If you're looking at a business with an interest in investing in it, you need to read its financial reports. Of course, when it comes to the annual report, you don't. Editorial Reviews. From the Back Cover. Learn to: Decipher the information in financial reports. The company's quarterly financial statements are considered a good place to start a research when thinking in investing in some company or when monitoring a.
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Reading Financial Statements — What do I need to know? Q. What is the importance of the distinction between current and non-current (or long-term) assets. Reading Financial Reports For Dummies®, 3rd Edition. Published by: John Wiley & Sons, Inc., River Street, Hoboken, NJ , norinkgibipen.tk of financial statement analysis with many astonishing real life examples. This book starts where others stop. Clearly, a must read that brings the reader beyond .
Accountants keep the books and record the financial activities of an entity such as a business. From these detailed records the accountant prepares financial statements that summarize the results of the activities. Financial statements are sent to people who have a stake in the outcomes of the activities.
If you own stock in General Electric, for example, or you have money in a mutual fund, you receive regular financial reports.
If you invest your hard-earned money in a private business or a real estate venture, or you save money in a credit union, you receive regular financial reports.
In summary, one important reason for studying accounting is to make sense of the financial statements in the financial reports you get. I guarantee that Warren Buffett knows accounting and how to read financial statements. Affecting both insiders and outsiders People who need to know accounting fall into two broad groups: insiders and outsiders. Business managers are insiders; they have the authority and responsibility to run a business.
They need a good understanding of accounting terms and the methods used to measure profit and put values on assets and liabilities. Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes Accounting information is indispensable for planning and controlling the financial performance and condition of the business.
Likewise, administrators of nonprofit and governmental entities need to understand the accounting terminology and measurement methods in their financial statements. The rest of us are outsiders. We are not privy to the day-to-day details of a business or organization. Therefore, we need to have a good grip on the financial statements included in the financial reports. For all practical purposes, financial reports are the only source of financial information we get directly from a business or other organization.
By the way, the employees of a business — even though they obviously have a stake in the success of the business — do not necessarily receive its financial reports. Only the investors in the business and its lenders are entitled to receive the financial reports.
Of course, a business could provide this information to those of its employees who are not shareowners, but generally speaking most businesses do not. The financial reports of public businesses are in the public domain, so their employees can easily secure a copy. However, financial reports are not automatically mailed to all employees of a public business. In our personal financial lives, a little accounting knowledge is a big help for understanding investing in general, how investment performance is measured, and many other important financial topics.
Keep in mind that this is not a book on bookkeeping and recordkeeping systems. I offer a brief explanation of procedures for capturing, processing, and storing accounting information in Chapter 3. Even experienced bookkeepers and accountants should find some nuggets in that chapter. However, this book is directed to users of accounting information.
I focus on the end products of accounting, particularly financial statements, and not how information is accumulated. Overcoming the stereotypes of accountants I recently saw a cartoon in which the young son of clowns is standing in a circus tent and is dressed as a clown, but he is holding a business briefcase.
He is telling his clown parents that he is running away to join a CPA firm. Why is this funny? As a CPA and accounting professor for more than 40 years, I have met and known a large number of accountants.
Most accountants are not as gregarious as used-car sales people though some are. Accountants certainly are more detail-oriented than your average person. Accountants use very little math no calculus and only simple algebra.
Accountants are very good at one thing: They want to see both sides of financial transactions: the give and take. If you walked down a busy street in Chicago, New York, or Los Angeles, I doubt that you could pick out the accountants.
I have no idea whether accountants have higher or lower divorce rates than others, whether they go to church more frequently, whether most are Republicans or Democrats, or if they generally sleep well at night. I do think that accountants are more honest in paying their income taxes than other people, although I have no proof of this.
Well, a great deal of the information you use in making personal finance and investing decisions is accounting information. You have a stake in the financial performance of the business you work for, the government entities you pay taxes to, the churches and charitable organizations you donate money to, the retirement plan you participate in, the businesses you download from, and the healthcare providers you depend on. The financial performance and viability of these entities has a direct bearing on your personal financial life and well-being.
Accounting For Dummies
For example, as an employee your job security and your next raise depend on the business making a profit. If the business suffers a loss, you may be laid off or asked to take a reduction in pay or benefits. Business managers get paid to make profit happen. If the business fails to meet its profit objectives or suffers a loss, its managers may be replaced or at least not get their bonuses.
As an author, I hope my publisher continues to make profit so I can keep receiving my royalty checks. I hope the stores I trade with make profit and continue in business. The federal government and many states depend on businesses making profit to collect income taxes from them.
Beginners' Guide to Financial Statement
When you sign a mortgage on your home, you should understand the accounting method the lender uses to calculate the interest amount charged on your loan each period.
Individual investors need to understand accounting basics in order to figure their return on invested capital. And it goes without saying that every organization, profit-motivated or not, needs to know how it stands financially. All economic activity requires information. The more developed the economic system, the more the system depends on information. Much of the information comes from the accounting systems used by the businesses, institutions, individuals, and other players in the economic system.
Some of the earliest records of history are the accounts of wealth and trading activity. The need for accounting information was a main incentive in the development of the numbering system we use today.
The history of accounting is quite interesting but beyond the scope of this book. Taking a Peek into the Back Office Every business and not-for-profit entity needs a reliable bookkeeping system see Chapter 3.
Keep in mind that accounting is a much broader term than bookkeeping. For one thing, accounting encompasses the problems in measuring the financial effects of economic activity. Furthermore, accounting includes the function of financial reporting of values and performance measures to those that need the information. Business managers and investors, and many other people, depend on financial reports for information about the performance and condition of the entity.
Of course the financial information base should be complete, accurate, and timely. Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls.
