The Guide to Understanding Financial Statements

by Costales, S. B.

• ISBN13: 9780070131972
• ISBN10: 007013197X
• Edition: 2nd
• Format: Paperback
• Copyright: 1993-10-22
• Publisher: McGraw Hill
• More Book Details
• Purchase Benefits

Table of Contents

Preface	xi
Part 1. Financial Analysis Fundamentals	1	(90)
Historical Development of Financial Statements	3	(4)
Review Questions	6	(1)
The Four Types of Financial Statements	7	(4)
Trying to Make Money	7	(1)
The Four Fundamental Financial Statements	8	(2)
The Balance Sheet	8	(1)
The Income Statement	9	(1)
The Cash Flow Statement	9	(1)
The Reconciliation of Net Worth Statement	10	(1)
Review Questions	10	(1)
The Nature of Business Organizations	11	(12)
The Legal Structure of Business	11	(3)
Sole Proprietorships	12	(1)
Partnerships	12	(1)
Corporations	13	(1)
The Subchapter S Corporation	13	(1)
Privately Held and Publicly Owned Businesses	14	(1)
Four Basic Business Sectors	15	(3)
Manufacturing	16	(1)
Wholesale	16	(1)
Retail	17	(1)
Services	17	(1)
Before We Get to the Numbers	18	(2)
Unaudited Financial Statements	19	(1)
Audited Financial Statements	19	(1)
Review Questions	20	(3)
The Balance Sheet: A Snapshot of Financial Structure	23	(10)
Assets	25	(3)
Current Assets	25	(1)
Property, Plant, and Equipment	26	(2)
Other Assets	28	(1)
Liabilities	28	(2)
Current Liabilities	28	(2)
Long-Term Debt	30	(1)
Stockholders' Equity	30	(1)
Liabilities--a Source of Assets	30	(1)
Proprietorships and Partnerships	31	(1)
Review Questions	31	(2)
The Income Statement: Measuring Financial Performance Over Time	33	(8)
The Accounts	34	(5)
Sales	34	(1)
Cost of Goods Sold	34	(2)
Gross Income	36	(1)
Operating Expenses	37	(1)
Depreciation Expense	37	(1)
Operating Income	38	(1)
Interest Expense	38	(1)
Income Tax Expense	38	(1)
Net Income	39	(1)
Review Questions	39	(2)
The Cash Flow Statement: Where Cash Comes from, Where It Goes	41	(12)
Assets, Liabilities, Sources, Uses	43	(2)
Cash Flow from Operations	45	(3)
Indirect Method	45	(1)
Direct Method	46	(2)
Cash Flow from Investing	48	(1)
Cash Flow from Financing	49	(1)
Net Change in Cash	50	(1)
Review Questions	50	(3)
The Reconciliation of Net Worth Statement: Accounting for the Bottom Line	53	(4)
Beginning Balance	54	(1)
Plus Net Income	54	(1)
Less Dividends	54	(1)
Ending Balance	55	(1)
Review Questions	55	(2)
A Few Important Financial Ratios	57	(10)
Liquidity Ratio	57	(6)
Current Ratio	58	(1)
Quick Ratio	59	(1)
Receivables Turn, or Days Receivables	59	(2)
Payable Turn, or Days Payables, Trade	61	(1)
Inventory Turn, or Days Inventory	62	(1)
Leverage	63	(1)
Total Liabilities to Tangible Net Worth	63	(1)
Operating Performance	64	(1)
Gross Margin	64	(1)
Operating Margin	64	(1)
Net Margin	65	(1)
Return on Investment (ROI)	65	(1)
Summary	65	(1)
Review Questions	66	(1)
The Operating Cycle and Its Financial Consequences	67	(8)
Stages of the Operating Cycle	67	(3)
Manufacturing: Perfume Manufacturer	67	(1)
Wholesale: Toy Wholesaler	68	(1)
Retail: Paint Store	68	(1)
Service: Office Cleaning Company	69	(1)
The Financial Consequences of the Operating Cycle	70	(1)
Dangers to the Delicate Balance	71	(1)
Four Secrets to Managing the Cycle	72	(1)
Speed Up Receivables	72	(1)
Slow Down Payables	73	(1)
