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Argenti The Fast Forward MBA in Selling (0-471-34854-6) by Joy J.D. Baldridge The Fast Forward MBA in Financial Planning (0-471-23829-5) by Ed McCarthy The Fast Forward MBA in Negotiating and Dealmaking (0-471-25698-6) by Roy J. Lewicki and Alexander Hiam The Fast Forward MBA in Project Management (0-471-32546-5) by Eric Verzuh The Fast Forward MBA in Business Planning for Growth (0-471-34548-2) by Philip Walcoff The Fast Forward MBA in Business Communication (0-471-32731-X) by Lauren Vicker and Ron Hein The Fast Forward MBA in Investing (0-471-24661-1) by John Waggoner The Fast Forward MBA in Hiring (0-471-24212-8) by Max Messmer The Fast Forward MBA in Technology Management (0-471-23980-1) by Daniel J. Petrozzo The Fast Forward MBA in Marketing (0-471-16616-2) by Dallas Murphy The Fast Forward MBA in Business (0-471-14660-9) by Virginia O’Brien THE FAST FORWARD MBA SERIES The Fast Forward MBA Series provides time-pressed business profes- sionals and students with concise, one-stop information to help them solve business problems and make smart, informed business decisions. All of the volumes, written by industry leaders, contain “tough ideas made easy.” The published books in this series are: John Wiley & Sons, Inc. The Fast Forward MBA in Finance J OHN A. T RACY The Fast Forward MBA in Finance S ECOND E DITION Copyright © 1996, 2002 by John A. Tracy. All rights reserved. Published by John Wiley & Sons, Inc., New York. 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, photo- copying, recording, scanning or otherwise, except as permitted under Sec- tions 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 Rose- wood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permis- sions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM. This publication is designed to provide accurate and authoritative informa- tion in regard to the subject matter covered. It is sold with the understand- ing that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought. Wiley also publishes its books in a variety of electronic formats. Some con- tent that appears in print may not be available in electronic books. ISBN: 0-471-20285-1 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 for Richard and Robert, my dog track buddies, who have helped me more than they know. vii CONTENTS PREFACE xiii PART 1 FINANCIAL REPORTING OUTSIDE AND INSIDE A BUSINESS CHAPTER 1—GETTING DOWN TO BUSINESS 3 Accounting Inside and Out 4 Internal Functions of Accounting 6 External Functions of Accounting 6 A Word about Accounting Methods 8 End Point 9 CHAPTER 2—INTRODUCING FINANCIAL STATEMENTS 11 Three Financial Imperatives, Three Financial Statements 11 Accrual-Basis Accounting 13 The Income Statement 16 The Balance Sheet 18 The Statement of Cash Flows 21 End Point 24 CHAPTER 3—REPORTING PROFIT TO MANAGERS 27 Using the External Income Statement for Decision-Making Analysis 27 Management Profit Report 31 Contribution Margin Analysis 35 End Point 36 CHAPTER 4—INTERPRETING FINANCIAL STATEMENTS 39 A Few Observations and Cautions 39 Premises and Principles of Financial Statements 41 Limits of Discussion 46 Profit Ratios 47 Book Value Per Share 49 Earnings Per Share 51 Market Value Ratios 53 Debt-Paying-Ability Ratios 55 Asset Turnover Ratios 58 End Point 59 PART 2 ASSETS AND SOURCES OF CAPITAL CHAPTER 5—BUILDING A BALANCE SHEET 63 Sizing Up Total Assets 63 Assets and Sources of Capital for Assets 66 Connecting Sales Revenue and Expenses with Operating Assets and Liabilities 69 Balance Sheet Tethered with Income Statement 75 End Point 76 CHAPTER 6—BUSINESS CAPITAL SOURCES 79 Business Example for This Chapter 80 Capital Structure of Business 81 Return on Investment 86 Pivotal Role of Income Tax 89 Return on Equity (ROE) 91 CONTENTS viii [...]... Business managers earn their keep by developing new products and services, expanding markets, improving productivity, anticipating changes, adapting to new technology, clarifying the business model, thinking out clear strategies, hiring and motivating people, making tough choices, solving problems, and arbitrating conflicts of interests between different constituencies (e.g., 3 FINANCIAL REPORTING... preparing the more informative financial statements and other internal accounting reports needed by business managers The “failing” of GAAP is not that these accounting rules are wrong for measuring profit, nor are they wrong for presenting the financial condition of a business—not at all It’s just that GAAP do not deal with presenting financial information to managers In fact, much of this management information... 2002 xv PA R T Financial Reporting Outside and Inside a Business 1 CHAPTER Getting Down to Business 1 E Every business has three primary financial tasks that determine the success or failure of the enterprise and by which its managers are judged: • Making profit—avoiding loss and achieving profit goals by making sales or earning other income and by controlling expenses • Cash flow—generating cash from... Control Information Internal Accounting Controls Independent Audits and Internal Auditing Fraud Management Control Reporting Guidelines Sales Mix Analysis and Allocation of Fixed Costs Budgeting Overview End Point CHAPTER 18—MANUFACTURING ACCOUNTING Product Makers versus Product Resellers Manufacturing Business Example Misclassification of Manufacturing Costs Idle Production Capacity Manufacturing Inefficiencies... most of the information disclosed in footnotes If managers prefer to have certain footnotes included in their internal accounting reports, the footnotes should be included—probably in much more detail and covering more sensitive matters than footnotes presented in external financial reports An external financial report includes three primary financial statements: One summarizes the profit-making activities... back the bills that are in better condition 10 CHAPTER 2 Introducing Financial Statements T This chapter introduces the financial statements that are included in periodic financial reports from a business to its shareowners and lenders They are called external financial statements to emphasize that the information is released outside the business Let me stress the word introducing in the chapter title... Boosting Sales Volumes Cash Flows across Different Product Lines Cash Flow from Bumping Up Sales Prices End Point 161 161 163 165 166 169 170 177 179 179 180 185 185 188 PART 4 CAPITAL INVESTMENT ANALYSIS TE CHAPTER 14—DETERMINING INVESTMENT RETURNS NEEDED A Business as an Ongoing Investment Project Cost of Capital Short-Term and Long-Term Asset Investments The Whole Business versus Singular Capital Investments... just keeping up with tax regulations and forms Accountants also have to stay abreast of changing accounting standards to prepare external financial reports 6 GETTING DOWN TO BUSINESS External Financial Reports In the next chapter I present an overview of external financial reports Please bear in mind that this book does not examine in any great detail the external financial reports of business.* This... from profit and securing cash from other sources and putting the cash inflow to good use • Financial health—deciding on the financial structure for the entity and controlling its financial condition and solvency To continue in existence for any period of time, a business has to make profit, generate cash flow, and stay solvent Accomplishing these financial objectives depends on doing all the other management... statement accounting and disclosure, the CPA auditor says so in the audit opinion on the financial statements External financial reports include footnotes that are an integral addendum to the financial statements Footnotes are needed because the external financial report is directed to outside investors and creditors of the business who are not directly involved in the day-to-day affairs of the business Managers . Entertainment ● Innovation ● Inspirational ● Insurance ● Interior Design & Decorating ● Internet Marketing ● Investing. published books in this series are: John Wiley & Sons, Inc. The Fast Forward MBA in Finance J OHN A. T RACY The Fast Forward MBA in Finance S ECOND