Crash Course in Accounting and Financial Statement Analysis Book

About the Authors     viii
Preface     x
Introduction to Accounting     1
What Is Accounting?     1
Why Is Accounting Important?     2
Making Corporate Decisions     2
Making Investment Decisions     2
Accounting Facilitates Corporate and Investment Decisions     2
Who Uses Accounting?     2
U.S. Accounting Regulations     2
Generally Accepted Accounting Principles     2
Overview of the Securities and Exchange Commission     3
Overview of the Financial Accounting Standards Board     4
International Accounting Regulations     4
Convergence of U.S. GAAP and IFRS     6
Summary     6
Basic Accounting Principles     11
Assumptions     11
Accounting Entity     12
Going Concern     13
Measurement and Units of Measure     13
Periodicity     14
Wrap-up: Assumptions     15
Principles     18
Historical Cost     18
Accrual Basis     18
Full Disclosure     21
Wrap-up: Principles     21
Constraints     24
Estimates and Judgments     24
Materiality     24
Consistency     24
Conservatism     24
Summary     27
Financial Reporting     29
Financial Reporting Overview     29
Finding Financial Reports     30
Form 10-K (Annual Filing)     30
Why Is the 10-K Important?     30
Form 10-Q (Quarterly Filing)     30
Other Important Filings     31
Form 8-K     31
Form S-1     31
Form 14A     31
Form 20-F     31
Summary     32
Reading the Annual Report     35
Introduction     35
Letter to Stockholders     36
Financial Highlights     38
Management's Discussion and Analysis     38
Financial Statements     40
Income Statement     40
Balance Sheet     41
Cash Flow Statement     41
Notes to Consolidated Statements     41
Report of Management's Responsibilities     43
Certification of Financial Statements     46
Risk Factors     48
Legal Proceedings     48
Report of Independent Auditors     49
Directors and Officers     52
Summary     54
Income Statement     55
What is the Income Statement?     55
Why Is It Important?     57
Revenues     57
Not All Income Is Revenue     58
Bad Debt Expense     61
What Is Bad Debt Expense?     61
Revenue Recognition: To Recognize and When?     61
Revenue Recognition: Long-Term Projects     62
Expense Recognition and Accrual Basis of Accounting     65
Basic Principles Revisited: Accrual Basis of Accounting and Matching Principle     65
Putting It All Together: The Accrual Basis of Accounting     65
Why Use Accrual Accounting?     65
Accrual versus Cash Accounting: What's the Difference?     66
Revenue Manipulation     67
Cost of Goods Sold     70
COGS Do Not Include Administrative Costs     70
Gross Profit     73
Selling, General and Administrative     75
Research and Development     77
Stock Options Expense     77
Depreciation Expense     80
Depreciation Is a "Phantom" Noncash Expense     82
Straight-Line Depreciation Method     83
Accelerated Depreciation Methods     86
Depreciation Methods Compared     92
Amortization     92
Amortization Is a "Noncash" Expense (Like Depreciation)     93
What Is the Difference between Depreciation and Amortization?     93
Summary     96
Goodwill     96
Goodwill Not Amortized after 2001     96
Interest Expense     97
Interest Income     99
Other Nonoperating Income     99
Income Tax Expense     99
Equity Income in Affiliates     100
Minority Interest     102
Net Income     104
Shares Outstanding     104
Representation of Shares Outstanding in the Income Statement     104
Common Dividends     108
Preferred Dividends     108
Earnings per Share     108
Nonrecurring Items     110
Unusual or Infrequent Items     110
Discontinued Operations     112
Extraordinary Items     113
Accounting Changes     114
Earnings before Interest, Taxes, Depreciation, and Amortization     117
EBITDA: Popular Measure of a Company's Financial Performance     118
EBITDA Has Several Shortcomings     119
EBIT     122
Summary     123
Balance Sheet     129
Introduction     129
Assets Represent the Company's Resources     131
