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John A. Tracy. Accounting For Dummies
Accounting For Dummies® To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Accounting For Dummies Cheat Sheet” in the Search box. Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Opening the Books on Accounting
Accounting in Today’s New Economy
Checking Your Preconceptions about Accounting
Thinking about where assets come from
Asking about profit
Sorting out stereotypes of accountants
Providing Vital Financial Information
Recognizing users of accounting information
Using accounting in your personal financial life
Seeing accounting at work
Accounting’s Two Primary Roles
Taking a Peek behind the Scenes
Focusing on Transactions
Separating basic types of transactions
Knowing who’s on the other side of transactions
Recording events
Taking the Financial Pulse of a Business
Meeting the balance sheet (statement of financial condition)
A POP QUIZ
Reporting profit and loss
Reporting cash flows and changes in owners’ equity
Remembering management’s role
Accounting as a Form of Art
Introducing Financial Statements
Setting the Stage for Financial Statements
Offering a few preliminary comments about financial statements
Looking at other aspects of reporting financial statements
The Income Statement
Presenting the components of the income statement
Income statement pointers
The Balance Sheet
Presenting the components of the balance sheet
Balance sheet pointers
The Statement of Cash Flows
Presenting the components of the statement of cash flows
Statement of cash flows pointers
A Note about the Statement of Changes in Shareowners’ Equity
Gleaning Important Information from Financial Statements
How’s profit performance?
Is there enough cash?
Can you trust financial statement numbers?
Why no (or limited) cash distribution from profit?
Complying with Accounting and Financial Reporting Standards
Looking at who makes the standards
Knowing about GAAP
Divorcing public and private companies
Following the rules and bending the rules
Safeguarding Company Assets
Separating the Duties of Bookkeepers and Accountants
Pedaling through the Bookkeeping Cycle
Getting to the end of the period
Finishing up for the period
Managing Accounting Systems
Categorize financial information: The chart of accounts
Standardize source documents and data-entry procedures for recording activities
Hire competent personnel
Get involved in end-of-period procedures
Leave good audit trails
Keep alert for unusual events and developments
Design truly useful reports for managers
Enforcing Strong Internal Controls
INTERNAL CONTROLS AGAINST MISTAKES AND THEFT
Double-Entry Accounting
Juggling the Books to Conceal Embezzlement and Fraud
Accounting in the Digital Age
Noting a Few Foundational Accounting Concepts Related to Technology
Using Accounting Software in the Cloud and on the Ground
Controlling and Protecting Money Flows in the Electronic Age
Processing payroll
Controlling bank accounts
Surveying bank forms of electronic payments
Checking out non-bank forms of electronic payments
Using enhanced accounting controls
CONSIDERING THE FUTURE OF CRYPTOCURRENCIES
Managing the Accounting Function in the On-Demand World
Source documentation
Data rooms
Financial reporting
Flash reports and KPIs
Accounting and financial analysis tools
Recognizing the Legal and Accounting Entity
Being Aware of the Legal Roots of Business Entities
Sole proprietorship
Partnerships
S corporations
Limited liability companies (LLCs)
C corporations
Going It Alone: Sole Proprietorships
Differentiating Partnerships and Limited Liability Companies
Looking at important features
Understanding profit allocation
LIMITING LIABILITY: PROFESSIONAL CORPORATIONS AND LLPs
Incorporating a Business
Issuing stock shares
Distinguishing different classes of stock shares
Determining the market value of stock shares
Watching out for dilution of share value
Recognizing conflicts between stockholders and managers
Exploring Financial Statements
Reporting Profit or Loss in the Income Statement
Presenting Typical Income Statements
Looking at businesses that sell products
Looking at businesses that sell services
Looking at investment businesses
Taking Care of Housekeeping Details
HOW BIG IS A BIG BUSINESS, AND HOW SMALL IS A SMALL BUSINESS?
