Business Skills All-in-One For Dummies E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1143

Veröffentlichungsjahr: 2018

Beschreibung

Find workplace success There are some things that will never go out of style, and good business skills are one of them. With the help of this informative book, you'll learn how to wear multiple hats in the workplace no matter what comes your way--without ever breaking a sweat. Compiled from eight of the best Dummies books on business skills topics, Business Skills All-in-One For Dummies offers everything you need to hone your abilities and translate them into a bigger paycheck. Whether you're tasked with marketing or accounting responsibilities--or anything in between--this all-encompassing reference makes it easier than ever to tackle your job with confidence. * Manage a successful operation * Write more effectively * Work on the go with Microsoft Office 365 * Deal with marketing, accounting, and projects with ease If you've ever dreamed about being able to juggle all your work responsibilities without ever dropping the ball, the book is for you.

Leseprobe

Business Skills All-in-One For Dummies®

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright © 2018 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Control Number: 2018933542

ISBN 978-1-119-47397-8 (pbk); ISBN 978-1-119-47400-5 (ebk); ISBN 978-1-119-47398-5 (ebk)

Business Skills All-in-One For Dummies®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Business Skills All-in-One For Dummies Cheat Sheet” in the Search box.

Table of Contents

Cover

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond the Book

Where to Go from Here

Book 1: AccountingAccounting

Chapter 1: Introducing Financial Statements

Setting the Stage for Financial Statements

Income Statement

Balance Sheet

Statement of Cash Flows

A Note about the Statement of Changes in Shareowners’ Equity

Gleaning Important Information from Financial Statements

Keeping in Compliance with Accounting and Financial Reporting Standards

Chapter 2: Reporting Profit or Loss in the Income Statement

Presenting Typical Income Statements

Taking Care of Housekeeping Details

Being an Active Reader

Deconstructing Profit

Pinpointing the Assets and Liabilities Used to Record Revenue and Expenses

Reporting Unusual Gains and Losses

Watching for Misconceptions and Misleading Reports

Chapter 3: Reporting Financial Condition in the Balance Sheet

Expanding the Accounting Equation

Presenting a Proper Balance Sheet

Judging Liquidity and Solvency

Understanding That Transactions Drive the Balance Sheet

Sizing Up Assets and Liabilities

Financing a Business: Sources of Cash and Capital

Recognizing the Hodgepodge of Values Reported in a Balance Sheet

Chapter 4: Reporting Cash Sources and Uses in the Statement of Cash Flows

Meeting the Statement of Cash Flows

Explaining the Variance between Cash Flow and Net Income

Sailing through the Rest of the Statement of Cash Flows

Pinning Down Free Cash Flow

Limitations of the Statement of Cash Flows

Chapter 5: Reading a Financial Report

Knowing the Rules of the Game

Making Investment Choices

Contrasting Reading Financial Reports of Private versus Public Businesses

Using Ratios to Digest Financial Statements

Frolicking through the Footnotes

Checking Out the Auditor’s Report

Book 2: Operations Management

Chapter 1: Designing Processes to Meet Goals

Getting Started with Process Improvement

Planning Operations

Improving Processes According to a Goal

Managing Bottlenecks

Chapter 2: Planning for Successful Operations

Planning from the Top Down

Exploring the Components of an Aggregate Plan

Considering Materials

Planning for Services

Applying Information to the Entire Organization

Chapter 3: Creating a Quality Organization

Reaching Beyond Traditional Improvement Programs

Adding to the Tool Box

Overcoming Obstacles

Book 3: Decision-Making

Chapter 1: The Key Ingredients for Effective Decisions

Distinguishing the Different Kinds of Decisions

Identifying the Different Decision-Making Styles

Recognizing the Workplace Environment and Culture as a Force

Developing the Decision-Maker: To Grow or Not?

Chapter 2: Walking through the Decision-Making Process

Clarifying the Purpose of the Decision

Eliciting All Relevant Info

Sifting and Sorting Data: Analysis

Generating Options

Assessing Immediate and Future Risk

Mapping the Consequences: Knowing Who Is Affected and How

Making the Decision

Communicating the Decision Effectively

Implementing the Decision

Decision-Making on Auto-Pilot

Chapter 3: Becoming a More Effective Decision-Maker

Upping Your Game: Transitioning from Area-Specific to Strategic Decisions

Displaying Character through Decision-Making

Improving Your Decision-Making by Becoming a Better Leader

Creating Safe and Stable Workplaces

Book 4: Project Management

Chapter 1: Achieving Results

Determining What Makes a Project a Project

Defining Project Management

Knowing the Project Manager’s Role

Do You Have What It Takes to Be an Effective Project Manager?

