Finance and accounting for nonfinancial managers free download

It emphasizes the business issues. Many financial books focus on the mathematics. This book employs mathematical information only when it is needed for the business decision-making process. It includes a chapter on how to read an annual report that helps you use the information that is available there to better understand your own company.

This chapter also identifies a number of other sources of information in the public domain about your competition that may be very strategically valuable. Please make a comment if link is not working for you. I appreciate your valuable comments and suggestions. For more books please visit or site. File Name: fundamentals of finance and accounting for nonfinancial managers. In today's business world, when every manager is held accountable for the bottom line, you have to be finance savvy.

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Enlarge cover. The morning module covers basic financial accounting topics and the afternoon module builds on these to cover financial management skills. Even so, looking at examples of financial data and nonfinancial data show that theres a difference. However, if the business is in need of funds to finance expansion or to take advantage of other profitable opportunities, the owners may leave all or part of their profit in the company.

The portion of total profits of the company that the owners have reinvested in the business during its entire history is called retained earnings. Notice that this amount is equal to the total amount of the assets. While this is something of a format consideration, it does have some significance that we can review here. This equation is never out of balance. The balance sheet equation also holds for any business or personal transaction.

This analogy is ex- actly applicable to business transactions and the corporate bal- ance sheet. This is a short-term loan, usually from a commercial bank.

Such a loan may also be called a working capital loan. Zero-Balance Account. This type of short-term working capital loan has a very specific feature: Customer payments go directly to the bank, which uses the funds to reduce the out- standing loan, which benefits the company by reducing its inter- est expense.

Hence the checking account al- ways has a zero balance. Cus- tomers make payments directly to the bank, which actually owns the receivables. This is a fairly expensive form of financing, often costing 2 to 4 percent per month.

Types of Long-Term Debt There are several kinds of securities that a company can issue in order to acquire debt financing for extended periods of time. The maturity of these securities is always more than one year and can be as much as thirty or forty years, or even longer.

The interest on these securities is known as the coupon rate. In a bankruptcy, holders of these bonds would be general creditors. Debentures usually pay interest quarterly or semiannually. Mortgage Bonds. Mortgage bonds are similar to debentures, except that the collateral on the loan is specific assets, usually real estate.

Subordinated Debentures. These are exactly the same as debentures except that, in case of bankruptcy, holders of these securities must wait until all holders of mortgage bonds and de- bentures have been financially satisfied. These bonds are the same as debentures except that their holders have the option of turning them in to the company in exchange for a specified number of shares of common stock converting them.

The com- mon stock price at which conversion is worthwhile is often called the strike price. It is much higher than the stock price at the time the bonds are originally issued.

Zero-Coupon Bond. This is a bond with a long maturity, probably 10 to 20 years. It is very different from other bonds in that the company pays no annual interest. Instead, it sells the bond at a significant discount from full value. The buyer benefits because, in effect, the interest payments are also invested at the coupon rate, in this case 9 percent, and so the effective interest rate will be slightly higher than that on a regular debenture.

However, income taxes may have to be paid on the interest each year, even though no cash is received, so other investors may find this feature less attractive. The seller enjoys the fact that no annual interest payments need be made, giving the firm many years to grow its business.

The following paragraphs describe the details of the income statement. As a reference, we have provided a five-year history of the Metropolitan Manufacturing Company in Exhibit This is part of the same set of financials as the balance sheet in Chapter 1. The numbers refer to the line numbers on the income state- ment. This is often called sales; in Great Britain, it is called turnover or income. Cost of Goods Sold 2, 2, 2, 2, 2, General and Administrative Expenses 1, 1, 1, 27a.

Depreciation 56 50 50 50 45 Federal Income Tax 78 Cash Dividends 46 46 73 95 40 You might say that you have made the sale when you receive the purchase order. However, revenue is not recorded until the customer has received and approved of the products or services purchased. Revenue is the value of products or services that are deliv- ered to a satisfied customer.

