Accounting For Dummies, 4th edition
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Introduction.................................................................. |
1 |
About This Book............................................................................................... |
1 |
Conventions Used in This Book ..................................................................... |
2 |
What You’re Not To Read ................................................................................ |
4 |
Foolish Assumptions ....................................................................................... |
5 |
How This Book Is Organized........................................................................... |
6 |
Part I: Opening the Books on Accounting ........................................... |
6 |
Part II: Figuring Out Financial Statements........................................... |
7 |
Part III: Accounting in Managing a Business ....................................... |
7 |
Part IV: Preparing and Using Financial Reports ................................. |
8 |
Part V: The Part of Tens......................................................................... |
8 |
Glossary................................................................................................... |
8 |
Icons Used in This Book.................................................................................. |
9 |
Where to Go from Here.................................................................................... |
9 |
Part I: Opening the Books on Accounting ...................... |
11 |
Chapter 1: Accounting: The Language of Business, |
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Investing, Finance, and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
.13 |
Accounting Is Not Just for Accountants...................................................... |
14 |
Affecting both insiders and outsiders ............................................... |
14 |
Overcoming the stereotypes of accountants.................................... |
15 |
Relating accounting to your personal financial life ......................... |
16 |
Looking for Accounting in All the Right Places.......................................... |
17 |
Taking a Peek into the Back Office............................................................... |
18 |
Focusing on Transactions ............................................................................. |
21 |
Taking the Pulse of a Business: Financial Statements ............................... |
23 |
Meeting the balance sheet and the accounting equation ............... |
24 |
Reporting profit and loss, and cash flows......................................... |
25 |
Respecting the importance of this trio.............................................. |
26 |
Considering Accounting Careers ................................................................. |
27 |
Certified public accountant (CPA) ..................................................... |
27 |
The controller: The chief accountant in an organization................ |
28 |
A springboard to other careers .......................................................... |
29 |
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Accounting For Dummies, 4th Edition |
Chapter 2: Financial Statements and Accounting Standards . . . . . |
. .31 |
Introducing the Information Content of Financial Statements................. |
32 |
Setting up the business example........................................................ |
32 |
The income statement ......................................................................... |
33 |
The balance sheet ................................................................................ |
35 |
The statement of cash flows ............................................................... |
37 |
How Profit and Cash Flow from Profit Differ .............................................. |
40 |
Gleaning Key Information from Financial Statements ............................... |
41 |
How’s profit performance?.................................................................. |
41 |
Is there enough cash? .......................................................................... |
42 |
Can you trust the financial statement numbers? |
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Are the books cooked?..................................................................... |
43 |
Why no cash distribution from profit? .............................................. |
44 |
Keeping in Step with Accounting and Financial Reporting Standards.... |
45 |
Recognizing U.S. standards ................................................................. |
45 |
Getting to know the U.S. standard setters ........................................ |
47 |
Going worldwide................................................................................... |
48 |
Noting a divide between public and private companies................. |
49 |
Recognizing how income tax methods influence |
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accounting methods......................................................................... |
50 |
Following the rules and bending the rules........................................ |
51 |
Chapter 3: Bookkeeping and Accounting Systems . . . . . . . . . . . . . . . |
.53 |
Bookkeeping and Beyond.............................................................................. |
54 |
Pedaling Through the Bookkeeping Cycle .................................................. |
54 |
Managing the Bookkeeping and Accounting System................................. |
59 |
Categorize your financial information: The chart of accounts....... |
59 |
Standardize source document forms and procedures .................... |
61 |
Hire competent, trained personnel.................................................... |
62 |
Enforce strong — I mean strong! — internal controls ..................... |
63 |
Complete the process with end-of-period procedures.................... |
65 |
Leave good audit trails ........................................................................ |
66 |
Look out for unusual events and developments .............................. |
66 |
Design truly useful reports for managers ......................................... |
67 |
Double-Entry Accounting for Single-Entry Folks........................................ |
68 |
Juggling the Books to Conceal Embezzlement and Fraud ........................ |
70 |
Using Accounting Software ........................................................................... |
72 |
Part II: Figuring Out Financial Statements.................... |
75 |
Chapter 4: Reporting Revenue, Expenses, and the Bottom Line . . . . |
.77 |
Presenting a Typical Income Statement...................................................... |
78 |
Taking care of some housekeeping details ....................................... |
79 |
Your job: Asking questions!................................................................. |
81 |
Finding Profit .................................................................................................. |
84 |
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Getting Particular about Assets and Liabilities.......................................... |
86 |
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Making sales on credit → Accounts receivable asset...................... |
86 |
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Selling products → Inventory asset ................................................... |
87 |
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Prepaying operating costs → Prepaid expense asset...................... |
