How to Read a Financial Report. John A. Tracy
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OPERATING EXPENSES AND ACCOUNTS PAYABLE Recording Expenses Before They Are Paid Accounting Issues 9 OPERATING EXPENSES AND PREPAID EXPENSES Paying Certain Operating Costs Before They Are Recorded as Expenses Accounting Issues: Using Prepaid Expenses to Massage the Numbers 10 DEPRECIATION EXPENSE AND PROPERTY, PLANT, AND EQUIPMENT Overview of Expense Accounting Depreciation Expense Accumulated Depreciation and Book Value of Fixed Assets Book Values and Current Replacement Costs Intangible Assets Accounting Issues 11 ACCRUING LIABILITY FOR UNPAID EXPENSES Recording Accrued Liability for Operating Expenses Bringing Interest Expense Up to Snuff Accounting Issues 12 INCOME TAX EXPENSE AND ITS LIABILITY Taxation of Business Profit Accounting Issues 13 NET INCOME AND RETAINED EARNINGS, AND EARNINGS PER SHARE (EPS) Net Income into Retained Earnings Earnings per Share (EPS) Accounting Issues 14 CASH FLOW FROM OPERATING (PROFIT-SEEKING) ACTIVITIES Profit Versus Cash Flow from Profit Changes in Assets and Liabilities That Impact Cash Flow from Operating Activities The Direct Method for Reporting Cash Flow from Operating Activities Profit Before the Bottom Line Accounting Issues 15 CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Completing the Statement of Cash Flows Seeing the Big Picture of Cash Flows Accounting Issues
5 Part Three USING FINANCIAL STATEMENTS 16 FOOTNOTES AND MANAGEMENT DISCUSSIONS Financial Report Content in Addition to Financial Statements Financial Statements—Brief Review Why Footnotes? Two Types of Footnotes Management Discretion in Writing Footnotes Analysis Issues 17 FINANCIAL STATEMENT RATIOS AND ANALYSIS Financial Reporting Ground Rules Financial Statement Preliminaries Benchmark Financial Ratios Two Cash Flow Ratios to Chew On Final Comments 18 FINANCIAL ENGINEERING What Financial Engineering Is Not What Financial Engineering Is 19 CPAs AND FINANCIAL REPORTS Certified Public Accountant (CPA) From Preparation to Audit of Financial Reports by CPAs Why Audits? Do Auditors Discover Financial Reporting Fraud? 20 BASIC QUESTIONS, BASIC ANSWERS When You Buy Stock Does the Company Get Your Money? Are Financial Reports Reliable? Are Some Financial Statements Misleading and Fraudulent? Should You Take the Time to Compute Financial Statement Ratios? Why Read Financial Statements, Then, If You Won’t Find Information That Has Been Overlooked by Others? The Financial Statements and Footnotes of Large Public Companies Would Take Several Hours to Read Carefully: What’s the Alternative? Is There a Basic Test to Gauge a Company’s Financial Performance? Do Financial Statements Report the Truth, the Whole Truth, and Nothing but the Truth? Does Its Financial Report Explain the Basic Profit-Making Strategy or Profit Model of a Business? Does the Market Price of a Public Company’s Stock Shares Depend Directly and Only on the Information Reported in Its Financial Statements? Does the Balance Sheet of a Private Business Tell the Market Value of the Business? Do Books on Investing and Personal Finance Refer to Financial Statements? A Very Short Summary ABOUT THE AUTHORS INDEX END USER LICENSE AGREEMENT