Chapter 2: Knowing Your Project’s Audiences

Understanding Your Project’s Audiences

Developing an Audience List

Considering the Drivers, Supporters, and Observers

Displaying Your Audience List

Confirming Your Audience’s Authority

Assessing Your Audience’s Power and Interest

Chapter 3: Clarifying Your Project

Defining Your Project with a Scope Statement

Looking at the Big Picture: Explaining the Need for Your Project

Marking Boundaries: Project Constraints

Documenting Your Assumptions

Presenting Your Scope Statement

Chapter 4: Developing a Game Plan

Breaking Your Project into Manageable Chunks

Creating and Displaying a WBS

Identifying Risks While Detailing Your Work

Documenting Your Planned Project Work

Chapter 5: Keeping Everyone Informed

Successful Communication Basics

Choosing the Appropriate Medium for Project Communication

Preparing a Written Project-Progress Report

Holding Key Project Meetings

Preparing a Project Communications Management Plan

Book 5: LinkedIn

Chapter 1: Looking into LinkedIn

Understanding Your New Contact Management and Networking Toolkit

Discovering What You Can Do with LinkedIn

Understanding LinkedIn Costs and Benefits

Navigating LinkedIn

Chapter 2: Signing Up and Creating Your Account

Joining LinkedIn

Starting to Build Your Network

Chapter 3: Growing Your Network

Building a Meaningful Network

Importing Contacts into LinkedIn

Sending Connection Requests

Accepting (or Gracefully Declining) Invitations

Chapter 4: Exploring the Power of Recommendations

Understanding Recommendations

Writing Recommendations

Requesting Recommendations

Gracefully Declining a Recommendation (or a Request for One)

Managing Recommendations

Chapter 5: Finding Employees

Managing Your Job Listings

Screening Candidates with LinkedIn

Using Strategies to Find Active or Passive Job Seekers

Book 6: Business Writing

Chapter 1: Planning Your Message

Adopting the Plan-Draft-Edit Principle

Fine-Tuning Your Plan: Your Goals and Audience

Making People Care

Choosing Your Written Voice: Tone

Using Relationship-Building Techniques

Chapter 2: Making Your Writing Work

Stepping into a Twenty-First-Century Writing Style

Enlivening Your Language

Using Reader-Friendly Graphic Techniques

Chapter 3: Improving Your Work

Changing Hats: Going from Writer to Editor

Reviewing the Big and Small Pictures

Moving from Passive to Active

Sidestepping Jargon, Clichés, and Extra Modifiers

Chapter 4: Troubleshooting Your Writing

Organizing Your Document

Catching Common Mistakes

Reviewing and Proofreading: The Final Check

Chapter 5: Writing Emails That Get Results

Fast-Forwarding Your Agenda In-House and Out-of-House

Getting Off to a Great Start

Building Messages That Achieve Your Goals

Structuring Your Middle Ground

Closing Strong

Perfecting Your Writing for Email

Book 7: Digital Marketing

Chapter 1: Understanding the Customer Journey

Creating a Customer Avatar

Getting Clear on the Value You Provide

Knowing the Stages of the Customer Journey

Preparing Your Customer Journey Road Map

Chapter 2: Crafting Winning Offers

Offering Value in Advance

Designing an Ungated Offer

Designing a Gated Offer

Designing Deep-Discount Offers

Maximizing Profit

Chapter 3: Pursuing Content Marketing Perfection

Knowing the Dynamics of Content Marketing

Finding Your Path to Perfect Content Marketing

Executing Perfect Content Marketing

Distributing Content to Attract an Audience

Chapter 4: Blogging for Business

Establishing a Blog Publishing Process

Applying Blog Headline Formulas

Auditing a Blog Post

Chapter 5: Following Up with Email Marketing

Understanding Marketing Emails

Sending Broadcast and Triggered Emails

Building a Promotional Calendar

Creating Email Campaigns

Writing and Designing Effective Emails

Cuing the Click

Getting More Clicks and Opens

Ensuring Email Deliverability

About the Authors

Connect with Dummies

Index

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

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Introduction

When was the last time you received an email and cringed at the muddled organization and horrible grammar? Or you felt so overwhelmed that your productivity plummeted? Or how about the last time you were so unsure about making a big decision that you came across as unprepared or worse — unprofessional?

