
Discounted Cash Flow Measuresp. 197
Riskp. 202
Capital Expenditure Definedp. 204
The Cash Flow Forecastp. 205
Characteristics of a Quality Forecastp. 205
Establishing the ROI Targetp. 209
Analytical Simulationsp. 212
Comprehensive Case Studyp. 215
Additional Financial Information
Financing the Businessp. 223
Debtp. 224
Equityp. 233
Some Guidance on Borrowing Moneyp. 235
Business Planning and the Budgetp. 240
S.W.O.T. Analysisp. 241
Planningp. 242
Significant Planning Guidelines and Policiesp. 245
Some Additional Issuesp. 247
A Guide to Better Budgetsp. 248
Preparation of the Budgetp. 250
Selected Business Readingsp. 253
Profitability During Tough Timesp. 254
Do the Right Thingp. 257
Appendixesp. 260
Glossaryp. 289
Indexp. 309
Table of Contents provided by Ingram. All Rights Reserved.



This is a book for businesspeople. All decisions in a business

organization are made in accordance with how they will affect

the organization’s financial performance and future

financial health. Whether your background is in marketing, manufacturing,

distribution, research and development, or the current

technologies, you need financial knowledge and skills if you are to

really understand your company’s decision-making, financial, and

overall management processes. The budget is essentially a financial

process of prioritizing the benefits resulting from business opportunities

and the investments required to implement those

opportunities. An improved knowledge of these financial processes

and the financial executives who are responsible for them

will improve your ability to be an intelligent and effective participant.

The American economy has experienced incredible turmoil in

the years since this book was first published. Before U.S. government

intervention, we were on the verge of our second ‘‘great depression.’’

We witnessed the demise of three great financial firms,

Bear Stearns, Lehman Brothers, and AIG. Corporate bankruptcies

were rampant, with General Motors, Chrysler, and most of the

major airlines filing. The U.S. government lent the banks hundreds

of billions of dollars to save the financial system, while approximately

seven million Americans lost their jobs (and most of these

jobs will never exist again; see Chapter 6, ‘‘Key Financial Ratios,’’

for a discussion of employee productivity trends). The cumulative

value of real estate in this country declined by 40 percent; combining

this with the 50 percent drop in the stock market, millions of

Americans lost at least half of their net worth. Accounting scandals

caused the downfall of many companies, the demise of some

major CPA firms, and jail time for some of the principals involved.

(Enron would not have happened had its CPA firm done the audit

job properly. Bernard Madoff’s Ponzi scheme could not have been

maintained had his CPA firm not been complicit.) More than ever,

business and organization managers require a knowledge of finance

and accounting as a prerequisite to professional advancement.

It is for this reason that we have updated this book with

additional accounting and regulatory compliance information and

introduced the stronger analytical skills that are necessary to navigate

the global economic turmoil.

This book is special for a number of reasons:

1. It teaches what accountants do; it does not teach how to do

accounting. Businesspeople do not need to learn, nor are

they interested in learning, how to do debits and credits.

They do need to understand what accountants do and why,

so that they can use the resulting information—the

financial statements—intelligently.

2. It is written by a businessperson for other businesspeople.

Throughout a lifetime of business, consulting, and training

experience, I have provided my audiences with down-toearth,

practical, useful information. I am not an

accountant, but I do have the knowledge of an intelligent

user of financial information and tools. I understand your

problems, and I seek to share my knowledge with you.

3. It emphasizes the business issues. Many financial books

focus on the mathematics. This book employs mathematical

information only when it is needed to support the

business decision-making process.

4. It includes a chapter on how to read an annual report that

helps you use the information that is available there,

including the information required by Sarbanes-Oxley, to

better understand your own company. Sarbanes-Oxley is

legislation passed by Congress and enforced by the Securities

and Exchange Commission. The governance information

required by this act is highlighted and explained,

and its impact is analyzed. This chapter also identifies a

number of sources of information about your competition

that are in the public domain and that may be very strategically


5. It includes a great deal of information on how the finance

department contributes to the profitability and

performance of the company. The financial staff should be

part of the business profitability team. This book describes

what you should expect from them.

6. It contains many practical examples of how the information

can be used, based upon extensive, practical experience.

It also provides a number of exercises, including a

practice case study, as appendices.

Organization of the Book

This book is organized in four parts, which are followed by Appendices

A through D:

Part 1: ‘‘Understanding Financial Information,’’ Chapters

1 through 5

In Part 1, the reader is given both an overview and detailed information

about each of the financial statements and its components.

A complete understanding of this information and how it is developed

is essential for intelligent use of the financial statements.

The financial statements that are discussed in Part 1 are:

* The balance sheet

* The income statement

* The statement of cash flows

Each statement is described, item by item. The discussion explains

where the numbers belong and what they mean. The entire structure

of each financial statement will be described, so that you will

be able to understand how the financial statements interrelate and

what information each of them conveys.

