AccountforNon_FullCover 6/2/06 4:39 PM Page A quick, compact and easy-to-understand YOUR BUSINESS resource for non-accountants Dr Wayne Label covers it all in a style that’s easy to comprehend and apply, so you can understand the accounting systems that will help your growing business succeed basics Ł Balance sheets Ł Statements of cash flow Ł Assets and liabilities Ł Managing budgets Ł Audits and auditors Ł Double-entry accounting FOR Ł Accounting ratios Ł And everything else you need to know Ł Income statements For entrepreneurs or anyone who needs to brush up on accounting fast, this book will have you up and running in no time Fast, effective and easy to understand Business $16.95 U.S $21.95 CAN UPC ISBN 13: 978-1-4022-0657-3 ISBN 10: 1-4022-0657-7 EAN Dr Wayne Label, CPA, MBA, Ph.D., is a Certified Public Accountant in the state of Texas He has taught at several universities in the United States and abroad Dr Label has published three books on accounting and over 30 articles in professional journals ACCOUNTING NON-ACCOUNTANTS Accounting for Non-Accountants is the must-have accounting guide for all of us who have never taken an accounting class, are mystified by accounting jargon and have no clue about balance sheets, income statements or statements of cash flow Ł Understanding bookkeeping Quick Start YOUR BUSINESS Quick Start Accounting for NonAccountants The fast and easy way to learn the basics Ł Demystify debits and credits Ł Read a financial statement Ł Understand quality of earnings Ł Understand corporate transactions Ł How to put together an Manage your business better through expert accounting explanations, examples, techniques and tips! Ł The cash flow statement Ł Create and manage budgets effectively Ł Work with auditors Ł What are the key ratios in understanding your business income statement LABEL DR WAYNE A LABEL, CPA Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page i Accounting NonAccountants for Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page ii Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page iii Accounting NonAccountants for The fast and easy way to learn the basics DR WAYNE A LABEL, CPA Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page iv Copyright © 2006 by Wayne A Label Cover and internal design © 2006 by Sourcebooks, Inc © Copyright 2005 Station Casinos, Inc; Design: Kuhlmann Leavitt, Inc., St Louis Sourcebooks and the colophon are registered trademarks of Sourcebooks, Inc All rights reserved No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems— except in the case of brief quotations embodied in critical articles or reviews—without permission in writing from its publisher, Sourcebooks, Inc This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought.—From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations All brand names and product names used in this book are trademarks, registered trademarks, or trade names of their respective holders Sourcebooks, Inc., is not associated with any product or vendor in this book Published by Sourcebooks, Inc P.O Box 4410, Naperville, Illinois 60567-4410 (630) 961-3900 FAX: (630) 961-2168 www.sourcebooks.com Library of Congress Cataloging-in-Publication Data Label, Wayne A (Wayne Allan) Accounting for non-accountants : the fast and easy way to learn the basics / Wayne Label p cm ISBN-13: 978-1-4022-1483-7 Includes bibliographical references and index ISBN-13: 978-1-4022-0657-3 ISBN-10: 1-4022-0657-7 Accounting Financial statements I Title II Title: Accounting for nonaccountants HF5636.L33 2006 657—dc22 2006012421 Printed and bound in the United States of America DR 10 Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page v Contents ACKNOWLEDGMENTS ix INTRODUCTION CHAPTER 1: Introducing Accounting and Financial Statements • What Is Accounting? • Who Uses Accounting Information? • Financial Statements • How Different Business Entities Present Accounting Information CHAPTER 2: Generally Accepted Accounting Principles 13 • Who Are the SEC, AICPA, and the FASB? • Generally Accepted Accounting Principles (GAAP) CHAPTER 3: The Balance Sheet and