Table of Contents

Introduction

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: Opening the Books on Accounting

Part II: Exploring Financial Statements

Part III: Accounting in Managing a Business

Part IV: Preparing and Using Financial Reports

Part V: The Part of Tens

Glossary

Icons Used in This Book

Where to Go from Here

Part I: Opening the Books on Accounting

Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes

Accounting’s Main Jobs: Providing Vital Information to Non-Accountants

Distinguishing among different users of accounting information

Overcoming the stereotypes of accountants

Making good use of accounting in your personal financial life

Recognizing the Broad Sweep of Accounting Everywhere You Look

Taking a Peek Behind the Scenes

Focusing on Transactions

Taking the Pulse of a Business: Financial Statements

Meeting the balance sheet and the accounting equation

Reporting profit and loss, and cash flows

Respecting the importance of this troika

Mapping Accounting Careers

Certified public accountant (CPA) and specialties

Introducing a new kid on the block: Chartered Global Management Accountant (CGMA)

The controller: The chief accountant in an organization

A springboard to other careers

Chapter 2: Financial Statements and Accounting Standards

Introducing the Basic Content of Financial Statements

Realizing that form follows function in financial statements

Income statements

Balance sheets

Statement of cash flows

A note about the statement of changes in shareowners’ equity

Contrasting Profit and Cash Flow from Profit

Gleaning Key Information from Financial Statements

How’s profit performance?

Is there enough cash?

Can you trust financial statement numbers?

Why no cash distribution from profit?

Keeping in Step with Accounting and Financial Reporting Standards

Recognizing U.S. standards

Getting to know the U.S. standard setters

Internationalization of accounting standards (maybe, maybe not)

Divorcing public and private companies

Following the rules and bending the rules

Chapter 3: Keeping the Books

Bookkeeping and Beyond

Taking a Panoramic View of Bookkeeping and Accounting

Pedaling Through the Bookkeeping Cycle

Managing Your Bookkeeping and Accounting System

Categorize your financial information: The chart of accounts

Standardize source document forms and processing procedures

Hire competent personnel

Enforce strong internal controls

Get involved with end-of-period procedures

Leave good audit trails

Keep alert for unusual events and developments

Design truly useful reports for managers

Double-Entry Accounting for Single-Entry-Minded People

Juggling the Books to Conceal Embezzlement and Fraud

Using Accounting Software in the Cloud and on the Ground

Part II: Exploring Financial Statements

Chapter 4: Reporting Profit

Presenting Typical Income Statements

Looking at a product business

Looking at a service business

Taking care of some housekeeping details

Your job: Asking questions!

Finding Profit

Getting Particular about Assets and Operating Liabilities

Making sales on credit → Accounts receivable asset

Selling products → Inventory asset

Prepaying operating costs → Prepaid expense asset

Fixed assets → Depreciation expense

Unpaid expenses → Accounts payable, accrued expenses payable, and income tax payable

Summing Up the Diverse Financial Effects of Making Profit

Reporting Extraordinary Gains and Losses

Correcting Common Misconceptions About Profit

Closing Comments

Chapter 5: Reporting Financial Condition

Presenting the Balance Sheet

Doing a preliminary read of the balance sheet

Kicking balance sheets out into the real world

Judging Liquidity and Solvency

Current assets and liabilities

Current and quick ratios

Understanding That Transactions Drive the Balance Sheet

Coupling the Income Statement and Balance Sheet

Sizing up assets and liabilities

Sales revenue and accounts receivable

Cost of goods sold expense and inventory

Fixed assets and depreciation expense

Operating expenses and their balance sheet accounts

Intangible assets and amortization expense

Debt and interest expense

Income tax expense and income tax payable

Net income and cash dividends (if any)

Financing a Business: Sources of Cash and Capital

Recognizing the Hodgepodge of Values Reported in a Balance Sheet

Chapter 6: Reporting Cash Flows and Changes in Stockholders’ Equity

Meeting the Statement of Cash Flows

Presenting the direct method

Opting for the indirect method

Dissecting the Divergence Between Cash Flow and Net Income

Accounts receivable change

Inventory change

Prepaid expenses change

Depreciation: Real, but noncash expense

Changes in operating liabilities

Putting the cash flow pieces together

Sailing Through the Rest of the Statement of Cash Flows

Investing activities

Financing activities

Be an Active Reader

Recognize Shortcomings of the Depreciation Add-back Shortcut

Pinning Down “Free Cash Flow”

The Cash Flow Statement in the Real World: A Good Idea Gone Awry?

Looking Quickly at the Statement of Changes in Stockholders Equity

Chapter 7: Accounting Alternatives

Setting the Stage

Taking Financial Statements with a Grain of Salt

Taking an alternative look at the company’s financial statements

Spotting significant differences

Explaining the Differences

Accounts receivable and sales revenue

Inventory and cost of goods sold expense

Fixed assets and depreciation expense

Accrued expenses payable, income tax payable, and expenses

Wrapping things up

Calculating Cost of Goods Sold Expense and Inventory Cost

FIFO (first-in, first-out)

LIFO (last-in, first-out)

Recording Depreciation Expense

Scanning Revenue and Expense Horizons

Part III: Accounting in Managing a Business

Chapter 8: Deciding the Legal Structure for a Business

Securing Capital: Starting With Owners

Contrasting two sources of owners’ equity

Leveraging equity capital with debt

Recognizing the Legal Roots of Business Entities

Incorporating a Business

Issuing stock shares

Offering different classes of stock shares

Determining the market value of stock shares

Keeping alert for dilution of share value

Recognizing conflicts between stockholders and managers

Differentiating Partnerships and Limited Liability Companies

Going It Alone: Sole Proprietorships

Choosing the Right Legal Structure for Income Tax

C corporations

S corporations

Partnerships and LLCs

One More Thing

Chapter 9: Accounting in Managing Profit

Helping Managers: The Fourth Vital Task of Accounting

Following the organizational structure

Centering on profit centers

Internal Profit Reporting

Designing internal profit (P&L) reports

Reporting operating expenses

Presenting a Profit Analysis Template

Separating variable and fixed expenses

Stopping at operating earnings

Focusing on margin — the catalyst of profit

Answering Critical Profit Questions

How did you make profit?

