Reading Financial Reports for Dummies (4 page)

Calculating fi xed assets turnover .................................................... 214

What do the numbers mean? ........................................................... 215

Tracking Total Asset Turnover .................................................................. 215

Calculating total asset turnover ....................................................... 215

What do the numbers mean? ........................................................... 216

Chapter 16: Examining Cash Infl ow and Outfl ow . . . . . . . . . . . . . . . . .217

Assessing Accounts Receivable Turnover ............................................... 217

Calculating accounts receivable turnover ...................................... 218

What do the numbers mean? ........................................................... 219

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Taking a Close Look at Customer Accounts ............................................ 220

Finding the Accounts Payable Ratio ......................................................... 222

Calculating the ratio .......................................................................... 222

What do the numbers mean? ........................................................... 223

Determining the Number of Days in Accounts Payable .......................... 223

Calculating the ratio .......................................................................... 223

What do the numbers mean? ........................................................... 224

Deciding Whether Discount Offers Make Good Financial Sense ........... 225

Calculating the annual interest rate ................................................ 225

What do the numbers mean? ........................................................... 226

Chapter 17: How Companies Keep the Cash Flowing . . . . . . . . . . . . .227

Slowing Down Bill Payments ...................................................................... 227

Speeding Up Collecting Accounts Receivables ........................................ 228

Borrowing on Receivables .......................................................................... 230

Reducing Inventory ..................................................................................... 231

Getting Cash More Quickly ......................................................................... 232

Part V: The Many Ways Companies

Answer to Others ...................................................... 235

Chapter 18: Finding Out How Companies Find Errors:

The Auditing Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .237

Inspecting Audits and Auditors ................................................................. 237

Looking for mistakes ......................................................................... 238

Meeting Mr. or Ms. Auditor .............................................................. 238

Examining Records: The Role of the Auditor ........................................... 239

Preliminary review ............................................................................. 240

Fieldwork ............................................................................................ 240

Audit report ........................................................................................ 242

Filling the GAAP ........................................................................................... 242

Accounting standards: Four important qualities ........................... 243

Changing principles: More work for the FASB ............................... 244

Chapter 19: Digging into Government Regulations . . . . . . . . . . . . . . .247

Checking Out the 10-Q ................................................................................ 248

Financial information ........................................................................ 248

Other critical matters ........................................................................ 249

Introducing the 10-K .................................................................................... 250

Business operations .......................................................................... 250

Financial data ..................................................................................... 250

Information about directors and executives .................................. 252

The extras ........................................................................................... 252

Investigating Internal Controls .................................................................. 253

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Uncovering the Ways Companies Keep in Compliance .......................... 254

Digging into Board Operations .................................................................. 256

The nominating process ................................................................... 256

Contacting board members .............................................................. 257

Finding Out about Insider Ownership ....................................................... 258

Chapter 20: Creating a Global Financial Reporting Standard . . . . . .259

Why Develop a Worldwide Financial Standard? ...................................... 259

Key Moves to Reshape Global Financial Reporting ................................ 260

Who Benefi ts from a Global Standard and How? ..................................... 261

Investors ............................................................................................. 261

Capital Markets .................................................................................. 262

Companies .......................................................................................... 262

Exploring Key Differences between GAAP and IFRS ............................... 262

Accounting framework ...................................................................... 263

Financial statements .......................................................................... 263

Revenue recognition .......................................................................... 265

Assets .................................................................................................. 265

Inventory ............................................................................................. 266

Related-party transactions-disclosures .......................................... 266

Discontinued operations................................................................... 267

Impairment charges ........................................................................... 267

Chapter 21: Checking Out the Analyst-Corporation Connection . . . .269

Typecasting the Analysts ........................................................................... 269

Buy-side analysts ............................................................................... 270

Sell-side analysts ................................................................................ 271

Independent analysts ........................................................................ 273

Bond analysts ..................................................................................... 274

Regarding Bond Rating Agencies ............................................................... 274

Delving into Stock Rating ............................................................................ 276

Taking a Look at How Companies Talk to Analysts ................................ 277

Analyst calls........................................................................................ 277

Press releases ..................................................................................... 278

Road shows......................................................................................... 279

Chapter 22: How Companies Communicate with Shareholders . . . .281

Making the Most of Meetings ..................................................................... 282

Checking Out How the Board Runs the Company ................................... 283

Watching the directors ..................................................................... 283

Speaking out at meetings .................................................................. 284

Moving away from duking it out ...................................................... 285

Sorting through Reports ............................................................................. 286

Catching Up on Corporate Actions ........................................................... 287

Culling Information from Analyst Calls ..................................................... 288

Listening between the lines .............................................................. 289

Knowing when to expect analyst calls ............................................ 292

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Staying Up to Date Using Company Web Sites ......................................... 292

Regarding Reinvestment Plans .................................................................. 293

Dividend-reinvestment plans ........................................................... 293

Direct-stock-purchase plans ............................................................. 294

Chapter 23: Keeping Score When Companies

Play Games with Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .295

Getting to the Bottom of Creative Accounting ........................................ 296

Defi ning the scope of the problem .................................................. 296

Recipes for cooked books ................................................................. 297

Unearthing the Games Played with Earnings ........................................... 298

Reading between the revenue lines ................................................. 299

Detecting creative revenue accounting .......................................... 303

Exploring Exploitations of Expenses ......................................................... 305

Advertising expenses ........................................................................ 306

Research and development costs .................................................... 306

Patents and licenses .......................................................................... 307

Asset impairment ............................................................................... 308

Restructuring charges ....................................................................... 309

Finding Funny Business in Assets and Liabilities .................................... 309

Recognizing overstated assets ......................................................... 310

Looking for undervalued liabilities .................................................. 312

Playing Detective with Cash Flow .............................................................. 314

Discontinued operations................................................................... 314

Income taxes paid .............................................................................. 315

Part VI: The Part of Tens ........................................... 317

Chapter 24: Ten Financial Scandals That Rocked the World. . . . . . .319

Enron ............................................................................................................. 320

Citigroup ....................................................................................................... 321

Adelphia ........................................................................................................ 321

WorldCom/MCI ............................................................................................ 322

Sunbeam ....................................................................................................... 323

Tyco ............................................................................................................... 323

Waste Management ..................................................................................... 324

Bristol-Meyers Squibb ................................................................................. 325

Halliburton ................................................................................................... 325

Arthur Andersen .......................................................................................... 326

Chapter 25: Ten Signs That a Company’s in Trouble . . . . . . . . . . . . . .329

Lower Liquidity ............................................................................................ 329

Low Cash Flow ............................................................................................. 330

Disappearing Profi t Margins ....................................................................... 330

Revenue Game-Playing ................................................................................ 331

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Too Much Debt ............................................................................................ 332

Unrealistic Values for Assets and Liabilities ............................................ 332

A Change in Accounting Methods ............................................................. 332

Questionable Mergers and Acquisitions .................................................. 333