87 |
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Fixed assets → Depreciation expense ............................................... |
88 |
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Unpaid expenses → Accounts payable, accrued expenses |
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payable, and income tax payable .................................................. |
89 |
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Summing Up the Financial Effects of Profit................................................. |
91 |
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Reporting Extraordinary Gains and Losses................................................ |
92 |
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Closing Comments ......................................................................................... |
95 |
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Chapter 5: Reporting Assets, Liabilities, and Owners’ Equity . . . . . . |
.97 |
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Understanding That Transactions Drive the Balance Sheet..................... |
98 |
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Presenting a Balance Sheet......................................................................... |
100 |
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Kicking balance sheets out into the real world .............................. |
102 |
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Internal balance sheets............................................................ |
103 |
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External balance sheets ........................................................... |
103 |
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Judging solvency ................................................................................ |
103 |
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Current (short-term) assets .................................................... |
104 |
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Current (short-term) liabilities ............................................... |
104 |
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Current ratio.............................................................................. |
105 |
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Preparing multiyear statements ....................................................... |
105 |
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Coupling the Income Statement and Balance Sheet ................................ |
106 |
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Sizing up assets and liabilities .......................................................... |
108 |
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Sales revenue and accounts receivable........................................... |
109 |
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Cost of goods sold expense and inventory..................................... |
109 |
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Fixed assets and depreciation expense........................................... |
110 |
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SG&A expenses and their three balance sheet accounts.............. |
111 |
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Intangible assets and amortization expense .................................. |
112 |
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Debt and interest expense ................................................................ |
113 |
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Income tax expense and income tax payable ................................. |
114 |
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Net income and cash dividends (if any).......................................... |
114 |
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Financing a Business.................................................................................... |
115 |
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Costs and Other Balance Sheet Values...................................................... |
117 |
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Chapter 6: Reporting Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
119 |
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Seeing the Big Picture of Cash Flows......................................................... |
119 |
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Meeting the Statement of Cash Flows ....................................................... |
122 |
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Dissecting the Difference Between Cash Flow and Net Income ............. |
125 |
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Accounts receivable change ............................................................. |
126 |
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Inventory change................................................................................ |
127 |
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Prepaid expenses change.................................................................. |
127 |
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The depreciation factor..................................................................... |
128 |
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Changes in operating liabilities ........................................................ |
129 |
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Putting the cash flow pieces together ............................................. |
130 |
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Accounting For Dummies, 4th Edition |
Sailing Through the Rest of the Statement of Cash Flows ...................... |
131 |
Investing activities ............................................................................. |
131 |
Financing activities ............................................................................ |
132 |
Trying to Pin Down “Free Cash Flow”........................................................ |
134 |
Being an Active Reader ............................................................................... |
135 |
Chapter 7: Choosing Accounting Methods: |
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Different Strokes for Different Folks . . . . . . . . . . . . . . . . . . . . . . . . . |
. .137 |
Reading Statements with a Touch of Skepticism ..................................... |
138 |
Recognizing a business’s bias........................................................... |
138 |
Contrasting aggressive and conservative numbers....................... |
139 |
Figuring Out Why Financial Statements Differ ......................................... |
141 |
Cash balance ....................................................................................... |
142 |
Accounts receivable balance ............................................................ |
143 |
Inventory and cost of goods sold expense ..................................... |
144 |
Cost of fixed assets, accumulated depreciation, |
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and depreciation expense ............................................................. |
145 |
Accrued expenses payable liability balance................................... |
146 |
Wrapping things up............................................................................ |
147 |
Calculating Cost of Goods Sold and Cost of Inventory ........................... |
148 |
