Crash Course in Accounting and Financial Statement Analysis

by Feldman, Matan; Libman, Arkady

Edition: 2nd

ISBN13: 9780470047019

ISBN10: 0470047011

Format: Paperback

Pub. Date: 2007-02-26

Publisher(s): Wiley

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Summary

Seamlessly bridging academic accounting with real-life applications, Crash Course in Accounting and Financial Statement Analysis, Second Edition is the perfect guide to a complete understanding of accounting and financial statement analysis for those with no prior accounting background and those who seek a refresher.

Author Biography

Matan Feldman is founder and CEO of Wall Street Prep, a provider of step-by-step self-study courses and customized university and corporate training seminars in financial accounting, corporate finance, financial modeling, valuation modeling, and M&A modeling. Before Wall Street Prep, he worked as an equity research associate at JPMorgan Chase & Co. and as a financial analyst in the M&A group at Chase Manhattan Bank. He received an MA in economics with honors from Boston University.

Arkady Libman is the Managing Director of Wall Street Prep. Before Wall Street Prep, he worked as an equity research associate at Friedman, Billings, Ramsey & Co., Inc., and as an investment banking analyst at JPMorgan Chase & Co. He completed coursework at the London School of Economics and graduated with honors from Bowdoin College with a BA in economics.

Established by investment bankers, Wall Street Prep is a global full-service financial training firm, providing self-study programs as well as instructor-led training and e-learning services to investment banks, financial institutions, Fortune 1000 companies, and academic institutions.

