TE AM FL Y The Fast Forward MBA in Finance SECOND EDITION THE FAST FORWARD MBA SERIES The Fast Forward MBA Series provides time-pressed business professionals and students with concise, one-stop information to help them solve business problems and make smart, informed business decisions All of the volumes, written by industry leaders, contain “tough ideas made easy.” The published books in this series are: The Fast Forward MBA Pocket Reference, Second Edition (0-471-22282-8) by Paul A Argenti The Fast Forward MBA in Selling (0-471-34854-6) by Joy J.D Baldridge The Fast Forward MBA in Financial Planning (0-471-23829-5) by Ed McCarthy The Fast Forward MBA in Negotiating and Dealmaking (0-471-25698-6) by Roy J Lewicki and Alexander Hiam The Fast Forward MBA in Project Management (0-471-32546-5) by Eric Verzuh The Fast Forward MBA in Business Planning for Growth (0-471-34548-2) by Philip Walcoff The Fast Forward MBA in Business Communication (0-471-32731-X) by Lauren Vicker and Ron Hein The Fast Forward MBA in Investing (0-471-24661-1) by John Waggoner The Fast Forward MBA in Hiring (0-471-24212-8) by Max Messmer The Fast Forward MBA in Technology Management (0-471-23980-1) by Daniel J Petrozzo The Fast Forward MBA in Marketing (0-471-16616-2) by Dallas Murphy The Fast Forward MBA in Business (0-471-14660-9) by Virginia O’Brien The Fast Forward MBA in Finance SECOND EDITION J O H N A T R A C Y John Wiley & Sons, Inc Copyright © 1996, 2002 by John A Tracy All rights reserved Published by John Wiley & Sons, Inc., New York Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744 Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional person should be sought Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books ISBN: 0-471-20285-1 Printed in the United States of America 10 for Richard and Robert, my dog track buddies, who have helped me more than they know CONTENTS xiii PREFACE PART FINANCIAL REPORTING OUTSIDE AND INSIDE A BUSINESS CHAPTER 1—GETTING DOWN TO BUSINESS Accounting Inside and Out Internal Functions of Accounting External Functions of Accounting A Word about Accounting Methods End Point CHAPTER 2—INTRODUCING FINANCIAL STATEMENTS Three Financial Imperatives, Three Financial Statements Accrual-Basis Accounting The Income Statement The Balance Sheet The Statement of Cash Flows End Point 6 11 11 13 16 18 21 24 vii CONTENTS CHAPTER 3—REPORTING PROFIT TO MANAGERS 27 Using the External Income Statement for Decision-Making Analysis Management Profit Report Contribution Margin Analysis End Point 27 31 35 36 CHAPTER 4—INTERPRETING FINANCIAL STATEMENTS A Few Observations and Cautions Premises and Principles of Financial Statements Limits of Discussion Profit Ratios Book Value Per Share Earnings Per Share Market Value Ratios Debt-Paying-Ability Ratios Asset Turnover Ratios End Point 39 39 41 46 47 49 51 53 55 58 59 PART ASSETS AND SOURCES OF CAPITAL CHAPTER 5—BUILDING A BALANCE SHEET Sizing Up Total Assets Assets and Sources of Capital for Assets Connecting Sales Revenue and Expenses with Operating Assets and Liabilities Balance Sheet Tethered with Income Statement End Point CHAPTER 6—BUSINESS CAPITAL SOURCES Business Example for This Chapter Capital Structure of Business Return on Investment Pivotal Role of Income Tax Return on Equity (ROE) viii 63 63 66 69 75 76 79 80 81 86 89 91 CONTENTS Financial Leverage End Point CHAPTER 7—CAPITAL NEEDS OF GROWTH Profit Growth Plan Planning Assets and Capital Growth End Point 92 95 97 98 99 105 PART PROFIT AND CASH FLOW ANALYSIS CHAPTER 8—BREAKING EVEN AND MAKING PROFIT Adding Information in the Management Profit Report Fixed Operating Expenses Depreciation: A Special Kind of Fixed Cost Interest Expense Pathways to Profit End Point CHAPTER 9—SALES VOLUME CHANGES Three Ways of Making a $1 Million Profit Selling More Units Sales Volume Slippage Fixed Costs and Sales Volume Changes End Point CHAPTER 10—SALES PRICE AND COST CHANGES Sales Price Changes When Sales Prices Head South Changes in Product Cost and Operating Expenses End Point CHAPTER 11—PRICE/VOLUME TRADE-OFFS Shaving Sales Prices to Boost Sales Volume Volume Needed to Offset Sales Price Cut Thinking in Reverse: Giving Up Sales Volume for Higher Sales Prices End Point 109 109 112 113 116 116 122 125 126 129 133 134 136 139 139 144 146 148 149 150 154 157 159 ix ... Daniel J Petrozzo The Fast Forward MBA in Marketing (0-471-16616-2) by Dallas Murphy The Fast Forward MBA in Business (0-471-14660-9) by Virginia O’Brien The Fast Forward MBA in Finance SECOND EDITION... Verzuh The Fast Forward MBA in Business Planning for Growth (0-471-34548-2) by Philip Walcoff The Fast Forward MBA in Business Communication (0-471-32731-X) by Lauren Vicker and Ron Hein The Fast Forward. . .The Fast Forward MBA in Finance SECOND EDITION THE FAST FORWARD MBA SERIES The Fast Forward MBA Series provides time-pressed business professionals and students with concise, one-stop information