Being an Active Reader
Deconstructing Profit
Revenue and expense effects on assets and liabilities
Comparing three scenarios of profit
Folding profit into retained earnings
Pinpointing the Assets and Liabilities Used to Record Revenue and Expenses
Making sales: Accounts receivable and deferred revenue
Selling products: Inventory
Prepaying operating costs: Prepaid expenses
Understanding fixed assets: Depreciation expense
Figuring unpaid expenses: Accounts payable, accrued expenses payable, and income tax payable
THE SPECIAL CHARACTER OF DEPRECIATION
Reporting Unusual Gains and Losses
Watching for Misconceptions and Misleading Reports
Reporting Financial Condition in the Balance Sheet
Expanding the Accounting Equation
Presenting a Proper Balance Sheet
Doing an initial reading of the balance sheet
Kicking balance sheets out into the real world
Internal balance sheets
External balance sheets
Judging Liquidity and Solvency
Current assets and liabilities
Current and quick ratios
Understanding That Transactions Drive the Balance Sheet
Sizing Up Assets and Liabilities
Sales revenue and accounts receivable
Cost of goods sold expense and inventory
Fixed assets and depreciation expense
Operating expenses and their balance sheet accounts
Intangible assets and amortization expense
KEEPING A CASH BALANCE
Debt and interest expense
Income tax expense and income tax payable
Net income and cash dividends (if any)
Financing a Business: Sources of Cash and Capital
Recognizing the Hodgepodge of Values Reported in a Balance Sheet
Reporting Cash Sources and Uses in the Statement of Cash Flows
Meeting the Statement of Cash Flows
Presenting the direct method
Opting for the indirect method
Explaining the Variance between Cash Flow and Net Income
Accounts receivable change
Inventory change
Prepaid expenses change
Depreciation: Real but noncash expense
COMPARING DEPRECIATION AND AMORTIZATION
Changes in operating liabilities
Putting the cash flow pieces together
Sailing through the Rest of the Statement of Cash Flows
Understanding investing activities
Looking at financing activities
Reading actively
Pinning Down “Free Cash Flow”
Limitations of the Statement of Cash Flows
Financial Accounting Issues
Reporting Changes in Owners’ Equity
Recognizing Reasons for Accounting Differences
Looking at a More Conservative Version of the Company’s Income Statement
Presenting an alternative income statement
Spotting significant differences
Explaining Differences
Accounts receivable and sales revenue
Inventory and cost of goods sold expense
Fixed assets and depreciation expense
Accrued expenses payable, income tax payable, and expenses
Wrapping things up
Calculating Cost of Goods Sold Expense and Inventory Cost
FIFO (first-in, first-out)
LIFO (last-in, first-out)
Recording Depreciation Expense
Scanning the Revenue and Expense Radar Screen
Using the Statement of Cash Flows as an Audit/Sanity Test
Understanding Financial Reports, Financial Statements, and Financial Information
Producing Financial Reports
Quickly Reviewing the Theory of Financial Reporting
Starting with the financial statements
Keeping in mind the reasons for financial reports
Recognizing Top Management’s Role
Keeping Current with Financial Accounting and Reporting Standards
Making Sure Disclosure Is Adequate
Footnotes: Nettlesome but needed
Other disclosures in financial reports
Putting a Spin on the Numbers (Short of Cooking the Books)
Window dressing: Pumping up the ending cash balance and cash flow
Smoothing the rough edges off year-to-year profit fluctuations
The pressure on public companies
Compensatory effects
Management discretion in the timing of revenue and expenses
FINANCIAL REPORTING ON THE INTERNET
Comparing Public and Private Companies
Reports from publicly owned companies
Reports from private businesses
Dealing with Information Overload
Browsing based on your interests
Recognizing condensed versions
Using other sources of business information
Deciphering a Financial Report
Knowing the Rules of the Game
Making Investment Choices
Managing investments alone or using a third party
Finding and understanding information sources
Contrasting Reading Financial Reports of Private Versus Public Businesses
STUDYING THE PROXY STATEMENT
Explaining the Role of MDORs and MD&As
Frolicking through the Footnotes
Checking Out the Auditor’s Report
Why audits?
What’s in an auditor’s report?
Discovering fraud, or not
Analyzing Financial Information with Ratios
Understanding the Importance of Using Ratios to Digest Financial Statements
Improving Your Knowledge of Financial Language and Lingo
Starting with Sample Company Financial Statements
Benchmark Financial Ratios: Financial Strength and Solvency
Current ratio
Net working capital
Acid test ratio (aka quick ratio)
Debt-to-equity ratio
Debt-to-tangible net equity
Benchmark Financial Ratios: Financial Performance
Return on sales (ROS)
Return on equity (ROE)
Return on assets (ROA)
Earnings per share (EPS), basic and fully diluted
Price/earnings (P/E) ratio
Debt service coverage ratio
Making Time for Additional Ratios (If Needed)
Generating Internal Financial Information for Management Use
Building on the Foundation of the External Financial Statements
Seeking out problems and opportunities
Avoiding information overload
Distinguishing Internal and External Financial Statements
Format
Detail
Confidentiality
Timeliness
Completeness
Gathering Financial Condition Information
Cash
Accounts receivable
Inventory
Fixed assets less accumulated depreciation
Intangible assets
Accounts payable
Accrued expenses payable
Income tax payable
Interest-bearing debt
Owners’ equity
Culling Profit Information
Presenting an income statement for managers