How did you increase profit?

Taking a Closer Look at the Lines in the Profit Template

Sales volume

Sales revenue

Cost of goods sold

Variable operating expenses

Fixed operating expenses

Using the Profit Template for Decision-Making Analysis

Tucking Away Some Valuable Lessons

Recognize the leverage effect caused by fixed operating expenses

Don’t underestimate the impact of small changes in sales price

Know your options for improving profit

Closing with a Boozy Example

Chapter 10: Budgeting

Exploring the Reasons for Budgeting

Modeling reasons for budgeting

Planning reasons for budgeting

Control reasons for budgeting

Additional Benefits of Budgeting

Is Budgeting Worth Its Costs?

Realizing That Not Everyone Budgets

Avoiding budgeting

Relying on internal accounting reports

Watching Budgeting in Action

Developing your profit improvement strategy and profit budget

Budgeting cash flow for the coming year

Considering Capital Expenditures and Other Cash Needs

Chapter 11: Cost Accounting

Looking down the Road to the Destination of Costs

Are Costs Really That Important?

Becoming More Familiar with Costs

Direct versus indirect costs

Fixed versus variable costs

Relevant versus irrelevant costs

Actual, budgeted, and standard costs

Product versus period costs

Assembling the Product Cost of Manufacturers

Minding manufacturing costs

Classifying costs properly

Calculating product cost

Examining fixed manufacturing costs and production capacity

Puffing Profit by Excessive Production

Shifting fixed manufacturing costs to the future

Cranking up production output

Being careful when production output is out of kilter with sales volume

Part IV: Preparing and Using Financial Reports

Chapter 12: Getting a Financial Report Ready

Recognizing Top Management’s Role

Reviewing the Purposes of Financial Reporting

Keeping Current with Accounting and Financial Reporting Standards

Making Sure Disclosure Is Adequate

Footnotes: Nettlesome but needed

Other disclosures in financial reports

Putting a Spin on the Numbers (Short of Cooking the Books)

Window dressing for fluffing up the cash balance and cash flow

Sanding the rough edges off the year-to-year profit numbers

Going Public or Keeping Things Private

Reports from publicly owned companies

Reports from private businesses

Dealing with Information Overload

Browsing based on your interests

Recognizing condensed versions

Using other sources of business information

Statement of Changes in Owners’ Equity

Chapter 13: How Lenders and Investors Read a Financial Report

Knowing the Rules of the Game

Checking Out the Auditor’s Report

Considering the trustworthiness of financial reports

What’s in an auditor’s report

Massaging the numbers and auditors

Discovering fraud, or not

Becoming a More Savvy Investor

Once Again: Contrasting Financial Reports of Private and Public Businesses

“Reading” Financial Statements with Ratios

Gross margin ratio

Profit ratio

Earnings per share (EPS), basic and diluted

Price/earnings (P/E) ratio

Dividend yield

Book value, market value, and book value per share

Return on equity (ROE) ratio

Current ratio

Acid-test (quick) ratio

Return on assets (ROA) ratio and financial leverage gain

More ratios?

Frolicking Through the Footnotes

Chapter 14: Filling Out the Financial Statements for Business Managers

Building on the Foundation of the External Financial Statements

Seeking out problems and opportunities

Avoiding information overload

Gathering Financial Condition Information

Cash

Accounts receivable

Inventory

Prepaid expenses

Fixed assets less accumulated depreciation

Accounts payable

Accrued expenses payable

Income tax payable

Interest-bearing debt

Owners’ equity

Culling Profit Information

Digging deeper into the return on equity (ROE) measure of profit

Margin: The catalyst of profit

Sales revenue and expenses

Digging into Cash Flow Information

Distinguishing investing and financing cash flows from operating cash flows

Managing operating cash flows

Part V: The Part of Tens

Chapter 15: Ten Accounting Tips for Managers

Reach Break-Even, and Then Rake in Profit

Set Sales Prices Right

Don’t Confuse Profit and Cash Flow

Call the Shots on Accounting Policies

Budget Well, but Wisely

Be Sure to Get the Key Accounting Information You Need

Tap into Your CPA’s Expertise

Critically Review Your Controls Over Employee Dishonesty and Fraud

Lend a Hand in Preparing Your Financial Reports

Sound Like a Pro in Talking Your Financial Statements

Chapter 16: Ten Tips for Reading a Financial Report

Get in the Right Frame of Mind

Decide What to Read

Improve Your Accounting Savvy

Judge Profit Performance

Test Earnings Per Share (EPS) Against Change in Bottom Line

Tackle Extraordinary Gains and Losses

Check Cash Flow Beside Profit

Look for Signs of Financial Distress

Recognize the Risks of Restatement and Fraud

Remember the Limits of Financial Reports

Appendix: Glossary: Slashing Through the Accounting Jargon Jungle