The customer either pays cash or promises to pay in the future; in the latter case, the amount is recorded as accounts receivable. Be clear that earning revenue is not the same as receiving cash for products and services.

Cash can be received prior to the recording of revenue. More commonly, however, businesses receive cash after the revenue is earned, resulting in accounts receivable. One type of business in which the receipt of cash and the recording of revenue might occur at the same time is the checkout counter at a supermarket.

This is after reductions for price discounts and allowances for possible returns and warranties. This amount is subtracted from revenue in order to determine gross margin or gross profit.

Cost of goods sold includes the following elements: Raw materials Purchased components Direct labor this includes the wages and other payments made to those who actually manufactured the product, and possibly their direct supervisors Operating and repairing the equipment used to manufac- ture the product Other manufacturing expenses, including utilities and maintenance of the production facility The amount recorded for cost of goods sold is related to the dif- ference between expenses and expenditures, discussed in Chap- ter 1.

If inventory levels decrease during the period, then the cost of goods sold will be higher than the cost of production by the amount of the change in inventory. Gross margin percentage is another measure of that performance. Included in this category are staff expenses accounting, com- puter operations, senior management , selling expenses salaries, travel , promotional expenses advertising, trade shows and re- search and development technological research.

It does not represent a cash expenditure. For the Metropolitan Manufacturing Company example, however, to simplify the calculations, we used a rate of 50 per- cent. All expenses related to purchases from vendors and all other operating expenses have been taken into account. The owners of the business may take this profit for their personal use dividends or reinvest all or part of it in the corporation to finance expansion and modernization retained earnings.

The remainder the portion that was not paid to the owners was retained in the business. This is the cumulative retained earnings; it ap- pears on the balance sheet on line In the past it was called the sources and uses of funds statement, which is a more accurate description of the in- formation it contains.

It describes in summary form how the company generated the cash flows it needed sources to finance its various financial opportunities and responsibilities uses dur- ing the past year.

The sources and uses of funds statement for Metropolitan Manufacturing Company is shown in Exhibit What we will do in this chapter is: 1. Present a sources and uses of funds statement. Discuss the meaning of each number. Describe how each number was developed, relating it back to its source on the balance sheet. Restate the numbers in the statement of cash flows format.

Depreciation 56, Increase in Bank Notes , Increase in Accounts Payable , Increase in Other Current Liabilities 39, Decrease in Investments 3, Increase in Inventory , Increase in Accounts Receivable 40, Decrease in Long-Term Debt 50, Payment of Cash Dividends 46, Net Increase in Cash Balance in 26, Therefore, net income is traditionally listed first. In ad- dition, it strongly affects the retained earnings amount on the balance sheet line Net income causes retained earnings to increase.

Payments of cash dividends cause retained earnings to decrease. When net income was calculated, an expense item was subtracted line item 28 that did not require a cash expenditure during this pe- riod and will never require one in the future. The item is depreci- ation expense.

The expenditures related to this expense—i. The depreciation expense was subtracted on line 28 for two reasons. First, generally accepted accounting principles GAAP require this. Second, depreciation expense is deductible as an expense for corporate income tax purposes, and so including it provides tax benefits.

Notice that Metropolitan added to its short-term debt while also paying off some long-term debt. By its very definition, the long- term amount that was paid off was not due.

There could be several explana- tions for this financing strategy, but it probably was related to the difference between short-term and long-term interest rates. Metropolitan probably borrowed short-term funds at a lower in- terest rate and used some of the funds to reduce its long-term loan, which had a higher interest rate. Overall, an increase in accounts payable shows that the company is making more purchases on credit, and so is being financed by its suppliers to a greater degree. This is not an analy- sis of the strategy of buying on credit, which considers having vendors finance purchases or extending payment periods to lengthy terms as a cheap source of cash.

In an accounting report like this one, it is merely a statement that the amount of accounts payable is larger than in the past. An increase in accounts pay- able can result from the following actions: Taking more time to pay bills Buying more products on credit Paying higher prices for credit purchases Since this category is primarily made up of accruals and similar items, it naturally increases each year as the company gets larger. These investments could have been bonds, long-term certificates of deposit, or possibly the common stock of another company.

