Accounting for Fun

and Profit

Accounting for Fun

andProfit
A Guide to Understanding
Financial Statements

Lawrence A. Weiss

Accounting For Fun and Profit: A Guide to Understanding Financial

Statements
Copyright Lawrence A. Weiss, 2016
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means
electronic, mechanical, photocopy, recording, or any other except for
brief quotations, not to exceed 250 words, without the prior permission
of the publisher
First published in 2016 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-63157-511-2 (paperback)
ISBN-13: 978-1-63157-512-9 (e-book)
Business Expert Press Financial Accounting and Auditing Collection
Collection ISSN: 2151-2795 (print)
Collection ISSN: 2151-2817 (electronic)
Cover and interior design by S4Carlisle Publishing Services
Private Ltd., Chennai, India
First edition: 2016
10987654321
Printed in the United States of America.

Dedication
For Marilyn, Josh, and Dan

Abstract
Accounting is an economic information system, and can be thought of
as the language of business. Accounting principles cannot be discovered;
they are created, developed, or decreed and are supported or justified
by intuition, authority, and acceptability. Managers have alternatives in
their accounting choices; the decisions are political, and trade-offs will
be made. Accounting information provides individuals, both inside and
outside a firm, with a starting point to understand and evaluate the key
drivers of a firm, its financial position, and performance. If you are managing a firm, investing in a firm, lending to a firm, or even working for
a firm, you should be able to read the firms financial statements and ask
questions based on those statements.This book explains the fundamentals
of financial statements. It is designed and meant to explain the language
of accounting to nonaccountants (i.e., those who hire accountants). After
reading this book, you should be able to pick up an annual report, read it,
understand much of it, and have a solid foundation to start asking questions about the firm. Hopefully, this book will show you that accounting
can be fun and informative.

Keywords
Accounting, economic drivers of a firm, financial statements, financial
analysis

Contents
Acknowledgments....................................................................................xi
Prefacexiii
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12

Introduction......................................................................1
Accounting is Not Economic Reality................................15
The Accounting Process...................................................27
Accrual Accounting..........................................................49
Current Assets..................................................................59
Long-Term Assets.............................................................87
Current Liabilities............................................................97
The Time Value of Money: Discounting
and Net Present Values...................................................111
Long-Term Debt............................................................127
Owners Equity..............................................................143
Cash is King...................................................................153
Financial Statement Analysis..........................................177

Index..................................................................................................189

Acknowledgments
I am grateful to Bridgette Hayes and Stephanie Landers, who corrected
my many editorial mistakes and helped make my prose easier to read.
I would also like to thank Michael Duh for helping to ensure the numbers
are consistent.
A special thanks is also owed to Prof. Mark Bettner for his editorial
comments as well as Scott Isenberg and the team at Business Expert Press.
Finally, I would like to thank my former teachers for setting me on
my academic path and all my former students who have made my career
such a pleasure.

Preface
If you were building a house, would you hire an architect, give her some
money and say, Build me a house? If you did, the house might end up on
the front cover of an architectural magazine, but it might not be a house
you would want to live in. I suggest you might benefit from learning a bit
about architecture before building a house so that you could work with
the architect to build the house you want to live in. Similarly, if a surgeon
(who is paid to cut people open, who enjoys cutting people open, and
who honestly believes she can best cure people by cutting them open)
suggests an operation, you would be smart to learn about your illness and
get a second opinion before having the surgery.
Accounting is no different, and it is much too important to be left to
the accountants. If there is one message you should take away from this
book, it is NEVER TRUST AN ACCOUNTANT! This may seem a bit
harsh, but why would you trust an accountant any more than an architect,
doctor, or other professional? A healthy dose of skepticism is a good thing.
Any time you hire a professional, it is best to have a basic understanding
of what the professional does so you can tell the professional what you
want them to do. If you have a medical condition that might require surgery, know enough about your condition to determine whether surgery
is the right course of action and, if it is, to find the best surgeon for you
(not a good idea to try doing surgery on yourself!). Likewise, if you are
managing a firm, investing in a firm, lending to a firm, or even working
for a firm, you should be able to read the firms financial statements and
ask questions based on those statements.
This book explains the fundamentals of financial statements. Many
accountants would benefit from reading this book as it may help them
better understand why they are doing what they do, and improve their
ability to explain accounting to others. However, the book is not designed
for accountants. It is designed and meant for those who use and provide
accounting information (i.e., those who hire accountants).

xiv PREFACE

The book takes the perspective of a user of financial information and

therefore limits its coverage of some of the technical aspects (some of
the details can be left for the professionals). This means that many of
this books topics are aimed at understanding what an accountant means
when she uses certain terms and what the limits to accounting are. Some
parts of the book are still a bit technical, but they are included because
learning the basics of accounting is like learning vocabulary and grammar
in a language. After all, accounting is a type of language: it is the language
of business.
After reading this book, you should be able to pick up an annual report, read it, understand much of it, and have a solid foundation to start
asking questions about the firm. Moreover, if there is something you do
not understand, seek out an accountant and ask. There are accountants in
all organizations and they generally welcome questions. If the accountant
cannot answer your question, it means one of two things: One, there is a
problem in the financial statements if the firm is presenting material in a
manner that even an accountant cannot understand. Two, it means you
need to find another accountant (as with all professionals, some are better
than others).
Hopefully this book will show you that accounting can be fun and
informative, or at least that it is not as painful as you may fear.

CHAPTER 1

Introduction
Accounting is about communication. It is an economic information
system and can be thought of as the language of business. Accounting
standards are as much a product of political action as they are of careful
logic or empirical findings. Accounting principles cannot be discovered;
they are created, developed, or decreed and are supported or justified
by intuition, authority, and acceptability. This is important to note, as
accounting rules may or may not have any inherent logic to them. We
have alternatives in our accounting choices; the decisions are political and
trade-offs will be made. However, if a user of accounting information
understands the economic consequences of each choice, she can base her
own accounting choices on her desired outcome and also interpret the
decisions made by others.
Accounting information provides individuals, both inside and outside
a firm, with a starting point to understand and evaluate the key drivers of
a firm, its financial position and performance. This information can then
be used to enhance decisions as well as help predict a firms future cash
flows. The present current value of those cash flows provides an estimate
for the value of the firm. Accounting systems and information are also required for business and legal reasons. It is therefore essential for managers,
investors, and others to be aware of the signals given and received by the
business community through financial reports.
Who has access to an organizations accounting information? It depends
on the nature of the organization. For-profit firms can be public or private. A firm goes public when its ownership units shares can be exchanged traded in a public capital market (e.g., the New York Stock
Exchange). Public firms are much more heavily regulated by the government and must provide a prescribed set of accounting information to the

ACCOUNTING FOR FUN AND PROFIT

government and the general public.1 By contrast, private firms do not

have to disclose their accounting information to the general public.2
Not-for-profit organizations (charities, churches, private universities,
and so on) must file a set of specified information to the government that
is made public.
Who (or what group) is responsible for issuing an organizations annual
report? Senior management.
Who (or what group) is the annual report for? There are lots of different
potential users including:
Owners, both current (those who actually own a piece or
share of the firm) and potential (those who are thinking about
buying a piece or share of the firm),
Suppliers of goods, services, and funds. Individuals and other
firms who do something for the firm and expect, at some point,
to receive something (usually cash) from the firm. This includes
both current and potential employees (i.e., suppliers of labor),
Customers (who purchase the firms goods and services),
The government, both in the sense of taxes (getting money
from the firm) but also in terms of regulation, since
government regulators are supposed to ensure the firm
operates and reports according to the law, and
Various other outside groups, including accounting professors
(who will use the firms reports in class), reporters (who may use
the firms reports in a story), environmental groups, and so on.
In sum, senior management publishes annual reports for various users.
1

The government actually gets two sets of financial data. One is the tax information
which all firms must provide to the Internal Revenue Service (IRS) and is not publicly
available. The other is the public financial information that the firm provides to the
Security and Exchange Commission (SEC) which then posts it on an electronic site
called EDGAR. See www.sec.gov/edgar.shtml
2
The vast majority of firms are private, and most of these are owner managed (meaning the firms owners are also the managers). However, there are some very large firms
which are private. For example, Mars Corporation (the large confectionary firm with
brands such as M&Ms) is a private company and its accounting information is not
available to the general public.

