What is included with this book?
Introduction | p. 1 |
Organization of the Book | p. 3 |
Additional Background | p. 8 |
Accounting Defined | p. 9 |
Generally Accepted Accounting Principles | p. 10 |
Financial Analysis | p. 11 |
Some Additional Perspectives on the Planning Process | p. 13 |
Understanding Financial Information | |
The Balance Sheet | p. 19 |
Expenses and Expenditures | p. 22 |
Assets | p. 23 |
Important Accounting Concepts Affecting the Balance Sheet | p. 30 |
Liabilities | p. 36 |
Stockholders' Equity | p. 37 |
Total Liabilities and Stockholders' Equity | p. 40 |
Additional Balance Sheet Information | p. 41 |
Analysis of the Balance Sheet | p. 44 |
The Income Statement | p. 55 |
Analysis of the Income Statement | p. 60 |
The Statement of Cash Flows | p. 64 |
Sources of Funds | p. 65 |
Uses of Funds | p. 68 |
Statement of Cash Flows | p. 71 |
Financial Practice Review | p. 71 |
Analyzing the Statement of Cash Flows | p. 71 |
Generally Accepted Accounting Principles: A Review and Update | p. 75 |
The Fiscal Period | p. 76 |
The Going Concern Concept | p. 76 |
Historical Monetary Unit | p. 76 |
Conservatism | p. 77 |
Quantifiable Items or Transactions | p. 77 |
Consistency | p. 78 |
Full Disclosure | p. 78 |
Materiality | p. 78 |
Significant Accounting Issues | p. 78 |
The Annual Report and Other Sources of Incredibly Valuable Information | p. 83 |
The Annual Report | p. 84 |
The 10-K Report | p. 104 |
The Proxy Statement | p. 106 |
Other Sources of Information | p. 107 |
The Securities and Exchange Commission | p. 108 |
Analysis of Financial Statements | |
Key Financial Ratios | p. 113 |
Statistical Indicators | p. 113 |
Financial Ratios | p. 114 |
Liquidity Ratios | p. 116 |
Ratios of Working Capital Management | p. 119 |
Measures of Profitability | p. 128 |
Financial Leverage Ratios | p. 135 |
Using Return on Assets to Measure Profit Centers | p. 142 |
Assets | p. 143 |
Revenue | p. 145 |
After-Tax Cash Flow (ATCF) | p. 146 |
Return on Assets: Its Components | p. 146 |
Overhead Allocations | p. 153 |
Problems That Arise from Cost Allocation | p. 153 |
What About the IRS and GAAP? | p. 156 |
Effect on Profits of Different Cost Allocation Issues | p. 156 |
Decision Making for Improved Profitability | |
Analysis of Business Profitability | p. 167 |
Chart of Accounts | p. 169 |
Fixed Costs | p. 169 |
Variable Costs | p. 170 |
Development of Fixed-Cost Estimates | p. 170 |
Development of Variable-Cost Estimates | p. 170 |
Breakeven Calculation | p. 172 |
Variance Analysis | p. 181 |
Return on Investment | p. 189 |
What is Analyzed? | p. 189 |
Why are These Opportunities Analyzed So Extensively? | p. 190 |
Discounted Cash Flow | p. 192 |
Present Value | p. 195 |
Discounted Cash Flow Measures | p. 197 |
Risk | p. 202 |
Capital Expenditure Defined | p. 204 |
The Cash Flow Forecast | p. 205 |
Characteristics of a Quality Forecast | p. 205 |
Establishing the ROI Target | p. 209 |
Analytical Simulations | p. 212 |
Comprehensive Case Study | p. 215 |
Additional Financial Information | |
Financing the Business | p. 223 |
Debt | p. 224 |
Equity | p. 233 |
Some Guidance on Borrowing Money | p. 235 |
Business Planning and the Budget | p. 240 |
S.W.O.T. Analysis | p. 241 |
Planning | p. 242 |
Significant Planning Guidelines and Policies | p. 245 |
Some Additional Issues | p. 247 |
A Guide to Better Budgets | p. 248 |
Preparation of the Budget | p. 250 |
Selected Business Readings | p. 253 |
Profitability During Tough Times | p. 254 |
Do the Right Thing | p. 257 |
Appendixes | p. 260 |
Glossary | p. 289 |
Index | p. 309 |
Table of Contents provided by Ingram. All Rights Reserved. |
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The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.
Introduction
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
valuable.
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
include:
* Understanding the reporting responsibilities of a public
company
* 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
categories:
* 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
are:
* 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.