Unfortunately, business professionals in all stages of their careers encounter these situations at one point or another. Although these instances may seem benign on the surface, they harm your professional reputation, which is hard to reverse. Would you want to do business with someone who is so unorganized that he constantly misses project deadlines or turns in shoddy work because he’s rushed? Of course not! Project management and having a solid organizational system are just a couple of the secrets to success that we discuss in this book.

About This Book

This book provides you with detailed information on topics that will help you gain the confidence needed to grow and advance in your business life. You’ll read about the ins and outs of the income statement, balance sheet, and statement of cash flows, how to craft the perfect written document that gets results, how to plan a project like a pro, and more.

Foolish Assumptions

There’s a time and a place for just about everything and assumptions are no different. First, we assume that you are a business professional and you’re ready, willing, and able to devote some time and energy into honing your business skills.

We also assume that you have at least a general knowledge of the major software packages that businesses use and are interested in utilizing them to advance in your professional activities. If that’s the case, this is the book for you!

Icons Used in This Book

Throughout this book, you’ll find special icons to call attention to important information. Here’s what to expect.

“If you see people falling asleep during your presentations, bang a book against the table to wake them up.” Kidding!

This icon is used for helpful suggestions and things you may find useful at some point. No worries, though: No one will be falling asleep during your presentations if you take to heart the tip written here!

This icon is used when something is essential and bears repeating. Again, this icon is used when something is essential and bears repeating. (See what we did there?)

The little Dummies Man is information to share with the people who handle the technical aspect of things. You can skip technical-oriented information without derailing any of the hard work you’re putting toward achieving your best professional self.

Pay attention to these warnings to avoid potential pitfalls. Nothing suggested will get you fired or arrested (unless you do something like practice mindfulness so well that you start to nod off while driving or during meetings with the CEO — we can’t help you there). If you see this icon, slow down and proceed with caution.

Beyond the Book

Although this book is a one-stop shop for your professional development, we can cover only so much in a set number of pages! If you find yourself at the end of this book thinking, “This was an amazing book! Where can I learn more about how to advance my career by working on my business skills?” head over to www.dummies.com for more resources.

For details about significant updates or changes that occur between editions of this book, go to www.dummies.com, search for Business Skills All-in-One For Dummies, and open the Downloads tab on this book’s dedicated page.

In addition, check out the cheat sheet for this book for tips on making informed decisions, avoiding common project management pitfalls, building your LinkedIn network, and more. To get to the cheat sheet, go to www.dummies.com, and then type Business Skills All-in-One For Dummies in the Search box.

Where to Go from Here

The minibooks and chapters are written to stand on their own, so you can start reading anywhere and skip around as you see fit.

If you don’t know where to start, check out Book 1, Chapter 1. However, if you see a particular topic that piques your interest, feel free to jump right into its chapter.

Book 1

Accounting

Contents at a Glance

Chapter 1: Introducing Financial Statements

Setting the Stage for Financial Statements

Income Statement

Balance Sheet

Statement of Cash Flows

A Note about the Statement of Changes in Shareowners’ Equity

Gleaning Important Information from Financial Statements

Keeping in Compliance with Accounting and Financial Reporting Standards

Chapter 2: Reporting Profit or Loss in the Income Statement

Presenting Typical Income Statements

Taking Care of Housekeeping Details

Being an Active Reader

Deconstructing Profit

Pinpointing the Assets and Liabilities Used to Record Revenue and Expenses

Reporting Unusual Gains and Losses

Watching for Misconceptions and Misleading Reports

Chapter 3: Reporting Financial Condition in the Balance Sheet

Expanding the Accounting Equation

Presenting a Proper Balance Sheet

Judging Liquidity and Solvency

Understanding That Transactions Drive the Balance Sheet

Sizing Up Assets and Liabilities

Financing a Business: Sources of Cash and Capital

Recognizing the Hodgepodge of Values Reported in a Balance Sheet

Chapter 4: Reporting Cash Sources and Uses in the Statement of Cash Flows

Meeting the Statement of Cash Flows

Explaining the Variance between Cash Flow and Net Income

Sailing through the Rest of the Statement of Cash Flows

Pinning Down Free Cash Flow

Limitations of the Statement of Cash Flows

Chapter 5: Reading a Financial Report

Knowing the Rules of the Game

Making Investment Choices

Contrasting Reading Financial Reports of Private versus Public Businesses

Using Ratios to Digest Financial Statements

Frolicking through the Footnotes

Checking Out the Auditor’s Report

Chapter 1

Introducing Financial Statements

IN THIS CHAPTER

Identifying the information components in financial statements

Evaluating profit performance and financial condition

Knowing the limits of financial statements

Recognizing the sources of accounting standards

In this chapter, you get interesting tidbits about the three primary business financial statements, or financials, as they’re sometimes called: the income statement, the balance sheet, and the statement of cash flows.