The FIFO (first-in, first-out) method................................................. |
149 |
The LIFO (last-in, first-out) method ................................................. |
150 |
The average cost method.................................................................. |
152 |
Recording Inventory Losses under the Lower of Cost |
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or Market (LCM) Rule .............................................................................. |
153 |
Appreciating Depreciation Methods.......................................................... |
154 |
Scanning the Expense Horizon................................................................... |
156 |
Part III: Accounting in Managing a Business............... |
159 |
Chapter 8: Deciding the Legal Structure for a Business . . . . . . . . |
. .161 |
Studying the Sources of Business Capital................................................. |
162 |
Deciding on debt ................................................................................ |
162 |
Tapping two sources of owners’ equity........................................... |
163 |
Recognizing the Legal Roots of Business Entities ................................... |
165 |
Incorporating a Business ............................................................................ |
165 |
Issuing stock shares........................................................................... |
166 |
Offering different classes of stock shares ....................................... |
167 |
Determining the market value of stock shares............................... |
169 |
Keeping alert for dilution of share value......................................... |
170 |
Recognizing conflicts between stockholders and managers........ |
172 |
Considering Partnerships and Limited Liability Companies.................. |
173 |
Going It Alone: Sole Proprietorships ......................................................... |
176 |
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Choosing the Right Legal Structure for Income Tax ................................ |
178 |
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C corporations .................................................................................... |
179 |
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S corporations .................................................................................... |
180 |
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Partnerships and LLCs ...................................................................... |
181 |
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Chapter 9: Analyzing and Managing Profit . . . . . . . . . . . . . . . . . . . . . |
.183 |
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Helping Managers Do Their Jobs ............................................................... |
184 |
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Following the organizational structure............................................ |
184 |
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Centering on profit centers ............................................................... |
185 |
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Presenting a P&L Template......................................................................... |
186 |
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Reporting operating expenses on the object |
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of expenditure basis ....................................................................... |
187 |
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Reporting operating expenses on their cost behavior basis........ |
187 |
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Separating variable and fixed expenses .......................................... |
189 |
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Variable expenses ..................................................................... |
189 |
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Fixed expenses.......................................................................... |
190 |
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Stopping at operating earnings ........................................................ |
191 |
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Focusing on margin — the catalyst of profit................................... |
192 |
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Answering Two Critical Profit Questions .................................................. |
192 |
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How did you make profit? ................................................................. |
192 |
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How did you increase profit? ............................................................ |
194 |
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Looking More Closely at the Profit Center P&L Report .......................... |
195 |
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Sales volume ....................................................................................... |
195 |
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Sales revenue ...................................................................................... |
195 |
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Cost of goods sold.............................................................................. |
196 |
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Variable operating expenses............................................................. |
196 |
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Fixed operating expenses.................................................................. |
197 |
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Using the P&L Template for Decision-Making Analysis........................... |
198 |
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Tucking Away Some Valuable Lessons ...................................................... |
199 |
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Recognize the leverage effect caused by fixed |
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operating expenses ........................................................................ |
199 |
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Don’t underestimate the impact of small |
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changes in sales price .................................................................... |
200 |
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Know your options for improving profit ......................................... |
201 |
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Closing with a Boozy Example.................................................................... |
202 |
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Chapter 10: Financial Planning, Budgeting, and Control . . . . . . . . . . |
205 |
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Exploring the Reasons for Budgeting ........................................................ |
206 |
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Modeling reasons for budgeting....................................................... |
207 |
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Planning reasons for budgeting........................................................ |
208 |
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Management control reasons for budgeting................................... |
209 |
