Reading Financial Reports for Dummies (61 page)

cash fl ow, 114, 119

Index

355

cash fl ow coverage ratio, 191

Microsoft, 158, 162

cash return on sales, 184–185

Milky Way bar, 30

current cash debt coverage ratio, 186–187

minority interest, 145

current ratio, 172

mistakes, in fi nancial statements, 238

debt to shareholders’ equity, 177

mock portfolio, listing, 248

debt-to-capital ratio, 179

molds, on the balance sheet, 85

dividend payout ratio, 161

monthly budget reports, 201–203

EBITDA (earnings before interest, taxes,

mood, of analysts or company executives,

depreciation, and amortization), 175

291

effects of currency exchange, 118

Moody’s Investor Service, 275

fi nancing activities of, 117

Morgan Stanley, 272

fi xed assets turnover, 214

Morningstar, 271, 274

free cash fl ow, 182–183

mortgage-backed securities, 321

gross margin, 167–168

Mulcahey, Michael (Adelphia director), 322

interest coverage ratio, 175–176

multistep format, for an income statement,

inventory turnover, 212–213

93–95

long-term debt, 126–127

long-term debt payments, 128–129

• N •

major recalls, 125

net profi t margin, 170, 184

NASDAQ, 40

notes on fi nancial borrowings, 126

National Association of Securities Dealers,

number of days in accounts payable

272–273

ratio, 224

negative working capital, 173

operating margin, 168

net assets, 79, 339

P/E (price/earnings) ratio, 157

net business income, 22, 339

quick ratio, 174

net cash from operations, 315

ROA (return on assets), 165

net income, 92, 94, 118, 206.
See also
net

ROE (return on equity), 166

profi t

ROS (return on sales), 163–164

net loss, 92, 94, 105, 170

shortfall in cash requirements, 192

net marketable value, 82, 339

spending on investments, 115

net profi t, 58, 105, 339

total asset turnover, 215

net profi t margin, 169–170, 184

Web site, 2

net revenue, 98, 339

MD&A (management’s discussion and

net sales, 98, 339

analysis) section, 17, 62, 64–68

net-income statement, 211

Medicare taxes, 57

New York Stock Exchange (NYSE), 16, 40,

medium-term notes, 126

272–273

merchant services, 233

nominating process, 256–257

merger magic, 297

noncurrent assets, 79, 80

mergers

nonhuman entities, 26

described, 139

nonoperating expenses, 102, 104

notes on, 131, 149

nonoperating income, 104, 339

questionable, 333–334

nonresident aliens, 26

reporting, 287

nonstandard auditors’ report, 69–71

Merrill Lynch, 272

Norwalk Agreement, 260

356
Reading Financial Reports For Dummies, 2nd Edition
notes to fi nancial statements

partnerships, 23–24, 239, 340

in annual reports, 14, 17, 62, 73

past due accounts, 221

defi ned, 339

past sales success, 198

hiding problems in, 121

patents, 85, 307

red fl ags in, 136–138

pay down liabilities, 314

revenue-recognition policies, 303

payroll taxes, payment of, 45

small print of, 122

PCAOB (Public Company Accounting

number of days in accounts payable ratio,

Oversight Board), 39

223–224

P/E (price/earnings) ratio, 154–160

numbering system, for accounts, 51

pension and retirement benefi ts, 132–133

numbers, rounding in fi nancial reports, 78

pension plans section, 65–66

NYSE (New York Stock Exchange), 16, 40,

periodic inventory tracking, 206

272–273

perpetual inventory system, 206

personal net worth, of owners, 31

• O •

personal tax returns, 22

physical capacity, 305, 340

objectives, of an audit, 240

physical count, 311

obligations, to retirees, 138

P&L (profi t and loss statement).
See

offi ce needs, expenses for, 101

income statements

operating activities, on a statement of cash

Poor, Henry Varnum (S&P founder), 275

fl ows, 108

preferred stock, 89, 251, 340

operating cash fl ow, 160, 339

preferred stock account, 55

operating expenses, 56–57, 101–102, 339

preliminary review, by auditors, 240

operating leases, 130, 339

press releases, 276, 278–279

operating margin, 168–169, 340.
See also

press reports, 278

profi t

price/earnings (P/E) ratio, 154–160

operating period, 93, 340

PricewaterhouseCoopers, report

operating profi ts, 58, 103

comparing GAAP and IFRS, 263

operating-activities section, 111–114

pricing policy, considering, 198

opinion paragraph, of the auditors’

Prince, Charles (Citigroup CEO), 321

report, 69

private companies, 13, 29–33

organization structure, in an annual

Pro forma EPS, 159

report, 37

product development, expenses of, 125

other assets, 86

product improvements, in the MD&A, 67

other expenses, 102

product liabilities, in the MD&A, 66

overstated assets, 310–312

production budget, 200

over-the-counter, stock as, 40

production phase, managing costs

overvalued assets, 332

during, 99

owners, diversifi cation by, 35

profi t.
See also
operating margin

owner’s equity, 18

on an income statement, 92

owner’s equity account, 54

defi ned, 10, 340

owners’ net worth, 32

net, 339

profi t and loss statement (P&L).

