PORTABLE MBA in FINANCE AND ACCOUNTING The Portable MBA Series The Portable MBA, Third Edition,Robert Bruner, Mark Eaker, R. Edward Freeman, Robert Spekman and Elizabeth Olmsted Teisberg The Portable MBA Desk Reference, Second Edition,Nitin Nohria The Portable MBA in Economics,Philip K.Y. Young The Portable MBA in Entrepreneurship, Second Edition,William D. Bygrave The Portable MBA in Entrepreneurship Case Studies,William D. Bygrave The Portable MBA in Finance and Accounting, Third Edition,John Leslie Livingstone and Theodore Grossman The Portable MBA in Investment,Peter L. Bernstein The Portable MBA in Management, First Edition,Allan Cohen The Portable MBA in Market-Driven Management: Using the New Marketing Concept to Create a Customer-Oriented Company, Frederick E. Webster The Portable MBA in Marketing, Second Edition, Alexander Hiam and Charles Schewe The Portable MBA in New Product Development: Managing and Forecasting for Strategic Success,Robert J. Thomas The Portable MBA in Psychology for Leaders,Dean Tjosvold The Portable MBA in Real-Time Strategy: Improvising Team-Based Planning for a Fast-Changing World,Lee Tom Perry, Randall G. Stott, and W. Norman Smallwood The Portable MBA in Strategy, Second Edition,Liam Fahey and Robert Randall The Portable MBA in Total Quality Management: Strategies and Techniques Proven at Today’s Most Successful Companies,Stephen George and Arnold Weimerskirch Forthcoming: The Portable MBA in Management, Second Edition,Allan Cohen PORTABLE MBA in FINANCE AND ACCOUNTING THIRD EDITION Edited by John Leslie Livingstone and Theodore Grossman John Wiley & Sons, Inc. Copyright © 2002 by John Wiley & Sons, Inc., New York. All rights reserved. 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 Section 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: [email protected]. 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. This title is also available in print as Bookz ISBN 0-471-06185-9. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com Preface Do you know how to accomplish these important business tasks? • Understand financial statements. • Measure liquidity of a business. • Analyze business profitability. • Differentiate between regular income and extraordinary items. • Predict future bankruptcy for an enterprise. • Prepare a budget. • Do a break-even analysis. • Measure productivity. • Figure out return on investment. • Compute the cost of capital. • Put together a business plan. • Legitimately minimize income taxes payable by you or your business. • Decide whether your business should be a limited partnership, a C or S corporation, or some other type of entity. • Take your company public. • Manage foreign currency exposure. • Evaluate a merger or acquisition target. • Serve as a director of a corporation. • Build a successful e-business. • Understand and use financial derivatives. • Use information technology for competitive advantage. • Value a business. These are some of the key topics explained in this book. It is a book de- signed to help you learn the basics in finance and accounting, without incur- ring the considerable time and expense of a formal MBA program. v vi Preface The first edition of this book was published in 1992, and the second edi- tion in 1997. Both editions, hardback and paperback, have been highly success- ful and have sold many, many copies. In addition, the book has been translated into Chinese (Cantonese and Mandarin), French, Indonesian, Portuguese, and Spanish. We are delighted that so many readers in various countries have found this book useful. Now, the entire book has been updated for the third edition. The following new chapters have been added: • Chapter 1: Using Financial Statements • Chapter 3: Cost-Volume-Profit Analysis • Chapter 5: Information Technology and You • Chapter 6: Forecasts and Budgets • Chapter 9: The Business Plan • Chapter 10: Planning Capital Expenditure • Chapter 17: Profitable Growth by Acquisition • Chapter 18: Business Valuation Also, there are eight new authors, substantial revisions of four chapters and complete updates of all remaining chapters. The book consists of valu- able, practical how-to-do-it information, applicable to an entire range of busi- nesses, from the smallest startup to the largest corporations in the world. Each chapter of the book has been written by an outstanding expert in the subject matter of that particular chapter. Some of these experts are full-time practitioners in the real world, and others are part-time consultants who also serve as business school professors. Most of these professors are on the fac- ulty of Babson College, which is famous for its major contributions to the field of entrepreneurship and which, year after year, is at the top of the an- nual list of leading independent business schools compiled by U.S. News and World Report. This book can be read, and reread, with a great deal of profit. Also, it can be kept handy on a nearby shelf in order to pull it down and look up answers to questions as they occur. Further, this book will help you to work with finance and accounting professionals on their own turf and in their own jargon. You will know what questions to ask, and you will better understand the answers you receive without being confused or intimidated. Who can benefit from this book? Many different people, such as: • Managers wishing to improve their business skills. • Engineers, chemists, scientists and other technical specialists preparing to take on increased management responsibilities. • People already operating their own businesses, or thinking of doing so. • Business people in nonfinancial positions who want to be better versed in financial matters. • BBA or MBA alumni who want a refresher in finance and accounting. Preface vii • People in many walks of life who need to understand more about financial matters. Whether you are in one, some, or even none of the above categories, you will find much of value to you in this book, and the book is reader friendly. Frankly, most finance and accounting books are technically complex, boringly detailed, or just plain dull. This book emphasizes clarity to nonfinancial read- ers, using many helpful examples and a bright, interesting style of writing. Learn, and enjoy! JOHNLESLIELIVINGSTONE THEODOREGROSSMAN Acknowledgments A book like this results only from the contributions of many talented people. We would like to thank the chapter authors that make up this book for their clear and informative explanations of the powerful concepts and tools of fi- nance and accounting. In this world of technology and the Internet, while most of the underlying concepts remain fixed, the applications are ever changing, requiring the authors to constantly rededicate themselves to their professions. Our deepest appreciation goes to our wives, Trudy Livingstone and Ruth Grossman, and to our children Robert Livingstone, Aaron and Melissa Gross- man, and Michael Grossman. They provide the daily inspiration to perform our work and to have undertaken this project. J. L. L. T. G. ix