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How to Read and Interpret Financial Statements

Book Description

The ability to understand financial statements is an essential skill for success today. This comprehensive course teaches students how to read and analyze the reports that are fundamental to gauging the health of any business. It explains how to interpret balance sheets, income statements, and statements of cash flows— and consider the numbers in the context of external economic conditions. Students will learn to: • Grasp the basic concepts and principles of financial accounting and reporting • View key financial statements—the balance sheet, the income statement, and the statement of cash flows—from the perspective of senior management • Uncover essential data by applying the right type of analysis—ratio, vertical, or horizontal—to the right statement • Understand recent changes in legislation, rules, and standards of practice that affect accounting and finance • Follow the provisions of the Sarbanes-Oxley Act and track its impact on the auditing process and the financial statement value chain • Review industry statistics, competitive considerations, and other nonfinancial information to achieve a deeper understanding of a company’s financial statements Now completely revised and updated, the second edition of How to Read and Interpret Financial Statements includes a section on the Statement of Comprehensive Income, expanded coverage of off-balance-sheet financing, a glossary of important terms, and updated information on the difference between marketable securities and investments and the impact of changes in fair value on a company’s financial statements. In each chapter, exhibits, examples, and exercises reinforce lessons and give readers the chance to apply new concepts and practice new skills.

Table of Contents

  1. Cover
  2. Title
  3. Copyright
  4. Contents
  5. About This Course
  6. How to Take This Course
  7. Pre-Test
  8. 1 Understanding Financial Statements
    1. Introduction
    2. Accounting Is More an Art Than a Science
      1. Internal Users
      2. External Users
    3. Basic Concepts and Principles of Financial Accounting and Financial Statements
    4. Generally Accepted Accounting Principles (GAAP)
      1. Auditor’s Reports
    5. Limitations of Financial Statements
    6. Recap
    7. Review Questions
    8. Answers to “Think About It...” Questions from This Chapter
  9. 2 Types of Financial Statements
    1. Introduction
    2. Elements of Financial Statements
      1. Assets
      2. Liabilities
      3. Equity
      4. Investments by Owners
      5. Distributions to Owners
      6. Revenues
      7. Expenses
      8. Gains
      9. Losses
    3. The Balance Sheet
      1. Assets
      2. Liabilities
      3. Owners’ Equity
    4. Income Statement
      1. Sales
      2. Cost of Goods Sold
    5. Statement of Retained Earnings
    6. Statement of Cash Flows
    7. Notes to the Financial Statements and Supplemental Information
    8. Management’s Discussion and Analysis of Financial Condition and Results of Operation
    9. Recap
    10. Review Questions
    11. Answers to “Think About It...” Questions from This Chapter
  10. 3 The Balance Sheet: Assets
    1. Introduction
    2. Current Assets
      1. Cash
      2. Marketable Securities
      3. Receivables
      4. Inventories
      5. Prepaid Expenses
    3. Long-Term Investments
      1. Cost Method of Valuation
      2. Equity Method of Valuation
    4. Property, Plant, and Equipment
      1. Tangible Fixed Assets
      2. Intangible Assets
      3. Wasting Assets
    5. Other Assets
    6. Recap
    7. Review Questions
    8. Answers to “Think About It...” Questions from This Chapter
  11. 4 The Balance Sheet: Liabilities and Owners’ Equity
    1. Introduction
    2. Liabilities
      1. Current Liabilities
      2. Long-Term Liabilities
    3. Off-Balance-Sheet Financing
    4. Owners’ (or Shareholders’) Equity
      1. Capital Stock
      2. Additional Paid-In Capital
      3. Retained Earnings
      4. Treasury Stock
    5. Recap
    6. Review Questions
    7. Answers to “Think About It...” Questions from This Chapter
  12. 5 The Income Statement
    1. Introduction
    2. Income Statement Format
      1. Components of an Income Statement
      2. Comprehensive Income
    3. Cash Versus Accrual Basis of Accounting
      1. Cash Basis
      2. Accrual Basis
    4. Apportionment of Revenues and Expenses
      1. Prepaid Expenses Requiring Apportionment
      2. Unearned and Recorded Revenues Requiring Apportionment
      3. Unrecorded Accrued Revenues
      4. Unrecorded Accrued Expenses
      5. Valuation of Accounts Receivable and Investments
      6. Valuation of Marketable Securities
    5. Recap
    6. Review Questions
    7. Answers to “Think About It...” Questions from This Chapter
  13. 6 The Statement of Cash Flows
    1. Introduction
    2. The Usefulness of the Statement of Cash Flows
    3. The Nature of the Statement of Cash Flows
      1. Significant Noncash Financing and Investing Activities
    4. Statement of Cash Flows: Format Alternatives
      1. The Direct Method
      2. The Indirect Method
    5. Free Cash Flow
    6. Recap
    7. Review Questions
    8. Answers to “Think About It...” Questions from This Chapter
  14. 7 Balance Sheet Analysis
    1. Introduction
    2. Ratios in Financial-Statement Analysis
      1. Limitations of Financial Ratios
    3. Categories of Financial Ratios
      1. Liquidity Ratios
      2. Activity Ratios
      3. Leverage Ratios
    4. Vertical and Horizontal Analysis
    5. Recap
    6. Review Questions
    7. Answers to “Think About It...” Questions from This Chapter
  15. 8 Income Statement Analysis
    1. Sales
    2. Cost of Goods Sold
      1. Gross Profit
      2. Operating Expenses
    3. Operating Income
    4. Profitability Ratios
      1. Gross Profit Margin
      2. Operating Profit Margin
      3. Profit Margin
      4. Return on Assets
      5. Return on Equity
      6. Earnings Per Share
      7. Limitations of Financial Ratios
    5. Horizontal and Vertical Analysis
    6. Recap
    7. Review Questions
    8. Answers to “Think About It...” Questions from This Chapter
  16. 9 Analysis of Operational Results
    1. Introduction
    2. Cost Behavior
      1. Fixed Costs
      2. Variable Costs
      3. Mixed Costs
    3. Cost-Volume-Profit Analysis
      1. Break-Even Point
    4. The Graphic Presentation of Break-Even
    5. Using Break-Even Analysis
    6. Contribution Margin
      1. Advantages of Cost-Volume-Profit Analysis
      2. Limitations of Cost-Volume-Profit Analysis
    7. The Profit-Volume Graph
      1. Plotting a Profit Line
    8. Recap
    9. Review Questions
    10. Answers to “Think About It...” Questions from This Chapter
  17. Bibliography
  18. Glossary
  19. Online Resources
  20. Post-Test
  21. Index