Its Components 25 • Understanding the Balance Sheet • The Accounting Equation • The Components of the Balance Sheet • The Transactions Behind the Balance Sheet CHAPTER 4: The Income Statement 45 • Understanding the Income Statement • The Income Statement Illustrated • Transactions That Effect the Income Statement CHAPTER 5: Preparing and Using a Statement of Cash Flows 65 • What Is a Statement of Cash Flows? • Cash and Cash Equivalents • The Statement of Cash Flows Illustrated CHAPTER 6: Double-Entry Accounting 75 • The General Journal • The General Ledger • Adjusting Journal Entries • Closing Journal Entries Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page vi CHAPTER 7: The Corporation 101 • The Corporation Defined • What Is Capital Stock? • Dividends and Splits • Incorporating Solana Beach Bicycle Company • What Is Treasury Stock? CHAPTER 8: Using Financial Statements for Short-Term Analysis 125 • Using Short-Term Ratios • Current and Quick Ratios • Working Capital • Composition of Assets CHAPTER 9: Using Financial Statements for Long-Term Analysis 137 • • • • • • • Quality of Earnings Rate of Return on Investment Sales-Based Ratios or Percentages Earnings Data Long-Term Debt Position Dividend Data Footnotes CHAPTER 10: Budgeting for Your Business 149 • What Is a Budget? • Planning and Control • Advantages of Budgeting • The Master Budget • Sales Budget • Capital Budget • Budgeted Income Statement • The Cash Budget CHAPTER 11: Audits and Auditors 159 • What Is an Audit? • Types of Auditors • The Standard Audit Opinion Illustrated Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page vii • The Parts of the Report • Other Types of Audit Reports • Why Audits Are Useful to You APPENDIX A: Internet for Accountants 171 APPENDIX B: Financial Statements—Station Casinos, Inc .175 INDEX 221 ABOUT THE AUTHOR 227 Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page viii Accounting for Non-Acc.qxd 5/24/06 3:50 PM Page ix Acknowledgments I would like to thank Ewurama Ewusi-Mensah and Rachel Jay at Sourcebooks for their tireless efforts to make this book readable and understandable to the non-accountants of the world I would also like to thank Drs Bruce Lubich and Richard Samuelson for their time and effort in reading the manuscript, adding valuable insights, and making the book a better read Finally, I would like to thank the thousands of students and users of my previous book on this same topic whose comments and suggestions have helped to improve this book Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 217 Appendix B: Financial Statements—Station Casinos, Inc 217 Accounting for Non-Acc.qxd 218 5/24/06 3:52 PM Page 218 Accounting for Non-Accountants Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 219 Appendix B: Financial Statements—Station Casinos, Inc 219 Accounting for Non-Acc.qxd 220 5/24/06 3:52 PM Page 220 Accounting for Non-Accountants Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 221 Index A accounting equation, 25, 29, 42, 54, 56–58, 60, 77, 79, 81, 82, 88 accounts payable, 26, 28, 35, 39, 40, 42, 46, 48, 68, 71, 86, 91, 97, 156 accounts receivable, 27, 34, 41, 43, 48, 49, 52, 57, 59, 61, 67, 68, 70, 71, 86, 89, 90–92, 97, 98, 127, 133, 134, 155 Accrual Basis of Accounting, 61 American Accounting Association, 160, 172 American Institute of Certified Public Accountants (AICPA), 7, 11, 14, 21, 164 assets, 19, 26–43, 105, 128, 145 contra-asset, 59, 61, 90, 92, 98 current, 32, 128–131 intangible, 32, 33, 42 long-term, 16, 32, 36, 39, 43, 88, 92, 150 short-term, 32, 39, 43, 128 audit, 160–169 adverse, 166, 167, 168 compliance, 168 independent, 167 operational, 169 qualified, 166, 169 unqualified, 163–166, 169 auditor, 5, 15, 160–169 governmental, 163, 168 internal, 162, 163, 169 Accounting for Non-Acc.qxd 222 5/24/06 3:52 PM Page 222 Accounting for Non-Accountants B balance sheet, 8, 11, 15, 17, 19–43, 46, 49, 54, 56, 57, 59, 60, 61, 62, 66–69, 80, 87, 88, 90, 92, 106, 110, 111, 113–117, 120, 122, 123, 128, 132, 134, 154, 155 bookkeeping, 5, 77, 86 budget, 150–158 advantages, 150, 151 capital, 154, 158 cash, 155–157 master, 