Download Accounting for Dummies (ISBN - 0470246006) PDF

TitleAccounting for Dummies (ISBN - 0470246006)
TagsFor Dummies
File Size4.4 MB
Total Pages410
Table of Contents
                            Accounting for Dummies, 4th Edition
	Contents at a Glance
	Table of Contents
		About This Book
		Conventions Used in This Book
		What You’re Not To Read
		Foolish Assumptions
		How This Book Is Organized
		Icons Used in This Book
		Where to Go from Here
	Part I: Opening the Books on Accounting
		Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes
			Accounting Is Not Just for Accountants
			Looking for Accounting in All the Right Places
			Taking a Peek into the Back Office
			Focusing on Transactions
			Taking the Pulse of a Business: Financial Statements
			Considering Accounting Careers
		Chapter 2: Financial Statements and Accounting Standards
			Introducing the Information Content of Financial Statements
			How Profit and Cash Flow from Profit Differ
			Gleaning Key Information from Financial Statements
			Keeping in Step with Accounting and Financial Reporting Standards
		Chapter 3: Bookkeeping and Accounting Systems
			Bookkeeping and Beyond
			Pedaling Through the Bookkeeping Cycle
			Managing the Bookkeeping and Accounting System
			Double-Entry Accounting for Single-Entry Folks
			Juggling the Books to Conceal Embezzlement and Fraud
			Using Accounting Software
	Part II: Figuring Out Financial Statements
		Chapter 4: Reporting Revenue, Expenses, and the Bottom Line
			Presenting a Typical Income Statement
			Finding Profit
			Getting Particular about Assets and Liabilities
			Summing Up the Financial Effects of Profit
			Reporting Extraordinary Gains and Losses
			Closing Comments
		Chapter 5: Reporting Assets, Liabilities, and Owners’ Equity
			Understanding That Transactions Drive the Balance Sheet
			Presenting a Balance Sheet
			Coupling the Income Statement and Balance Sheet
			Financing a Business
			Costs and Other Balance Sheet Values
		Chapter 6: Reporting Cash Flows
			Seeing the Big Picture of Cash Flows
			Meeting the Statement of Cash Flows
			Dissecting the Difference Between Cash Flow and Net Income
			Sailing Through the Rest of the Statement of Cash Flows
			Trying to Pin Down “Free Cash Flow”
			Being an Active Reader
		Chapter 7: Choosing Accounting Methods: Different Strokes for Different Folks
			Reading Statements with a Touch of Skepticism
			Figuring Out Why Financial Statements Differ
			Calculating Cost of Goods Sold and Cost of Inventory
			Recording Inventory Losses under the Lower of Cost or Market ( LCM) Rule
			Appreciating Depreciation Methods
			Scanning the Expense Horizon
	Part III: Accounting in Managing a Business
		Chapter 8: Deciding the Legal Structure for a Business
			Studying the Sources of Business Capital
			Recognizing the Legal Roots of Business Entities
			Incorporating a Business
			Considering Partnerships and Limited Liability Companies
			Going It Alone: Sole Proprietorships
			Choosing the Right Legal Structure for Income Tax
		Chapter 9: Analyzing and Managing Profit
			Helping Managers Do Their Jobs
			Presenting a P& L Template
			Answering Two Critical Profit Questions
			Looking More Closely at the Profit Center P& L Report
			Using the P& L Template for Decision-Making Analysis
			Tucking Away Some Valuable Lessons
			Closing with a Boozy Example
		Chapter 10: Financial Planning, Budgeting, and Control
			Exploring the Reasons for Budgeting
			Realizing That Not Everyone Budgets
			Watching Budgeting in Action
			Considering Capital Expenditures and Other Cash Needs
		Chapter 11: Cost Concepts and Conundrums
			Looking down the Road to the Destination of Costs
			Are Costs Really That Important?
			Becoming More Familiar with Costs
			Assembling the Product Cost of Manufacturers
			Puffing Profit by Excessive Production
	Part IV: Preparing and Using Financial Reports
		Chapter 12: Getting a Financial Report Ready for Release
			Recognizing Management’s Role
			Keeping in Mind the Purpose of Financial Reporting
			Staying on Top of Accounting and Financial Reporting Standards
			Making Sure Disclosure Is Adequate
			Putting a Spin on the Numbers (But Not Cooking the Books)
			Going Public or Keeping Things Private
			Dealing with Information Overload
			Statement of Changes in Owners’ Equity
		Chapter 13: How Lenders and Investors Read a Financial Report
			Knowing the Rules of the Game
			Becoming a More Savvy Investor
			Comparing Private and Public Business Financial Reports
			Analyzing Financial Statements with Ratios
			Frolicking Through the Footnotes
			Checking for Ominous Skies in the Auditor’s Report
		Chapter 14: How Business Managers Use a Financial Report
			Building on the Foundation of the External Financial Statements
			Gathering Financial Condition Information
			Culling Profit Information
			Digging into Cash Flow Information
		Chapter 15: Audits and Accounting Fraud
			Exploring the Need for Audits
			What’s in an Auditor’s Report
			Who’s Who in the World of Audits
			Standing Firm When Companies Massage the Numbers, or Not
			Discovering Fraud, or Not
			Who Audits the Auditors?
	Part V: The Part of Tens
		Chapter 16: Ten Accounting Tips for Managers
			Reach Break-Even, and Then Rake in Profit
			Set Sales Prices Right
			Distinguish Profit from Cash Flow
			Call the Shots on Accounting Policies
			Budget Wisely
			Get the Accounting Information You Need
			Tap into Your CPA’s Expertise
			Critically Review Your Fraud Controls
			Lend a Hand in Preparing Your Financial Reports
			Sound Like a Pro in Talking about Your Financial Statements
		Chapter 17: Ten Tips for Reading a Financial Report
			Get in the Right Frame of Mind
			Decide What to Read
			Improve Your Accounting Savvy
			Judge Profit Performance
			Track Profit into Earnings per Share
			Confront Extraordinary Gains and Losses
			Compare Cash Flow and Profit
			Look for Signs of Financial Distress
			Recognize the Risks of Restatement and Fraud
			Remember the Limits of Financial Reports
	Appendix: Glossary: Slashing Through the Accounting Jargon Jungle
Document Text Contents
Page 1

