How to read a financial report: wringing vital signs out of the numbers

HOW TO READ A FINANCIAL REPORT......Page 3
CONTENTS......Page 7
LIST OF EXHIBITS......Page 9
PREFACE TO THE NINTH EDITION......Page 11
Part One FUNDAMENTALS......Page 13
 1 STARTING WITH CASH FLOWS......Page 15
  Summary of Cash Flows for a Business......Page 16
  What Does Cash Flows Summary Not Tell You?......Page 18
  Profit Is Not Measured by Cash Flows......Page 19
  Cash Flows Do Not Reveal Financial Condition......Page 20
  A Final Note Before Moving On......Page 21
 2 TWO BEDROCK FINANCIAL STATEMENTS......Page 23
  Need for Financial Information......Page 24
  Reporting Profit Performance: The Income Statement......Page 26
  Reporting Financial Condition: The Balance Sheet......Page 29
 3 REPORTING CASH FLOWS......Page 33
  Statement of Cash Flows......Page 34
  Cash Versus Accrual Accounting......Page 36
  Financial Tasks of Business Managers......Page 37
 4 FITTING TOGETHER FINANCIAL STATEMENTS......Page 39
  One Problem in Financial Reporting......Page 41
  Connecting the Dots......Page 45
Part Two CONNECTIONS......Page 47
 5 SALES REVENUE AND ACCOUNTS RECEIVABLE......Page 49
  Exploring One Link at a Time......Page 51
  How Sales Revenue Drives Accounts Receivable......Page 52
  Accounting Issues......Page 54
 6 COST OF GOODS SOLD EXPENSE AND INVENTORY......Page 55
  Holding Products in Inventory Until They Are Sold......Page 57
  Inventory Control......Page 59
  Accounting Issues......Page 60
 7 INVENTORY AND ACCOUNTS PAYABLE......Page 61
  Acquiring Inventory on the Cuff......Page 63
  Accounting Issues......Page 65
 8 OPERATING EXPENSES AND ACCOUNTS PAYABLE......Page 67
  Recording Expenses Before They Are Paid......Page 69
  Accounting Issues......Page 72
 9 OPERATING EXPENSES AND PREPAID EXPENSES......Page 73
  Paying Certain Operating Costs Before They Are Recorded as Expenses......Page 75
  Accounting Issues: Using Prepaid Expenses to Massage the Numbers......Page 77
 10 DEPRECIATION EXPENSE AND PROPERTY, PLANT, AND EQUIPMENT......Page 79
  Overview of Expense Accounting......Page 80
  Depreciation Expense......Page 82
  Accumulated Depreciation and Book Value of Fixed Assets......Page 85
  Book Values and Current Replacement Costs......Page 86
  Intangible Assets......Page 87
  Accounting Issues......Page 88
 11 ACCRUING LIABILITY FOR UNPAID EXPENSES......Page 89
  Recording Accrued Liability for Operating Expenses......Page 91
  Bringing Interest Expense Up to Snuff......Page 93
  Accounting Issues......Page 94
 12 INCOME TAX EXPENSE AND ITS LIABILITY......Page 95
  Taxation of Business Profit......Page 97
  Accounting Issues......Page 99
 13 NET INCOME AND RETAINED EARNINGS, AND EARNINGS PER SHARE (EPS)......Page 101
  Net Income into Retained Earnings......Page 102
  Earnings per Share (EPS)......Page 106
  Accounting Issues......Page 107
 14 CASH FLOW FROM OPERATING (PROFIT-SEEKING) ACTIVITIES......Page 109
  Profit Versus Cash Flow from Profit......Page 110
  Changes in Assets and Liabilities That Impact Cash Flow from Operating Activities......Page 113
  The Direct Method for Reporting Cash Flow from Operating Activities......Page 116
  Profit Before the Bottom Line......Page 117
  Accounting Issues......Page 118
 15 CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES......Page 119
  Completing the Statement of Cash Flows......Page 120
  Seeing the Big Picture of Cash Flows......Page 123
  Accounting Issues......Page 125
Part Three USING FINANCIAL STATEMENTS......Page 127
 16 FOOTNOTES AND MANAGEMENT DISCUSSIONS......Page 129
  Financial Report Content in Addition to Financial Statements......Page 131
  Financial Statements—Brief Review......Page 133
  Why Footnotes?......Page 135
  Two Types of Footnotes......Page 136
  Management Discretion in Writing Footnotes......Page 138
  Analysis Issues......Page 139
 17 FINANCIAL STATEMENT RATIOS AND ANALYSIS......Page 141
  Financial Reporting Ground Rules......Page 142
  Financial Statement Preliminaries......Page 143
   Extraordinary Gains and Losses......Page 145
   A New Financial Statement......Page 146
   Current Ratio......Page 147
   Acid Test Ratio (Quick Ratio)......Page 148
   Debt-to-Equity Ratio......Page 149
   Return on Equity (ROE)......Page 150
   Earnings per Share (EPS)......Page 151
   Market Cap......Page 153
  Two Cash Flow Ratios to Chew On......Page 155
  Final Comments......Page 157
 18 FINANCIAL ENGINEERING......Page 159
  What Financial Engineering Is Not......Page 161
  What Financial Engineering Is......Page 162
   Common Types of Financial Engineering......Page 163
   Final Word......Page 166
 19 CPAs AND FINANCIAL REPORTS......Page 167
  Certified Public Accountant (CPA)......Page 169
  From Preparation to Audit of Financial Reports by CPAs......Page 170
  Why Audits?......Page 171
  Do Auditors Discover Financial Reporting Fraud?......Page 174
 20 BASIC QUESTIONS, BASIC ANSWERS......Page 175
  When You Buy Stock Does the Company Get Your Money?......Page 177
  Are Financial Reports Reliable?......Page 178
  Are Some Financial Statements Misleading and Fraudulent?......Page 179
  Should You Take the Time to Compute Financial Statement Ratios?......Page 180
  Why Read Financial Statements, Then, If You Won’t Find Information That Has Been Overlooked by Others?......Page 181
  The Financial Statements and Footnotes of Large Public Companies Would Take Several Hours to Read Carefully: What’s the Alternative?......Page 182
  Is There a Basic Test to Gauge a Company’s Financial Performance?......Page 183
  Do Financial Statements Report the Truth, the Whole Truth, and Nothing but the Truth?......Page 184
  Does Its Financial Report Explain the Basic Profit-Making Strategy or Profit Model of a Business?......Page 186
  Does the Market Price of a Public Company’s Stock Shares Depend Directly and Only on the Information Reported in Its Financial Statements?......Page 187
  Does the Balance Sheet of a Private Business Tell the Market Value of the Business?......Page 188
  Do Books on Investing and Personal Finance Refer to Financial Statements?......Page 189
  A Very Short Summary......Page 190
ABOUT THE AUTHORS......Page 191
INDEX......Page 193
EULA......Page 200