For each financial statement, we introduce its basic information components. The purpose of financial statements is to communicate information that is useful to the readers of the financial statements, to those who are entitled to the information. Financial statement readers include the managers of the business and its lenders and investors. These constitute the primary audience for financial statements. (Beyond this primary audience, others are also interested in a business’s financial statements, such as its labor union or someone considering buying the business.) Think of yourself as a shareholder in a business. What sort of information would you want to know about the business? The answer to this question should be the touchstone for the accountant in preparing the financial statements.

The financial statements explained in this chapter are for businesses. Business financial statements serve as a useful template for not-for-profit (NFP) entities and other organizations (social clubs, homeowners’ associations, retirement communities, and so on). In short, business financial statements are a good reference point for the financial statements of non-business entities. There are differences but not as many as you may think. As you go along in this and the following chapters, we point out the differences between business and non-business financial statements.

Toward the end of this chapter, we briefly discuss accounting standards and financial reporting standards. Notice here that we distinguish accounting from financial reporting. Accounting standards deal primarily with how to record transactions for measuring profit and for putting values on assets, liabilities, and owners’ equity. Financial reporting standards focus on additional aspects such as the structure and presentation of financial statements, disclosure in the financial statements and elsewhere in the report, and other matters. We use the term financial accounting to include both types of standards.

The philosophy behind the need for standards is that all businesses should follow uniform methods for measuring and reporting profit performance and reporting financial condition. Consistency in financial accounting across all businesses is the name of the game. We won’t bore you with a lengthy historical discourse on the development of accounting and financial reporting standards in the United States. The general consensus (backed by law) is that businesses should use consistent accounting methods and terminology. General Motors and Microsoft should use the same accounting methods; so should Wells Fargo and Apple. Of course, businesses in different industries have different types of transactions, but the same types of transactions should be accounted for in the same way. That is the goal.

Setting the Stage for Financial Statements

This chapter focuses on the basic information components of each financial statement reported by a business.

Offering a few preliminary comments about financial statements

Realistic examples are needed to illustrate and explain financial statements, which presents a slight problem. The information content of a business’s financial statements depends on whether it sells products or services, invests in other businesses, and so on. For example, the financial statements of a movie theater chain are different from those of a bank, which are different from those of an airline, which are different from an automobile manufacturer’s, which are different from — well, you name it.

The classic example used to illustrate financial statements involves a business that sells products and sells on credit to its customers. Therefore, the assets in the example include receivables from the business’s sales on credit and inventory of products it has purchased or manufactured that are awaiting future sale. Keep in mind, however, that many businesses that sell products do not sell on credit to their customers. Many retail businesses sell only for cash (or accept credit or debit cards that are near cash). Such businesses do not have a receivables asset.

The financial statements of a business do not present a history of the business. Financial statements are, to a large extent, limited to the recent profit performance and financial condition of the business. A business may add some historical discussion and charts that aren’t strictly required by financial reporting standards. (Public corporations that have their ownership shares and debt traded in open markets are subject to various disclosure requirements under federal law, including certain historical information.)

The illustrative financial statements that follow do not include a historical narrative of the business. Nevertheless, whenever you see financial statements, we encourage you to think about the history of the business. To help you out in this regard, here are some particulars about the business example in this chapter:

It sells products to other businesses (not on the retail level).

It sells on credit, and its customers take a month or so before they pay.

It holds a fairly large stock of products awaiting sale.

It owns a wide variety of long-term operating assets that have useful lives from 3 to 30 years or longer (building, machines, tools, computers, office furniture, and so on).

It has been in business for many years and has made a profit most years.

It borrows money for part of the total assets it needs.

It’s organized as a corporation and pays federal and state income taxes on its annual taxable income.

It has never been in bankruptcy and is not facing any immediate financial difficulties.

The following sections present the company’s annual income statement for the year just ended, its balance sheet at the end of the year, and its statement of cash flows for the year.

