Read Reading Financial Reports for Dummies Online
Authors: Lita Epstein
preparing, 10
required by the SEC, 248
for private companies, 32–33
Forms 3, 4, and 5, on insider ownership,
readers of, 11–12
258
reporting unreliable, 255
Schedule C (“Profi t or Loss from
types of, 12–16
Business”) form, 22
weaknesses in internal controls over, 253
Schedule C-EZ (“Net Profi t from
fi nancial statements
Business”) form, 22
in annual reports, 17–19, 61, 71–72
Schedule E (“Supplemental Income and
defi ned, 337
Loss”) form, 22
of IFRS compared to GAAP, 263–265
Schedule F (“Profi t or Loss from
notes to, 339
Farming”) form, 22
reading consolidated, 146–148
Schedule SE (“Self-Employment Tax”)
required for Form 10-Q, 248
form, 22
fi nancing activities
forward P/E ratio, 155
on a statement of cash fl ows, 108, 110
fraudulent fi nancial reporting, 238, 337
understanding, 115–117
free cash fl ow, 182–184
fi nished-goods inventory, 99
freight charges account, 56
Fiorina, Carly (HP CEO), 285
funding, LLCs seeking, 25
fi rst in, fi rst out (FIFO) inventory tracking
furniture and fi xtures account, 53, 85
system, 82, 207, 210–211, 266
fi scal years, 77, 255
• G •
Fitch Ratings, 275
fi xed assets
GAAP (generally accepted accounting
sales of, 315
principles)
turnover, 214–215
accounting rules, 332–333
Index
351
accrual accounting required, 44
• H •
changing, 244–245
compared to IFRS, 262–267
Halliburton scandal, 325–326
defi ned, 337
Hasbro
demands of, 19
accounts payable turnover ratio, 223
described, 242
accounts receivable turnover ratio, 219
following, 242–245
acquiring fi nancial statements of, 154
governing reporting practices, 299
annual reports Web sites, 121
recognition of, 16
average accounts payable, 223
relationships to IFRS, 15
average accounts receivable, 219
gains, unrealized, 341
average sales credit period, 219
GECS (General Electric Capital Services),
bad debt, 220
140–144
basic and diluted EPS, 156
general ledger, 50
cash debt coverage ratio, 189
general offi ce needs, 101
cash fl ow, 114, 119
generally accepted accounting principles.
cash fl ow coverage ratio, 192
See
GAAP (generally accepted
cash return on sales ratio, 185
accounting principles)
current cash debt coverage ratio, 187
generally accepted audit standards
current ratio, 172
statement, in an auditors’ report, 69
debt to shareholders’ equity, 178
Getz, Herbert (Waste Management general
debt-to-capital ratio, 179
counsel), 324
EBITDA (earnings before interest, taxes,
global fi nancial reporting, 260–261
depreciation, and amortization), 176
global fi nancial reporting standard, 259–
effects of currency exchange, 118
267
fi nancing activities of, 117
goals, in the budget process, 197–199
fi xed assets turnover, 214
going-concern problem, 70, 338
free cash fl ow, 183
Goldman Sachs, 285
gross margin, 168
goods
interest coverage ratio, 176
ordered but not shipped, 299–300
inventory turnover, 213
shipped but not ordered, 300
long-term debt, 127–128
goodwill
long-term debt payments, 128–129
as an asset, 85
net profi t margin, 170
described, 131, 149
notes on fi nancial borrowings, 126
explaining in consolidated fi nancial
number of days in accounts payable
statements, 149
ratio, 224
impairment of, 308
operating margin, 168–169
as negative, 264
P/E (price/earnings) ratio, 157
value of, 308
quick ratio, 174
goodwill account, 53, 338
ROE (return on equity), 166
government
ROS (return on sales), 163–164
need for fi nancial reports, 11
spending on investments, 115
reports for, 14–15
total asset turnover, 216
gross margin, 167–168, 338
Web site, 2
gross profi t, 57, 94, 100, 103, 338
growth prospects, 170
352
Reading Financial Reports For Dummies, 2nd Edition
Hau, Thomas (Waste Management
initial public offering.
See
IPO (initial
controller), 324
public offering)
headline EPS, 159
in-process research and development, 297
Hewlett, Walter (HP founder), 285
inside ownership, 258
hidden assets, 84
insolvency, 192, 338
highlights
institutional shareholders, 286
in an annual report, 17
in-store credit, 218, 338
to fi nancial data, 72
insurance expenses, 102
hockey stick, 290
intangible assets, 50, 53, 85, 308, 338
hold rating, 277
intellectual property, 338
HP, Compaq merger with, 285
intellectual property account, 53
interest
• I •
charging for late payment, 229
as a fi nancial decision, 58
IASB (International Accounting Standards
paying for a securitization program, 230
Board), 15–16, 260
interest coverage ratio, 175–176
IFRS (International Financial Reporting
interest expenses, 57, 102, 338
Standards)
interest income, 102
adoption worldwide, 261
interest rate, for bonds, 274
compared to GAAP, 262–267
internal control structure, 240
described, 15
internal controls, 81, 240–241, 251, 253–254
discontinued operations, 267
internal fi nancial reports
worldwide scope of, 259
analyzing, 202–203
impairment of asset value, 255
defi ned, 338
impairments to assets section, 65
described, 12, 15–16
income
preparing monthly, 201
effect of debits and credits on, 48
using, 203–204
non-operating, 339
Internal Revenue Service (IRS), IRS.
See
IRS
from nonoperating activities, 104–105
(Internal Revenue Service)
before taxes, 94
International Accounting Standards Board
income statements
(IASB), 15–16, 260
in annual reports, 18, 71
International Financial Reporting
defi ned, 338
Standards.
