Financial Statements Demystified: A Self-Teaching Guide

305 Pages·2009·1.52 MB·english

by  Bonita Kramer

FINANCIAL STATEMENTS
DEMYSTIFIED
A SELF-TEACHING GUIDE
BONITA K. KRAMER
CHRISTIE W. JOHNSON
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Copyright © 2009 by Bonita K. Kramer and Christie W. Johnson. All rights reserved. Except as permitted under the United States
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From Bonita K. Kramer:
For Mark, David, and Kyle—all of whom have demystifi ed the meaning
of life in my mind.
From Christie W. Johnson:
For Pat and Swithin—you believe in me, always.
From both of us:
And for Gil W. Crain, Ph.D.,
who unexpectedly passed away in July of 2008.
A great friend, colleague, mentor, and professor
who encouraged and supported us in all our endeavors.
TThhiiss ppaaggee iinntteennttiioonnaallllyy lleefftt bbllaannkk
CONTENTS
ACKNOWLEDGMENTS vii
INTRODUCTION 1
CHAPTER 1 Four Basic Financial Statements 3
CHAPTER 2 Basic Concepts 19
CHAPTER 3 The Income Statement 31
CHAPTER 4 The Balance Sheet: Classifi cations and Concepts 55
CHAPTER 5 The Balance Sheet: A Closer Examination 81
CHAPTER 6 Statement of Cash Flows 159
CHAPTER 7 Reading the Financial Statements:
The Auditors’ Reports and Financial
Statement Footnotes 193
CHAPTER 8 Analysis of Financial Statements 211
CHAPTER 9 Additional Issues 235
CHAPTER 10 Fraudulently Misstated Financial Statements 245
Final Exam 267
Answers to Quiz and Final Exam Questions 285
Index 289
v
TThhiiss ppaaggee iinntteennttiioonnaallllyy lleefftt bbllaannkk
Acknowledgments
From Bonita K. Kramer:
I doubt I would have undertaken this project without the support of my coauthor,
Christie Johnson. Christie is an extraordinary writer who has a wealth of informa-
tion about fi nancial accounting. She has been a faculty member at Montana State
University since I was an undergraduate accounting student here many years ago.
Then, as now, she had a stellar reputation as an educator, and to coauthor this book
with her as a colleague truly has been one of the highlights of my career.
Additionally, however, I could not have written this book without the patience of
my husband, Mark, who is my best friend, and our boys, David and Kyle. While my
husband never doubted my ability to write this book, he was concerned about the
time I would invest in it.
Finally, I want to thank my parents, Rod and Betty Peterson, for their encourage-
ment throughout my life to continue my education and to pursue various profes-
sional challenges over the years. They never doubted my abilities and always quietly
cheered me on. Yet they also instilled in me a sense of what is truly important in
life, and I am grateful.
vii
viii Financial Statements Demystifi ed
From Christie W. Johnson:
Bonita fl atters me with her remarks describing why our collaboration on this
project took place, but I should set the record straight. The opportunity actually
arose from Bonita’s reputation as an expert in the area of fraud education and con-
tributions to this specialized fi eld and her outstanding reputation as a teacher and
scholar. She has garnered numerous teaching and research-related honors during
her career as an accounting educator. Bonita is a teaching role model and an incred-
ibly patient and effective mentor when it comes to publishing endeavors. She has a
talent for teaching an old dog (like me) some new tricks, and I was honored by her
invitation to collaborate. I appreciate and am very grateful for this opportunity, one
I probably would not have enjoyed had it not been for Bonita’s faith and interest in
working with me.
Bonita and I both very much enjoy getting to know our students in person and
teaching to a live audience. We are motivated to come up with many different ways to
illustrate or explain a concept, knowing that individual student learning styles vary
considerably. If we see a few foreheads and eyebrows scrunching, we have a visual cue
that our students are struggling to understand a diffi cult or important concept. In a
classroom setting, we can react to these cues, ask and answer questions, and meet with
students one on one.
In writing Financial Statements Demystifi ed, it was our joint goal to connect
with individuals we probably won’t meet in person, a prospect both exciting and a
bit daunting! We organized this book by presenting the topics and concepts we both
felt to be most relevant to your understanding of fi nancial accounting and reporting
while avoiding the accounting system details found in most traditional textbooks.
We hope that you fi nd our explanations and illustrations provide useful information
and that the benefi ts you gain by reading this book exceed the cost of its purchase!
I too would like to acknowledge my family’s support in this endeavor. My husband,
Pat, was remarkably patient, especially during marathon writing episodes when
I would become so focused and paused just long enough to share the meals he pre-
pared. My daughter, Swithin, plays an important supporting role in my writing and
publishing endeavors. In an interesting reversal of roles, I now seek Swithin’s input
and advice. I think she must take great delight when she has an opportunity to wield
a bold-line red pen, much like the one I drew out of my bag and used to critique her
written work when she was in junior high and high school.
Bonita’s parents and my own instilled many virtues we both appreciate and honor,
and they believed deeply in our talents and abilities. While we each grieved over the
loss of a parent last year, we knew they would be proud of our collaborative efforts
on this book.
INTRODUCTION
This book is intended for people who want to understand the information provided
in fi nancial statements. We don’t describe all the accounting details of preparing
fi nancial statements, which is an approach typically employed in many accounting
courses. Since many accounting students, upon graduation, will hold positions
requiring that they prepare their employers’ fi nancial statements or audit their cli-
ents’ fi nancial statements, the preparer approach employed in college makes sense
for accounting majors. However, that is not our goal here. Instead, we focus on a
user approach to understanding fi nancial statements.
Because of the user approach we take in this book, you don’t need any account-
ing courses or background to learn this material. Instead, this book is meant to help
people base decisions on the information provided in fi nancial statements.
What kinds of decisions might you be thinking of making in which fi nancial
statements can be useful? Well, perhaps you are an investor thinking about your
future retirement and are wondering whether you might like to purchase some stock
in a particular company. Or perhaps you already own stock in a company and are
trying to decide if this is a good time to sell that stock. Or perhaps you are a creditor
wondering whether you should lend some money to an organization. Perhaps you
are a union offi cial involved in negotiations with a business and want to have a thor-
ough understanding of the business’s fi nancial health. Perhaps you own a business
and, regardless of its size, want to understand the fi nancial statements compiled by
your accountants better to help you make future business decisions. Perhaps you are
a manager in an organization that has its own accounting department, which rou-
tinely prepares fi nancial statements for your use, and you want to comprehend bet-
ter the statements they are sending to your offi ce. Or perhaps you are about to enter
a graduate business program without an accounting undergraduate degree and want
a reference guide to the content and terminology of fi nancial statements.
1