Part 1 also contains a chapter on how to read and understand

an annual report. The benefits of doing so are numerous. They


* Understanding the reporting responsibilities of a public


* Further understanding the accounting process

* Identifying and using information about competitors that

is in the public domain

Managers are always asking for more information about what

they should look for as they read the financial statements. In response

to this need, Chapters 1, 2, and 3 have been greatly expanded.

Along with a line-by-line explanation of each component

of the financial statement, they now include a preliminary analysis

of the story that the numbers are telling. For most of the numbers,

the book answers the questions: What business conclusions can I

reach by reading these financial statements? What are the key ‘‘red

flags’’ that should jump out at me?

Each of these red flags is identified. Questions that you should

ask the financial staff are included, and the key issues and action

items that need to be addressed are discussed. This serves as an

analytical bridge between reading the financial statements and the

more comprehensive analysis of the numbers that appears in

Chapter 6, ‘‘Key Financial Ratios.’’

Part 2: ‘‘Analysis of Financial Statements,’’ Chapters 6

through 8

Part 2 focuses on the many valuable analyses that can be performed

using the information that was learned in Part 1. Business

management activities can essentially be divided into two basic


* Measuring performance

* Making decisions

Chapters 6 through 8 explain how to measure and evaluate the

performance of the company, its strategic business units, and even

its individual products.

Financial ratios and statistical metrics are very dynamic tools.

This section has been updated and enhanced to include analyses

that will help the businessperson survive in our more complex economic

environment. Technology has changed the way we do business.

This section includes discussions of the customer interface,

supply-chain management, global sourcing, and financial measurement

and controls.

Now that we have learned how to read and understand financial

statements, we can also understand how they are prepared

and what they mean. Part 2 identifies management tools that can

help us use the information in financial statements to analyze the

company’s performance. The ratios that will be covered describe

the company’s:

* Liquidity

* Working capital management

* Financial leverage (debt)

* Profitability and performance

Financial turmoil from 2007 to 2010 has resulted in the loss of

millions of jobs in the United States. Most of these jobs will not

return in their previous form. Companies are focusing on measuring

how much business revenue they can achieve with a minimal

increase in the number of employees.

With the support of technology and improving business models,

revenue per employee is becoming a key metric of a company’s

effectiveness and its ability to compete and achieve.

Part 3, ‘‘Decision Making for Improved Profitability,’’

Chapters 9 and 10

Part 3 discusses the key financial analysis techniques that managers

can use to make decisions about every aspect of their business.

Financial analysis provides valuable tools for decision making.

However, managers must still make the decisions.

Part 3 also explores and analyzes fixed-cost versus variablecost

issues within the context of strategic planning. These include:

* Supply-chain management

* New product strategy

* Marketing strategy

* Product mix and growth strategies

Measuring the performance of profit centers is no longer a

growing trend. It is now a necessary business practice. This is also

true of investment decision making based upon cash flow forecasting

techniques. The financial benefits of success are too valuable

and the financial penalties for failure too severe for companies to

make decisions without first extensively examining the cash flow

issues involved in each proposal. Part 3 explains the technique

called discounted cash flow. To determine the cash flow impact of

proposed investment decisions, there are several measures using

this technique:

* Internal rate of return

* Net present value

* Profitability index

The types of investments that are covered in this discussion


* Capital expenditures

* Research and development

* Acquiring other companies

* Marketing programs

* Strategic alliances

Part 4: ‘‘Additional Financial Information,’’ Chapters 11

through 13

Part 4 describes in considerable detail some additional financial

information that will benefit the businessperson. It includes discussions

of the planning process and the budget, and why they are

so important. It also covers the many ways in which the company

may obtain financing. While this is not a direct responsibility of

most members of the management team, knowledge of debt and

equity markets and sources of corporate financing will be very

beneficial for the business manager.

Appendices A through D

In order to ensure that you have understood the information provided

in this book, we have included four practice exercises in the

appendices. One of the goals of this book is to make the information

it provides really useful in your business management efforts.

An effective way to achieve this is to practice the lessons and analyses.

Appendix A provides practice in constructing the three financial

statements. This ‘‘fill in the blanks’’ exercise will reinforce the

knowledge gained in Part 1.

Appendix B is a glossary ‘‘matching’’ test. Seventy-nine financial

terms are given, along with their definitions, but not in the

same sequence. This will reinforce understanding of the many

terms and ‘‘buzzwords’’ that businesspeople must understand

when they communicate with accounting people and use the information

that they produce.

Appendix C is a comprehensive case study of a company that

is (in a financial sense) severely underachieving. The company’s

past performance must be analyzed using the knowledge gained in

Chapter 6, ‘‘Key Financial Ratios.’’ The case study also includes the

budget plan and forecasting techniques discussed in Chapters 10

and 12.

The format and content of financial information is seriously

affected by the business the company is in. Thus, Appendix D provides

a list of 10 companies and 10 sets of financial information.

The goal is to figure out which set of financial information belongs

to which of the 10 companies. Providing actual, recognizable companies

provides the opportunity to understand how ratios behave

and is another step forward in making the financial information

really useful.

Answers are provided for all four appendices, but please give

the exercises a try before you peek.

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