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Additional benefits of budgeting, and a note of caution ............... |
210 |
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Accounting For Dummies, 4th Edition |
Realizing That Not Everyone Budgets....................................................... |
212 |
Avoiding budgeting ............................................................................ |
212 |
Relying on internal accounting reports........................................... |
213 |
Making reports useful for management control ................... |
213 |
Making reports useful for decision-making ........................... |
213 |
Making reports clear and straightforward ............................ |
214 |
Watching Budgeting in Action .................................................................... |
214 |
Developing your profit strategy and budgeted profit report........ |
216 |
Budgeting cash flow for the coming year........................................ |
218 |
Considering Capital Expenditures and Other Cash Needs ..................... |
220 |
Chapter 11: Cost Concepts and Conundrums . . . . . . . . . . . . . . . . . . |
. .223 |
Looking down the Road to the Destination of Costs ............................... |
224 |
Are Costs Really That Important? .............................................................. |
225 |
Becoming More Familiar with Costs.......................................................... |
226 |
Direct versus indirect costs .............................................................. |
228 |
Fixed versus variable costs............................................................... |
229 |
Relevant versus irrelevant costs ...................................................... |
229 |
Actual, budgeted, and standard costs ............................................. |
230 |
Product versus period costs............................................................. |
231 |
Assembling the Product Cost of Manufacturers ...................................... |
232 |
Minding manufacturing costs ........................................................... |
232 |
Classifying costs properly................................................................. |
234 |
Calculating product cost ................................................................... |
236 |
Examining fixed manufacturing costs and production capacity...... |
237 |
The burden rate ........................................................................ |
237 |
Idle capacity .............................................................................. |
238 |
The effects of increasing inventory........................................ |
238 |
Puffing Profit by Excessive Production ..................................................... |
240 |
Shifting fixed manufacturing costs to the future............................ |
240 |
Cranking up production output........................................................ |
241 |
Being careful when production output is out |
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of kilter with sales volume............................................................. |
243 |
Part IV: Preparing and Using Financial Reports........... |
245 |
Chapter 12: Getting a Financial Report Ready for Release . . . . . . |
. .247 |
Recognizing Management’s Role................................................................ |
248 |
Keeping in Mind the Purpose of Financial Reporting.............................. |
249 |
Staying on Top of Accounting and Financial Reporting Standards ....... |
250 |
Making Sure Disclosure Is Adequate ......................................................... |
251 |
Footnotes: Nettlesome but needed .................................................. |
252 |
Other disclosures in financial reports............................................. |
254 |
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Putting a Spin on the Numbers (But Not Cooking the Books) ............... |
256 |
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Window dressing for fluffing up the cash balance ......................... |
257 |
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Sanding the rough edges off profit ................................................... |
258 |
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The pressure on public companies ........................................ |
259 |
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Compensatory effects .............................................................. |
259 |
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Two profit histories .................................................................. |
260 |
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Management discretion in the timing |
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of revenue and expenses...................................................... |
261 |
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Going Public or Keeping Things Private ................................................... |
263 |
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Reports from publicly owned companies ....................................... |
263 |
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Reports from private businesses ..................................................... |
264 |
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Dealing with Information Overload............................................................ |
265 |
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Browsing based on your interests.................................................... |
265 |
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Recognizing condensed versions ..................................................... |
266 |
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Using other sources of business information................................. |
267 |
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Statement of Changes in Owners’ Equity.................................................. |
267 |
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Chapter 13: How Lenders and Investors Read a Financial Report . . . . |
271 |
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Knowing the Rules of the Game ................................................................. |
272 |
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Becoming a More Savvy Investor............................................................... |
273 |
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Comparing Private and Public Business Financial Reports.................... |
274 |
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Analyzing Financial Statements with Ratios............................................. |
276 |
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Gross margin ratio.............................................................................. |
278 |
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Profit ratio ........................................................................................... |
280 |
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Earnings per share (EPS), basic and diluted................................... |
280 |
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Price/earnings (P/E) ratio ................................................................. |
282 |
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Dividend yield ..................................................................................... |
283 |
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Book value and book value per share.............................................. |