This is evi- denced by the increase in the gross book value of fixed assets. Since assets are presented at the lower of cost or market, the only explanation for an increase in gross book value is the purchase of fixed assets. The increase in the level of inventory could be the result of any combination of the following: Replacement costs are greater than the cost of what was sold. Costs have remained the same, but the number of units in inventory has increased.

The mix of products on hand has changed in the direction of more expensive products. It cannot be determined simply from the inventory numbers whether inventory increased because sales forecasts were overly optimistic or sales were disappointing.

We do not know if it was raw materials, work in process, or finished goods inventory that increased. Analysis of these issues will be necessary. The only thing that is certain is that the financial investment in inventory has increased. However, not enforcing credit agreements is a sign of either accounting sloppiness or market- place weakness fear that customers would not buy if they could not take their time in paying.

The rules of accounting provide strong evidence that this was a voluntary act. Long-term debt by definition is not due within the current year.

As mentioned in the discussion of the increase in short-term debt, if this amount had been due, it would have been classified as a current liability, most likely cur- rent portion of long-term debt. This payment could have been made because of any combination of the following: The interest rates on the long-term debt were high. The company had extra cash.

The company used the proceeds from lower-cost short- term bank debt. Such dividends are traditionally but not necessarily voted on and disbursed on a quarterly basis. This format, called the statement of cash flows, will be found in all published annual reports of public companies, and also in the financial reports of almost every other company whose financials are prepared and produced by certified public accountants.

Note that uses of funds are shown in parentheses and that sources of funds are shown without parentheses. The statement of cash flows for Metropolitan Manufacturing Com- pany is shown in Exhibit Financial Review Before you begin the process of analyzing the data provided, it would be very useful for you to review the content and structure of the financial statements.

To accomplish this, complete the fi- nancial statement exercise in Appendix A. Exhibit This is a re- search organization, made up primarily of accountants. The FASB, along with the entire accounting profession, has, over time, developed a series of rules called generally accepted ac- counting principles GAAP. These are a series of more than one hundred publications that describe what corporate reporting methodologies should be. Most of these methodologies have been adopted and are now incorporated into accounting prac- tice.

A broad analogy is that the GAAP rules are the basic consti- tution and the bulletins are proposed amendments. Here are some of the GAAP rules. The Fiscal Period All reporting is done for predetermined periods of time. Reports may be issued for months or quarters and certain reports are issued annually. The Going Concern Concept When accountants are keeping the books and preparing the fi- nancial statements, they presume that the company will con- tinue to be in existence for the foreseeable future.

Historical Monetary Unit Accounting is the recording of past business events in dollars. Financial statements, and in fact all financial accounting, report only in dollars.

While units of inventory, market share, and em- ployee efficiency are critical business issues, reporting on them is not within the realm of financial accounting responsibility. Financial statements depicting past years are presented as they occurred. The selling prices of the products and the value of assets may very well be different today, but reports of past peri- ods are not adjusted. One example of this is the allowance for bad debts on the balance sheet, which is recorded before the losses are actually incurred.

Another example is reserves for inventory writedowns, which are recorded before the dated or out of style products are actually put up for sale at distress prices. Payment in advance, while assuring the cer- tainty of the sale in a business sense, does not change the ac- counting rule. Revenue is recorded only when it is earned. However, because that value cannot be quantified and expressed in dollars, accounting does not rec- ognize it as an asset.

The value of trademarks and franchise names is also generally not included. Coke, Windows, and Disney are certainly franchise brand names with worldwide recognition. While the business value of a franchise name can be almost infi- nite if it is maintained, franchise names are not assets on the balance sheet because that value cannot be quantified. Once these decisions have been made, however, later successive financial statements must employ the same methodology.

When a major change is made in accounting methodology, the accountants must highlight that change and redo past financial statements the reference points to reflect that change. Only then can com- parative analysis and trends be valid. Materiality An event that is material, or significant, is one that may affect the judgment, analysis, or perception of the reader of the informa- tion. Events that are perceived as material must be disclosed sep- arately and highlighted accordingly.

