Reading Financial Reports for Dummies (58 page)

BOOK: Reading Financial Reports for Dummies
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net business income:
Business income or profit after a company has subtracted all its business expenses.

net marketable value:
The book value of securities, adjusted for any gains or losses.

net profit:
A company’s bottom line, which shows how much money the company earns after it deducts all its expenses.

net sales or net revenue:
Sales a company makes minus any adjustments to those sales.

non-operating income:
Income from a source that isn’t part of a company’s normal revenue-generating activities.

notes to the financial statements:
The section in the annual report that offers additional detail about the numbers provided in those statements.

operating cash flow:
Cash generated by company operations to produce and sell company products.

operating expense:
Any expense that goes into operating a business but isn’t directly involved in selling the product, such as advertising, dues and subscriptions, or equipment rental.

operating lease:
A rental agreement for equipment that offers no ownership provisions.

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Reading Financial Reports For Dummies, 2nd Edition
operating margin or profit:
A company’s earnings after it subtracts all costs and expenses directly related to the core business of the company — its sales of products or services.

operating period:
A specific length of time — which may be a day, month, quarter, or year — for which financial results are determined.

parent company:
A major corporation that controls numerous smaller companies that it has bought in order to build the company.

partnership:
A business that’s owned by more than one person and isn’t incorporated.

physical capacity:
The number of facilities a company has and the amount of product the company can manufacture.

preferred stock:
A type of stock that gives its owners no voting power in the company’s operations but guarantees their dividends, which must be paid before common stockholders can get theirs.

profit:
The amount of money the company earns.

proxies:
Paper ballots sent to shareholders so they can vote on critical issues that impact the company’s operations, such as members of the board of directors and executive compensation programs.

receivership:
A type of bankruptcy in which a company can avoid liquidating itself and, instead, work with a court-appointed trustee to restructure its debt so it can emerge from bankruptcy.

recognize:
To record a revenue or expense in a company’s books.

related-party revenue:
Revenue that comes from a company selling to another entity where the seller controls how the company operates and makes a profit.

restate earnings:
To correct “accounting errors” by changing the numbers originally reported to the general public.

restructure:
To reorganize business operations by means such as combining divisions, splitting divisions, dismantling an entire division, or closing manufacturing plants.

retained earnings:
Profit that a company doesn’t pay to stockholders over the years it accumulates in the retained earnings account.

revenue:
Payments a company receives for its products or services.

Glossary

341

royalties:
Payments a company makes for the use of intellectual property owned by another company or individual.

secondary public offerings:
The sale of additional shares of stock to the general public by a company that already sells shares on the public stock market.

secured debt:
Money borrowed on the basis of collateral, which is usually a major asset such as a building.

securities:
Stocks and bonds sold on the public financial markets.

shareholders’ equity:
The value of the stocks held by company shareholders.

short-term borrowings or debt:
Lines of credit or other debt that a company must repay within the next 12-month period.

side letters:
The agreements a company makes with its regular customers outside the actual documentation it uses in a formal contract to purchase or sell the goods.

sole proprietorship:
A business started and owned by an individual that’s not incorporated.

solvency:
A company’s ability to pay all its outstanding bills and other debts.

statement of cash flows:
One of the key financial statements, a document that reports a company’s performance over time, focusing on how cash flows through the business.

stock incentives:
Shares of company stock that a company offers as part of an employee compensation package.

stock-option plan:
An offer a company gives to employees and board members to buy the company’s stock at prices below market value.

tangible asset:
Any asset that you can touch, such as cash, inventory, equipment, or buildings.

tax liability account:
An account that tracks tax payments that a company has made or must still make.

trading securities:
Securities that a company buys primarily as a place to hold onto assets until the company decides how to use the money for its operations or growth.

unrealized losses or gains:
Changes in the value of a holding that hasn’t sold yet but has a market value that has increased or decreased since the time it was bought.

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Reading Financial Reports For Dummies, 2nd Edition
variable costs:
Costs that change based on the amount needed, such as raw materials or employee overtime.

venture capitalist:
A person who invests in start-up businesses, providing the necessary cash in exchange for some portion of company ownership.

volume discount:
A reduced rate received by a business that agrees to buy a large number of a manufacturer’s product.

wholly owned subsidiary:
A company whose stock is purchased in full by another company.

working capital:
A company’s current assets minus its current liabilities; this figure measures the liquid assets the company has at its disposal to continue building its business.