151, 152, 158 sales, 152, 153 C capital stock, 104, 122 common, 104–106, 109–112, 114, 122 dividends, 107, 108, 111, 113, 117, 119, 123 cash, 107, 108, 111, 117, 122 stock, 107, 108, 111–115 preferred, 104–106, 110, 111, 122, 123 selling, 109, 110 split, 108, 109, 115, 123 Cash Basis of Accounting, 61 Certified Public Accountants, 7, 11, 14, 21, 160–162, 165, 166, 168, 169, 172, 173, 221 corporation, 4, 9, 10, 11, 16, 18, 22, 27, 98, 101–123, 139, 142, 143, 147, 148, 162, 175 cost of goods sold, 47, 50, 53–56, 58, 61, 62, 80, 86, 91, 93–97, 127, 131, 132, 134, 142, 152–154 credit, 52, 61, 70, 76–87, 91, 93–100, 119, 126, 127, 130, 131, 133, 134, 138, 168 current ratio, 126–128, 134, 135 Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 223 Index 223 D debit, 76–87, 91, 93–100, 119 dividend payout ratio, 139, 146, 147 E earning per share (EPS), 143, 147 expense, 8, 17, 20–23, 43, 46–63, 67, 69, 70, 77, 78, 80–83, 86, 88–94, 96–99, 113, 139, 141, 142, 144, 145, 148, 150, 152–158 accumulated depreciation, 92 bad debt, 47, 50, 52, 61, 90, 91, 93 depreciation, 92, 99 insurance, 92 interest, 92, 93 F Financial Accounting Standards Board (FASB), 7, 11, 14, 22 financial statement, 1, 3–5, 7–12, 14–24, 29, 42, 46–63, 66, 67, 73, 87, 90, 93, 99, 100, 106, 111, 121, 126–148, 160, 161, 163, 164–169, 175, 177, 179, 181, 183, 185, 187, 189, 191, 193, 195, 197, 199, 201, 203, 205, 209, 211, 213, 215, 217 conservatism, 20, 21 Entity Concept, 18, 22 footnotes, 15, 17, 22, 137, 147 Going Concern Principle, 18, 19, 22 Historical Cost Principle, 22 Materiality Principle, 20, 22 obtainable, 15, 18, 22 quantifiable, 17 Realizable Value Principle, 23 Recognition Principle, 23 relevant, 15, 23 reliable, 15, 16, 23 short-term ratios, 126, 127 Accounting for Non-Acc.qxd 224 5/24/06 3:52 PM Page 224 Accounting for Non-Accountants Stable-Monetary-Unit Concept, 23 sufficient, 15 understandable, 15, 17, 23 verifiable, 16, 24 G general journal, 75–82, 84, 93, 98–100, 112, 119 adjusting, 87–90, 98 closing, 93–99 general ledger, 75, 82, 85–87, 90, 99, 100 Generally Accepted Accounting Principles (GAAP), 7, 11, 14, 15, 48, 66, 160, 161, 163, 166, 167 Generally Accepted Auditing Standards (GAAS), 160, 164 Governmental Accounting Standards Board (GASB), 163 gross profit, 47, 53–56, 58, 61, 62, 152–154 H historical cost, 29, 42 I income statement, 8, 11, 17, 20, 21, 46–63, 66, 67, 69, 70, 79, 80, 93, 97, 111, 120, 134, 148–150, 154, 155 Accrual Concept, 48 interest, 52 income taxes, 47, 48, 52, 62, 144, 145 Internal Revenue Service (IRS), 7, 12, 66, 163 inventory turnover ratio, 127, 131, 132, 134 L liabilities, 26–43, 128, 145 current, 128–130 Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 225 Index 225 long-term, 33 short-term, 33, 39, 128 N net income, 8, 20, 46, 47, 49, 50–62, 67–71, 90, 94, 98, 99, 107, 138–141, 143–148, 154, 155 O owner’s equity, 26, 28–30, 33, 35–43, 46, 54, 56, 57, 58, 60, 77–84, 88, 98, 99, 106, 139, 140 owner’s investment, 26, 28, 33, 35–37, 39, 40, 46, 69, 78, 79, 84–86, 91, 97, 106, 140 P P/E ratio, 143, 146, 148 partnership, 9, 10, 12, 103, 139, 148, 162 proprietorship, 9, 10, 12, 27, 98, 102, 103, 121, 139, 148 Public Company Accounting Oversight Board (PCAOB), 160, 169 Q quality of earnings, 137, 138 quick ratio, 126–129, 135 R retained earnings, 8, 11, 26, 28, 33–35, 41, 43, 54, 56–59, 66, 72, 80, 86, 87, 91, 93, 94, 96–98, 106, 107, 111–123, 139 return on investment (ROI), 137, 139, 142, 148 revenue, 5, 7, 8, 12, 23, 27, 46–63, 67, 69, 70, 78, 80, 82, 83, 86, 91, 94, 96, 98, 99, 131, 150, 152, 154, 163, 168 Accounting for Non-Acc.qxd 226 5/24/06 3:52 PM Page 226 Accounting for Non-Accountants S Sarbanes-Oxley Act of 2002, 160 Securities and Exchange Commission (SEC), 7, 14, 23, 164 statement of cash flows, 8, 11, 60, 62, 66–73 financing activities, 72, 73 investing activities, 71–73 operating activities, 69–71, 73 statement of retained earnings, Statements on Auditing Standards (SASs), 160 stockholders’ equity, 111–120, 139, 148 T treasury stock, 101, 115–121, 123 trial balance, 85–87, 90–92, 96–98, 100 W working capital, 102, 125–127, 