Liabilities and Shareholders' Equity Represent the Company's Sources of Funds (i.e., How It Pays for Assets)     134
Lemonade Stand and the Accounting Equation     137
Balance Sheet     137
Double-Entry Accounting     138
Why Is Double-Entry Accounting Important?     143
Income Statement Revisited: Links to Balance Sheet     143
Retained Earnings: The Link Between Balance Sheet and Income Statement     144
Impact of Revenues on the Balance Sheet     145
Impact of COGS on the Balance Sheet     145
Impact of SG&A on the Balance Sheet     146
Impact of Depreciation on the Balance Sheet     146
Impact of Interest Expense on the Balance Sheet     146
Impact of Tax Expense on the Balance Sheet     146
Total Impact of the Year on the Balance Sheet     147
Summary     148
Order of Liquidity     149
Current versus Noncurrent Assets     149
Current versus Long-Term Liabilities     149
Assets     153
Inventories     157
LIFO Reserve: The Link between FIFO and LIFO Inventory Methods     164
Writing Down Inventories     164
Deferred Taxes     164
PP&E, Net of Depreciation     169
Reconciliation of PP&E     170
Fixed Asset Impairments     175
Fixed Asset Retirement and Disposal     176
Intercompany Investments     177
Consolidation     179
Intangible Assets     179
Goodwill     181
Summary: Intangible Assets and Goodwill     184
Summary: Assets     186
Liabilities     190
Other Typical Current Liabilities     192
Debt     193
Short-Term Debt versus Long-Term Debt     193
Capital Leases     194
Operating Leases     194
Deferred Taxes     195
Summary: Deferred Taxes     197
Pensions     198
Defined Benefit Plan     202
Minority Interest     205
Summary: Liabilities     209
Shareholders' Equity     212
Introduction     213
Common Stock      214
Additional Paid-In Capital     214
Preferred Stock     215
Treasury Stock     216
Retained Earnings     217
Summary: Shareholders' Equity     219
Summary     222
Cash Flow Statement     223
Introduction     223
Cash Flow Statement to the Rescue!     225
Cash Flow from Operations     228
Overview     228
Indirect Method     228
Getting from Net Income to Cost from Operations     229
Depreciation     231
Working Capital     233
Changes in Accounts Receivable     235
Changes in Accounts Receivable and the Lemonade Stand     235
Changes in Inventories     236
Changes in Inventories and the Lemonade Stand     237
Changes in Accounts Payable     239
Accounts Payable and the Lemonade Stand     239
Changes in Other Current Assets     240
Changes in Other Current Liabilities     241
Increases/Decreases in Deferred Taxes     241
Summary: Cash Flow from Operations     244
Cash Flow from Investing Activities     247
Overview      247
Components     247
Cash Flow from Financing Activities     251
Overview     251
Components     251
How the Cash Flow is Linked to the Balance Sheet     255
Summary     256
Online Exercise     256
Financial Ratio Analysis     259
Introduction     259
What Is Financial Ratio Analysis?     259
Liquidity Ratios     260
Current Ratio     260
Quick (Acid) Test     260
Current Cash Debt Coverage Ratio     261
Profitability Ratios     261
Gross Profit Margin     261
Profit Margin on Sales     261
Return on Assets     262
Return on Equity     262
Earnings per Share     262
Price-to-Earnings Ratio     262
Payout Ratio     262
Activity Ratios     262
Receivables Turnover     263
Days Sales Outstanding     263
Inventory Turnover     263
Days Sales of Inventory     263
Asset Turnover     263
Coverage Ratios     263
Debt to Total Assets     264
Times Interest Earned      264
Cash Debt Coverage Ratio     264
Calculations     265
Appendix     267
Stock Options     267
Stock Options Expensing     268
Then...     268
...and Now     269
Debt     270
How Are These Two Forms of Capital Raised?     270
Who Issues Debt?     270
Long-Term Debt     271
Capital versus Operating Leases     272
Direct Method     272
Index     275