This is a relative concept. Much of it is free. It is a wonderful review of the accounting process and the concept of generally accepted accounting principles GAAP.

There is much that you can learn about your own com- pany from its annual report. This includes how it per- ceives itself and how it presents itself to the rest of the world. This company was founded in the United States in Its European predecessor company is even older. Other companies whose annual reports are referred to in this discussion are the Walt Disney Company and Merck. Each of these companies must prepare an annual report and send a copy to each shareholder because its shares are registered with the Securities and Exchange Commission and are publicly traded.

Not all companies are subject to SEC regula- tion; only those whose shares are registered and publicly traded are subject to them.

The size of the company is not an issue here; some very large multibillion-dollar companies are private, and some very small companies have publicly traded shares. The annual report is a product of many regulatory require- ments, serves as a public relations vehicle, and reflects strong tradition. Many companies include information in their annual report that is not specifically required. However, because that information has historically been presented every year, it be- comes expected, and omitting it would arouse questions.

Dupont used to be called DuPont Chemical Company. The cover of its report provides an announcement of a very stra- tegic repositioning: DuPont is a science company.

We bring science to the mar- ketplace in ways that benefit people and generate value for our shareholders. The public. Science has a positive image; chemicals do not. Its employees. This emphasizes that orienta- tion. Security analysts. Science companies are much more at- tractive to investors than chemical companies. DuPont has been successfully changing its mix of products.

Its stock will perform better if security analysts and investors know of and believe in this repositioning strategy. Science companies are known for higher margins and higher growth. The inside cover of the annual report provides a highlights sec- tion. It includes summary financial information from the income statement and balance sheet along with stock market data— earnings per share and stock prices. The company is and wants us to know that it is dedicated to knowledge and is a modern and efficient business.

This letter includes a description and analysis of all busi- ness events of the past year that have had a significant read material impact on the performance and condition of the com- pany. It also includes considerable commentary on how the company sees its future. This letter is reviewed as part of the audit process. It must present all issues in an even-handed manner. Negative as well as positive events must be presented in a logical, cohesive way so that the reader will learn useful information.

The company wants to convey the idea that management is on top of things and knows what has to be done. It has also invested heavily in pharmaceutical busi- nesses.

This supports its strategic repositioning away from re- sources and commodities and toward the sciences. Its businesses now include materials, chemicals, and biological products. Management hopes that this tradition of innovation will con- tinue.

Public Relations Large companies like DuPont have a multitude of interlocking constituencies. The stockholders, some of whom are often em- ployees, are the voters who elect the board of directors, which in turn appoints the officials responsible for regulatory issues, including taxes, corporate governance, relationships with the Food and Drug Administration FDA , and environmental con- cerns. DuPont wants to influence the way it is viewed by the world. To accomplish this, it devotes more than ten pages to a description of each of its businesses.

This letter indicates that the company holds those cast members in very high esteem. It presents, in a very direct manner, some very pointed themes. Revitalizing underperforming areas home video and con- sumer products. Disney is focusing on some issues to address and wants us to know that it knows that these issues need to be addressed.

Achieving greater profitability from existing assets con- trolling costs. The letter describes the need for greater efficiency and indicates that the company need not re- main in all its current businesses forever. Capital efficiency initiatives to drive long-term growth how best to invest. Disney has included outside partners in many of its ventures and to some extent is becoming a theme park management company. This provides more focus on and cash from its core competencies. Continued product development being Disney.

Disney is an entertainment company that is quite successful in its cross-branding strategy. Its parks, cruises, movies, TV and cable, and consumer products mostly carry the Disney brand and cross-sell one another. Management Discussion and Analysis This section of the annual report provides an extensive, some- what detailed review of the past year. In paragraph form, the company discusses its financial results in considerable detail. This is referred to as segment reporting.

Many years ago, when companies diversified into somewhat unrelated businesses, it became difficult for analysts to bench- mark these companies against their competitors because their business identity was difficult to determine.

