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by Lita Epstein
Reading Financial Reports For Dummies, 3rd Edition
Introduction
Introduction
About This Book
Conventions Used in This Book
What You're Not to Read
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part I: Getting Started with Reading Financial Reports
Chapter 1: Opening the Cornucopia of Reports
Figuring Out Financial Reporting
Preparing the reports
Seeing why financial reporting counts (and who's counting)
Checking Out Types of Reporting
Keeping everyone informed
Following the rules: Government requirements
Going global
Staying within the walls of the company: Internal reporting
Dissecting the Annual Report to Shareholders
Breaking down the parts
Getting to the meat of the matter
Keeping the number crunchers in line
Chapter 2: Recognizing Business Types and Their Tax Rules
Flying Solo: Sole Proprietorships
Keeping taxes personal
Reviewing requirements for reporting
Joining Forces: Partnerships
Partnering up on taxes
Meeting reporting requirements
Seeking Protection with Limited Liability Companies
Taking stock of taxes
Reviewing reporting requirements
Shielding Your Assets: S and C Corporations
Paying taxes the corporate way
Getting familiar with reporting requirements
Chapter 3: Public or Private: How Company Structure Affects the Books
Investigating Private Companies
Checking out the benefits
Defining disadvantages
Figuring out reporting
Understanding Public Companies
Examining the perks
Looking at the negative side
Filing and more filing: Government and shareholder reports
Entering a Whole New World: How a Company Goes from Private to Public
Teaming up with an investment banker
Making a public offering
Chapter 4: Digging into Accounting Basics
Making Sense of Accounting Methods
Cash-basis accounting
Accrual accounting
Why method matters
Understanding Debits and Credits
Double-entry accounting
Profit and loss statements
The effect of debits and credits on sales
Depreciation and amortization
Checking Out the Chart of Accounts
Asset accounts
Liability accounts
Equity accounts
Revenue accounts
Expense accounts
Differentiating Profit Types
Gross profit
Operating profit
Net profit
Part II: Checking Out the Big Show: Annual Reports
Chapter 5: Exploring the Anatomy of an Annual Report
Everything but the Numbers
Debunking the letter to shareholders
Making sense of the corporate message
Meeting the people in charge
Finding basic shareholder information
Getting the skinny from management
Getting guarantees from management
Bringing the auditors’ answers to light
Presenting the Financial Picture
Summarizing the Financial Data
Finding the highlights
Reading the notes
Chapter 6: Balancing Assets against Liabilities and Equity
Understanding the Balance Equation
Introducing the Balance Sheet
Digging into dates
Nailing down the numbers
Figuring out format
Ogling Assets
Current assets
Long-term assets
Accumulated depreciation
Looking at Liabilities
Current liabilities
Long-term liabilities
Navigating the Equity Maze
Stock
Retained earnings
Capital
Drawing
Chapter 7: Using the Income Statement
Introducing the Income Statement
Digging into dates
Figuring out format
Delving into the Tricky Business of Revenues
Defining revenue
Adjusting sales
Considering cost of goods sold
Gauging gross profit
Acknowledging Expenses
Sorting Out the Profit and Loss Types
EBITDA
Nonoperating income or expense
Net profit or loss
Calculating Earnings per Share
Chapter 8: The Statement of Cash Flows
Digging into the Statement of Cash Flows
The parts
The formats
Checking Out Operating Activities
Depreciation
Inventory
Accounts receivable
Accounts payable
The cash flow from activities section, summed up
Investigating Investing Activities
Understanding Financing Activities
Issuing stock
Buying back stock
Paying dividends
Incurring new debt
Paying off debt
Recognizing the Special Line Items
Discontinued operations
Foreign currency exchange
Adding It All Up
Chapter 9: Scouring the Notes to the Financial Statements
Deciphering the Small Print
Accounting Policies Note: Laying out the Rules of the Road
Depreciation
Revenue
Expenses
Figuring out Financial Borrowings and Other Commitments
Long-term obligations
Short-term debt
Lease obligations
Mergers and Acquisitions: Finding Noteworthy Information
Pondering Pension and Retirement Benefits
Breaking Down Business Breakdowns
Reviewing Significant Events
Finding the Red Flags
Finding out about valuing assets and liabilities
Considering changes in accounting policies
Decoding obligations to retirees and future retirees
Chapter 10: Considering Consolidated Financial Statements
Getting a Grip on Consolidation
Looking at Methods of Buying up Companies
Reading Consolidated Financial Statements
Looking to the Notes
Mergers and acquisitions
Goodwill
Liquidations or discontinued operations
Part III: Analyzing the Numbers
Chapter 11: Testing the Profits and Market Value
The Price/Earnings Ratio
Figuring out earnings per share
Calculating the P/E ratio
Practicing the P/E ratio calculation
Using the P/E ratio to judge company market value (stock price)
Understanding variation among ratios
The Dividend Payout Ratio
Determining dividend payout
Digging into companies’ profits with dividends
Return on Sales
Figuring out ROS
Reaching the truth about profits with ROS
Return on Assets
Doing some dividing to get ROA
Ranking companies with the help of ROA
Return on Equity
Calculating ROE
Reacting to companies with ROEs assistance
The Big Three: Margins
Dissecting gross margin
Investigating operating margin
Catching the leftover money: Net profit margin
Chapter 12: Looking at Liquidity
Finding the Current Ratio
Calculating the current ratio
What do the numbers mean?
Determining the Quick Ratio
Calculating the quick ratio
What do the numbers mean?
