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Accounting For Dummies®, 5th Edition Published by John Wiley & Sons, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2013 by John Wiley & Sons, Inc., Indianapolis, Indiana Published by John Wiley & Sons, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646- 8600. 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Library of Congress Control Number: 2012956425 ISBN 978-1-11848222-3 (pbk); ISBN 978-1-118-50262-4 (ebk); ISBN 978- 1-118-50263-1 (ebk); ISBN 978-1-118-50264-8 (ebk) Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 About the Author John A. Tracy (Boulder, Colorado) is Professor of Accounting, Emeritus, at the University of Colorado in Boulder. Before his 35-year tenure at Boulder, he was on the business faculty for four years at the University of California in Berkeley. Early in his career he was a staff accountant with Ernst & Young. John is the author of several books on accounting and finance, including How To Read a Financial Report, The Fast Forward MBA in Finance, and Cash Flow For Dummies and Small Business Financial Management Kit For Dummies with his son Tage C. Tracy. John received his BSC degree from Creighton University. He earned his MBA and PhD degrees at the University of Wisconsin in Madison. He is a CPA (inactive status) in Colorado. Dedication For our twelve grandchildren — Alexander, Ryan, Mitchel, Paige, Katrina, Claire, Eric, MacKenzie, Madison, Tanner, Karsen, and Brody. Author’s Acknowledgments I’m deeply grateful to everyone at Wiley Publishing who helped produce this book. Their professionalism, courtesy, and good humor were much appreciated. It has been a pleasure working with everyone. I got a call in 1996 from Kathy Welton, then Vice President and Publisher for the Consumer Publishing Group of the For Dummies books. Kathy asked if I’d be interested in doing this book. It didn’t take me very long to say yes. Thank you again, Kathy! I can’t say enough nice things about Pam Mourouzis, who as project editor on the first edition of the book had to teach me the Dummies ways. The book is immensely better for her insights and advice. The two copyeditors on the book — Diane Giangrossi and Joe Jansen — did a wonderful job. Mary Metcalfe provided valuable suggestions on the manuscript. Thanks to Holly McGuire and Jill Alexander who encouraged me to revise the book. The second edition benefited from the editing by Norm Crampton and Ben Nussbaum. I owe a special thanks to Stacy Kennedy, acquisitions editor, for asking me to do this and previous revisions. Joan Friedman was the project editor on the two previous editions. Joan was a delight to work with, and it goes without saying that she made the book much better. Susan Hobbs (or Suz, as she prefers) was the project editor for this revision. She had the thankless task of keeping me in line — and she did a very good job. Suz didn’t let any sloppy sentences slip through, and she made many helpful suggestions. Thank you most sincerely Suz, and I hope to work with you again on the next edition. Also, thanks to Carla Su DeWitt, the technical editor on this edition, who made several good suggestions. I’ve been very fortunate to see five editions of this book. But I’m getting older. I have convinced my son Tage to come on as coauthor for the next edition. We are already coauthors on three books, and you will notice in this edition I refer to our books several times. This is not just fatherly pride. Tage is a very successful business and financial consultant with a wealth of experience. You could say that I’m the “academic” and he’s the practitioner. It is my great joy that we work together so well. A chip off the old block, as they say. Publisher’s Acknowledgments We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Susan Hobbs (Previous Editions: Joan Friedman, Norm Crampton) Acquisitions Editor: Stacy Kennedy Copy Editor: Susan Hobbs (Previous Edition: Joan Friedman) Assistant Editor: David Lutton Editorial Program Coordinator: Joe Niesen Technical Editor: Carla Su DeWitt Editorial Manager: Carmen Krikorian Editorial Assistant: Rachelle Amick Art Coordinator: Alicia B. South Cover Photo: © Yue Wang / iStock Images Cartoons: Rich Tennant (www.the5thwave.com) Composition Services Project Coordinator: Katie Crocker Layout and Graphics: Carl Byers, Joyce Haughey Proofreaders: Lindsay Amones, Evelyn Wellborn Indexer: Potomac Indexing, LLC Publishing and Editorial for Consumer Dummies Kathleen Nebenhaus, Vice President and Executive Publisher Ensley Eikenburg, Associate Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher Composition Services Debbie Stailey, Director of Composition Services ® Accounting For Dummies , 5th Edition Visit www.dummies.com/cheatsheet/accounting to view this book's cheat sheet. Table of Contents Introduction About This Book Conventions Used in This Book What You’re Not to Read Foolish Assumptions How This Book Is Organized Part I: Opening the Books on Accounting Part II: Exploring Financial Statements Part III: Accounting in Managing a Business Part IV: Preparing and Using Financial Reports Part V: The Part of Tens Glossary 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’s Main Jobs: Providing Vital Information to Non-Accountants Distinguishing among different users of accounting information Overcoming the stereotypes of accountants Making good use of accounting in your personal financial life Recognizing the Broad Sweep of Accounting Everywhere You Look Taking a Peek Behind the Scenes Focusing on Transactions Taking the Pulse of a Business: Financial Statements Meeting the balance sheet and the accounting equation Reporting profit and loss, and cash flows Respecting the importance of this troika Mapping Accounting Careers Certified public accountant (CPA) and specialties Introducing a new kid on the block: Chartered Global Management Accountant (CGMA) The controller: The chief accountant in an organization A springboard to other careers Chapter 2: Financial Statements and Accounting Standards Introducing the Basic Content of Financial Statements Realizing that form follows function in financial statements Income statements Balance sheets Statement of cash flows A note about the statement of changes in shareowners’ equity Contrasting Profit and Cash Flow from Profit Gleaning Key Information from Financial Statements