The Essentials Of Finance And Accounting For Nonfinancial Managers

299 Pages·2002·1.936 MB·English

by  Edward Fields

THE
ESSENTIALS
OF
FINANCE
AND
ACCOUNTING
FOR
NONFINANCIAL
MANAGERS
This Page Intentionally Left Blank
THE
E
SSENTIALS
OF
FINANCE
AND
ACCOUNTING
FOR
N
ONFINANCIAL
M
ANAGERS
EDWARD FIELDS
American Management Association
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Contents
Introduction 1
Part1:UnderstandingFinancialInformation
1. TheBalanceSheet 15
2. TheIncomeStatement 38
3. TheStatementof CashFlows 43
4. GenerallyAcceptedAccountingPrinciples:A
Review 51
5. TheAnnualReportandOtherSourcesof
IncrediblyValuableInformation 55
Part2:AnalysisofFinancialStatements
6. KeyFinancialRatios 79
7. UsingReturnonAssets toMeasureProfitCenters 105
8. OverheadAllocations 116
Part3:DecisionMakingforImprovedProfitability
9. Analysisof BusinessProfitability 129
10. ReturnonInvestment 149
v
vi Contents
Part4:AdditionalFinancialInformation
11. FinancingtheBusiness 181
12. BusinessPlanningandtheBudget 196
13. SelectedBusinessReadings 208
AppendixA. FinancialStatementPractice 219
AnswerKey
AppendixB. AMatchingExercise 226
AnswerKey
AppendixC. PaleyProducts 236
AnswerKey
AppendixD. AMatchingExercise 245
AnswerKey
Glossary 251
Index 283
Introduction
Background
This is a book for businesspeople. All decisions in a business or-
ganization are made in accordance with how they will affect the
organization’sfinancialperformanceandfuturefinancialhealth.
Whetheryourbackgroundismarketing,manufacturing,distribu-
tion,researchanddevelopment,orthecurrenttechnologies,you
need financial knowledge and skills if you are to really under-
stand your company’s decision-making, financial, and overall
management processes. The budget is essentially a financial
process of prioritizing the benefits resulting from business op-
portunitiesandtheinvestmentsrequiredtoimplementthoseop-
portunities.An improvedknowledgeofthese financialprocesses
and the financial executives who are responsible for them will
improveyourabilitytobeanintelligentandeffectiveparticipant.
Thisbookisspecialfor anumberof reasons:
1. It teaches what accountants do; it does not teach how to
do accounting. Businesspeople do not need to learn, nor
aretheyinterestedinlearning,howtododebitsandcred-
its.Theydoneedtounderstandwhataccountantsdoand
why, so that they can intelligently use the resulting infor-
mation—thefinancialstatements.
2. It is written by a businessperson for other businesspeo-
ple. Throughout a lifetime of business, consulting, and
training experience, I have provided my audiences with
1
2 Introduction
down-to-earth, practical, useful information. I am not an
accountant,butI dohavetheknowledge ofan intelligent
useroffinancialstatements.Iunderstandyourproblems,
andIseektosharemyknowledgewithyou.
3. It emphasizes the business issues. Many financial books
focusonthemathematics.Thisbookemploysmathemat-
ical information only when it is needed for the business
decision-makingprocess.
4. Itincludesachapteronhowtoreadanannualreportthat
helps you use the information that is available there to
better understand your own company. This chapter also
identifiesanumberofothersourcesofinformationinthe
public domain about your competition that may be very
strategicallyvaluable.
5. It includes information on how the finance department
contributes to the profitability and performance of the
company. The financial staff should be part of the busi-
ness profitability team. This book describes what you
shouldexpectfromthem.
6. It contains many practical examples of how the informa-
tion can be used, based upon extensive, practical experi-
ence. It also provides several exercises, including a
practicecasestudy,asappendices.
Thebookisinfourparts:
Part 1, Understanding Financial Information, Chapters 1
through 5. In Part 1, the reader is given both an overview and
detailed information about each of the financial statements and
its components. A complete understanding of this information
and how it is developed is essential for intelligent use of the fi-
nancialstatements.
Part 2, Analysis of Financial Statements, Chapters 6 through
8. Part 2 describes the many valuable analyses that can be per-
formed, using the information that was learned in Part 1. Busi-
ness management activities can essentially be divided into two
basiccategories:
Measuringperformance
Making decisions
Introduction 3
Part 2 describes how to measure and evaluate the perform-
ance of the company, its strategic business units, and even its
individualproducts.
Part 3, Decision Making for Improved Profitability, Chapters
9 and 10. This part describes the key financial analysis tech-
niques that managers can use to make decisions about every as-
pect of their business. Financial analysis provides valuable tools
for decisionmaking. However, managersmust still makethe de-
cisions.
Part 4, Additional Financial Information, Chapters 11
through 13 and appendices. Part 4 provides further information
aboutelementsofthefinancialprocessthatcanserveastoolsfor
thebusinessmanager.Theseincludethebudgetandmethodsof
obtaining the financing to support the business. Part 4 also in-
cludesa glossaryand quiteafewpracticeexercises.
Part 1, Understanding Financial Information
Part1discussesthefinancialreportsthatthecompanyproduces.
Theseinclude:
Thebalancesheet
Theincomestatement
Thestatementofcashflows
Each statement is described, item by item. The discussion ex-
plains where the numbers belong and what they mean. The en-
tirestructureofeachfinancialstatementisdescribed,sothatyou
will be able to understand how the financial statements interre-
lateandwhatinformationtheyconvey.
Part 1 also explains how to read and understand an annual
report.Thebenefitsofdoingsoarenumerous.Theyinclude:
Understanding the reporting responsibilities of a public
company
Furtherunderstandingtheaccountingprocess
Identifying and using information about your competitors
thatisinthepublic domain