Investigating the Interest Coverage Ratio
Calculating the interest coverage ratio
What do the numbers mean?
Comparing Debt to Shareholders’ Equity
Calculating debt to shareholders’ equity
What do the numbers mean?
Determining Debt-to-Capital Ratio
Calculating the debt-to-capital ratio
What do the numbers mean?
Chapter 13: Making Sure the Company Has Cash to Carry On
Measuring Income Success
Calculating free cash flow
Figuring out cash return on sales ratio
Checking Out Debt
Determining current cash debt coverage ratio
Computing cash debt coverage ratio
Calculating Cash Flow Coverage
Finding out the cash flow coverage ratio
Mattel
Hasbro
What do the numbers mean?
Part IV: Understanding How Companies Optimize Operations
Chapter 14: How Reports Help with Basic Budgeting
Peering into the Budgeting Process
Understanding who does what
Setting goals
Building Budgets
Providing Monthly Budget Reports
Using Internal Reports
Chapter 15: Turning Up Clues in Turnover and Assets
Exploring Inventory Valuation Methods
Applying Three Inventory Valuation Methods
Average costing
FIFO
LIFO
How to compare inventory methods and financial statements
Determining Inventory Turnover
Calculating inventory turnover
What do the numbers mean?
Investigating Fixed Assets Turnover
Calculating fixed assets turnover
What do the numbers mean?
Tracking Total Asset Turnover
Calculating total asset turnover
What do the numbers mean?
Chapter 16: Examining Cash Inflow and Outflow
Assessing Accounts Receivable Turnover
Calculating accounts receivable turnover
What do the numbers mean?
Taking a Close Look at Customer Accounts
Finding the Accounts Payable Ratio
Calculating the ratio
What do the numbers mean?
Determining the Number of Days in Accounts Payable
Calculating the ratio
What do the numbers mean?
Deciding Whether Discount Offers Make Good Financial Sense
Calculating the annual interest rate
What do the numbers mean?
Chapter 17: How Companies Keep the Cash Flowing
Slowing Bill Payments
Speeding Up Collecting Accounts Receivables
Borrowing on Receivables
Reducing Inventory
Getting Cash More Quickly
Part V: The Many Ways Companies Answer to Others
Chapter 18: Finding Out How Companies Find Errors: The Auditing Process
Inspecting Audits and Auditors
Looking for mistakes
Meeting Mr. or Ms. Auditor
Examining Records: The Role of the Auditor
Preliminary review
Fieldwork
Audit report
Filling the GAAP
Accounting standards: Four important qualities
Changing principles: More work for the FASB
Chapter 19: Digging into Government Regulations
Checking Out the 10-Q
Financial information
Other critical matters
Introducing the 10-K
Business operations
Financial data
Information about directors and executives
The extras
Investigating Internal Controls
Uncovering the Ways Companies Keep in Compliance
Digging into Board Operations
Understanding the nominating process
Contacting board members
Finding Out about Insider Ownership
Chapter 20: Creating a Global Financial Reporting Standard
Why Develop a Worldwide Financial Standard?
Key Moves to Reshape Global Financial Reporting
Who Benefits from a Global Standard and How?
Investors
Capital Markets
Companies
Key Differences between GAAP and the IFRS
Accounting framework
Financial statements
Revenue recognition
Assets
Inventory
Related-party transactions disclosures
Discontinued operations
Impairment charges
Chapter 21: Checking Out the Analyst–Corporation Connection
Typecasting the Analysts
Buy-side analysts
Sell-side analysts
Independent analysts
Bond analysts
Regarding Bond-Rating Agencies
Delving into Stock Rating
Taking a Look at How Companies Talk to Analysts
Analyst calls
Press releases
Mobile apps
Road shows
Chapter 22: How Companies Communicate with Shareholders
Making the Most of Meetings
Checking Out How the Board Runs the Company
Watching the directors
Speaking out at meetings
Moving away from duking it out
Sorting through Reports
Catching Up on Corporate Actions
Culling Information from Analyst Calls
Listening between the lines
Knowing when to expect analyst calls
Staying Up-to-Date Using Company Websites
Regarding Reinvestment Plans
Dividend reinvestment plans
Direct stock purchase plans
Chapter 23: Keeping Score When Companies Play Games with Numbers
Getting to the Bottom of Creative Accounting
Defining the scope of the problem
Seeing through cooked books
Unearthing the Games Played with Earnings
Reading between the revenue lines
Detecting creative revenue accounting
Exploring Exploitations of Expenses
Advertising expenses
Research and development costs
Patents and licenses
Asset impairment
Restructuring charges
Finding Funny Business in Assets and Liabilities
Recognizing overstated assets
Looking for undervalued liabilities
Playing Detective with Cash Flow
Discontinued operations
Income taxes paid
Part VI: The Part of Tens
Chapter 24: en (+1) Financial Scandals That Rocked the World
Enron
Madoff
Citigroup
Adelphia
WorldCom/MCI
Sunbeam
Tyco
Waste Management
Bristol-Meyers Squibb
Halliburton
Arthur Andersen
Chapter 25: Ten Signs That a Company's in Trouble
Lower Liquidity
Low Cash Flow
Disappearing Profit Margins
Revenue Game Playing
Too Much Debt
Unrealistic Values for Assets and Liabilities
A Change in Accounting Methods
Questionable Mergers and Acquisitions
Slow Inventory Turnover
Slow-Paying Customers
Glossary
About the Authors
Cheat Sheet
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