Control Inventory	73	(1)
Accurately Anticipate Capital Expenses	73	(1)
The Cash Crunch Effect of Rapid Growth	73	(1)
Review Questions	74	(1)
Analyzing a Set of Financial Statements	75	(10)
Statement Analysis	75	(7)
The Company	76	(1)
Business/Industry Profile	76	(1)
Financial Analysis	76	(5)
Risk Evaluation	81	(1)
The Importance of Trend Analysis	82	(1)
A Word on Projections	82	(1)
Review Questions	83	(2)
Detecting Error, Fraud, and Window Dressing	85	(6)
The True Value of Assets	85	(4)
Three Forms of Value	86	(1)
Receivables Valuation	87	(1)
Inventory Valuation	88	(1)
Machinery Valuation	88	(1)
Real Estate Valuation	88	(1)
Fraud	89	(1)
Review Questions	90	(1)
Part 2. Case Studies	91	(66)
Faux Leather	93	(8)
The Company	93	(1)
Business/Industry Profile	93	(1)
Financial Analysis	94	(1)
Financial Structure	94	(1)
Operations	95	(1)
Cash Flow	95	(1)
Risk Evaluation	95	(6)
Lender Perspective	95	(1)
Investor/Management Perspective	96	(1)
Trade Creditor Perspective	96	(5)
Outdoor Sports, Inc.	101	(8)
The Company	101	(1)
Business/Industry Profile	101	(1)
Financial Analysis	102	(1)
Financial Structure	102	(1)
Operations	103	(1)
Cash Flow	103	(1)
Risk Evaluation	103	(6)
Lender Perspective	103	(1)
Investor/Management Perspective	104	(1)
Trade Creditor Perspective	104	(5)
Frank's Electrical Supply	109	(8)
The Company	109	(1)
Business/Industry Profile	109	(1)
Financial Analysis	110	(1)
Financial Structure	110	(1)
Operations	110	(1)
Cash Flow	111	(1)
Risk Evaluation	111	(6)
Lender Perspective	111	(1)
Investor/Management Perspective	111	(1)
Trade Creditor Perspective	111	(6)
Green Thumb Gardens	117	(8)
The Company	117	(1)
Business/Industry Profile	117	(1)
Financial Analysis	118	(1)
Financial Structure	118	(1)
Operations	118	(1)
Cash Flow	118	(1)
Risk Evaluation	119	(6)
Lender Perspective	119	(1)
Investor/Management Perspective	119	(1)
Trade Creditor Perspective	120	(5)
G&G Fashions	125	(8)
The Company	125	(1)
Business/Industry Profile	125	(1)
Financial Analysis	125	(2)
Financial Structure	126	(1)
Operations	126	(1)
Cash Flow	126	(1)
Risk Evaluation	127	(6)
Lender Perspective	127	(1)
Investor/Management Perspective	127	(1)
Trade Creditor Perspective	127	(6)
Hammerhead Hardware	133	(8)
The Company	133	(1)
Business/Industry Profile	133	(1)
Financial Analysis	134	(1)
Financial Structure	134	(1)
Operations	134	(1)
Cash Flow	134	(1)
Risk Evaluation	134	(7)
Lender Perspective	135	(1)
Investor/Manager Perspective	135	(1)
Trade Creditor Perspective	135	(6)
The Old Mill Restaurant	141	(8)
The Company	141	(1)
Business/Industry Profile	141	(1)
Financial Analysis	142	(1)
Financial Structure	142	(1)
Operations	142	(1)
Cash Flow	142	(1)
Risk Evaluation	142	(7)
Lender Perspective	143	(1)
Investor/Management Perspective	143	(1)
Trade Creditor Perspective	143	(6)
Auto Tire and Recapping	149	(8)
The Company	149	(1)
Business/Industry Profile	149	(1)
Financial Analysis	150	(1)
Financial Structure	150	(1)
Operations	150	(1)
Cash Flow	150	(1)
Risk Evaluation	150	(7)
Lender Perspective	151	(1)
Investor/Management Perspective	151	(1)
Trade Creditor Perspective	151	(6)
Appendix: Using Spreadsheets to Standardize Financial Statements and to Calculate Cash Flows and Financial Ratios	157	(10)
Index	167