By John A. Tracy, CPA




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Chapter 9

Analyzing and Managing Profit
In This Chapter
� Recognizing the profit-making function of business managers

� Scoping the field of managerial accounting

� Centering on profit centers

� Understanding P&L reports

� Analyzing profit for fun and profit

As a manager, you get paid to make profit happen. That’s what separatesyou from the employees at your business. Of course, you should be a
motivator, innovator, consensus builder, lobbyist, and maybe sometimes a
babysitter, too, but the hard-core purpose of your job is to make and improve
profit. No matter how much your staff loves you (or do they love those dough-
nuts you bring in every Monday?), if you don’t meet your profit goals, you’re
facing the unemployment line.

Competition in most industries is fierce, and you can never take profit perfor-
mance for granted. Changes take place all the time — changes initiated by
the business and changes from outside forces. Maybe a new superstore down
the street is causing your profit to fall off, and you figure that you’ll have a
huge sale to draw customers, complete with splashy ads on TV and Dimbo
the Clown in the store. Whoa, not so fast. First make sure that you can afford
to cut prices and spend money on advertising and still turn a profit. Maybe
price cuts and Dimbo’s balloon creations will keep your cash register singing,
but making sales does not guarantee that you make a profit. Profit is a two-
headed beast: Profit comes from making sales and controlling expenses.

This chapter focuses on the fundamental financial factors that drive profit —
what you could call the levers of profit. Business managers need a sure-handed
grip on these profit handles. Profit reports prepared for people outside the
business don’t disclose all the vital information that business managers need
to plan and control profit performance. A manager needs to thoroughly under-
stand external income statements and also needs to look deep into the bowels
of the business.

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Helping Managers Do Their Jobs
As previous chapters explain, accounting serves critical functions in a busi-
ness. A business needs a dependable recordkeeping and bookkeeping system
for operating in a smooth and efficient manner. Strong internal accounting
controls are needed to minimize errors and fraud. A business must comply
with a myriad of tax laws, and it depends on its chief accountant (controller)
to make sure that all its tax returns are prepared on time and correctly. A
business prepares financial statements that must conform with established
accounting standards, which are reported on a regular basis to its creditors
and external shareowners. In addition, accounting should help managers in
their decision-making, control, and planning. This sub-field of accounting is
generally called managerial or management accounting.

This is the first of three chapters devoted to this branch of accounting. In this
chapter, I pay particular attention to the internal accounting report to managers
that provides essential feedback information needed for controlling current
profit performance, and which also serves as the platform for planning future
profit performance. I also explain how managers use accounting information for
analyzing how they make profit and why profit changes from one period to the
next. Chapter 10 concentrates on financial planning and budgeting, and Chapter
11 examines the methods and problems of determining product costs (generally
called cost accounting).

Designing and monitoring the accounting system, complying with tax laws, and
preparing external financial reports all put heavy demands on the time and
attention of the accounting department of a business. Even so, managers’ needs
for accounting information should not be given second-level priority. The chief
accountant (controller) has the responsibility of ensuring that the financial infor-
mation needs of managers are served with maximum usefulness. Ideally, a man-
ager tells the accountant exactly what information he needs and how to report
the information. In the real world, however, this is not exactly how it works. The
accountant has to more or less read the mind of the manager. Oftentimes the
accountant has to take the initiative regarding the information to report to man-
agers and how to report it.

Following the organizational structure
The first rule of managerial accounting is to follow the organizational struc-
ture: to report relevant information for which each manager is responsible.
(This principle is sometimes referred to as responsibility accounting.) If a man-
ager is in charge of sales in a territory, for instance, the controller reports the
sales activity for that territory during the period to the sales manager. Two

184 Part III: Accounting in Managing a Business

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Page 409

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