Calculating cash flow on the back of an envelope
CASH FLOW CHARACTERISTICS OF SALES AND EXPENSES
Managing operating cash flows
Scrutinizing sales revenue and expenses
Avoiding Rookie Mistakes
Applying Wall Street’s Tricks and Treats to Engineer Financial Results
Knowing What Financial Engineering Is Not
Defining What Financial Engineering Is
Identifying Commonly Used “Tricks of the Trade”
Using tricks that fit within GAAP but need more digging
Discontinued operations and/or extraordinary events
Stock buybacks
Tax rates and jurisdictions
Understanding commonly used tricks outside the realm of GAAP
EBITDA and addbacks
Sales revenue recognition
Pro forma operating results
Manufacturing Imaginary Profits (and, Yes, Losses)
Reviewing examples of “manufacturing” profits
Keeping critical points in mind
Looking Out for Particular Trends and Terminology
Leveraging Accounting in Managing a Business
Analyzing Profit
Helping Managers: The Fourth Pillar of Accounting
Branching out in the field of management accounting
Following the organizational structure
Centering on profit centers
Internal Profit Reporting
Designing internal profit (P&L) reports
Reporting operating expenses
Reporting operating expenses on the object of expenditure basis
Separating operating expenses further on their behavior basis
Looking at Strategic Profit Analysis
Presenting a profit analysis template
Separating variable and fixed expenses
Variable expenses
Fixed expenses
Stopping at operating earnings
Focusing on margin — the catalyst of profit
DIFFERENT USES OF THE TERM MARGIN
Using the template to explain profit
Taking a Closer Look at the Lines in the Profit Template
Sales revenue
Cost of goods sold
DEALING WITH INVENTORY SHRINKAGE
Variable operating expenses
Fixed operating expenses
DEALING WITH A SHORTCOMING
Using the Profit Template for Decision-Making Analysis
Tucking Away Some Valuable Lessons
Recognize the leverage effect caused by fixed operating expenses
Don’t underestimate the impact of small changes in sales price
Know your options for improving profit
Accounting for Costs
Looking Down the Road to the Destination of Costs
Are Costs Really That Important?
ACCOUNTING VERSUS ECONOMIC COSTS
Becoming More Familiar with Costs
Direct versus indirect costs
Fixed versus variable costs
Relevant versus irrelevant costs
Actual, projected, and standard costs
Product versus period costs
Assembling the Product Cost of Manufacturers
Minding manufacturing costs
Classifying costs properly
ALLOCATING INDIRECT COSTS IS NOT AS SIMPLE AS ABC
Calculating product cost
Examining fixed manufacturing costs and production capacity
The burden rate
Idle capacity
The effects of increasing inventory
THE ACTUAL COSTS/ACTUAL OUTPUT METHOD — AND WHEN NOT TO USE IT
Puffing Profit by Excessive Production
Shifting fixed manufacturing costs to the future
Cranking up production output
Being careful when production output is out of kilter with sales volume
Preparing Best-in-Class Forecasts, Projections, and Budgets
Focusing on Key Forecasting Concepts
Putting Forecasting in Its Place
Planning reasons for forecasting
Control reasons for preparing forecasts
Exploring Forecasting
The living and breathing business forecast
Initial forecasting for a new business
Initial forecasting for an existing business
Gathering reliable data
Involving key team members
Ensuring consistency and completeness
Considering timing and presentation
Projections as financial models
Increasing the Power of Your Forecasts
The SWOT
Top down or bottom up
What if?
Rolling forecasts
Seeing a Financial Forecast in Action
The income statement
The balance sheet
The statement of cash flows
Rehashing the Value of Forecasts
Capitalizing a Business: How, When, Why, and What
Identifying the Elements of a Business Plan
Capturing the most critical material
Providing a few examples
Valuing Businesses: A Crash Course in the Basics
Why businesses are valued
Raising capital
A liquidity event
Business planning and risk management
Estate and personal planning
How businesses are valued
Surveying Commonly Used Business Valuation Techniques
Cash flow multiple method
Price earnings multiple method
Summarizing the Two Basic Types of Available Capital
Realizing when to raise equity
Knowing when debt is the best source of capital
Taking a Deeper Dive into Raising Debt Capital
Maturity and security
Debt sources (loans)
Debt underwriting and costs
Debt structure
Debt covenants
Digging Further into the World of Equity Capital
Disguising equity as debt
Structuring equity with preferences
HOW UNICORNS ARE INFLATED
Reaching the end of the line with equity capital
Raising Capital: Tips, Tidbits, and Traps
The Part of Tens
Ten Tips for Managers
Reach Breakeven and Then Rake in Profit
Set Sales Prices Right
Don’t Confuse Profit and Cash Flow
Call the Shots on Accounting Policies
Prepare Accurate Forecasts and Projections
Demand the Accounting Information You Want
Tap into Your CPA’s Expertise
Critically Review Your Controls over Employee Dishonesty and Fraud
Lend a Hand in Preparing Your Financial Reports
Speak about Your Financial Statements as a Pro
Ten Tips for Reading a Financial Report
Get in the Right Frame of Mind
Decide What to Read
Improve Your Accounting Savvy
Judge Profit Performance
Test Earnings Per Share (EPS) against Change in Bottom Line
Tackle Unusual Gains and Losses
Check Cash Flow from Profit
Look for Signs of Financial Distress
Recognize the Possibility of Restatement and Fraud
Remember the Limits of Financial Reports
Index. A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
Y
About the Authors
Dedication
Authors’ Acknowledgments
WILEY END USER LICENSE AGREEMENT
