When someone asks for information about a business, they are likely to receive its financial statements. These statements quantify the results, financial position, and cash flows of a business. However, these documents only provide information at quite a high level, and so may obscure more than they reveal. The Interpretation of Financial Statements is designed to cut through this obscurity, describing a number of tools for dissecting financial statements, as well as a wealth of additional insights into the reasons for the presence of or changes in certain numbers.
The bulk of the course covers three topics, which are the interpretation of the balance sheet, income statement, and cash flows. There is also a detailed explanation of the contents and interpretation of additional public company information. You'll gain valuable insight about the accounts that make up the various line items in the financial statements, the use of applicable analysis tools, specific operational and financial issues that may be causing certain results to appear in the financial statements, and much more.
Upon successful completion of this course, participants will be able to:
- Identify how the accrual basis of accounting concept functions.
- Identify how the accounting equation concept works.
- Cite the business situations indicated by different cash levels and cash designations.
- Cite the uses of the contribution margin and days sales outstanding measurements, as well as the situations in which they can be misleading.
- Cite the industry situations in which an investment in inventory is considered to be critical.
- Identify the reasons for different inventory turnover levels.
- Cite the calculations used for the different depreciation methods.
- Identify the effects on profitability of the various depreciation rules.
- State the contents of the prepaid expenses line item.
- Cite the situations that can change the balance of the prepaid expenses line item.
- Identify the circumstances under which goodwill is considered to be impaired.
- Identify the business conditions that can alter the balances in the current liabilities line items.
- Identify the circumstances causing a change in debt classification.
- Identify the situations in which the debt level can be considered minor.
- Cite the effects of debt-to-equity conversions on measurements.
- Identify the contents of the book value and tangible book value measurements.
- Identify the situations that cause reliable sales.
- Identify the types of investors attracted to rapid sales growth.
- Identify the contents of the cost of goods sold.
- Cite the methods used to improve the gross margin percentage.
- Define the contents of operating expenses.
- Identify the business situations that can cause these line items to change.
- Identify the situations in which net operating losses may be generated.
- Name the techniques used to improve the net profit margin and earnings per share.
- Cite the contents of the different classifications within the statement of cash flows.
- Identify the types of audit examinations, the uses to which the margin of safety can be put, and the contents of the dividend analysis formulas.
- Cite the required contents of the different sections of the Form 10-K.
Table of Contents
Chapter 1 – Overview of the Financial Statements
The General Ledger
The Accrual Basis of Accounting
Costs versus Expenses
The Balance Sheet
The Income Statement
The Statement of Cash Flows
Interactions between the Financial Statements
Financial Statement Footnotes
Chapter 1 – Review Questions
Chapter 2 – Interpretation of Cash and Investments
The Interpretation of Cash and Investments
Natural Cash Balance
Relevance of a Low Cash Figure
Events Triggering Changes in Cash
Sources of Cash
The Impact of Sales Growth on Cash
Sufficiency of the Cash and Investment Balance
The Liquidity of Investments
The Return on Investment
Chapter 2 – Review Questions
Chapter 3 – Interpretation of Receivables
The Interpretation of Accounts Receivable
Inherent Profit Margin
Age of the Trade Receivables
Age of the Other Accounts Receivable
No Allowance for Doubtful Accounts
Reliability of the Allowance for Doubtful Accounts
No Allowance for Other Accounts Receivable
Amount of Bad Debts Recognized
