Introduction 1 About This Book 2 Conventions Used in This Book 2 What You''re Not to Read 2 Foolish Assumptions 3 Icons Used in This Book 3 Beyond the Book 4 Where to Go from Here 4 Part 1: Getting Started with Reading Financial Reports 5 Chapter 1: Opening the Cornucopia of Reports 7 Figuring Out Financial Reporting 8 Preparing the reports 8 Seeing why financial reporting counts (and who''s counting) 9 Checking Out Types of Reporting 10 Keeping everyone informed 11 Following the rules: Government requirements 12 Going global 13 Staying within the walls of the company: Internal reporting 13 Dissecting the Annual Report to Shareholders 15 Breaking down the parts 15 Getting to the meat of the matter 16 Keeping the number crunchers in line 17 Chapter 2: Recognizing Business Types and Their Tax Rules 19 Flying Solo: Sole Proprietorships 20 Keeping taxes personal 20 Reviewing requirements for reporting 21 Joining Forces: Partnerships 21 Partnering up on taxes 22 Meeting reporting requirements 22 Seeking Protection with Limited Liability Companies 22 Taking stock of taxes 23 Reviewing reporting requirements 23 Shielding Your Assets: S and C Corporations 23 Paying taxes the corporate way 24 Getting familiar with reporting requirements 26 Chapter 3: Public or Private: How Company Structure Affects the Books 27 Investigating Private Companies 28 Checking out the benefits 29 Defining disadvantages 30 Figuring out reporting 31 Understanding Public Companies 32 Examining the perks 33 Looking at the negative side 34 Filing and more filing: Government and shareholder reports 35 Entering a Whole New World: How a Company Goes from Private to Public 38 Teaming up with an investment banker 38 Making a public offering 39 Chapter 4: Digging into Accounting Basics 41 Making Sense of Accounting Methods 41 Cash-basis accounting 42 Accrual accounting 42 Why method matters 42 Understanding Debits and Credits 44 Double-entry accounting 45 Profit and loss statements 45 The effect of debits and credits on sales 46 Depreciation and amortization 47 Checking Out the Chart of Accounts 48 Asset accounts 49 Liability accounts 52 Equity accounts 52 Revenue accounts 53 Expense accounts 54 Differentiating Profit Types 55 Gross profit 55 Operating profit 56 Net profit 56 Part 2: Checking Out the Big Show: Annual Reports 57 Chapter 5: Exploring the Anatomy of an Annual Report 59 Everything but the Numbers 60 Debunking the letter to shareholders 60 Making sense of the corporate message 61 Meeting the people in charge 62 Finding basic shareholder information 62 Getting the skinny from management 62 Management as a whole? 65 Getting guarantees from management 66 Bringing the auditors'' answers to light 67 Presenting the Financial Picture 70 Summarizing the Financial Data 70 Finding the highlights 71 Reading the notes 71 Chapter 6: Balancing Assets against Liabilities and Equity 73 Understanding the Balance Equation 73 Introducing the Balance Sheet 74 Digging into dates 74 Nailing down the numbers 76 Figuring out format 76 Ogling Assets 78 Current assets 78 Long-term assets 81 Accumulated depreciation 84 Looking at Liabilities 85 Current liabilities 85 Long-term liabilities 86 Navigating the Equity Maze 87 Stock 87 Retained earnings 88 Capital 88 Drawing 88 Chapter 7: Using the Income Statement 89 Introducing the Income Statement 90 Digging into dates 91 Figuring out format 91 Delving into the Tricky Business of Revenues 94 Defining revenue 94 Adjusting sales 95 Considering cost of goods sold 97 Gauging gross profit 98 Acknowledging Expenses 99 Sorting Out the Profit and Loss Types 101 EBITDA 101 Nonoperating income or expense 102 Net profit or loss 103 Calculating Earnings per Share 103 Chapter 8: The Statement of Cash Flows 105 Digging into the Statement of Cash Flows 106 The parts 106 The formats 107 Checking Out Operating Activities 109 Depreciation 110 Inventory 110 Accounts receivable 110 Accounts payable 111 The cash flow from activities section, summed up 111 Investigating Investing