 INTRODUCTION
3

What is this report about? What is it meant to tell the users? It is designed
to give the users identified above information about the firms economic
resources, how it obtained those resources, who has claims on the resources, what the firm has done with those resources, and how they have
changed over time. It is designed and meant for users who have some
understanding of basic business, economics, and accounting.
How are these various groups going to use this information? The information should be used as a starting point in trying to estimate the timing,
likelihood, and amount of future cash flows. Why? So they can assess a
firms financial health and make better informed decisions (i.e., invest in
the firm, sell to the firm, lend to the firm, buy from the firm, and so on).
Okay, so if senior management is producing this information for a variety of users, it means management is basically providing outsiders with
information about the senior managements activities. Is that right? Yes,
it is like a student (as opposed to a teacher) producing the report card on
how well she did. Are there any checks to make sure what management says is
true? Actually, there are not many checks we can use for this. A
ccounting
has limitations; it is not, in any sense of the word, trustworthy (more on
this in Chapter 2) and it provides limited supervision of senior management. This is why it is critical for anyone using the information in financial statements to understand how the information is prepared.
Consider, if you were senior management, what would you want to say?
Well, that depends on whom your message is for.
What does senior management normally tell the owners? It is not uncommon for them to report, I am great. You could not have a better manager.
It is true we lost a lot of money this year, but anyone else would have lost
much more. You are lucky to have us, and there is no question you should
keep us as your senior management. Normally, management wants to
keep their jobs, and they therefore tell the owners they are doing a good,
if not great, job. However, normally does not mean always.
What if senior management itself wants to buy the firm from the
non-management owners? Imagine you are managing a firm you inherited
from your parents. You are working hard and doing your best, but you
do not own the firm outright. You have some siblings who also own part
of the firm, and they do not help at all. They do not pull their fair share,
yet they still demand money from the firm. Because of this, you want to

ACCOUNTING FOR FUN AND PROFIT

buy them out. What would you tell them? You could say the firm is doing
great. Or you could say that the firm is barely making it and that while it
is really worth next to nothing, you still want to buy it from them and will
pay them some minor amount for their shares. When reading a financial
statement, you need to know not just to whom management is talking to,
but also what senior managements bias is. Does senior management want
to make the firm look good or bad? It depends on their bias.
What does management normally want to tell bankers and the people or
companies who sell goods and services to the firm? Typically, management
wants to tell these readers not to worry because the firm will pay what it
owes (i.e., repay loans to the banks or pay suppliers for services rendered
or goods provided).
What does management want to tell the firms employees? We are doing
okay but not great, so the firm is unable to give raises this year, but employees jobs are secure and they do not need to look for other ones. Note
that we have a potential conflict here. Management may want to tell the
owners they are doing great, but tell the employees the firm is doing okay.
How about the customers? What does management want to tell them?
Again, management wants to tell them that the firm is doing okay, that
it will be around to supply them next year, but that it is not doing well
enough to give any discounts.
What about the government? Well, the primary governmental entity
looking at firms financial information is the Internal Revenue Service
(IRS). To this group, management probably wants to show minimal
profits saying that it does not have much to give to the government this
year. Maybe in a few years when the firm is doing better, the government
can ask for something.
Notice that what management wants to tell the government is pretty
much the exact opposite of what they normally want to tell the firms owners. The good news for management today is that in most countries, firms
are allowed to produce two sets of financial statements: one for the government (which is private and intended to be read only by the governments
taxing authorities) and another for everyone else. So to some extent, management can plead poverty to the government, while telling others they
are doing well. It may seem hard to believe that there are two sets of financial statement reporting about the same firms performance in the same