Looking at other aspects of reporting financial statements

Dollar amounts in financial statements are typically rounded off, either by not presenting the last three digits (when rounded to the nearest thousand) or by not presenting the last six digits (when rounded to the nearest million by large corporations). We strike a compromise on this issue and show the last three digits for each item as 000, which means that we rounded off the amount but still show all digits. Many smaller businesses report their financial statement dollar amounts to the last dollar or even the last penny, for that matter. Keep in mind that having too many digits in a dollar amount makes it hard to comprehend.

Actual financial statements use only one- or two-word account titles on the assumption that you know what all these labels mean. What you see in this chapter, on the other hand, are the basic information components of each financial statement. We provide descriptions for each financial statement element rather than the terse and technical account titles you find in actual financial statements. Also, we strip out subtotals that you see in actual financial statements because they aren’t necessary at this point. So, with all these caveats in mind, let’s get going.

Oops! We forgot to mention a few things about financial reports. Financial reports are rather stiff and formal. No slang or street language is allowed, and we’ve never seen a swear word in one. Financial statements would get a G in the movies rating system. Seldom do you see any graphics or artwork in a financial statement itself, although you do see a fair amount of photos and graphics on other pages in the financial reports of public companies. And there’s virtually no humor in financial reports. However, Warren Buffet, in his annual letter to the stockholders of Berkshire Hathaway, includes some wonderful humor to make his points.

Income Statement

First on the minds of financial report readers is the profit performance of the business. The income statement is the all-important financial statement that summarizes the profit-making activities of a business over a period of time. Figure 1-1 shows the basic information content of an external income statement for our company example. External means that the financial statement is released outside the business to those entitled to receive it — primarily its shareowners and lenders. Internal financial statements stay within the business and are used mainly by its managers; they aren’t circulated outside the business because they contain competitive and confidential information.

FIGURE 1-1: Income statement information components for a business that sells products.

Presenting the components of the income statement

Figure 1-1 presents the major ingredients, or information packets, in the income statement for a company that sells products. As you may expect, the income statement starts with sales revenue on the top line. There’s no argument about this, although in the past, certain companies didn’t want to disclose their annual sales revenue (to hide the large percent of profit they were earning on sales revenue).

Sales revenue is the total amount that has been or will be received from the company’s customers for the sales of products to them. Simple enough, right? Well, not really. The accounting profession is currently reexamining the technical accounting standards for recording sales revenue, and this has proven to be a challenging task. Our business example, like most businesses, has adopted a certain set of procedures for the timeline of recording its sales revenue.

Recording expenses involves much more troublesome accounting problems than revenue problems for most businesses. Also, there’s the fundamental question regarding which information to disclose about expenses and which information to bury in larger expense categories in the external income statement. Direct your attention to the four kinds of expenses in Figure 1-1. Expenses are deducted from sales revenue to determine the final profit for the period, which is referred to as the bottom line. The preferred label is net income, as you see in the figure.

The four expense categories you see in Figure 1-1 should almost always be disclosed in external income statements. These constitute the minimum for adequate disclosure of expenses. The cost of goods sold expense is just what it says: the cost of the products sold to customers. The cost of the products should be matched against the revenue from the sales, of course.

Only one conglomerate operating expense has to be disclosed. In Figure 1-1, it’s called selling, general, and administrative expenses, which is a popular title in income statements. This all-inclusive expense total mixes together many kinds of expenses, including labor costs, utility costs, depreciation of assets, and so on. But it doesn’t include interest expenses or income tax expense; these two expenses are always reported separately in an income statement.

The cost of goods sold expense and the selling, general, and administrative expenses take the biggest bites out of sales revenue. The other two expenses (interest and income tax) are relatively small as a percent of annual sales revenue but are important enough in their own right to be reported separately. And though you may not need this reminder, bottom-line profit (net income) is the amount of sales revenue in excess of the business’s total expenses. If either sales revenue or any of the expense amounts are wrong, profit is wrong

A service business does not sell products; therefore, it doesn’t have the cost of goods sold expense. In place of cost of goods sold, it has other types of expenses. Most service businesses are labor extensive; they have relatively large labor costs as a percent of sales revenue. Service companies differ in how they report their operating expenses. For example, United Airlines breaks out the cost of aircraft fuel and landing fees. The largest expense of the insurance company State Farm is payments on claims. The movie chain AMC reports film exhibition costs separate from its other operating expenses. We offer these examples to remind you that accounting should always be adapted to the way the business operates and makes profit. In other words, accounting should follow the business model.