284 |
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Return on equity (ROE) ratio............................................................ |
286 |
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Current ratio ....................................................................................... |
287 |
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Acid-test ratio ..................................................................................... |
287 |
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Return on assets (ROA) ratio and financial leverage gain ............ |
288 |
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Frolicking Through the Footnotes ............................................................. |
289 |
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Checking for Ominous Skies in the Auditor’s Report .............................. |
291 |
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Chapter 14: How Business Managers Use a Financial Report . . . . . |
293 |
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Building on the Foundation of the External Financial Statements ........ |
294 |
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Seeking out problems and opportunities........................................ |
294 |
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Avoiding information overload......................................................... |
294 |
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Gathering Financial Condition Information .............................................. |
295 |
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Cash...................................................................................................... |
296 |
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Accounts receivable........................................................................... |
297 |
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Inventory ............................................................................................. |
298 |
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Prepaid expenses ............................................................................... |
298 |
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Fixed assets and accumulated depreciation................................... |
299 |
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xviii Accounting For Dummies, 4th Edition
Accounts payable ............................................................................... |
300 |
Accrued expenses payable ............................................................... |
300 |
Income tax payable ............................................................................ |
301 |
Interest-bearing debt.......................................................................... |
302 |
Owners’ equity.................................................................................... |
303 |
Culling Profit Information............................................................................ |
303 |
Margin: The catalyst of profit ........................................................... |
304 |
Sales revenue and expenses ............................................................. |
305 |
Digging into Cash Flow Information........................................................... |
306 |
Distinguishing investing and financing cash flows |
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from operating cash flows ............................................................. |
307 |
Managing operating cash flows ........................................................ |
308 |
Chapter 15: Audits and Accounting Fraud . . . . . . . . . . . . . . . . . . . . . |
. .311 |
Exploring the Need for Audits .................................................................... |
312 |
What’s in an Auditor’s Report .................................................................... |
313 |
The clean (unqualified) opinion ....................................................... |
313 |
Other kinds of audit opinions ........................................................... |
314 |
Who’s Who in the World of Audits............................................................. |
315 |
Standing Firm When Companies Massage the Numbers, or Not ........... |
316 |
Discovering Fraud, or Not........................................................................... |
318 |
Who Audits the Auditors?........................................................................... |
319 |
Part V: The Part of Tens ............................................. |
321 |
Chapter 16: Ten Accounting Tips for Managers . . . . . . . . . . . . . . . . |
. .323 |
Reach Break-Even, and Then Rake in Profit.............................................. |
323 |
Set Sales Prices Right................................................................................... |
324 |
Distinguish Profit from Cash Flow ............................................................. |
325 |
Call the Shots on Accounting Policies....................................................... |
326 |
Budget Wisely ............................................................................................... |
327 |
Get the Accounting Information You Need ............................................... |
328 |
Tap into Your CPA’s Expertise..................................................................... |
329 |
Critically Review Your Fraud Controls ...................................................... |
329 |
Lend a Hand in Preparing Your Financial Reports................................... |
330 |
Sound Like a Pro in Talking about Your Financial Statements ............... |
331 |
Chapter 17: Ten Tips for Reading a Financial Report . . . . . . . . . . . |
. .333 |
Get in the Right Frame of Mind .................................................................. |
333 |
Decide What to Read ................................................................................... |
335 |
Improve Your Accounting Savvy ................................................................ |
336 |
Judge Profit Performance............................................................................ |
336 |
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Track Profit into Earnings per Share ......................................................... |
337 |
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Confront Extraordinary Gains and Losses................................................ |
338 |
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Compare Cash Flow and Profit ................................................................... |
339 |
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Look for Signs of Financial Distress........................................................... |
340 |
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Recognize the Risks of Restatement and Fraud ....................................... |
340 |
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Remember the Limits of Financial Reports .............................................. |
341 |
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Glossary: Slashing Through the Accounting |
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Jargon Jungle............................................................ |
343 |
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Index........................................................................ |
357 |
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