Activities 112 Understanding Financing Activities 113 Issuing stock 113 Buying back stock 114 Paying dividends 114 Incurring new debt 115 Paying off debt 115 Recognizing the Special Line Items 116 Discontinued operations 116 Foreign currency exchange 116 Adding It All Up 117 Chapter 9: Scouring the Notes to the Financial Statements 119 Deciphering the Small Print 120 Accounting Policies Note: Laying out the Rules of the Road 121 Depreciation 122 Revenue 122 Expenses 123 Figuring out Financial Borrowings and Other Commitments 124 Long-term obligations 124 Short-term debt 125 Lease obligations 126 Mergers and Acquisitions: Finding Noteworthy Information 127 Pondering Pension and Retirement Benefits 128 Breaking Down Business Breakdowns 130 Reviewing Significant Events 132 Finding the Red Flags 133 Finding out about valuing assets and liabilities 134 Considering changes in accounting policies 134 Decoding obligations to retirees and future retirees 135 Chapter 10: Considering Consolidated Financial Statements 137 Getting a Grip on Consolidation 137 Looking at Methods of Buying up Companies 142 Reading Consolidated Financial Statements 144 Looking to the Notes 146 Mergers and acquisitions 147 Goodwill 147 Liquidations or discontinued operations 148 Part 3: Analyzing the Numbers 149 Chapter 11: Testing the Profits and Market Value 151 The Price/Earnings Ratio 152 Figuring out earnings per share 152 Calculating the P/E ratio 153 Practicing the P/E ratio calculation 154 Using the P/E ratio to judge company market value (stock price) 155 Understanding variation among ratios 157 The Dividend Payout Ratio 158 Determining dividend payout 158 Digging into companies'' profits with dividends 159 Return on Sales 161 Figuring out ROS 161 Reaching the truth about profits with ROS 162 Return on Assets 162 Doing some dividing to get ROA 163 Ranking companies with the help of ROA 163 Return on Equity 163 Calculating ROE 164 Reacting to companies with ROEs assistance 164 The Big Three: Margins 165 Dissecting gross margin 165 Investigating operating margin 166 Catching the leftover money: Net profit margin 167 Chapter 12: Looking at Liquidity 169 Finding the Current Ratio 170 Calculating the current ratio 170 What do the numbers mean? 171 Determining the Quick Ratio 171 Calculating the quick ratio 171 What do the numbers mean? 172 Investigating the Interest Coverage Ratio 173 Calculating the interest coverage ratio 173 What do the numbers mean? 174 Comparing Debt to Shareholders'' Equity 174 Calculating debt to shareholders'' equity 175 What do the numbers mean? 176 Determining Debt-to-Capital Ratio 176 Calculating the debt-to-capital ratio 176 What do the numbers mean? 178 Chapter 13: Making Sure the Company Has Cash to Carry On 179 Measuring Income Success 180 Calculating free cash flow 180 Figuring out cash return on sales ratio 182 Checking Out Debt 183 Determining current cash debt coverage ratio 184 Computing cash debt coverage ratio 186 Calculating Cash Flow Coverage 188 Finding out the cash flow coverage ratio 188 Mattel 189 Hasbro 190 What do the numbers mean? 190 Part 4: Understanding How Companies Optimize Operations 191 Chapter 14: How Reports Help with Basic Budgeting 193 Peering into the Budgeting Process 194 Understanding who does what 194 Setting goals 195 Building Budgets 197 Providing Monthly Budget Reports 199 Using Internal Reports 201 Chapter 15: Turning Up Clues in Turnover and Assets 203 Exploring Inventory Valuation Methods 203 Applying Three Inventory Valuation Methods 206 Average costing 207 FIFO 208 LIFO 208 How to compare inventory methods and financial statements 209 Determining Inventory Turnover 209 Calculating inventory turnover 210 What do the numbers mean? 211 Investigating Fixed Assets Turnover 212 Calculating fixed assets turnover 212 What do the numbers mean? 213 Tracking Total Asset Turnover 213 Calculating total asset turnover 213 What do the numbers mean? 214 Chapter 16: Examining Cash Inflow and Outflow 215 Assessing Acc.