Accountants design the internal controls for the bookkeeping system, which serve to minimize errors in recording the large number of activities that an entity engages in over the period.
The internal controls that accountants design are also relied on to detect and deter theft, embezzlement, fraud, and dishonest behavior of all kinds. In accounting, internal controls are the ounce of prevention that is worth a pound of cure.
I explain internal controls in Chapter 3.
Here, I want to stress the importance of the bookkeeping system in operating a business or any other entity. These back-office functions are essential for keeping operations running smoothly, efficiently, and without delays and errors. This is a tall order, to say the least.
Based on detailed private information in personnel files and earnings-to-date information, the correct amounts of income tax, social security tax, and several other deductions from gross wages have to be determined.
Stubs, which report various information to employees each pay period, have to be attached to payroll checks. The total amounts of withheld income tax and social security taxes, plus the employment taxes imposed on the employer, have to be paid to federal and state government agencies on time.
Retirement, vacation, sick pay, and other benefits earned by the employees have to be updated every pay period. In short, payroll is a complex and critical function that the accounting department performs. Many businesses outsource payroll functions to companies that specialize in this area.
The accounting department makes sure that the cash is deposited in the appropriate checking accounts of the business and that an adequate amount of coin and currency is kept on hand for making change for customers.
Accountants balance the checkbook of the business and control who has access to incoming cash receipts.
In larger organizations, the treasurer may be responsible for some of these cash flow and cashhandling functions. The accounting department prepares all these checks for the signatures of the business officers who are authorized to sign checks. The accounting department keeps all the supporting business documents and files to know when the checks should be paid, makes sure that the amount to be paid is correct, and forwards the checks for signature.
A typical business makes many downloads during the course of a year, many of them on credit, which means that the items bought are received today but paid for later. So this area of responsibility includes keeping files on all liabilities that arise from downloads on credit so that cash payments can be processed on time.
The accounting department Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes also keeps detailed records on all products held for sale by the business and, when the products are sold, records the cost of the goods sold. Except for relatively small-cost items, such as screwdrivers and pencil sharpeners, a business maintains detailed records of its property, both for controlling the use of the assets and for determining personal property and real estate taxes.
The accounting department keeps these property records. The accounting department may be assigned other functions as well, but this list gives you a pretty clear idea of the back-office functions that the accounting department performs.
Quite literally, a business could not operate if the accounting department did not do these functions efficiently and on time. And to repeat one point: To do these back-office functions well the accounting department must design a good bookkeeping system and make sure that it is accurate, complete, and timely.
Financial Statement Analysis Books
Focusing on Transactions Accounting focuses on transactions. A good bookkeeping system captures and records every transaction that takes place without missing a beat.
Transactions are economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals. Transactions are the lifeblood of every business, the heartbeat of activity that keeps it going.
Understanding accounting, to a large extent, means understanding how accountants record the financial effects of transactions. The immediate and future financial effects of some transactions can be difficult to determine. Figure illustrates the interactions between the business and the other parties in its economic exchanges. Even a relatively small business generates a surprisingly large number of transactions, and all transactions have to be recorded.
Certain other events that have a financial impact on the business have to be recorded as well. The liability to pay the damages is recorded. The waterlogged assets may have to be written down, meaning that the recorded values of the assets are reduced to zero if they no longer have any value to the business.
For example, products that were being held for sale to customers until they floated down the river must be removed from the inventory asset account. As I explain in more detail in Chapter 3, at the end of the year the accountant makes a special survey to make sure that all events and developments during the year that should be recorded have been recorded, so that the financial statements and tax returns for the year are complete and correct.
In Chapter 2, I explain the fundamental information components of financial statements, and then Part II gets into the nitty-gritty details. Financial statements are prepared at the end of each accounting period. A period may be one month, one quarter three calendar months , or one year.
Financial statements report summary amounts, or totals.
User account menu
Accountants seldom prepare a complete listing of the details of all the activities that took place during a period, or the individual items making up a total amount. Business managers occasionally need to search through a detailed list of all the specific transactions that make up a total amount. When they want to drill down into the details, they ask the accountant for the more detailed information.
But this sort of detailed listing is not a financial statement. Outside investors in a business see only summary-level financial statements. For example, investors see the total amount of sales revenue for the period but not how much was sold to each and every customer.
This is called the statement of financial condition or, more commonly, the balance sheet. The date of preparation is given in the header, or title, above this financial statement.
The asset values reported in the balance sheet are the amounts recorded when the assets were originally acquired — although I should mention that an asset is written down below its historical cost when the asset has suffered a loss in value.
And to complicate matters, some assets are written up to their current fair values. Some assets have been on the books only a few weeks or a few months, so their reported historical values are current. They can refer to tangible assets such as machinery, computers, buildings and land.
Non-current assets can also be intangible , such as goodwill, patents or copyright.
Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life. Learn The Different Liabilities On the other side of the balance sheet equation are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations which are due after a period of at least one year from the date of the balance sheet.
Current liabilities are the company's liabilities which will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payables, along with the current portion of longer-term borrowing, such as the latest interest payment on a year loan. Learn about Shareholders' Equity Shareholders' equity is the initial amount of money invested into a business.
If, at the end of the fiscal year, a company decides to reinvest its net earnings into the company after taxes , these retained earnings will be transferred from the income statement onto the balance sheet into the shareholder's equity account.
This account represents a company's total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders' equity on the other.If you have time, you can return to these topics Introduction later.
Financial statements: Income statements show how much money a company made and spent over a period of time. Accountants seldom prepare a complete listing of the details of all the activities that took place during a period, or the individual items making up a total amount.
Every recordkeeping system needs quality controls built into it, which are called internal controls or internal accounting controls. I found an actual example of this in a publicly traded company and wanted to show you so you could spot it for yourself in the future. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax.