Read Reading Financial Reports for Dummies Online
Authors: Lita Epstein
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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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
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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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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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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