INTRODUCTION

year, but it is what happens. Management can make different accounting

choices and their decision to do so may depend on whether their report
is going to the government or to everyone else. Over time the cumulative
numbers will match, but in a given year they may be very different.
Think of the annual report as a public relations tool. Better yet, think
of it as a painting. Accounting is an art: it really is much closer to art, or
perhaps to the legal profession, than it is to math or science. Management
is painting a picture of the firm. Management may try to paint like Rembrandt and give you a picture that illustrates fairly transparently what the
firm looks like (you look at the painting and know what the author was
painting). However, management may paint more like Picasso. My Dad
loved Picasso, but I have never understood him (the painter, not my Dad).
Still, I have read that Picasso painted his mistresses, who I have seen in photos and who were beautiful (at least superficially). So, even though when I
look at a Picasso painting that is supposedly of a female but to me it does
not look human, I know the person being painted was physically beautiful.
In accounting, like art, it helps to know something about the composer.
For fun: Can you identify what firm produced the Annual Report covers
in Exhibit 1.1?

(A)

(B)

(C)
Exhibit 1.1 What firm produced these covers?

ACCOUNTING FOR FUN AND PROFIT

They are for the wine and spirits firm Pernod Ricard whose 37
premium brands include Absolut, Chivas, Glenlivet, G.H. Mumm
Champagne, and Kahlua among many others (the reports shown are for
the years ending 2006, 2010, and 2015). I am not really sure how they
relate to the financials, but clearly they have an artistic bend.
By contrast, the report covers in Exhibit 1.2, for Boeing, reveals its
products by showing them on the covers. Boeing is saying this is who we
are and what we do.
Most firms no longer have fancy covers. They simply have the information required by the government (see www.sec.gov/edgar.shtml)
and maybe the firms logo. Exhibit 1.3 shows the cover for Apple Inc.
The covers of annual reports tell you something about the firms that
published them. It is like getting dressed in the morning: What you wear

Exhibit 1.2 Boeing Annual Report covers 2012 to 2014

 INTRODUCTION
7

Exhibit 1.3 Apple Inc. Annual Report cover 2015

tells the world not only something about you but also something about
what you want the world to think about you.
And that is what the annual report is meant to do. It is senior management telling the world something about the firm and what senior management wants the world to think about the firm.
So, let us open the cover and take a look at what is inside.

ACCOUNTING FOR FUN AND PROFIT

Inside an Annual Report

The annual report usually begins with a summary or the highlights of the
firms results for the year (and usually some prior years) being reviewed.
This is generally followed by a letter from the Chief Executive Officer
(CEO) of the firm (and sometimes from the chairman of the board as
well). This letter should be read carefully, as it outlines the CEOs view
of what happened and where the firm is heading. It often includes an
overview of the firms strategy, and generally thanks the investors and
employees. It should be read as a political statement and a piece of public
relations, which is what it is. Still, it can contain valuable information
about what the head of the organization is thinking.
Though the exact ordering can differ, the CEOs letter is usually
followed by lots of information on the firms products (e.g., what they
are, how they are being developed, perhaps even how they compare
to those of major competitors). This provides background not only of
the firms products, but often on the industry and general economy as
well. Again, this should be viewed with a great deal of skepticism as the
firm is usually trying to present its products and markets in the best
possible light.
Next up is normally a brief review of the firms major accounting policies, some of which will be discussed in more detail later in the book. It is
very important to read the accounting policies as they set the context for
the accounting numbers.
Then, somewhere in the middle of the annual report comes the main
dish: the financial statements. These are the Balance Sheet, the Income
Statement, and the Statement of Cash Flows.3 All three will be discussed
in greater detail in the coming chapters.
The financial statements are followed by the Notes to the Financial
Statements, which provide details on all the accounting choices that
were made when preparing the annual report. The financial statements

There is also sometimes a Statement of Changes in Retained Earnings (which is fairly

straight forward), a Statement of Changes in Equity (which can be more complex),
and a Comprehensive Income Statement (which includes all components of net income/loss and other comprehensive income/loss).