Chapter 3 – Review Questions
Chapter 4 – Interpretation of Inventory
The Interpretation of Inventory
Relative Importance of Inventory
Age of the Inventory
Reality of the Ending Balance
Type of Costing System Used
Ownership of the Inventory
Reliability of the Reserve for Obsolete Inventory
Amount of Obsolete Inventory and Inventory Adjustments Recognized
Chapter 4 – Review Questions
Chapter 5 – Interpretation of Fixed Assets
The Interpretation of Fixed Assets
Existence of Depreciation
Sufficiency of Depreciation
What is Being Capitalized
What is Being Derecognized
Proportion of Sales to Fixed Assets
Cash Flow Support of Fixed Assets
Proportion of Repairs to Fixed Assets
Chapter 5 – Review Questions
Chapter 6 – Interpretation of Other Assets
The Interpretation of Prepaid Expenses
Nature of the Account Contents
The Increasing Account Balance
The Impact of Sales Growth on Prepaid Expenses
The Interpretation of Goodwill
Chapter 6 – Review Questions
Chapter 7 – Interpretation of Current Liabilities
The Interpretation of Current Liabilities
Days Payables Outstanding
Changes in Payable Days
Sales Tax Payables Issues
Dividends Payable Issues
Wages Payable Issues
Income Taxes Payable Issues
Warranty Liability Issues
Chapter 7 – Review Questions
Chapter 8 – Interpretation of Debt
The Interpretation of Debt
Interest Coverage Ratio
Relative Size of Debt
Line of Credit Usage
Shifts from Long-term to Short-term Debt
Conversions from Payables to Debt
Conversions from Debt to Equity
Chapter 8 – Review Questions
Chapter 9 – Interpretation of Equity
The Interpretation of Equity
The Book Value Concept
Tangible Book Value
Book Value per Share
Changes in Retained Earnings
Negative Retained Earnings
Appropriated Retained Earnings
Treasury Stock Usage
Number of Shares Authorized and Outstanding
Chapter 9 – Review Questions
Chapter 10 – Interpretation of Sales
The Interpretation of Sales
The Trend of Sales
The Quality of Sales
The Reliability of Sales
The Timing of Revenue Recognition
Revenue at Gross or Net
Orders versus Sales
The Presence of Sales Discounts
The Trend of Sales Returns
Chapter 10 – Review Questions
Chapter 11 – Interpretation of the Cost of Sales and Gross Margin
The Interpretation of the Cost of Sales and Gross Margin
Gross Margin Analysis
Contribution Margin Analysis
The Inventory Build Concept
Direct Materials Changes
Obsolete Inventory Changes
Direct Labor Changes
Factory Overhead Changes
Freight In Changes
Chapter 11 – Review Questions
Chapter 12 – Interpretation of Operating Expenses
The Interpretation of Operating Expenses
Strategy Impact on Operating Expenses
Research and Development Costs
Payroll Tax Wage Cap Issues
Non-Cash Operating Expenses
Supplies Expense and the Capitalization Limit
The Fixed Nature of Compensation in Operating Expenses
The Public Company Impact on Operating Expenses
Chapter 12 – Review Questions
Chapter 13 – Interpretation of Other Income, Taxes, and Profits
The Interpretation of Other Income, Taxes, and Profits
Implications of Interest and Dividend Income
Implications of Gains/Losses on Asset Sales
Effects of Interest Expense
Implications of Taxable Income
Effective Tax Rate
Net Profit Margin
Deflated Profit Growth
Core Earnings Ratio
Earnings per Share
Manipulation of Earnings per Share
Chapter 13 – Review Questions
Chapter 14 – Interpretation of Cash Flows
The Interpretation of the Statement of Cash Flows
Overview of the Statement of Cash Flows
The Direct Method
The Indirect Method
Examination of Cash Flows from Operating Activities
Examination of Cash Flows from Investing Activities
Examination of Cash Flows from Financing Activities
Cash Flow Return on Sales
Chapter 14 – Review Questions
Chapter 15 – Other Analysis Topics
Financial Statement Audits, Reviews, and Compilations
Working Capital Analysis
Working Capital Productivity
Breakeven and the Margin of Safety
Dividend Payout Ratio
Dividend Yield Ratio
Chapter 15 – Review Questions
Chapter 16 – Additional Public Company Information
The Form 10-K
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Company Stock
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A)
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Chapter 16 – Review Questions
Review Question Answers and Rationales
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