Income statement pointers

Most businesses break out one or more expenses instead of disclosing just one very broad category for all selling, general, and administrative expenses. For example, Apple, in its condensed income statement, discloses research and development expenses separate from its selling, general, and administrative expenses. A business could disclose expenses for advertising and sales promotion, salaries and wages, research and development (as does Apple), and delivery and shipping — though reporting these expenses varies quite a bit from business to business. Businesses do not disclose the compensation of top management in their external financial reports, although this information can be found in the proxy statements of public companies that are filed with the Securities and Exchange Commission (SEC). In summary, the extent of details disclosed about operating expenses in externally reported financial reports varies quite a bit from business to business. Financial reporting standards are rather permissive on this point.

Inside most businesses, a profit statement is called a P&L (profit and loss) report. These internal profit performance reports to the managers of a business include more detailed information about expenses and about sales revenue — a good deal more! Reporting just four expenses to managers (as shown in Figure 1-1) would not do.

Sales revenue refers to sales of products or services to customers. In some income statements, you also see the term income, which generally refers to amounts earned by a business from sources other than sales. For example, a real estate rental business receives rental income from its tenants. (In the example in this chapter, the business has only sales revenue.)

The income statement gets the most attention from business managers, lenders, and investors (not that they ignore the other two financial statements). The much-abbreviated versions of income statements that you see in the financial press, such as in The Wall Street Journal, report the top line (sales revenue and income) and the bottom line (net income) and not much more. Refer to Chapter 2 in this minibook for more information on income statements.

Balance Sheet

A more accurate name for a balance sheet is statement of financial condition or statement of financial position, but the term balance sheet has caught on, and most people use this term. Keep in mind that the most important thing is not the balance but rather the information reported in this financial statement.

In brief, a balance sheet summarizes on the one hand the assets of the business and on the other hand the sources of the assets. However, looking at assets is only half the picture. The other half consists of the liabilities and owner equity of the business. Cash is listed first, and other assets are listed in the order of their nearness to cash. Liabilities are listed in order of their due dates (the earliest first, and so on). Liabilities are listed ahead of owners’ equity. We discuss the ordering of the components in a balance sheet in Chapter 3 in this minibook.

Presenting the components of the balance sheet

Figure 1-2 shows the building blocks of a typical balance sheet for a business that sells products on credit. As mentioned, one reason the balance sheet is called by this name is that its two sides balance, or are equal in total amounts. In this example, the $5.2 million total assets equals the $5.2 million total liabilities and owners’ equity. The balance or equality of total assets on the one side of the scale and the sum of liabilities plus owners’ equity on the other side of the scale is expressed in the accounting equation. Note: The balance sheet in Figure 1-2 shows the essential elements in this financial statement. In a financial report, the balance sheet includes additional features and frills, which we explain in Chapter 3 of this minibook.

FIGURE 1-2: Balance sheet information components for a business that sells products and makes sales on credit.

Take a quick walk through the balance sheet. For a company that sells products on credit, assets are reported in the following order: First is cash, then receivables, then cost of products held for sale, and finally the long-term operating assets of the business. Moving to the other side of the balance sheet, the liabilities section starts with the trade liabilities (from buying on credit) and liabilities for unpaid expenses. Following these operating liabilities is the interest-bearing debt of the business. Owners’ equity sources are then reported below liabilities. So a balance sheet is a composite of assets on one hand and a composite of liabilities and owners’ equity sources on the other hand.

A balance sheet is a reflection of the fundamental two-sided nature of a business (expressed in the accounting equation). In the most basic terms, assets are what the business owns, and liabilities plus owners’ equity are the sources of the assets. The sources have claims against the assets. Liabilities and interest-bearing debt have to be paid, of course, and if the business were to go out of business and liquidate all its assets, the residual after paying all its liabilities would go to the owners.

A company that sells services doesn’t has an inventory of products being held for sale. A service company may or may not sell on credit. Airlines don’t sell on credit, for example. If a service business doesn’t sell on credit, it won’t have two of the sizable assets you see in Figure 1-2: receivables from credit sales and inventory of products held for sale. Generally, this means that a service-based business doesn’t need as much total assets compared with a products-based business with the same size sales revenue.