 INTRODUCTION
9

present an overview or summary, whereas the notes contain much more

detail.
Somewhere near the end of the financial statements is The Report of
the Independent Auditor. The firm hires and pays an outside group of
professionals to examine its financial statements and issue an opinion on
their reasonableness. Wait. How can the outside professionals be considered
independent if they are hired and paid by the firm on which they are reporting? Good question, and many people would argue that the auditors are
not completely independent (Enron is a case in point). However, there are
three counterpoints to this argument. First, these professionals are in fact
hired by a subset of the board of directors who are supposed to be totally
separate from management. Second, auditors report to the board and not
to the management. Third, and this one is key, the auditors can be sued if
they do not do their job properly, especially by the firms owners, who the
auditors technically report to.
There are four companies today known as the big four that audit
most of the larger public firms (Deloitte, Ernst and Young, KPMG,
and PricewaterhouseCoopers). These are large accounting firms and
they provide an array of accounting, auditing, tax, legal, and consulting
services. They are perhaps the largest service firms in the world and are
substantially larger than the largest consulting firm (in 2015, Deloitte
listed $16 billion of U.S. revenues and 70,000 professionals, whereas
McKinsey and Company listed 11,000 professionals). The group was
once known as the big eight but mergers and the demise of Enrons
auditor (Arthur Andersen) reduced the group to four. These are international companies, with the size and expertise to audit the largest public
firms. Also, these firms have substantial resources and could pay out
large sums if they lost a lawsuit. Arguably, what keeps these firms honest
(independent) is that for many of the senior partners their most valuable asset is their ownership unit in their accounting firm. In theory,
any one senior partner who fails to do her job properly could expose
the firm to massive litigation (Arthur Andersen, the audit firm hired by
Enron, collapsed largely because of its misconduct in auditing Enron).
To counter this possibility, these firms set up their own internal systems
(with a central group auditing the auditors) to ensure their work is done
properly, at least in theory. The SarbanesOxley Act (enacted in July

10

ACCOUNTING FOR FUN AND PROFIT

2002) has also done a great deal to increase auditor independence both
with increased oversight (and the creation of the Public Company Accounting Oversight Board) and by limiting a uditor conflicts of interest
(e.g., the nature and extent of non-audit work done by auditors has been
greatly reduced).
So, if a firm has a good audit report can the numbers be trusted? NO!
ABSOLUTELY NOT! The auditor only expresses an opinion on the
fairness of the financial statements.4 First, the auditor is supposed to assess whether the statements reasonably portray the underlying economics
within the accounting framework. However, reasonableness or fairness is
subject to interpretation, often a court of laws interpretation. Users of
annual reports should interpret an auditor saying the numbers are reasonable as the auditor saying they are close enough that she is not overly
worried about being sued. Second, the auditor does not check everything
because that would be much too time consuming, which would delay the
annual reports and make the information they contain less useful, and
would also be prohibitively expensive. Third, it is possible for the auditor
to make a good faith effort, do her job responsibly and professionally, and
still fail to discover a major error or fraud. Finally, if the auditor feels the
statements are not reasonable, she will probably enter into a negotiation
with management to change the numbers prior to publication to avoid
having to release a negative audit report.
Does that mean the audit report is basically useless? Not at all. In fact, the
report can be quite informative and useful, especially as a starting point.
Let me explain by describing the various types of audit reports and what
each means.
The first and most common is called an unqualified or clean report.
Here the auditor says he was able to do his work, and that the statements
appear reasonable and in conformity with generally accepted accounting
principles (GAAP) applied consistently over time, the auditor did not
find any material misstatements and there is no evidence suggesting that

In some countries, this opinion is set up as certifying the statements are true and
correct. Unfortunately, this is far from what is really done by the audit.

