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To sign up, visit our website: www.amacombooks.org The Essentials of Finance and Accounting for Nonfinancial Managers THIRD EDITION .................18807$ $$FM 12-01-1513:12:02 PS PAGEi This page intentionally left blank The Essentials of Finance and Accounting for Nonfinancial Managers THIRD EDITION Edward Fields American Management Association New York • Atlanta • Brussels • Chicago • Mexico City • San Francisco Shanghai • Tokyo • Toronto • Washington, D.C. .................18807$ $$FM 12-01-1513:12:02 PS PAGEiii Bulkdiscountsavailable.Fordetailsvisit: www.amacombooks.org/go/specialsales Orcontactspecialsales: Phone:800-250-5308 Email:[email protected] ViewalltheAMACOMtitlesat:www.amacombooks.org AmericanManagementAssociation:www.amanet.org Thispublicationisdesignedtoprovideaccurateandauthoritativeinformationin regardtothesubjectmattercovered.Itissoldwiththeunderstandingthatthe publisherisnotengagedinrenderinglegal,accounting,orotherprofessionalservice. Iflegaladviceorotherexpertassistanceisrequired,theservicesofacompetent professionalpersonshouldbesought. LibraryofCongressCataloging-in-PublicationData Fields,Edward(Financialconsultant),author. Theessentialsoffinanceandaccountingfornonfinancialmanagers/Edward Fields.—Thirdedition. pages cm Includesbibliographicalreferencesandindex. ISBN978-0-8144-3694-3(pbk.) ISBN0-8144-3694-3(pbk.) ISBN978-0-8144-3695-0(ebook) 1.Accounting. 2.Finance. I.Title. HF5636.F526 2016 l658.15—dc23 2015028693 (cid:2)2016EdwardFields. Allrightsreserved. PrintedintheUnitedStatesofAmerica. Thispublicationmaynotbereproduced,storedinaretrievalsystem,ortransmitted inwholeorinpart,inanyformorbyanymeans,electronic,mechanical, photocopying,recording,orotherwise,withoutthepriorwrittenpermissionof AMACOM,adivisionofAmericanManagementAssociation,1601Broadway,New York,NY10019. Thescanning,uploading,ordistributionofthisbookviatheInternetoranyother meanswithouttheexpresspermissionofthepublisherisillegalandpunishableby law.Pleasepurchaseonlyauthorizedelectroniceditionsofthisworkanddonot participateinorencouragepiracyofcopyrightedmaterials,electronicallyor otherwise.Yoursupportoftheauthor’srightsisappreciated. AboutAMA AmericanManagementAssociation(www.amanet.org)isaworldleaderintalent development,advancingtheskillsofindividualstodrivebusinesssuccess.Our missionistosupportthegoalsofindividualsandorganizationsthroughacomplete rangeofproductsandservices,includingclassroomandvirtualseminars,webcasts, webinars,podcasts,conferences,corporateandgovernmentsolutions,businessbooks andresearch.AMA’sapproachtoimprovingperformancecombinesexperiential learning—learningthroughdoing—withopportunitiesforongoingprofessional growthateverystepofone’scareerjourney. Printingnumber 10 9 8 7 6 5 4 3 2 1 .................18807$ $$FM 12-01-1513:12:03 PS PAGEiv Contents Introduction 1 OrganizationoftheBook 3 AdditionalBackground 9 AccountingDefined 10 GenerallyAcceptedAccountingPrinciples 11 FinancialAnalysis 12 SomeAdditionalPerspectivesonthePlanningProcess 14 Part1: UnderstandingFinancialInformation 1. TheBalanceSheet 21 ExpensesandExpenditures 23 Assets 25 ImportantAccountingConceptsAffectingtheBalanceSheet 33 Liabilities 39 Stockholders’Equity 41 TotalLiabilitiesandStockholders’Equity 43 AdditionalBalanceSheetInformation 44 AnalysisoftheBalanceSheet 47 APointtoPonder 58 2. TheIncomeStatement 60 AnalysisoftheIncomeStatement 65 3. TheStatementofCashFlows 70 SourcesofFunds 71 UsesofFunds 74 StatementofCashFlows 77 AnalyzingtheStatementofCashFlows 78 4. GenerallyAcceptedAccountingPrinciples:AReviewandUpdate 82 TheFiscalPeriod 83 TheGoingConcernConcept 83 HistoricalMonetaryUnit 83 Conservatism 84 QuantifiableItemsorTransactions 85 Consistency 85 FullDisclosure 85 Materiality 86 SignificantAccountingIssues 86 5. TheAnnualReportandOtherSourcesofIncrediblyValuable