See
IFRS (International
described, 47–48, 92
Financial Reporting Standards)
detail in, 91
Internet, reaching shareholders on, 282
IFRS compared to GAAP, 264
introductory paragraph, of the auditors’
in quarterly reports, 13
report, 68
for sole proprietors, 23
inventory
income taxes, 102, 315
described, 82–83
incorporation, 2, 22, 25, 37
in IFRS compared to GAAP, 266
independent analyst groups, 273
included in current ratio, 173
independent directors, 286
reducing, 231–232
indirect method, for a statement of cash
reports on, 16
fl ows, 109–110
shifting the value of, 310–311
infrequent extraordinary items, 264
in a statement of cash fl ows, 112
tracking, 83, 206
Index
353
inventory account, 52
• K •
inventory purchases budget, 200
inventory turnover, 211–213, 334
Kersh, Russell (Sunbeam fi nance chief),
inventory valuation methods, 206–211, 266
323
inventory write-down, 311
Koenig, James (Waste Management
investigations, by the SEC, 331
CFO), 324
investing activities, 108, 110, 114–115
Kozlowski, L. Dennis (Tyco CEO), 323–324
investment bankers, 34, 40, 272
investment research fi rms, Web sites
of, 274
• L •
investments, 147, 315
land
investor relations sections, of Web sites,
as a long-term asset, 84
292, 331
undeveloped, 311
investors
Land account, 52
global fi nancial reporting standard,
language, in analyst calls, 289
261–262
last in, fi rst out (LIFO) inventory tracking
need for fi nancial reports, 11
system, 82–83, 206–207, 210–211, 266
role in private company operations, 32
late fees, charging, 229
IPO (initial public offering)
lawsuits
compared to Form 10, 33
against Arthur Andersen, 327
defi ned, 338
class-action, 287
described, 115
explanations of, 135
pricing stock for, 40
potential, 137
results of a successful, 35
Lay, Kenneth L. (Enron CEO), 320
IRS (Internal Revenue Service).
See also
LCM (lower of cost or market) inventory
taxes
tracking system, 83, 207
Form 1065 (“U.S. Return of Partnership
leading or projected P/Es, 155
Income”), 23
lease obligations, 130
Schedule C (“Profi t or Loss from
leasehold improvements account, 52, 84
Business”) form, 22
leases, 84, 339
Schedule C-EZ (“Net Profi t from
legal fees, added by Sarbanes-Oxley, 39
Business”) form, 22
legal issues, of partnerships, 23
Schedule E (“Supplemental Income and
legal proceedings, 37, 249–250
Loss”) form, 22
letter from the president or CEO, 17
Schedule F (“Profi t or Loss from
letter to shareholders, 62–63
Farming”) form, 22
leveraged buyouts, 104
Schedule SE (“Self-Employment Tax”)
Levitt, Arthur (SEC Chairman), 297
form, 22
liabilities
• J •
accrued, 88, 335
on a balance sheet, 18
contingent, 313, 336
Jobs, Steve (Apple founder), 34
current, 18, 54, 87–88, 172, 188, 336
joint ventures, 140
defi ned, 10, 76, 338
junk bonds, 274, 276
described, 47, 53, 87
just-in-time inventory system, 231–232
effect of debits and credits on, 48
long-term, 18, 54, 88, 188, 339
354
Reading Financial Reports For Dummies, 2nd Edition
liabilities
(continued)
mailing, of annual and quarterly
looking for undervalued, 312–314
reports, 286
in the MD&A, 66
major events, in an 8-K form, 15, 37
pay down, 314
majority interest, 145, 339
undervalued, 332
managed earnings, 297
undervaluing, 309
management fees, 147
unrealistic values for, 332
management segments, 135
using to hide problems, 298
management’s discussion and analysis, 17,
valuing, 137
62, 64–68
liability accounts, 53–54
management’s discussion and analysis
licenses
(MD&A) section, 17, 62, 64–68
accounting for, 307
management’s report on internal controls,
maintaining a CPA, 238
253–254
life insurance, 102
managers, need for fi nancial reports, 11
LIFO (last in, fi rst out) inventory tracking
managing, cash, 81
system, 82–83, 206–207, 210–211, 266
managing earnings, 339
limited liability companies (LLCs), 24–25
manufacturing and other operational
lines of credit, 87, 129, 232
details, 134
liquidations, impact of, 150
manufacturing capacity, 67
liquidity
margins, 167
defi ned, 338
market research, 198
described, 68, 329
market risk, 248, 251
lack of, 36
market share data, 199
of public companies, 35
market value, 157–158
LLCs (limited liability companies), 24–25
marketable securities, 82, 339
Loans payable account, 54
Mars (company), 30
lockbox services, 233
master budget, 200
Lone Star Steakhouse & Saloon, 77
material changes, 254–256, 339
long-term accounts, 51
material developments, 249
long-term asset accounts, 52–53
material effect, 298
long-term assets, 18, 52, 83–86, 338
material misstatement, 69, 339
long-term borrowings, 126
material uncertainties, 70
long-term debt, 87–88, 126–129, 339
materiality game, 298
long-term liabilities, 18, 54, 88, 188, 339
materials on hand, 200
long-term notes, 126
Mattel
long-term obligations, 126–129
accounts payable turnover ratio, 222
losses, 10, 92, 341
accounts receivable turnover ratio, 218
lower of cost or market (LCM) inventory
acquiring fi nancial statements of, 154
system, 83, 207
annual reports Web sites, 121
lumpy sales, 290
average accounts payable, 222
average accounts receivable, 218
• M •
average credit collection period, 219
bad debt, 220
machinery, age of, 87
basic and diluted EPS, 156
machinery and equipment accounts, 85
cash debt coverage ratio, 188–189