Reading Financial Reports for Dummies (60 page)

preparing, 10

required by the SEC, 248

for private companies, 32–33

Forms 3, 4, and 5, on insider ownership,

readers of, 11–12

258

reporting unreliable, 255

Schedule C (“Profi t or Loss from

types of, 12–16

Business”) form, 22

weaknesses in internal controls over, 253

Schedule C-EZ (“Net Profi t from

fi nancial statements

Business”) form, 22

in annual reports, 17–19, 61, 71–72

Schedule E (“Supplemental Income and

defi ned, 337

Loss”) form, 22

of IFRS compared to GAAP, 263–265

Schedule F (“Profi t or Loss from

notes to, 339

Farming”) form, 22

reading consolidated, 146–148

Schedule SE (“Self-Employment Tax”)

required for Form 10-Q, 248

form, 22

fi nancing activities

forward P/E ratio, 155

on a statement of cash fl ows, 108, 110

fraudulent fi nancial reporting, 238, 337

understanding, 115–117

free cash fl ow, 182–184

fi nished-goods inventory, 99

freight charges account, 56

Fiorina, Carly (HP CEO), 285

funding, LLCs seeking, 25

fi rst in, fi rst out (FIFO) inventory tracking

furniture and fi xtures account, 53, 85

system, 82, 207, 210–211, 266

fi scal years, 77, 255

• G •

Fitch Ratings, 275

fi xed assets

GAAP (generally accepted accounting

sales of, 315

principles)

turnover, 214–215

accounting rules, 332–333

Index

351

accrual accounting required, 44

• H •

changing, 244–245

compared to IFRS, 262–267

Halliburton scandal, 325–326

defi ned, 337

Hasbro

demands of, 19

accounts payable turnover ratio, 223

described, 242

accounts receivable turnover ratio, 219

following, 242–245

acquiring fi nancial statements of, 154

governing reporting practices, 299

annual reports Web sites, 121

recognition of, 16

average accounts payable, 223

relationships to IFRS, 15

average accounts receivable, 219

gains, unrealized, 341

average sales credit period, 219

GECS (General Electric Capital Services),

bad debt, 220

140–144

basic and diluted EPS, 156

general ledger, 50

cash debt coverage ratio, 189

general offi ce needs, 101

cash fl ow, 114, 119

generally accepted accounting principles.

cash fl ow coverage ratio, 192

See
GAAP (generally accepted

cash return on sales ratio, 185

accounting principles)

current cash debt coverage ratio, 187

generally accepted audit standards

current ratio, 172

statement, in an auditors’ report, 69

debt to shareholders’ equity, 178

Getz, Herbert (Waste Management general

debt-to-capital ratio, 179

counsel), 324

EBITDA (earnings before interest, taxes,

global fi nancial reporting, 260–261

depreciation, and amortization), 176

global fi nancial reporting standard, 259–

effects of currency exchange, 118

267

fi nancing activities of, 117

goals, in the budget process, 197–199

fi xed assets turnover, 214

going-concern problem, 70, 338

free cash fl ow, 183

Goldman Sachs, 285

gross margin, 168

goods

interest coverage ratio, 176

ordered but not shipped, 299–300

inventory turnover, 213

shipped but not ordered, 300

long-term debt, 127–128

goodwill

long-term debt payments, 128–129

as an asset, 85

net profi t margin, 170

described, 131, 149

notes on fi nancial borrowings, 126

explaining in consolidated fi nancial

number of days in accounts payable

statements, 149

ratio, 224

impairment of, 308

operating margin, 168–169

as negative, 264

P/E (price/earnings) ratio, 157

value of, 308

quick ratio, 174

goodwill account, 53, 338

ROE (return on equity), 166

government

ROS (return on sales), 163–164

need for fi nancial reports, 11

spending on investments, 115

reports for, 14–15

total asset turnover, 216

gross margin, 167–168, 338

Web site, 2

gross profi t, 57, 94, 100, 103, 338

growth prospects, 170

352
Reading Financial Reports For Dummies, 2nd Edition
Hau, Thomas (Waste Management

initial public offering.
See
IPO (initial

controller), 324

public offering)

headline EPS, 159

in-process research and development, 297

Hewlett, Walter (HP founder), 285

inside ownership, 258

hidden assets, 84

insolvency, 192, 338

highlights

institutional shareholders, 286

in an annual report, 17

in-store credit, 218, 338

to fi nancial data, 72

insurance expenses, 102

hockey stick, 290

intangible assets, 50, 53, 85, 308, 338

hold rating, 277

intellectual property, 338

HP, Compaq merger with, 285

intellectual property account, 53

interest

• I •

charging for late payment, 229

as a fi nancial decision, 58

IASB (International Accounting Standards

paying for a securitization program, 230

Board), 15–16, 260

interest coverage ratio, 175–176

IFRS (International Financial Reporting

interest expenses, 57, 102, 338

Standards)

interest income, 102

adoption worldwide, 261

interest rate, for bonds, 274

compared to GAAP, 262–267

internal control structure, 240

described, 15

internal controls, 81, 240–241, 251, 253–254

discontinued operations, 267

internal fi nancial reports

worldwide scope of, 259

analyzing, 202–203

impairment of asset value, 255

defi ned, 338

impairments to assets section, 65

described, 12, 15–16

income

preparing monthly, 201

effect of debits and credits on, 48

using, 203–204

non-operating, 339

Internal Revenue Service (IRS), IRS.
See
IRS

from nonoperating activities, 104–105

(Internal Revenue Service)

before taxes, 94

International Accounting Standards Board

income statements

(IASB), 15–16, 260

in annual reports, 18, 71

International Financial Reporting

defi ned, 338

Standards.
See
IFRS (International

described, 47–48, 92

Financial Reporting Standards)