 INTRODUCTION
11

the firm is not a viable going concern.5 This is what you should expect,
and you would then go into the statements and notes with a normal degree of skepticism (i.e., caveat emptor).
The second and less common is called a qualified report. Here the
auditor notes there is something that the reader should know. Although
the auditor finds the numbers are reasonable overall, there was something
that the auditor could not examine or determine. If the auditor was hired
after the start of the year, this means the auditor would not have been
able to check last years number herself at the end of last year. The a uditor
would point this out and note she is relying on the previous auditor. This
begs the question: Why did the firm change auditors?6 A positive explanation is the firm was growing and the prior auditor was too small to continue auditing the growing firm. Investors and creditors may appreciate
that the new auditor is larger, hopefully has more expertise, and with its
increased size should be able to pay out a larger sum in the event of a
lawsuit. A change may also occur when one firm acquires another firm
of equal or greater size and the auditor of the acquired firm becomes the
auditor of the combined firm. There could also have been a change for
certain expertise. The financial statement user should carefully consider
whether the change in auditor was for a legitimate reason or whether the
change occurred because the prior auditor was unwilling to express a positive opinion on the statements.
The auditor may note that the statements appear reasonable overall but
that there is an overriding issue which could not be determined and could
alter the economics of the firm. For example, the firm may be subject to a
lawsuit that the auditor cannot determine if the firm is likely to win or lose,
and the amount is large enough to potentially alter the firms financials.
5

GAAP refers to the guidelines (rules and practices). In the U.S., they are set out by
the Financial Accounting Standards Board (FASB), whereas many other countries follow those set out by the International Financial Standards Board whose guidelines are
referred to as International Financial Reporting Standards (IFRS).
6
There is a movement to force a change of auditors every few years, but the change is
in fact very expensive as auditors develop expertise with their clients. Most financial
institutions, which are considered critical to the economy, require periodic changes
in auditors.

12

ACCOUNTING FOR FUN AND PROFIT

The auditor may also note that the statements appear to be reasonable overall but that there has been a major change in an accounting
method. As will be discussed in detail in the coming chapters, firms have
many choices over accounting policies and these choices alter the final
numbers. Changing policies is allowed, but in the year of the change,
numbers must be presented using both the old and the new method and
the annual report must explain the reason for the change. Some changes
are managerial choices, others are dictated by the government. Regardless
of whether the firm made the change voluntarily or after being forced by
the government, major policy changes are considered so important that
they will be noted in the auditors report.
The third and fairly rare type of audit report is called a disclaimer or
denial of opinion. In this case the auditor notes that he was unable to
perform his work and cannot express an opinion on the financial statements. For instance, this can occur after a fire that destroyed factory
records, or perhaps when there is a strike and the auditor cannot access
the records.
Finally, the rarest form of opinion is called an adverse opinion. In
this case, the auditor expressly notes that the statements are not reasonable (e.g., they do not fairly reflect the firms economic condition). This
can occur when a firm is in financial distress and likely to be liquidated
(when a firm is not considered a going concern all the numbers must be
at liquidation value), or if the auditor fundamentally disagrees with the
firms financial presentation. The latter is very rare because either (a) the
auditor and firm will negotiate some changes in the numbers to enable
the auditor to express at least a qualified opinion, (b) the auditor will be
replaced, or (c) the opinion will simply not be issued.7

In Which Order Should Annual Reports be Read?

The best place to begin reading an annual report is with the auditors
report at the end. This will usually tell the reader nothing, since it is
normally a clean audit report. However, if there is an issue, it will alert
7

For example, firms entering bankruptcy often do not issue timely financial statements
and thus there is no opinion.

 INTRODUCTION
13

the reader at the start. Next the reader should examine the Notes to the
Financial Statements, as they put the statements into context. The statements themselves should be read next. All the puffery and the CEOs
letter at the front can be examined last. At least, this is how your author
reads an annual report.

