TEAMFLY Team-Fly ® The Fast Forward MBA in Finance The Fast Forward MBA in Finance S ECOND E DITION The Fast Forward MBA Pocket Reference, Second Edition (0-471-22282-8) by Paul A. 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. 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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 Financial Leverage 92 End Point 95 CHAPTER 7—CAPITAL NEEDS OF GROWTH 97 Profit Growth Plan 98 Planning Assets and Capital Growth 99 End Point 105 PART 3 PROFIT AND CASH FLOW ANALYSIS CHAPTER 8—BREAKING EVEN AND MAKING PROFIT 109 Adding Information in the Management Profit Report 109 Fixed Operating Expenses 112 Depreciation: A Special Kind of Fixed Cost 113 Interest Expense 116 Pathways to Profit 116 End Point 122 CHAPTER 9—SALES VOLUME CHANGES 125 Three Ways of Making a $1 Million Profit 126 Selling More Units 129 Sales Volume Slippage 133 Fixed Costs and Sales Volume Changes 134 End Point 136 CHAPTER 10—SALES PRICE AND COST CHANGES 139 Sales Price Changes 139 When Sales Prices Head South 144 Changes in Product Cost and Operating Expenses 146 End Point 148 CHAPTER 11—PRICE/VOLUME TRADE-OFFS 149 Shaving Sales Prices to Boost Sales Volume 150 Volume Needed to Offset Sales Price Cut 154 Thinking in Reverse: Giving Up Sales Volume for Higher Sales Prices 157 End Point 159 ix CONTENTS [...]... 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... liabilities was invested by the shareowners in the business and how much is attributable to the cumulative profit over the life of the business that was not distributed to its shareowners A business is profit-motivated, so its income statement (the financial statement that reports the profit or loss of the business for the period) occupies center stage The market value of the ownership shares in the business... reported in its balance sheet Having these two assets should be reflected in above-average profit performance, which is reported in the income statement of the business The chief executive can brag about these two assets in the company’s financial reports to shareowners and lenders, but don’t look for them in the company’s balance sheet The balance sheet at the start and end of the year for the business... 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 should already know 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... footnotes presented in external financial reports An external financial report includes three primary financial statements: One summarizes the profit-making activities of the business for the period; one summarizes the cash inflows and outflows for the same period; and one summarizes the assets of the business at the end of the period that are balanced by the claims against, and sources of, the assets *Without... 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... examine in any great detail the external financial reports of business.* This book is mainly concerned with internal reports to managers and how managers analyze the information in these reports for making decisions and for controlling the financial performance of the business Only a few brief comments about external financial reporting of particular importance to managers are mentioned here The financial... 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... 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 One brief chapter cannot possibly cover the waterfront and deal in a comprehensive... to test whether the statements have been prepared according to GAAP If there are material departures from these ground rules of financial 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 . TEAMFLY Team-Fly ® The Fast Forward MBA in Finance The Fast Forward MBA in Finance S ECOND E DITION The Fast Forward MBA Pocket Reference,. 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