About the Authors	p. viii
Preface	p. x
Introduction to Accounting	p. 1
What Is Accounting?	p. 1
Why Is Accounting Important?	p. 2
Making Corporate Decisions	p. 2
Making Investment Decisions	p. 2
Accounting Facilitates Corporate and Investment Decisions	p. 2
Who Uses Accounting?	p. 2
U.S. Accounting Regulations	p. 2
Generally Accepted Accounting Principles	p. 2
Overview of the Securities and Exchange Commission	p. 3
Overview of the Financial Accounting Standards Board	p. 4
International Accounting Regulations	p. 4
Convergence of U.S. GAAP and IFRS	p. 6
Summary	p. 6
Basic Accounting Principles	p. 11
Assumptions	p. 11
Accounting Entity	p. 12
Going Concern	p. 13
Measurement and Units of Measure	p. 13
Periodicity	p. 14
Wrap-up: Assumptions	p. 15
Principles	p. 18
Historical Cost	p. 18
Accrual Basis	p. 18
Full Disclosure	p. 21
Wrap-up: Principles	p. 21
Constraints	p. 24
Estimates and Judgments	p. 24
Materiality	p. 24
Consistency	p. 24
Conservatism	p. 24
Summary	p. 27
Financial Reporting	p. 29
Financial Reporting Overview	p. 29
Finding Financial Reports	p. 30
Form 10-K (Annual Filing)	p. 30
Why Is the 10-K Important?	p. 30
Form 10-Q (Quarterly Filing)	p. 30
Other Important Filings	p. 31
Form 8-K	p. 31
Form S-1	p. 31
Form 14A	p. 31
Form 20-F	p. 31
Summary	p. 32
Reading the Annual Report	p. 35
Introduction	p. 35
Letter to Stockholders	p. 36
Financial Highlights	p. 38
Management's Discussion and Analysis	p. 38
Financial Statements	p. 40
Income Statement	p. 40
Balance Sheet	p. 41
Cash Flow Statement	p. 41
Notes to Consolidated Statements	p. 41
Report of Management's Responsibilities	p. 43
Certification of Financial Statements	p. 46
Risk Factors	p. 48
Legal Proceedings	p. 48
Report of Independent Auditors	p. 49
Directors and Officers	p. 52
Summary	p. 54
Income Statement	p. 55
What is the Income Statement?	p. 55
Why Is It Important?	p. 57
Revenues	p. 57
Not All Income Is Revenue	p. 58
Bad Debt Expense	p. 61
What Is Bad Debt Expense?	p. 61
Revenue Recognition: To Recognize and When?	p. 61
Revenue Recognition: Long-Term Projects	p. 62
Expense Recognition and Accrual Basis of Accounting	p. 65
Basic Principles Revisited: Accrual Basis of Accounting and Matching Principle	p. 65
Putting It All Together: The Accrual Basis of Accounting	p. 65
Why Use Accrual Accounting?	p. 65
Accrual versus Cash Accounting: What's the Difference?	p. 66
Revenue Manipulation	p. 67
Cost of Goods Sold	p. 70
COGS Do Not Include Administrative Costs	p. 70
Gross Profit	p. 73
Selling, General and Administrative	p. 75
Research and Development	p. 77
Stock Options Expense	p. 77
Depreciation Expense	p. 80
Depreciation Is a "Phantom" Noncash Expense	p. 82
Straight-Line Depreciation Method	p. 83
Accelerated Depreciation Methods	p. 86
Depreciation Methods Compared	p. 92
Amortization	p. 92
Amortization Is a "Noncash" Expense (Like Depreciation)	p. 93
What Is the Difference between Depreciation and Amortization?	p. 93
Summary	p. 96
Goodwill	p. 96
Goodwill Not Amortized after 2001	p. 96
Interest Expense	p. 97
Interest Income	p. 99
Other Nonoperating Income	p. 99
Income Tax Expense	p. 99
Equity Income in Affiliates	p. 100
Minority Interest	p. 102
Net Income	p. 104
Shares Outstanding	p. 104
Representation of Shares Outstanding in the Income Statement	p. 104
Common Dividends	p. 108
Preferred Dividends	p. 108
Earnings per Share	p. 108
Nonrecurring Items	p. 110
Unusual or Infrequent Items	p. 110
Discontinued Operations	p. 112
Extraordinary Items	p. 113
Accounting Changes	p. 114
Earnings before Interest, Taxes, Depreciation, and Amortization	p. 117
EBITDA: Popular Measure of a Company's Financial Performance	p. 118
EBITDA Has Several Shortcomings	p. 119
EBIT	p. 122
Summary	p. 123
Balance Sheet	p. 129
Introduction	p. 129
Assets Represent the Company's Resources	p. 131
Liabilities and Shareholders' Equity Represent the Company's Sources of Funds (i.e., How It Pays for Assets)	p. 134
Lemonade Stand and the Accounting Equation	p. 137
Balance Sheet	p. 137
Double-Entry Accounting	p. 138
Why Is Double-Entry Accounting Important?	p. 143
Income Statement Revisited: Links to Balance Sheet	p. 143
Retained Earnings: The Link Between Balance Sheet and Income Statement	p. 144
Impact of Revenues on the Balance Sheet	p. 145
Impact of COGS on the Balance Sheet	p. 145
Impact of SG&A on the Balance Sheet	p. 146
Impact of Depreciation on the Balance Sheet	p. 146
Impact of Interest Expense on the Balance Sheet	p. 146
Impact of Tax Expense on the Balance Sheet	p. 146
Total Impact of the Year on the Balance Sheet	p. 147
Summary	p. 148
Order of Liquidity	p. 149
Current versus Noncurrent Assets	p. 149
Current versus Long-Term Liabilities	p. 149
Assets	p. 153
Inventories	p. 157
LIFO Reserve: The Link between FIFO and LIFO Inventory Methods	p. 164
Writing Down Inventories	p. 164
Deferred Taxes	p. 164
PP&E, Net of Depreciation	p. 169
Reconciliation of PP&E	p. 170
Fixed Asset Impairments	p. 175
Fixed Asset Retirement and Disposal	p. 176
Intercompany Investments	p. 177
Consolidation	p. 179
Intangible Assets	p. 179
Goodwill	p. 181
Summary: Intangible Assets and Goodwill	p. 184
Summary: Assets	p. 186
Liabilities	p. 190
Other Typical Current Liabilities	p. 192
Debt	p. 193
Short-Term Debt versus Long-Term Debt	p. 193
Capital Leases	p. 194
Operating Leases	p. 194
Deferred Taxes	p. 195
Summary: Deferred Taxes	p. 197
Pensions	p. 198
Defined Benefit Plan	p. 202
Minority Interest	p. 205
Summary: Liabilities	p. 209
Shareholders' Equity	p. 212
Introduction	p. 213
Common Stock	p. 214
Additional Paid-In Capital	p. 214
Preferred Stock	p. 215
Treasury Stock	p. 216
Retained Earnings	p. 217
Summary: Shareholders' Equity	p. 219
Summary	p. 222
Cash Flow Statement	p. 223
Introduction	p. 223
Cash Flow Statement to the Rescue!	p. 225
Cash Flow from Operations	p. 228
Overview	p. 228
Indirect Method	p. 228
Getting from Net Income to Cost from Operations	p. 229
Depreciation	p. 231
Working Capital	p. 233
Changes in Accounts Receivable	p. 235
Changes in Accounts Receivable and the Lemonade Stand	p. 235
Changes in Inventories	p. 236
Changes in Inventories and the Lemonade Stand	p. 237
Changes in Accounts Payable	p. 239
Accounts Payable and the Lemonade Stand	p. 239
Changes in Other Current Assets	p. 240
Changes in Other Current Liabilities	p. 241
Increases/Decreases in Deferred Taxes	p. 241
Summary: Cash Flow from Operations	p. 244
Cash Flow from Investing Activities	p. 247
Overview	p. 247
Components	p. 247
Cash Flow from Financing Activities	p. 251
Overview	p. 251
Components	p. 251
How the Cash Flow is Linked to the Balance Sheet	p. 255
Summary	p. 256
Online Exercise	p. 256
Financial Ratio Analysis	p. 259
Introduction	p. 259
What Is Financial Ratio Analysis?	p. 259
Liquidity Ratios	p. 260
Current Ratio	p. 260
Quick (Acid) Test	p. 260
Current Cash Debt Coverage Ratio	p. 261
Profitability Ratios	p. 261
Gross Profit Margin	p. 261
Profit Margin on Sales	p. 261
Return on Assets	p. 262
Return on Equity	p. 262
Earnings per Share	p. 262
Price-to-Earnings Ratio	p. 262
Payout Ratio	p. 262
Activity Ratios	p. 262
Receivables Turnover	p. 263
Days Sales Outstanding	p. 263
Inventory Turnover	p. 263
Days Sales of Inventory	p. 263
Asset Turnover	p. 263
Coverage Ratios	p. 263
Debt to Total Assets	p. 264
Times Interest Earned	p. 264
Cash Debt Coverage Ratio	p. 264
Calculations	p. 265
	p. 267
Stock Options	p. 267
Stock Options Expensing	p. 268
Then...	p. 268
...and Now	p. 269
Debt	p. 270
How Are These Two Forms of Capital Raised?	p. 270
Who Issues Debt?	p. 270
Long-Term Debt	p. 271
Capital versus Operating Leases	p. 272
Direct Method	p. 272
Index	p. 275
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