Lita Epstein, MBA Author, Bookkeeping For Dummies and Bookkeeping Workbook For Dummies Learn to: • Make sense of important financial documents, from balance sheets to cash flow statements • Locate the key areas to focus on when re viewing reports • Explore international accounting standards t hat may soon be accepted in the U.S. • Understand recent SEC and other go vernmental regulatory changes Reading Financial Reports 2nd Edition Making Everything Easier! ™ Open the book and find: • The accounting basics necessary to understand financial reports • New information on reporting standards for private/small versus public/large businesses • Updates surrounding the 2007 law on international financial reporting standards • The impact of corporate communications and new technologies • New real-world examples that reflect current trends • Updated Web sites and resources • Tips for spotting the fluff in financial reports Lita Epstein, MBA, is a seasoned financial writer who focuses on helping people understand the complex worlds of money and finance. She was a financial manager for a medical clinic and content director for a financial services Web site, MostChoice.com. She also writes for AOL’s Blogging Stocks and WalletPop. $21.99 US / $23.99 CN / £14.99 UK ISBN 978-0-470-37628-7 Business/Finance Go to dummies.com ® for more! The ins and outs of financial reports, explained in plain English Want to make sense of financial reports? This easy-to- follow guide gives you a set of tools to understand these complicated statements, helping you read between the lines to determine a company’s true financial health. You’ll make informed decisions about investing, spot possible problems, and use these reports to manage your own department or company for success. • Get down to reporting basics — recognize different business types and how their structure affects the books, and grasp the accounting method underlying it all • Analyze the annual report — make sense of the balance sheet, income and cash flow statements, and the notes while spotting red flags • Know your numbers — keep an eye on whether a company is making a profit or suffering a loss • Understand how companies optimize operations — use reports to measure how efficiently management is using its resources • Meet the financial watchdogs — from auditors to analysts, see who certifies report accuracy and how recent scandals have changed the rules • Practice makes perfect — put your skills to the test by dissecting the annual reports of two similar companies throughout the book Reading Financial Reports Epstein 2nd Edition spine=.768” by Lita Epstein Reading Financial Reports FOR DUMmIES ‰ 2ND EDITION Reading Financial Reports For Dummies © , 2nd Edition Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2009 by Wiley Publishing, Inc., Indianapolis, Indiana 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 978-646-8600. 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Library of Congress Control Number: 2008941626 ISBN: 978-0-470-37628-7 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 About the Author Lita Epstein ran the financial accounting lab when she worked as a teaching assistant as she completed her MBA at Emory University’s Goizueta Business School. After receiving her MBA, she managed finances for a small non-profit organization and the facilities management section of a large medical clinic. Now she enjoys helping people develop good financial, investing, and tax- planning skills. She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time, and finance and investing for women. She is the author of more than 25 books, including Working After Retirement For Dummies, Bookkeeping For Dummies, Bookkeeping Workbook For Dummies (all published by Wiley), Streetwise Crash Course MBA, and 250 Questions You Should Ask to Avoid Foreclosure (Adams Media Corporation). Lita is also the coauthor of Trading For Dummies (Wiley). Lita was the content director for a financial services Web site, MostChoice. com, and managed the Web site, Investing for Women. She also wrote TipWorld’s Mutual Fund Tip of the Day in addition to columns about mutual fund trends for numerous Web sites. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the federal bureaucracy, which gives her great insight into how government programs work. Lita has also been a reporter at a daily newspaper, a magazine editor, and an associate director for development at The Carter Center. For fun, Lita enjoys scuba diving and is certified as an underwater photogra- pher. She hikes, canoes, and enjoys surfing the Web to find its hidden treasures. [...]... competitors’ financial reports If these reports are based on false numbers, the financial playing field gets distorted A well-run company could make a bad decision to keep up with the false numbers of a competitor and end up reducing its own profitability Companies don’t produce financial reports only for public consumption Many financial reports are prepared for internal use only These internal reports. .. ideas for improving your financial report reading skills and directs you to some useful financial resources This icon highlights information you definitely want to remember This icon points out a critical piece of information that can help you find the dangers and perils in financial reports I also use this icon to emphasize information you definitely don’t want to skip or skim when reading a financial. .. 247 Checking Out the 10-Q 248 Financial information 248 Other critical matters 249 Introducing the 10-K 250 Business operations 250 Financial data 250 Information about directors and executives 252 The extras 252 Investigating Internal Controls 253 xv xvi Reading Financial Reports For Dummies, 2nd Edition Uncovering... assume that you ✓ Want to know more about the information in financial reports and how you can use it ✓ Want to know the basics of financial reporting ✓ Need to gather some analytical tools to more effectively use financial reports for your own investing or career goals ✓ Need a better understanding of the financial reports you receive from the company you work for to analyze the results of your department... I carefully dissect what goes into financial reports, giving you the tools you need to analyze those reports I introduce you to the company outsiders who are involved in the financial reporting process and show you how to find red flags that may indicate deceptive or fraudulent reporting 3 4 Reading Financial Reports For Dummies, 2nd Edition Part I: Getting Down to Financial Reporting Basics Part I... Statement of Cash Flows 107 The parts 108 The formats 109 xi xii Reading Financial Reports For Dummies, 2nd Edition Checking Out Operating Activities 111 Depreciation 111 Inventory 112 Accounts receivable 112 Accounts payable 113 Summing up the cash-flow-from-activities section 113 Investigating Investing Activities ... regulations and show you how to read financial reports with an ounce of skepticism and a set of tools that can help you determine whether the numbers make sense I help you see how companies can play games with their numbers and show you how to analyze the numbers in a financial report so you can determine a company’s true financial health 2 Reading Financial Reports For Dummies, 2nd Edition About This... false but pretty financial pictures, but you’d still need a way to gauge a firm’s financial health At this point in time, nothing’s available that can possibly replace financial reports Nothing can be substituted that’d give investors, financial institutions, and government agencies the information they need to make decisions about a company And without financial reports, the folks who work for a company... more about double-entry accounting, turn to Chapter 4 Chapter 1: Opening the Cornucopia of Reports Why financial reporting counts (and who’s counting) Many people count on the information companies present in financial reports Here are some key groups of readers and why they need accurate information: ✓ Executives and managers: They need information to know how well the company is doing financially and... Without financial reports, they’d have no idea what their compensation is based on Employees also make career and retirement-investment decisions based on the company’s financial reports If the reports are misleading or false, employees could lose most, if not all, of their 401(k) retirement savings, and their long-term financial futures could be at risk ✓ Creditors: They need to understand a company’s financial . UK ISBN 97 8-0 -4 7 0-3 762 8-7 Business/Finance Go to dummies. com ® for more! The ins and outs of financial reports, explained in plain English Want to make sense of financial reports? This easy-to- follow. annual reports of two similar companies throughout the book Reading Financial Reports Epstein 2nd Edition spine=.768” by Lita Epstein Reading Financial Reports FOR DUMmIES ‰ 2ND EDITION Reading Financial. numbers mean? 178 Determining Debt-to-Capital Ratio 178 Calculating the debt-to-capital ratio 178 What do the numbers mean? 180 Reading Financial Reports For Dummies, 2nd Edition xiv Chapter