• P •

See
income statements

profi t data, historical, 331

Pacioli, Luca (father of accounting), 16

profi t lines, in the multistep format, 94–95

parent company, 340

profi t margins, 330–331

Index

357

profi t types, 57–58, 103

reinvestment plans, 293–294

projected or leading EPS, 159–160

related-party revenue, 302, 340

promotions, 101

related-party transactions, 252, 266

proposing release, 261

relevance, of accounting information, 243

proxies, 257, 340

reliability, of accounting information, 243

proxy fi ghts, 285–286

report format, for a balance sheet, 79

proxy votes, 284

reported EPS, 159

public companies, 13, 33–39

reporting, questionable, 316

Public Company Accounting Oversight

reporting period, extending, 300

Board (PCAOB), 39

research and development (R&D)

public offerings, 41, 341

activities, as high risk, 307

public practice, CPAs in, 239

costs, 306–307

Publix Super Markets, 33

expenses for, 102

purchase discounts account, 56

projects, 67

purchase returns and allowances

restatement, of earnings, 296, 340

account, 56

restructuring, 136, 297, 340

purchases, from a subsidiary, 147

“restructuring,” in a letter to

purchases account, 56

shareholders, 63

restructuring charges, 65, 309

• Q •

retail or rental space, 305

retail outlet, 97

qualifi ed audit report, 69

retail stores, quick ratio for, 174

qualifi ed opinions, 71

retained earnings, 90, 161, 340

quarterly reports, 13, 37–38

retained earnings account, 55

quick assets, 174

retirees, obligations to, 138

quick ratio, 173–175

retirement benefi ts, 132

return on assets (ROA), 164–166

• R •

return on equity (ROE), 165–167

return on sales (ROS), 163–164

rate of return on assets, for pension

returns, 98–99

obligations, 133

revenue

raw materials, tracking, 99

acknowledging, 95

R&D.
See
research and development (R&D)

defi ned, 340

receivables, 230–231

defi ning, 95–97

receivables securitization program,

games played with, 331

230–231

net, 339

receivership, 254, 340

related-party, 302, 340

recognition, 65, 96, 340

revenue accounting, creative, 303–305

recognition of revenue.
See
revenue

revenue accounts, 55–56

recognition

revenue growth, 290–291

red fl ags

revenue recognition

in internal fi nancial reports, 201

games, 299–303

in notes to the fi nancial statements,

IFRS compared to GAAP, 265

136–138

in the MD&A, 65

red herring, 41

reviewing policies, 303–305

refi nancing, debt, 117

using to boost earnings, 298

358
Reading Financial Reports For Dummies, 2nd Edition
revenue recognition section, 124

Schedule C (“Profi t or Loss from

revenue results, 304

Business”) form, 22

revenue-booking practices, 46

Schedule C-EZ (“Net Profi t from Business”)

reviews, by CPAs, 13

form, 22

riding, the trade, 228

Schedule E (“Supplemental Income and

Rigas, John (Adelphia founder), 321–322

Loss”) form, 22

Rigas, Michael and Timothy (Adelphia

Schedule F (“Profi t or Loss from Farming”)

founder’s sons), 322

form, 22

rights of return, 301

Schedule K-1 (“Partner’s Share of Income,

risk factors, 249–250

Credits, Deductions, etc”), 23

ROA (return on assets), 164–166

Schedule SE (“Self-Employment Tax”)

road shows, 41, 279

form, 22

ROE (return on equity), 165–167

scope and objectives, of an audit, 240

Rooney, Phillip (Waste Management

scope paragraph, of the auditors’

president), 324

report, 69

ROS (return on sales), 163–164

SEC (Securities and Exchange Commission)

rounding, numbers in fi nancial reports, 78

AAERs (Accounting and Auditing

royalties, 101–102, 341

Enforcement Releases), 316

royalty expenses, 169

acceptance of IFRS fi nancial reports,

run-rate numbers, 290

260–261

annual report form required by, 250–252

• S •

cooling-off period imposed by, 41

creation and authority of, 16

S corporations, 26

criteria to recognize revenue for items

sales

not yet shipped, 302

adjusting, 97–99

disclosure requirements regarding board

defi ned, 10

operations, 256–258

effect of debits and credits, 48

documents, 40

net, 339

Edgar Web site, 15, 93, 247, 331

overstating, 323

Fair Disclosure (Regulation FD), 278, 288

reporting fi ctional, 300–301

form(s) fi led with, 14–15

to a subsidiary, 147

Form 8-K

sales budget, 199

as an exhibit on the 10-Q, 250

sales discounts account, 55–56

described, 15

sales forecast, 198–199

reporting material changes, 254–256

sales goals, 199

required for public companies, 37

sales of goods or services account, 55

Form 10, 33

sales price, 124

Form 10-K, 14, 250–252

sales returns and allowances account, 56

Form 10-Q

sales revenue, 100

described, 14

sales tax collected account, 54

Part II, 249–250

Sarbanes-Oxley Act of 2002, 37–39, 253–

parts of, 248

254, 256–257, 319

required by the SEC, 248

SBA (Small Business Administration),

Forms 3, 4, and 5, on insider

loans, 233

ownership, 258

“IFRS Road Map,” 260

Index

359

investigations, 287

reinvesting dividends through

investigations conducted by, 331

reinvestment plans, 293

monitoring of the MD&A section, 65

reporting on votes of, 249

previous years’ reports online, 331

in S corporations, 26

private company fi nancial reports fi led

speaking out at meetings, 284–285

with, 33

tactics deceiving, 295

proxies reviewed by, 257

shareholders’ equity

recognition of the FASB, 244

account, 54

reports fi led with, 13

comparing to debt, 176–178

responsibilities of, 19

defi ned, 341

Rule 10A-3, 286

described, 18

secondary public offerings, 115, 341

impact on ROA, 165

secured debt, 341

summary of key changes to, 64

secured debtors, 89

short-term borrowings, 87, 126, 341

secured line of credit, 232

short-term debt, 129, 341

securities

short-term fi nancing, 231

defaults upon senior, 249

side letters, 301, 341

defi ned, 341

single-step format, 93–94

holding off the books, 319

Skilling, Jeffrey (Enron CEO), 320

marketable, 82, 339

Small Business Administration (SBA),

reporting on changes in, 249