By John A.Tracy, CPA Accounting FOR DUMmIES ‰ 4TH EDITION 01_246009 ffirs.qxp 4/16/08 11:49 PM Page iii 01_246009 ffirs.qxp 4/16/08 11:49 PM Page ii Accounting FOR DUMmIES ‰ 4TH EDITION 01_246009 ffirs.qxp 4/16/08 11:49 PM Page i 01_246009 ffirs.qxp 4/16/08 11:49 PM Page ii By John A.Tracy, CPA Accounting FOR DUMmIES ‰ 4TH EDITION 01_246009 ffirs.qxp 4/16/08 11:49 PM Page iii Accounting For Dummies ® , 4th Edition Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2008 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. 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Library of Congress Control Number: 2008926448 ISBN: 978-0-470-24600-9 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 01_246009 ffirs.qxp 4/16/08 11:49 PM Page iv About the Author John A. Tracy (Boulder, Colorado) is Professor of Accounting, Emeritus, at the University of Colorado in Boulder. Before his 35-year tenure at Boulder, he was on the business faculty for four years at the University of California in Berkeley. Early in his career he was a staff accountant with Ernst & Young. John is the author of several books on accounting and finance, including The Fast Forward MBA in Finance, How To Read a Financial Report, and Small Business Financial Management Kit For Dummies with his son Tage Tracy. John received his BSC degree from Creighton University. He earned his MBA and PhD degrees at the University of Wisconsin in Madison. He is a CPA (inac- tive) in Colorado. 01_246009 ffirs.qxp 4/16/08 11:49 PM Page v 01_246009 ffirs.qxp 4/16/08 11:49 PM Page vi Dedication For our grandchildren — Alexander, Ryan, Mitchel, Paige, Katrina, Claire, Eric, MacKenzie, Madison, Tanner, Karsen, and Brody. Author’s Acknowledgments I’m deeply grateful to everyone at Wiley Publishing who helped produce this book. Their professionalism, courtesy, and good humor were much appreci- ated. I supplied some words, and the editors and production staff at Wiley molded them into the finished product. Out of the blue, I got a call in 1996 from Kathy Welton, then Vice President and Publisher for the Consumer Publishing Group of the For Dummies books. Kathy asked if I’d be interested in doing this book. It didn’t take me very long to say yes. Thank you again, Kathy! I can’t say enough nice things about Pam Mourouzis, who was project editor on the first edition of the book. The book is immensely better for her insights and advice. The two copyeditors on the book — Diane Giangrossi and Joe Jansen — did a wonderful job. Mary Metcalfe provided valuable suggestions on the manuscript. Thanks to Holly McGuire and Jill Alexander who encour- aged me to revise the book. The second edition benefited from the editing by Norm Crampton and Ben Nussbaum. I thank Stacy Kennedy, acquisitions editor, for asking me to do this and the previous revision. Joan Friedman was the project editor on this and the previous edition. Evidently, Wiley assigned me the best editor they have. Joan kept a steady hand on the tiller as we sailed through the choppy waters of the revisions. Joan was a delight to work with, and it goes without saying that she made the book much better. Thank you most sincerely Joan, and I hope to work with you again on the next revision. One reason I like to write books goes back to an accounting class in my undergraduate days at Creighton University in Omaha. I took a course taught by the Dean of the Business School, Dr. Floyd Walsh. I turned in a term paper, and he said that it was very well written. I have never forgotten that compli- ment. I think my old Prof would be proud of this book and might even give me an “A” on the assignment. 01_246009 ffirs.qxp 4/16/08 11:49 PM Page vii Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Joan Friedman (Previous Editions: Norm Crampton, Pam Mourouzis) Acquisitions Editor: Stacy Kennedy Technical Editor: Michael Newman, PhD Editorial Manager: Jennifer Ehrlich Editorial Supervisor: Carmen Krikorian Editorial Assistants: Erin Calligan Mooney, Joe Niesen, David Lutton Cartoons: Rich Tennant (www.the5thwave.com) Composition Services Project Coordinator: Katie Key Layout and Graphics: Brooke Graczyk, Melissa K. Jester, Laura Pence, Christine Williams Proofreaders: Laura Albert, John Greenough, Nancy L. Reinhardt Indexer: Infodex Indexing Services, Inc. Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A. Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_246009 ffirs.qxp 4/16/08 11:49 PM Page viii [...]