The result was a re- quirement that a company include in its annual report financial information for each of its business segments. While segment reporting provides only summary information, it is competitively valuable. DuPont also reveals that the risk- adjusted hurdle rate the company uses to evaluate capital expen- ditures is 15 percent.

The significance of this is discussed in Chapter 10 of this book. This part of the report is called an outlook. Management must be very careful about this presentation. It might cause existing and potential in- vestors to make decisions about their investments in the com- pany that may have an undesirable outcome. It makes the following statement: The Private Securities Reform Act of the Act provides a safe harbor for forward-looking statements made by or on behalf of our company.

Management believes that all statements that express expectations and projections with respect to future matters, including. Management is rightly protected from litigation over these views; if it were not, it could not afford to take the risk of presenting its assessment.

Imagine the political and legal issues that would arise if the company had to publish its budget. They might even be worse if actual perform- ance exceeded budgeted projections. No forecast numbers are provided, and rightly so.

Only strategies and issues are in- cluded in the discussion. It is addressed to the stockholders of the company, to whom the accounting firm reports, and sometimes also to the board of di- rectors. When the company sends out the notice of the annual meeting, it will include a proxy statement that identifies the major issues that will be decided by shareholder vote at the an- nual meeting.

No alternative CPA firm is presented. The Audit Process. A staff of internal auditors regularly monitors the adequacy and application of internal controls on a worldwide basis. These are both multinational CPA firms with offices in most parts of the world and thousands of partners. Auditors ensure that transactions were recorded correctly. They verify the accuracy of the financial statements and the many estimates that were made by management.

All publicly traded companies in the United States are required to have their financial statements audited. Most large private companies have their financial statements audited, as well. This process is be- coming global, as it facilitates international transactions and ven- tures. The Letter. The CPA firm writes a letter to the stockholders. Our responsibil- ity is to express an opinion on these financial statements based upon our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to ob- tain reasonable assurance about whether the financial state- ments are free of material misstatement. An audit also in- cludes assessing the accounting principles used and signifi- cant estimates made by management This letter has some very interesting features that provide in- sights into the accounting and audit processes.

The first sentence makes it very clear what role Arthur Andersen played: It audited. The next statement confirms that Merck is responsible for the numbers. Arthur Andersen expresses an opinion on the financial statements. This is a very simple term that has been the subject of an incredible amount of controversy over the years.

The letter does not refer to a warranty or fact. The burden is on Merck to prove that assets are listed at the lower of cost or market and that all other accounting principles have been adhered to.

The last statement in the letter confirms that the financials reflect estimates. New sections on how to read an annual report and navigating the shifts in the marketplace are also included.

This edition has been updated throughout to provide managers with the most current and complete information available. Selected Learning Objectives Participants will learn how to: Prepare budgets Read, understand, and use financial and operational measures Manage short-term assets Relate department performance to the big picture. If you want to take the course for credit you need to either purchase a hard copy of the course through amaselfstudy. As a manager, it's up to you to understand how and why.

Finance for Nonfinancial Managers helps you understand the information in essential financial reports and then shows you how to use that understanding to make informed, intelligent decisions. It provides a solid working knowledge of: Basic Financial Reports--All about balance sheets, income statements, cash flow statements, and more Cost Accounting--Methods to assess which products or services are most profitable to your firm Operational Planning and Budgeting--Ways to use financial knowledge to strengthen your company Briefcase Books, written specifically for today's busy manager, feature eye-catching icons, checklists, and sidebars to guide managers step-by-step through everyday workplace situations.

Look for these innovative design features to help you navigate through each page: Key Terms: Clear defi nitions of key terms and concepts Smart Managing: Tactics and strategies for managing change Tricks of the Trade: Tips for executing the tactics in the book Mistake Proofing: Practical advice for minimizing the possibility of error Caution: Warning signs for when things are about to go wrong For Example: Examples of successful change-management tactics Tools: Specific planning procedures, tactics, and hands-on techniques.

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