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How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, 8th Edition

Book Description

An updated new edition of the comprehensive guide to reading and understanding financial reports

Financial reports provide vital information to investors, lenders, and managers. Yet, the financial statements in a financial report seem to be written in a foreign language that only accountants can understand. This new Eighth Edition of How to Read a Financial Report breaks through that language barrier, clears away the fog, and offers a plain-English user's guide to financial reports. This updated edition features new information on the move toward separate financial and accounting reporting standards for private companies, the emergence of websites offering financial information, pending changes in the auditor's report language and what this means to investors, and requirements for XBRL tagging in reporting to the SEC, among other topics.

  • Makes it easy to understand what financial reports really say

  • Updated to include the latest information financial reporting standards and regulatory changes

  • Written by an author team with a combined 50-plus years of experience in financial accounting

With this new edition of How to Read a Financial Report, investors will find everything they need to fully understand the profit, cash flow, and financial condition of any business.

Table of Contents

  1. Cover
  2. Contents
  3. Title
  4. Copyright
  5. List of Exhibits
  6. Preface to the Eighth Edition
  7. Part One: Fundamentals
    1. Chapter 1: Starting with Cash Flows
      1. Cash Flows Summary for a Business
      2. What Does Cash Flows Summary Not Tell You?
      3. Profit Cannot Be Measured by Cash Flows
      4. Cash Flows Do Not Reveal Financial Condition
      5. A Final Note before Moving On
    2. Chapter 2: Three Financial Statements
      1. Reporting Financial Condition, Profit Performance, and Cash Flows
      2. Income Statement
      3. Balance Sheet
      4. Statement of Cash Flows
    3. Chapter 3: Profit Accounting
      1. An Important Question
      2. Nature of Profit
      3. Recording Revenue and Expenses
      4. Winding Up
    4. Chapter 4: Profit Isn’t Everything
      1. Threefold Financial Task of Business Managers
      2. One Problem in Reporting Financial Statements
      3. Interlocking Nature of the Three Financial Statements
      4. Connecting the Dots
  8. Part Two: Connections
    1. Chapter 5: Sales Revenue and Accounts Receivable
      1. Exploring One Link at a Time
      2. How Sales Revenue Drives Accounts Receivable
      3. Accounting Issues
    2. Chapter 6: Cost of Goods Sold Expense and Inventory
      1. Holding Products in Inventory before They Are Sold
      2. Accounting Issues
    3. Chapter 7: Inventory and Accounts Payable
      1. Acquiring Inventory on the Cuff
      2. Accounting Issues
    4. Chapter 8: Operating Expenses and Accounts Payable
      1. Recording Expenses before They Are Paid
      2. Accounting Issues
    5. Chapter 9: Operating Expenses and Prepaid Expenses
      1. Paying Certain Operating Costs before They Are Recorded as Expenses
      2. Accounting Issues: Using Prepaid Expenses to Massage the Numbers
    6. Chapter 10: Depreciation Expense and Property, Plant, and Equipment; Intangible Assets
      1. Brief Review of Expense Accounting
      2. Depreciation Expense
      3. Accumulated Depreciation and Book Value of Fixed Assets
      4. Book Values and Current Replacement Costs
      5. Intangible Assets
      6. Accounting Issues
    7. Chapter 11: Accruing the Liability for Unpaid Expenses
      1. Recording the Accrued Liability for Operating Expenses
      2. Bringing Interest Expense Up to Snuff
      3. Accounting Issues
    8. Chapter 12: Income Tax Expense and Its Liability
      1. Taxation of Business Profit
      2. Accounting Issues
    9. Chapter 13: Net Income and Retained Earnings; Earnings per Share (EPS)
      1. Net Income into Retained Earnings
      2. Earnings per Share (EPS)
      3. Accounting Issues
  9. Part Three: Cash Flow
    1. Chapter 14: Cash Flow from Operating (Profit-Making) Activities
      1. Profit and Cash Flow from Profit: Not Identical Twins!
      2. A Quick Word about the Direct Method for Reporting Cash Flow from Operating Activities
      3. An Alternative View of Cash Flow and Cash Flow
      4. Accounting Issues
    2. Chapter 15: Cash Flows from Investing and Financing Activities
      1. Rounding Out the Statement of Cash Flows
      2. Seeing the Big Picture of Cash Flows
      3. Accounting Issues
    3. Chapter 16: Growth and Decline Impacts on Cash Flow
      1. Setting the Stage
      2. Cash Flows in the Steady-State Case
      3. Cash Flow Growth Penalty
      4. Cash Flow “Reward” from Decline
      5. Red Ink and Cash Flow
      6. Final Comment
  10. Part Four: Analysis
    1. Chapter 17: Footnotes to Financial Statements
      1. Financial Statements—Brief Review
      2. Why Footnotes?
      3. Two Types of Footnotes
      4. Management Discretion in Writing Footnotes
      5. Analysis Issues
    2. Chapter 18: Financial Statement Ratios
      1. Financial Reporting Ground Rules
      2. Financial Statement Preliminaries
      3. Benchmark Financial Ratios
      4. Final Comments
    3. Chapter 19: Profit Analysis for Business Managers
      1. Managerial Accounting
      2. Beyond the Income Statement
      3. Classifying Operating Expenses
      4. Comparing Changes in Sales Prices and Sales Volume
      5. Breakeven Point
      6. Final Point
  11. Part Five: Truthfulness
    1. Chapter 20: Choosing Accounting Methods and Massaging the Numbers
      1. Chapter Preamble
      2. Choosing Accounting Methods
      3. Massaging the Numbers
      4. Business Managers and Their Accounting Methods
      5. Consistency of Accounting Methods
      6. Quality of Earnings
    2. Chapter 21: Audits of Financial Reports
      1. Why Audits?
      2. Certified Public Accountant (CPA)
      3. Are Audits Required?
      4. Clean Audit Opinion
      5. Do Auditors Discover Accounting Fraud?
      6. Reading an Auditor’s Report
      7. Post-SOX
    3. Chapter 22: Basic Questions, Basic Answers
      1. When You Sell a Stock Does the Company Get Your Money?
      2. Are Financial Reports Reliable and Trustworthy?
      3. Nevertheless, Are Some Financial Statements Misleading and Fraudulent?
      4. Is It Worth Your Time to Compute Financial Statement Ratios?
      5. Why Read Financial Statements, Then, If You Won’t Find Information That Has Been Overlooked by Others?
      6. The Financial Statements and Footnotes of Large Public Companies Would Take Several Hours to Read Carefully. What’s the Alternative?
      7. Is There Any One Basic Litmus Test for a Quick Gauge of a Company’s Financial Performance?
      8. Do Financial Statements Report the Truth, the Whole Truth, and Nothing but the Truth?
      9. Does Its Financial Report Explain the Basic Profit-Making Strategy of the Business?
      10. Does the Market Price of a Public Company’s Stock Shares Depend Directly and Only on the Information Reported in Its Financial Statements?
      11. Does the Balance Sheet of a Private Business Tell the Market Value of the Business?
      12. Do Books on Investing and Personal Finance Refer to Financial Statements?
      13. A Very Short Summary
    4. Chapter 23: Small Business Financial Reporting
      1. Different Standards for Different Businesses
      2. Reading a Small Business Financial Report
  12. About the Authors
  13. Index