How to Read this Book

This book can be read by someone with little or no business background.
It is a primer on the basics of accounting, what accountants do, and how
to interpret the information in financial statements.
The book is written in a conversational format, often asking questions (which, as you may have already noticed, are in italics) and then
providing the answers. The reader may want to pause after a question and
think how they would answer before reading on. Real-life examples are
included to illustrate the concepts and hopefully make the subject matter
more interesting.
The footnotes do not have to be read, but they are meant to be read
and add important details.8 After reading the book, you will hopefully
have enjoyed yourself and learned a lot about accounting. Welcome
aboard.

The Bottom Line

Accounting is an economic information system, it can be thought of as
the language of business, and understanding its process, uses, and limitations is essential to understand the economics of a firm.
The following chapter describes the underlying nature of accounting
and illustrates the necessary trade-offs that limit the ability of accounting
to reflect a firms underlying economic reality. There are many truths in
accounting.

I have tried to make this book fun while also paying attention to the details.

Index
Accounting
accrual basis of, 4958
cash basis of, 21, 50
for current liabilities, 97
description of, 1
economic concept of, 21
information, 1
introduction to, 113
for payables, 98
process of, 2744
system, 1, 41
traditional methods, 1720
Accounts receivable, 6364
aged, 7174
Accounts payable, 35, 98
description of, 35
Accrual accounting, 4958
expense, recognition of, 5456
revenue, recognition of, 5054
Accrued expenses, 109
Accumulated depreciation, 94
Activity ratios, 181182
Advances, 99
Adverse opinion, 12
Aged accounts receivable, 7174
Amortization, 96
Annual depreciation, 89
Annual percentage rate (APR), 116
Annual report, 2
covers of, 6
and customers, 4
and government, 4
inside of, 812
opinions and, 912
order of, 1213
purpose of, 3
reading of, 13
and senior management, 34
Annuities, 116122
Annuity due, 119122
Assets, 1522, 28
AVG, 1718, 20

Balance sheet, 1521, 2831

assets, 28
and income statement, 4144
liabilities, 29
owners equity, 29, 143151
presentation of, 2930
spreadsheet, 47
Bank debt, 9798
Bonds, 127

accounting for, 132135

callable, 130
convertible, 130131

ratings, 131132
redeemable, 130

serial bond (mortgage), 136

terms of, 127128
valuation, 122126

zero-coupon, 135

Bookkeeping, 27

Callable bonds, 130

Cash, 5961, 153175
accounting, 21
from financing, 165166
from investing, 162165
obtaining, 153154
from operations, 157162
used for, 154
Cash flow statements, 170175
categorizing, 154155
Common size financial statements, 184
Compound entry, 45
Compounding, 111, 113115
Contract rate, 128
Contributed capital, 143146
Convertible bonds, 130
Corporate bonds, 127
Coupon rate, 122, 128
Coupons, 122
Covenants, 129
Credit, description of, 31
Cumulative preferred shares, 146

190 INDEX

Current assets
accounts receivable, 6364
aged accounts receivable, 7174
cash, 5961
inventory, 7482
LIFO versus FIFO, 8083
market securities, 6162
others, 85
percentage of sales, 6571
Current liabilities, 97109
advances, 99
bank debt, 9798
deferred income tax, 99108
long-term debt, current maturity
for, 98
others, 108109
payables, 98
Dates, dividends
declaration date, 147
ex-dividend date, 147
payment date, 147
record date, 147
Debentures, 130
Debit, description of, 31
Declaration date, 147
Deferred income tax, 99108
Deferred tax asset, 108
Deferred tax liability, 107
Denial of opinion, 12
Depletion, 96
Depreciation
accumulated, 94
annual, 89
straight-line, 89
Discounting, 111115
Discount rate, 128
Discounts, 138140
Dividends, 29, 39, 147
dates and, 147
payable, 98
Double declining balance, 90
DuPont analysis, 184185
Dutch auction tender, 149
Effective rate, 128
method, 140