... manual Accounting information is presented on the assumption that you have a basic familiarity with the vocabulary of accounting and the accounting methods used to generate the information In short, most of the accounting information you encounter is not transparent The main reason for studying accounting is to learn its vocabulary and valuation methods, so you can make more intelligent use of the information... test your understanding of accounting by working the exercises in my Accounting Workbook For Dummies (Wiley) Conventions Used in This Book Learning accounting requires learning the fundamentals of financial statements You get accounting information in other forms of communication (in bank statements and in business newspaper articles, for example), but financial statements occupy center stage To understand... Exploring the Reasons for Budgeting 206 Modeling reasons for budgeting .207 Planning reasons for budgeting 208 Management control reasons for budgeting 209 Additional benefits of budgeting, and a note of caution .210 xv xvi Accounting For Dummies, 4th Edition Realizing That Not Everyone Budgets .212 Avoiding budgeting 212 Relying on internal accounting reports ... Glossary: Slashing Through the Accounting Jargon Jungle 343 Index 357 xix xx Accounting For Dummies, 4th Edition Introduction Y ou may know individuals who make their living as accountants You may be thankful that they’re the accountants and you’re not You may prefer to leave accounting to the accountants, and think that you don’t need to know anything about accounting This attitude reminds... and the accounting equation .24 Reporting profit and loss, and cash flows .25 Respecting the importance of this trio 26 Considering Accounting Careers 27 Certified public accountant (CPA) .27 The controller: The chief accountant in an organization 28 A springboard to other careers 29 xii Accounting For Dummies, 4th Edition Chapter 2: Financial Statements and Accounting. .. entrenched) conventions Uniform styles and formats for reporting financial statements have evolved over the years and become generally accepted The conventions for financial statement reporting can be compared to the design rules for highway signs and traffic signals Without standardization there would be a lot of accidents I present financial statements throughout the book Therefore, I want to take a... waiting to happen Unfortunately, you can’t necessarily depend on audits to discover accounting fraud Part V: The Part of Tens In the For Dummies style, I close the book with a pair of chapters in “The Part of Tens.” I condense the main lessons from the book’s chapters into two lists of ten vital points each Chapter 16 reviews ten important ways business managers should use accounting information Chapter... Ready for Release .247 Chapter 13: How Lenders and Investors Read a Financial Report 271 Chapter 14: How Business Managers Use a Financial Report 293 Chapter 15: Audits and Accounting Fraud 311 Part V: The Part of Tens 321 Chapter 16: Ten Accounting Tips for Managers 323 Chapter 17: Ten Tips for Reading a Financial Report 333 Glossary: Slashing Through the Accounting. .. Managing the Bookkeeping and Accounting System .59 Categorize your financial information: The chart of accounts .59 Standardize source document forms and procedures 61 Hire competent, trained personnel 62 Enforce strong — I mean strong! — internal controls .63 Complete the process with end-of-period procedures 65 Leave good audit trails 66 Look out for unusual events and developments... and continue straight through until the last page The choice is yours I’ve written this book for a wide audience You may be a small business manager who already has experience with financial statements, for example, but you need to know more about how to use accounting information in analyzing your profit performance and cash flow Or, you may be an investor who needs to know more about financial statements, . 46256, 31 7-5 7 2-3 447, fax 31 7-5 7 2-4 355, or online at http:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest. READ. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 80 0-7 6 2-2 974, outside the U.S. at 31 7-5 7 2-3 993, or fax 31 7-5 7 2-4 002. For. with end-of-period procedures 65 Leave good audit trails 66 Look out for unusual events and developments 66 Design truly useful reports for managers 67 Double-Entry Accounting for Single-Entry