129–131, 135 Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 227 About the Author Dr Wayne A Label, CPA, MBA, PhD, was born and raised in San Francisco He completed his undergraduate work in accounting at the University of California, Berkeley and then went on to the University of California, Los Angeles where he received his MBA and a PhD in accounting He is a Certified Public Accountant in the state of Texas He has taught at several universities in the United States and abroad He was the Director of the School of Accountancy at the University of Hawaii and chairman of the accounting department at the University of Nevada, Las Vegas Dr Label also taught for the Harvard Institute of International Development where he helped to start the Master’s Degree Program in Auditing in La Paz, Bolivia He received a Ford Foundation grant to aid the beginning of an MBA program at the Catholic University in Rio de Janeiro, Brazil He has also taught accounting courses in Peru, Chile, Mexico, and Germany Dr Label has published three books on accounting, and over thirty articles in professional journals He is currently teaching online courses for the University of Maryland University College and UCLA Dr Label has also given seminars in accounting and international business in numerous locations throughout the United States, as well as in Latin America, Europe, and Asia Dr Label divides his time between Puerto Vallarta, Mexico, and San Diego, California You can learn more about Dr Label at his website: www.waynelabel.com He can be contacted at wayne@waynelabel.com Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 228 Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 229 Accounting for Non-Acc.qxd 5/24/06 3:52 PM Page 230 AccountforNon_FullCover 6/2/06 4:39 PM Page A quick, compact and easy-to-understand resource for non-accountants Dr Wayne Label covers it all in a style that’s easy to comprehend and apply, so you can understand the accounting systems that will help your growing business succeed Ł Understanding bookkeeping basics Ł Balance sheets Ł Statements of cash flow Ł Assets and liabilities Ł Managing budgets Ł Audits and auditors Ł Double-entry accounting Ł Accounting ratios Ł And everything else you need to know Ł Income statements For entrepreneurs or anyone who needs to brush up on accounting fast, this book will have you up and running in no time Fast, effective and easy to understand Dr Wayne Label, CPA, MBA, Ph.D., is a Certified Public Accountant in the state of Texas He has taught at several universities in the United States and abroad Dr Label has published three books on accounting and over 30 articles in professional journals YOUR BUSINESS ACCOUNTING NON-ACCOUNTANTS Accounting for Non-Accountants is the must-have accounting guide for all of us who have never taken an accounting class, are mystified by accounting jargon and have no clue about balance sheets, income statements or statements of cash flow Quick Start YOUR BUSINESS Quick Start FOR Accounting for NonAccountants The fast and easy way to learn the basics Ł Demystify debits and credits Ł Read a financial statement Ł Understand quality of earnings Ł Understand corporate transactions Ł How to put together an Manage your business better through expert accounting explanations, examples, techniques and tips! Ł The cash flow statement Ł Create and manage budgets effectively Ł Work with auditors Ł What are the key ratios in understanding your business income statement LABEL DR WAYNE A LABEL, CPA .. .Accounting for Non- Acc.qxd 5/24/06 3:50 PM Page i Accounting NonAccountants for Accounting for Non- Acc.qxd 5/24/06 3:50 PM Page ii Accounting for Non- Acc.qxd 5/24/06 3:50 PM Page iii Accounting. .. Entities Present Accounting Information Accounting for Non- Acc.qxd 5/24/06 3:50 PM Page Accounting for Non- Accountants What Is Accounting? The purpose of accounting is to provide information that... 15 Accounting for Non- Acc.qxd 16 5/24/06 3:50 PM Page 16 Accounting for Non- Accountants Not all information about a firm is relevant for estimating its value or evaluating its management For