detail in, 91

Internet, reaching shareholders on, 282

IFRS compared to GAAP, 264

introductory paragraph, of the auditors’

in quarterly reports, 13

report, 68

for sole proprietors, 23

inventory

income taxes, 102, 315

described, 82–83

incorporation, 2, 22, 25, 37

in IFRS compared to GAAP, 266

independent analyst groups, 273

included in current ratio, 173

independent directors, 286

reducing, 231–232

indirect method, for a statement of cash

reports on, 16

fl ows, 109–110

shifting the value of, 310–311

infrequent extraordinary items, 264

in a statement of cash fl ows, 112

tracking, 83, 206

Index

353

inventory account, 52

• K •

inventory purchases budget, 200

inventory turnover, 211–213, 334

Kersh, Russell (Sunbeam fi nance chief),

inventory valuation methods, 206–211, 266

323

inventory write-down, 311

Koenig, James (Waste Management

investigations, by the SEC, 331

CFO), 324

investing activities, 108, 110, 114–115

Kozlowski, L. Dennis (Tyco CEO), 323–324

investment bankers, 34, 40, 272

investment research fi rms, Web sites

of, 274

• L •

investments, 147, 315

land

investor relations sections, of Web sites,

as a long-term asset, 84

292, 331

undeveloped, 311

investors

Land account, 52

global fi nancial reporting standard,

language, in analyst calls, 289

261–262

last in, fi rst out (LIFO) inventory tracking

need for fi nancial reports, 11

system, 82–83, 206–207, 210–211, 266

role in private company operations, 32

late fees, charging, 229

IPO (initial public offering)

lawsuits

compared to Form 10, 33

against Arthur Andersen, 327

defi ned, 338

class-action, 287

described, 115

explanations of, 135

pricing stock for, 40

potential, 137

results of a successful, 35

Lay, Kenneth L. (Enron CEO), 320

IRS (Internal Revenue Service).
See also

LCM (lower of cost or market) inventory

taxes

tracking system, 83, 207

Form 1065 (“U.S. Return of Partnership

leading or projected P/Es, 155

Income”), 23

lease obligations, 130

Schedule C (“Profi t or Loss from

leasehold improvements account, 52, 84

Business”) form, 22

leases, 84, 339

Schedule C-EZ (“Net Profi t from

legal fees, added by Sarbanes-Oxley, 39

Business”) form, 22

legal issues, of partnerships, 23

Schedule E (“Supplemental Income and

legal proceedings, 37, 249–250

Loss”) form, 22

letter from the president or CEO, 17

Schedule F (“Profi t or Loss from

letter to shareholders, 62–63

Farming”) form, 22

leveraged buyouts, 104

Schedule SE (“Self-Employment Tax”)

Levitt, Arthur (SEC Chairman), 297

form, 22

liabilities

• J •

accrued, 88, 335

on a balance sheet, 18

contingent, 313, 336

Jobs, Steve (Apple founder), 34

current, 18, 54, 87–88, 172, 188, 336

joint ventures, 140

defi ned, 10, 76, 338

junk bonds, 274, 276

described, 47, 53, 87

just-in-time inventory system, 231–232

effect of debits and credits on, 48

long-term, 18, 54, 88, 188, 339

354
Reading Financial Reports For Dummies, 2nd Edition
liabilities
(continued)

mailing, of annual and quarterly

looking for undervalued, 312–314

reports, 286

in the MD&A, 66

major events, in an 8-K form, 15, 37

pay down, 314

majority interest, 145, 339

undervalued, 332

managed earnings, 297

undervaluing, 309

management fees, 147

unrealistic values for, 332

management segments, 135

using to hide problems, 298

management’s discussion and analysis, 17,

valuing, 137

62, 64–68

liability accounts, 53–54

management’s discussion and analysis

licenses

(MD&A) section, 17, 62, 64–68

accounting for, 307

management’s report on internal controls,

maintaining a CPA, 238

253–254

life insurance, 102

managers, need for fi nancial reports, 11

LIFO (last in, fi rst out) inventory tracking

managing, cash, 81

system, 82–83, 206–207, 210–211, 266

managing earnings, 339

limited liability companies (LLCs), 24–25

manufacturing and other operational

lines of credit, 87, 129, 232

details, 134

liquidations, impact of, 150

manufacturing capacity, 67

liquidity

margins, 167

defi ned, 338

market research, 198

described, 68, 329

market risk, 248, 251

lack of, 36

market share data, 199

of public companies, 35

market value, 157–158

LLCs (limited liability companies), 24–25

marketable securities, 82, 339

Loans payable account, 54

Mars (company), 30

lockbox services, 233

master budget, 200

Lone Star Steakhouse & Saloon, 77

material changes, 254–256, 339

long-term accounts, 51

material developments, 249

long-term asset accounts, 52–53

material effect, 298

long-term assets, 18, 52, 83–86, 338

material misstatement, 69, 339

long-term borrowings, 126

material uncertainties, 70

long-term debt, 87–88, 126–129, 339

materiality game, 298

long-term liabilities, 18, 54, 88, 188, 339

materials on hand, 200

long-term notes, 126

Mattel

long-term obligations, 126–129

accounts payable turnover ratio, 222

losses, 10, 92, 341

accounts receivable turnover ratio, 218

lower of cost or market (LCM) inventory

acquiring fi nancial statements of, 154

system, 83, 207

annual reports Web sites, 121

lumpy sales, 290

average accounts payable, 222

average accounts receivable, 218

• M •

average credit collection period, 219

bad debt, 220

machinery, age of, 87

basic and diluted EPS, 156

machinery and equipment accounts, 85

cash debt coverage ratio, 188–189