Information 91 TheAnnualReport 92 v .................18807$ CNTS 12-01-1513:12:05 PS PAGEv vi CONTENTS TheGilbertBrothers:TheOriginalShareholderActivists 108 Modern-DayActivists 112 The10-KReport 113 TheProxyStatement 115 OtherSourcesofInformation 116 TheSecuritiesandExchangeCommission 118 Part2: AnalysisofFinancialStatements 6. KeyFinancialRatios 123 StatisticalIndicators 123 FinancialRatios 124 LiquidityRatios 126 RatiosofWorkingCapitalManagement 130 MeasuresofProfitability 139 FinancialLeverageRatios 147 RevenueperEmployee 153 Ratios:QuickandDirty 155 7. UsingReturnonAssetstoMeasureProfitCenters 157 Assets 159 Revenue 161 After-TaxCashFlow(ATCF) 161 ReturnonAssets:ItsComponents 162 ABusinesswithNo‘‘Assets’’ 168 8. OverheadAllocations 170 ProblemsThatArisefromCostAllocation 170 WhatAbouttheIRSandGAAP? 173 EffectonProfitsofDifferentCostAllocationIssues 173 Part3: DecisionMakingforImprovedProfitability 9. AnalysisofBusinessProfitability 185 ChartofAccounts 187 BreakevenCalculation 191 VarianceAnalysis 203 10. ReturnonInvestment 210 WhatIsAnalyzed? 210 WhyAreTheseOpportunitiesAnalyzedSoExtensively? 211 DiscountedCashFlow 213 PresentValue 216 DiscountedCashFlowMeasures 220 Risk 223 CapitalExpenditureDefined 225 TheCashFlowForecast 226 CharacteristicsofaQualityForecast 226 EstablishingtheROITarget 230 AnalyticalSimulations 233 Part4: AdditionalFinancialInformation 11. FinancingtheBusiness 239 Debt 240 Equity 249 SomeGuidanceonBorrowingMoney 251 .................18807$ CNTS 12-01-1513:12:05 PS PAGEvi CONTENTS vii 12. BusinessPlanningandtheBudget 256 S.W.O.T.Analysis 257 Planning 258 SignificantPlanningGuidelinesandPolicies 261 SomeAdditionalIssues 263 AGuidetoBetterBudgets 264 PreparationoftheBudget 266 13. FinalThoughts 269 ProfitabilityDuringToughTimes 270 DotheRightThing 273 AppendixA. FinancialStatementPractice 279 AppendixB. FinanceandAccountingTerms 285 AppendixC. ComprehensiveCaseStudy:PaleyProducts,Inc. 292 AppendixD. RatioMatchingChallenge 302 AppendixE. ComprehensiveCaseStudy:Woodbridge Manufacturing 308 AppendixF. ComprehensiveCaseStudy:BensonhurstBrewery 314 Glossary 319 Index 339 AbouttheAuthor 345 FreeSamplefromTheFirst-TimeManagerbyLorenB.Belker,Jim McCormick,andGaryS.Topchik 346 .................18807$ $TOC 12-02-1508:28:13 PS PAGEvii Introduction T his is a book for businesspeople. All decisions in a business organization are made in accordance with how they will affect the organization’s financial performance and future financialhealth.Whetheryourbackgroundisinmarketing,manu- facturing, distribution, research and development, or the current technologies,youneedfinancialknowledgeandskillsifyouareto reallyunderstandyourcompany’sdecision-making,financial,and overall management processes. The budget is essentially a finan- cialprocessofprioritizingthebenefitsresultingfrombusinessop- portunities and the investments required to implement those opportunities. An improved knowledge of these financial proc- esses and the financial executives who are responsible for them will improve your ability to be an intelligent and effective partici- pant. The American economy has experienced incredible turmoil in the years since this book was first published. Before U.S. govern- ment intervention in 2008/2009, we were on the verge of our sec- ond ‘‘great depression.’’ We witnessed the demise of three great financial firms, Bear Stearns, Lehman Brothers, and AIG. Corpo- rate bankruptcies were rampant, with General Motors, Chrysler, andmostofthemajorairlinesfiling.TheU.S.governmentlentthe banks hundreds of billions of dollars to save the financial system, while approximately seven million Americans lost their jobs (and most of these jobs will never exist again; see Chapter 6, ‘‘Key Fi- nancial Ratios,’’ for a discussionof employee productivity trends). 1 .................18807$ INTR 12-01-1513:12:07 PS PAGE1