Equity, 1522

Estimated warranties, 109

Ex-dividend date, 147
Expense, recognition of, 5456
Face value, 128
of bond, 122
Fair value reporting, 2122
FIFO, 1719
versus LIFO, 8083
Finance, cash and, 165166
Financial statement analysis, 177188
activity, 181182
calculations, 180181
common size statements, 184
components of, 178
DuPont analysis, 184185
leverage, 182183
liquidity, 183
other ratios, 183184
profitability, 178180
Fixed price tender, 148
Free cash flow, 168
Future value (FV), 112113
GAAP. See Generally accepted
accounting principles
General ledger, 31
Generally accepted accounting
principles (GAAP), 10
Gross profit, 56
Income statement, 3841, 48, 5658
and balance sheet, 4144
spreadsheet, 47
Intangible assets, 89, 96
Interest rates, 115116
Inventory, 7482
Investment
and cash, 162165
grade, 131132
Leverage, 182183
Liabilities, 1522, 29
LIFO, 1820, 22
versus FIFO, 8083
Liquidity, 183

Liquid market, 22
Long-term assets, 8796
Long-term debt, 127141
bonds. See Bonds
current maturity for, 98
discounts, 138140
maturity of, 141
premiums, 138140
Long-term marketable
securities, 87
Market rate, 128
Market securities, 6162
Market value. See Price value
Maturity value, 128

INDEX 
191

Property, plant, and equipment

(PP&E), 8896
Public relations tool. See
Annual report
Ratio analysis. See Financial
statement analysis
Redeemable bonds, 130
Returnable deposits, 108109
Return on Assets (ROA), 179
Return on Equity (ROE), 180
Revenue, recognition of, 5054
Reverse splits, 151
Ross, John, 8385

Mortgage bonds, 136

SarbanesOxley Act, 25

Natural resources, 89, 96

Net profit, 56
Noncurrent assets, 96
Nonfinancial amounts, 144

Share repurchases, 148

Spreadsheet
with balance sheet entries, 47
with income statement items, 47
Stated rate. See Coupon rate
Statement of profit or loss, 39
Stock dividends, 149151
Stock splits, 149151
Straight-line depreciation, 89, 139

Open market purchases, 148

Operating profit, 56
Operations, cash and, 157162
Ordinary annuity, 119122
Owners equity, 29, 143151
contributed capital, 143146
retained earnings, 147148
stock dividends, 149151
stock splits, 149151
treasury stock, 148149
Pacioli, Luca, 23
Par value. See Face value of bond
Payables, 98
Payment date, 147
Percentage of sales, 6571
Preferred shares, 144147
Premiums, 138140
Present value (PV), 112113
Price value, 128
Prime rate, 97
Profitability ratios, 178180
Profit before tax, 56

Serial bonds, 136

T account, 34
Taxes payable, 98
Tax loss recovery, 107108
Time value of money, 111113
annuities, 116122
annuity due, 119122
ordinary annuity, 119122
bond valuation, 122126
compounding, 111, 113115
discounting, 111115
interest rate, periodic, 115116
Treasury stock, 148149
Wages payable, 98
Yield, 128
Zero-coupon bonds, 135

OTHER TITLES IN OUR FINANCIAL ACCOUNTING

AND AUDITING COLLECTION
Mark S. Bettner, Bucknell University and
Michael P. Coyne, Fairfield University, Editors
Executive Compensation: Accounting and Economic Issues by Gary Giroux
Using Accounting and Financial Information: Analyzing, Forecasting, and
Decision-Making by Mark Bettner
Pick a Number: Internationalizing U.S. Accounting by Roger Hussey and Audra Ong
International Auditing Standards in the United States: Comparing and Understanding
Standards for ISA and PCAOB by Asokan Anandarajan and Gary Kleinman
Accounting for People Who Think They Hate Accounting by Anurag Singal

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