Reading Financial Reports for Dummies (2 page)

Diane Graves Steele,
Vice President and Publisher, Consumer Dummies
Kristin Ferguson-Wagstaffe,
Product Development Director, Consumer Dummies
Ensley Eikenburg,
Associate Publisher, Travel

Kelly Regan,
Editorial Director, Travel

Publishing for Technology Dummies

Andy Cummings,
Vice President and Publisher, Dummies Technology/General User
Composition Services

Gerry Fahey,
Vice President of Production Services
Debbie Stailey,
Director of Composition Services

Contents at a Glance

Introduction ................................................................ 1

Part I: Getting Down to Financial Reporting Basics ....... 7

Chapter 1: Opening the Cornucopia of Reports ............................................................ 9

Chapter 2: Recognizing Business Types and Their Tax Rules ................................... 21

Chapter 3: Public or Private: How Company Structure Affects the Books ............... 29

Chapter 4: Digging into Accounting Basics .................................................................. 43

Part II: Checking Out the Big Show: Annual Reports .... 59

Chapter 5: Exploring the Anatomy of an Annual Report ............................................ 61

Chapter 6: Balancing Assets against Liabilities and Equity ....................................... 75

Chapter 7: Using the Income Statement........................................................................ 91

Chapter 8: The Statement of Cash Flows .................................................................... 107

Chapter 9: Scouring the Notes to the Financial Statements ..................................... 121

Chapter 10: Considering Consolidated Financial Statements .................................. 139

Part III: Analyzing the Numbers ............................... 151

Chapter 11: Testing the Profi ts and Market Value ..................................................... 153

Chapter 12: Looking at Liquidity.................................................................................. 171

Chapter 13: Making Sure the Company Has Cash to Carry On ................................ 181

Part IV: Understanding How Companies

Optimize Operations ................................................. 193

Chapter 14: How Reports Help with Basic Budgeting ............................................... 195

Chapter 15: Turning Up Clues in Turnover and Assets ............................................ 205

Chapter 16: Examining Cash Infl ow and Outfl ow ....................................................... 217

Chapter 17: How Companies Keep the Cash Flowing................................................ 227

Part V: The Many Ways Companies

Answer to Others ..................................................... 235

Chapter 18: Finding Out How Companies Find Errors: The Auditing Process ....... 237

Chapter 19: Digging into Government Regulations ................................................... 247

Chapter 20: Creating a Global Financial Reporting Standard ................................... 259

Chapter 21: Checking Out the Analyst-Corporation Connection ............................. 269

Chapter 22: How Companies Communicate with Shareholders .............................. 281

Chapter 23: Keeping Score When Companies Play Games with Numbers ............. 295

Part VI: The Part of Tens .......................................... 317

Chapter 24: Ten Financial Scandals That Rocked the World ................................... 319

Chapter 25: Ten Signs That a Company’s in Trouble ................................................ 329

Glossary .................................................................. 335

Index ...................................................................... 343

Table of Contents

Introduction ................................................................. 1

About This Book .............................................................................................. 2

Conventions Used in This Book ..................................................................... 2

What You’re Not to Read ................................................................................ 2

Foolish Assumptions ....................................................................................... 3

How This Book Is Organized .......................................................................... 3

Part I: Getting Down to Financial Reporting Basics ........................... 4

Part II: Checking Out the Big Show: Annual Reports ......................... 4

Part III: Analyzing the Numbers ........................................................... 4

Part IV: Understanding How Companies Optimize Operations ....... 4

Part V: The Many Ways Companies Answer to Others ..................... 5

Part VI: The Part of Tens ....................................................................... 5

Icons Used in This Book ................................................................................. 5

Where to Go from Here ................................................................................... 6

Part I: Getting Down to Financial Reporting Basics ........ 7

Chapter 1: Opening the Cornucopia of Reports. . . . . . . . . . . . . . . . . . . . .9

Figuring Out Financial Reporting ................................................................... 9

Preparing the reports .......................................................................... 10

Why fi nancial reporting counts (and who’s counting) ................... 11

Checking Out Types of Reporting ............................................................... 12