Index

• A •

overstating, 310

policy, 220

AAERs (Accounting and Auditing

selling, 129

Enforcement Releases), 316

speeding up collecting, 228–230

account format, for balance sheets, 78

in a statement of cash fl ows, 112–113

accountants

tracking noncash sales to customers, 334

certifi ed public accountants (CPAs), 13,

turnover, 217–220, 230, 304

238–239

accounts receivable section, of the

changes or disagreements with, 37, 251

fi nancial report, 310

reporting a change in, 255

accrual accounting

accounting

defi ned, 335

creative, 297–298

described, 43–45

of IFRS compared to GAAP, 263

revenue recognition in, 299

information, 243

accrued dividends, 89

methods, 43–46, 332–333

accrued expenses payable, 312–313

Accounting and Auditing Enforcement

accrued liabilities, 88, 335

Releases (AAERs), 316

accrued payroll taxes account, 54

accounting department, 10

accumulate rating, 277

accounting fees and services, 252

accumulated amortization, 50

Accounting For Dummies
(Tracy), 81

accumulated depreciation, 49, 52–53, 86–87

accounting policies

acid test ratio.
See
quick ratio

changes in, 70, 137–138

acquisitions

changing, 325–326

note to the fi nancial statement on, 131

comparing, 125

notes in consolidated fi nancial

note on, 122–123

statements, 149

accounts, 48, 51

questionable, 333–334

accounts payable

reporting, 255, 287

account, 54, 335

using to hide problems, 297

described, 88, 113

Adelphia scandal, 321–322

increase in, 312

adjustments, to sales, 98

the number of days in, 223–224

administration expenses, 101

accounts payable turnover ratio, 222–223

advances, to a subsidiary, 147

accounts receivable

advertising expenses, 101, 125, 306

account, 52, 335

affi liates, 86

aging schedule, 220–221

agreement terminations, 254

described, 81, 112, 230

AICPA (American Institute of Certifi ed

as liquid holdings, 329–330

Public Accountants), 244

monitoring, 304

AIMR (Association for Investment

Management and Research), 140

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Reading Financial Reports For Dummies, 2nd Edition
Allowance for Bad Debt Account, 221

“As of” date, 76–77

allowances

asset accounts, 47, 51–53

for doubtful accounts, 66

assets

tracking, 98–99

on a balance sheet, 18

American Institute of Certifi ed Public

current, 18, 80–86, 172, 336

Accountants (AICPA), 244

defi ned, 10, 76, 335

American Stock Exchange, 40

depreciation of, 123–124

amortization

disposal of, 255

account, 53

effect of debits and credits on, 48

defi ned, 335

fi xed, 214

described, 49–50

hidden, 84

expenses of, 57, 102

IFRS compared to GAAP, 265–266

of intangible assets, 308

impairments to, 65

shifting the reporting of, 306

intangible, 50, 53, 85, 338

analyst calls, 288–292

long-term, 18, 52, 83–86, 338

analysts.
See
fi nancial analysts

managing, 205

angel, help from, 32

net, 339

annual interest rate, 225–226

noncurrent, 79, 80

annual meetings

overvalued, 309, 332

for shareholders, 282

purchase or sale of major new, 114

shareholders speaking out at, 284–285

recognizing overstated, 310–312

annual reports

revaluation of, 263

certifying fi nancial and other

revenue per dollar value of, 305

information, 38

tangible, 49, 51–53, 341

components of, 61–62

unrealistic values for, 332

described, 14

valuing, 137

dissecting, 17–19

associates, 140

fi led by public companies, 37

Association for Investment Management

fi nancial statements in, 18–19

and Research (AIMR), 140

letter to shareholders, 62–63

audit(s)

parts of, 17

board members on committees for, 284

transparency of IFRS companies, 262

by CPAs, 13

annuity, 132

defi ned, 335

AOL-Time Warner merger, 333

described, 237–238

Apple Computer, 34

audit committees

arm’s length transaction, 302, 335

appointing independent directors to, 286

Arthur Andersen

running independently, 284

auditor at Sunbeam, 323

audit fees, added by Sarbanes-Oxley, 39

auditor for Halliburton, 326

audit report, 242

auditor for Waste Management, 324

auditing process, 239–242

auditor for WorldCom, 322

auditors

Enron scandal and, 320

audit report, 242

scandal, 326–327

fi eld work by, 240–242

artwork, value of, 311–312

preliminary review, 240

Index

345

reasons for changing, 69–70

effect of Sarbanes-Oxley on, 39

resolving discrepancies found, 241

electing at annual meetings, 282

role of, 239–242

information about in the 10-K form, 252

auditors’ report, 17, 61, 68–71, 335

liability of, 283

average accounts receivable, 218–219

minimum qualifi cations, 257

average costing inventory tracking

watching, 283–284

system, 83

board operations, disclosure requirements

average current liabilities, 186

regarding, 256–258

average inventory, 212

bond analysts, 274

average sales credit period, 218–219

bond rating agencies, 270, 274–276

average-costing inventory system, 207,

bond ratings, changes in, 276

209, 211

bonds, 89, 126, 275

bonds payable account, 54

• B •

borrowing

on receivables, 230–231

backlogs, considering, 198

short-term, 87

bad debt, writing off, 220–221

bottom up budgeting, 196–197

balance sheets

Bristol-Meyers Squibb scandal, 325

in annual reports, 18, 71

budget amounts, 201

date of, 76–77

budget committee, 197

defi ned, 75, 335

budget reports, providing monthly,

formula for, 47

201–203

IFRS compared to GAAP, 263–264

budgeted income statement, 201

in quarterly reports, 13

budgeting process, 195–199

styles of, 78–80

budgets, 199–201

terms on, 75–76

buildings, 84

bankruptcy, reporting, 254

buildings account, 52

basic earnings per share (EPS), 106, 156

Buntrock, Dean (Waste Management

beginning inventory, 208

founder), 324

Belnick, Mark (Tyco chief counsel), 323

business combination, 254

best efforts agreement, 40

business income, net, 339

BestCalls Web site, 278, 292

business operations, 250

big-bath charges, 297

business structures, 21–28

bill-and-hold transactions, 302

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