The smaller amount of total assets of a service business means that the other side of its balance sheet is correspondingly smaller. In plain terms, this means that a service company doesn’t need to borrow as much money or raise as much capital from its equity owners.

As you may suspect, the particular assets reported in the balance sheet depend on which assets the business owns. We include just four basic types of assets in Figure 1-2. These are the hardcore assets that a business selling products on credit would have. It’s possible that such a business could lease (or rent) virtually all its long-term operating assets instead of owning them, in which case the business would report no such assets. In this example, the business owns these so-called fixed assets. They’re fixed because they are held for use in the operations of the business and are not for sale, and their usefulness lasts several years or longer.

Balance sheet pointers

So, where does a business get the money to buy its assets? Most businesses borrow money on the basis of interest-bearing notes or other credit instruments for part of the total capital they need for their assets. Also, businesses buy many things on credit and, at the balance sheet date, owe money to their suppliers, which will be paid in the future.

These operating liabilities are never grouped with interest-bearing debt in the balance sheet. The accountant would be tied to the stake for doing such a thing. Liabilities are not intermingled with assets — this is a definite no-no in financial reporting. You can’t subtract certain liabilities from certain assets and report only the net balance.

Could a business’s total liabilities be greater than its total assets? Well, not likely — unless the business has been losing money hand over fist. In the vast majority of cases, a business has more total assets than total liabilities. Why? For two reasons:

Its owners have invested money in the business.

The business has earned profit over the years, and some (or all) of the profit has been retained in the business. Making profit increases assets; if not all the profit is distributed to owners, the company’s assets rise by the amount of profit retained.

In the product company example (see Figure 1-2), owners’ equity is about $2.5 million, or $2.47 million to be more exact. Sometimes this amount is referred to as net worth because it equals total assets minus total liabilities. However, net worth can be misleading because it implies that the business is worth the amount recorded in its owners’ equity accounts. The market value of a business, when it needs to be known, depends on many factors. The amount of owners’ equity reported in a balance sheet, which is called the business’s book value, is not irrelevant in setting a market value on the business, but it usually isn’t the dominant factor. The amount of owners’ equity in a balance sheet is based on the history of capital invested in the business by its owners and the history of its profit performance and distributions from profit.

A balance sheet could be whipped up anytime you want — say, at the end of every day. In fact, some businesses (such as banks and other financial institutions) need daily balance sheets, but few businesses prepare balance sheets that often. Typically, preparing a balance sheet at the end of each month is adequate for general management purposes — although a manager may need to take a look at the business’s balance sheet in the middle of the month. In external financial reports (those released outside the business to its lenders and investors), a balance sheet is required at the close of business on the last day of the income statement period. If its annual or quarterly income statement ends, say, September 30, then the business reports its balance sheet at the close of business on September 30.

The profit for the most recent period is found in the income statement; periodic profit is not reported in the balance sheet. The profit reported in the income statement is before any distributions from profit to owners. The cumulative amount of profit over the years that hasn’t been distributed to the business’s owners is reported in the owners’ equity section of the company’s balance sheet.

By the way, note that the balance sheet in Figure 1-2 is presented in a top-and-bottom format instead of a left-and-right format. Either the vertical (portrait) or horizontal (landscape) mode of display is acceptable. You see both layouts in financial reports. Of course, the two sides of the balance sheet should be kept together, either on one page or on facing pages in the financial report. You can’t put assets up front and hide the other side of the balance sheet in the rear of the financial report.

Statement of Cash Flows

To survive and thrive, business managers confront three financial imperatives:

Make an adequate profit (or at least break even, for a not-for-profit entity).

The income statement reports whether the business made a profit or suffered a loss for the period.

Keep the financial condition in good shape.

The balance sheet reports the financial condition of the business at the end of the period.

Control cash flows.

Management’s control over cash flows is reported in the

statement of cash flows,

which presents a summary of the business’s sources and uses of cash during the same period as the income statement.

This section introduces you to the statement of cash flows. Financial reporting standards require that the statement of cash flows be reported when a business reports an income statement.

Presenting the components of the statement of cash flows

Successful business managers tell you that they have to manage both profit and cash flow; you can’t do one and ignore the other. Business managers have to deal with a two-headed dragon in this respect. Ignoring cash flow can pull the rug out from under a successful profit formula.

Figure 1-3 shows the basic information components of the statement of cash flows for the business example we use in the chapter. The cash activity of the business during the period is grouped into three sections:

The first reconciles net income for the period with the cash flow from the business’s profit-making activities, or

operating activities

.