Keeping everyone informed ............................................................... 13

Following the rules: Government requirements .............................. 14

Going global .......................................................................................... 15

Staying within the walls of the company: Internal reporting ......... 15

Dissecting the Annual Report to Shareholders ......................................... 17

Breaking down the parts ..................................................................... 17

The meat of the matter ....................................................................... 18

How the number crunchers are kept in line ..................................... 19

Chapter 2: Recognizing Business Types and Their Tax Rules. . . . . . .21

Flying Solo: Sole Proprietorships ................................................................ 21

Keeping taxes personal ....................................................................... 22

Reviewing requirements for reporting .............................................. 22

Joining Forces: Partnerships ........................................................................ 23

Partnering up on taxes ........................................................................ 23

Meeting reporting requirements ........................................................ 24

Seeking Protection with Limited Liability Companies .............................. 24

Taking stock of taxes ........................................................................... 24

Reviewing reporting requirements .................................................... 25

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x

Shielding Your Assets: S and C Corporations ............................................ 25

Paying taxes the corporate way ......................................................... 26

Getting familiar with reporting requirements .................................. 27

Chapter 3: Public or Private: How Company Structure

Affects the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Investigating Private Companies ................................................................. 29

Checking out the benefi ts ................................................................... 30

Defi ning disadvantages ....................................................................... 31

Figuring out reporting ......................................................................... 32

Understanding Public Companies ............................................................... 33

Examining the perks ............................................................................ 35

Looking at the negative side ............................................................... 35

Filing and more fi ling: Government and shareholder reports ....... 36

A Whole New World: How a Company Goes from Private to Public ....... 39

Teaming up with an investment banker ........................................... 40

Making a public offering ...................................................................... 41

Chapter 4: Digging into Accounting Basics . . . . . . . . . . . . . . . . . . . . . .43

Making Sense of Accounting Methods ........................................................ 43

Cash-basis accounting ......................................................................... 43

Accrual accounting .............................................................................. 44

Why method matters ........................................................................... 44

Understanding Debits and Credits .............................................................. 46

Double-entry accounting..................................................................... 47

Profi t and loss statements .................................................................. 47

The effect of debits and credits on sales .......................................... 48

Digging into depreciation and amortization ..................................... 49

Checking Out the Chart of Accounts ........................................................... 50

Asset accounts ..................................................................................... 51

Liability accounts................................................................................. 53

Equity accounts ................................................................................... 54

Revenue accounts ................................................................................ 55

Expense accounts ................................................................................ 56

Differentiating Profi t Types .......................................................................... 57

Gross profi t ........................................................................................... 57

Operating profi t.................................................................................... 58

Net profi t ............................................................................................... 58

Part II: Checking Out the Big Show: Annual Reports ..... 59

Chapter 5: Exploring the Anatomy of an Annual Report . . . . . . . . . . . .61

Everything but the Numbers ........................................................................ 62

Debunking the letter to shareholders ............................................... 62

Making sense of the corporate message ........................................... 63

Meeting the people in charge ............................................................. 64

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xi

Finding basic shareholder information ............................................. 64

Getting the skinny from management ............................................... 64

Bringing the auditors’ answers to light ............................................. 68

Presenting the Financial Picture .................................................................. 71

Summarizing the Financial Data .................................................................. 72

Finding the highlights .......................................................................... 72

Reading the notes ................................................................................ 73

Chapter 6: Balancing Assets against Liabilities and Equity . . . . . . . .75

Understanding the Balance Equation ......................................................... 75

Introducing the Balance Sheet ..................................................................... 76

Digging into dates ................................................................................ 76

Nailing down the numbers .................................................................. 78

Figuring out format .............................................................................. 78

Ogling Assets .................................................................................................. 80

Current assets ...................................................................................... 80

Long-term assets .................................................................................. 83

Accumulated depreciation ................................................................. 86

Looking at Liabilities ..................................................................................... 87

Current liabilities ................................................................................. 87

Long-term liabilities ............................................................................. 88