Reading Financial Reports For Dummies

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John Wiley & Sons, Mar 8, 2011 - Business & Economics - 384 pages
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The U.S. government began standardizing and regulating financial reporting in 1929 when the stock market crash made it painfully clear that businesses often made absurd claims and that investors were either gullible, unable to verify information, or both. Now, financial reports are used by a company’s management to measure profitability (or lack of it), optimize operations and guide the company, by banks and other lenders to gauge the company’s financial health, and by institutional or individual investors interested in purchasing stock.

Unless you’re financially savvy, annual reports with all those figures, frustrating footnotes, and fine print are boring and intimidating. However, once you have a fundamental knowledge of finance and its basic terminology, you can find the juicy parts. Reading Financial Reports For Dummies by Lita Epstein, a teacher of online financial courses and author of Trading for Dummies, gets you up to speed so you can:

  • Go past the prose that can maximize the positive and minimize the negative and get information in dollars and cents
  • Get an overview from the big three—the balance sheet, income statement, and statement of cash flows
  • Understand the lingo and read between the lines
  • Calculate basics like PE, Dividend Payout Ratio, ROS, ROA, ROE, Operating Margin, and Net Margin

It pays for investors to be somewhat skeptical instead of gullible. Pressured to please Wall Street, companies are sometimes tempted to use “creative” accounting. You’ll discover how to:

  • Detect red flags (that, unfortunately, aren’t emphasized in red) such as lawsuits, changes in accounting methods, and obligations to retirees and future retirees
  • Understand the different reporting requirements for public companies and private companies with various types of business structures
  • Analyze a company’s cash flow, a prime indicator of its financial health
  • Scrutinize deals such as mergers, acquisitions, liquidations and other major changes in key assets

Organized so you can start where you’re comfortable and proceed at your own pace, Reading Financial Reports for Dummies helps managers prepare annual reports and use financial reporting to budget more efficiently and helps investors base their decisions on knowledge instead of hype. Whether you’re in business or in the stock market, knowledge is always an asset.

 

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Contents

Introduction
Conventions Used in This Book
Foolish Assumptions
Checking Out the Big Show Annual Reports
The Part of Tens
Where to Go from Here
Part I
Chapter 1
Finding the Current Ratio
Determining the Quick Ratio
What do the numbers mean?
Calculating the interest coverage ratio
What do the numbers mean?
Calculating debt to shareholders equity
Determining DebttoCapital Ratio
What do the numbers mean?

Preparing the reports
Why financial reporting counts and whos counting
Checking Out Types of Reporting
Keeping everyone informed
Government requirements
Internal reporting
Breaking down the parts
How the number crunchers are kept in line
Chapter 2
Keeping taxes personal
Partnerships
Seeking Protection with Limited Liability Companies
S and C Corporations
Paying taxes the corporate way
Getting familiar with reporting requirements
Chapter 3
Checking out the benefits
Defining disadvantages
Figuring out reporting
Examining the perks
Government and shareholder reports
How a Company Goes from Private to Public
Making a public offering
Chapter 4
Accrual accounting
Understanding Debits and Credits
Profit and loss statements
Digging Into Depreciation and Amortization
Checking Out the Chart of Accounts
Asset accounts
Liability accounts
Equity accounts
Expense accounts
Gross profit
Part II
Chapter 5
Everything but the Numbers
Making sense of the corporate message
Meeting the people in charge
Bringing the auditors answers to light
Presenting the Financial Picture
Summarizing the Financial Data
Reading the notes
Chapter 6
Introducing the Balance Sheet
Nailing down the numbers
Ogling Assets
Longterm assets
Accumulated depreciation
Looking at Liabilities
Longterm liabilities
Stock
Capital
Chapter 7
Digging into dates
Figuring out format
Delving Into the Tricky Business of Revenues
Adjusting sales
Considering cost of goods sold
Gauging gross profit
Acknowledging Expenses
Sorting Out the Profit and Loss Types
Nonoperating income or expense
Net profit or loss
Chapter 8
Digging Into the Statement of Cash Flows
The formats
Checking Out Operating Activities
Depreciation
Accounts receivable
Investigating Investing Activities
Understanding Financing Activities
Buying back stock
Incurring new debt
Discontinued operations
Adding It All Up
Chapter 9
Deciphering the Small Print
Depreciation
Revenue
Figuring Out Financial Borrowings and Other Commitments
Shortterm debt
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
Decoding obligations to retirees and future retirees
Chapter 10
Looking at Methods of Buying Up Companies
Reading Consolidated Financial Statements
Looking to the Notes
Mergers and acquisitions
Goodwill
Part III
Chapter 11
The PriceEarnings Ratio
Practicing the PE ratio calculation
Using the PE 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
Reaching the truth about profits with ROS
Doing some dividing to get ROA
Return on Equity
Margins
Investigating operating margin
Net profit margin
Chapter 12
Chapter 13
Calculating free cash flow
Figuring out cash return on sales ratio
Checking Out Debt
Computing cash debt coverage ratio
Calculating CashFlow Coverage
Finding out the cashflow coverage ratio
Hasbro
Part IV
Chapter 14
Who does what?
Setting goals
Building Budgets
Providing Monthly Budget Reports
Using Internal Reports
Chapter 15
Exploring Inventory Valuation Methods
Applying Three Inventory Valuation Methods
Average costing
LIFO
Determining Inventory Turnover
What do the numbers mean?
What do the numbers mean?
Calculating total asset turnover
Chapter 16
Calculating accountsreceivable turnover
What do the numbers mean?
Taking a Close Look at Customer Accounts
Finding the AccountsPayable Ratio
What do the numbers mean?
Calculating the ratio
Deciding Whether Discount Offers Make Good Financial Sense
What do the numbers mean?
Chapter 17
Speeding Up Collecting Accounts Receivables
Borrowing on Receivables
Getting Cash More Quickly
Part V
Chapter 18
Looking for mistakes
The Role of the Auditor
Fieldwork
Audit report
Filling the GAAP
More work for the FASB
Chapter 19
Checking Out the 10Q
Other critical matters
Business operations
Information about directors and executives
The extras
Uncovering the Ways Companies Keep in Compliance
Digging Into Board Operations
The nominating process
Contacting board members
Chapter 20
Typecasting the Analysts
Sellside analysts
Independent analysts
Bond analysts
Regarding Bond Rating Agencies
Delving Into Stock Rating
Taking a Look at How Companies Talk to Analysts
Press releases
Chapter 21
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
Regarding Reinvestment Plans
Directstockpurchase plans
Chapter 22
Getting to the Bottom of Creative Accounting
Recipes for cooked books
Unearthing the Games Played with Earnings
Reading between the revenue lines
Detecting creative revenue accounting
Exploring Exploitations of Expenses
Advertising expenses
Asset impairment
Restructuring charges
Finding Funny Business in Assets and Liabilities
Looking for undervalued liabilities
Playing Detective with Cash Flow
Income taxes paid
Part VI
Chapter 23
Adelphia
WorldComMCI
Sunbeam
Waste Management
BristolMeyers Squibb
Arthur Andersen
Chapter 24
Low Cash Flow
Revenue GamePlaying
Unrealistic Values for Assets and Liabilities
Slow Inventory Turnover
SlowPaying Customers
Chapter 25
Yahoo Finance
The Wall Street Journal
Morningstar
Part VII
Appendix A
Appendix B
Copyright

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About the author (2011)

Lita Epstein is a writer and a designer and teacher of online financial courses, as well as the coauthor of Trading For Dummies.

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