The second summarizes the company’s

investing

transactions during the period.

The third reports the company’s

financing

transactions.

FIGURE 1-3: Information components of the statement of cash flows.

The net increase or decrease in cash from the three types of cash activities during the period is added to or subtracted from the beginning cash balance to get the cash balance at the end of the year.

The business earned $520,000 profit (net income) during the year (refer to Figure 1-1). The cash result of its operating activities was to increase its cash by $400,000, which you see in the first part of the statement of cash flows (see Figure 1-3). This still leaves $120,000 of profit to explain. This doesn’t mean that the profit number is wrong. The actual cash inflows from revenues and outflows for expenses run on a different timetable from when the sales revenue and expenses are recorded for determining profit. For a more comprehensive explanation of the differences between cash flows and sales revenue and expenses, see Book 1, Chapter 4.

The second part of the statement of cash flows sums up the long-term investments the business made during the year, such as constructing a new production plant or replacing machinery and equipment. If the business sold any of its long-term assets, it reports the cash inflows from these divestments in this section of the statement of cash flows. The cash flows of other investment activities (if any) are reported in this part of the statement as well. As you can see in Figure 1-3, the business invested $450,000 in new long-term operating assets (trucks, equipment, tools, and computers).

The third part of the statement sums up the dealings between the business and its sources of capital during the period — borrowing money from lenders and raising capital from its owners. Cash outflows to pay debt are reported in this section, as are cash distributions from profit paid to the owners of the business. The third part of the example statement shows that the result of these transactions was to increase cash by $200,000. (By the way, in this example, the business didn’t make cash distributions from profit to its owners. It probably could have, but it didn’t — which is an important point that we discuss later in “Why no cash distribution from profit?”)

As you see in Figure 1-3, the net result of the three types of cash activities was a $150,000 increase during the year. The increase is added to the cash balance at the start of the year to get the cash balance at the end of the year, which is $1.0 million. We should make one point clear: The $150,000 cash increase during the year (in this example) is never referred to as a cash flow bottom line or any such thing.

The term bottom line is reserved for the final line of the income statement, which reports net income — the final amount of profit after all expenses are deducted.

Statement of cash flows pointers

In 1987, the American rulemaking body for financial accounting standards (the Financial Accounting Standards Board) made the cash flow statement a required statement. Relatively speaking, this financial statement hasn’t been around that long. How has it gone? Well, in our humble opinion, this financial statement is a disaster for financial report readers.

Statements of cash flows of most businesses are frustratingly difficult to read and far too technical. The average financial report reader understands the income statement and balance sheet. Certain items may be hard to fathom, but overall, the reader can make sense of the information in the two financial statements. In contrast, trying to follow the information in a statement of cash flows — especially the first section of the statement — can be a challenge even for a CPA. (More about this issue in Chapter 4 of this minibook.)

Imagine you have a highlighter and the three basic financial statements of a business in front of you. What are the most important numbers to mark? Bottom-line profit (net income) in the income statement is one number you’d mark. Another key number is cash flow from operating activities in the statement of cash flows. You don’t have to understand the technical steps of how the accountant gets this cash flow number, but pay attention to how it compares with the profit number for the period. (We explain this point in detail in Chapter 5 of this minibook.)

Cash flow is almost always different from net income. The sales revenue reported in the income statement does not equal cash collections from customers during the year, and expenses do not equal cash payments during the year. Cash collections from sales minus cash payments for expenses gives cash flow from a company’s profit-making activities; sales revenue minus expenses gives the net income earned for the year. Sorry, mate, but that’s how the cookie crumbles.

A Note about the Statement of Changes in Shareowners’ Equity

Many business financial reports include a fourth financial statement — or at least it’s called a “statement.” It’s really a summary of the changes in the constituent elements of owners’ equity (stockholders’ equity of a corporation). The corporation is one basic type of legal structure that businesses use. We don’t show a statement of changes in owners’ equity here.

When a business has a complex owners’ equity structure, a separate summary of changes in the components of owners’ equity during the period is useful for the owners, the board of directors, and the top-level managers. On the other hand, in some cases, the only changes in owners’ equity during the period were earning profit and distributing part of the cash flow from profit to owners. In this situation, there isn’t much need for a summary of changes in owners’ equity. The financial statement reader can easily find profit in the income statement and cash distributions from profit (if any) in the statement of cash flows. For details, see the later section “Why no cash distribution from profit?”