Table Of ContentHow to Read and Interpret
Financial Statements
Second Edition
A Guide to Understanding What the
Numbers Really Mean
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How to Read and Interpret
Financial Statements
Second Edition
A Guide to Understanding What the
Numbers Really Mean
Michael P. Griffin
How to Read and Interpret Financial Statements, Second Edition
A Guide to Understanding What the Numbers Really Mean
© 2015 American Management Association. All rights reserved. This material may not be reproduced, stored in a retrieval system,
or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher.
ISBN 10: 0-7612-1559-X
ISBN 13: 978-0-7612-1559-2
AMACOM Self-Study Program
http://www.amaselfstudy.org
AMERICAN MANAGEMENT ASSOCIATION
http://www.amanet.org
Contents
About This Course ix
How to Take This Course xi
Pre-Test xiii
1 Understanding Financial Statements 1
Introduction
Accounting Is More an Art Than a Science
Internal Users
External Users
Basic Concepts and Principles of Financial Accounting and Financial
Statements
Generally Accepted Accounting Principles (GAAP)
Auditor’s Reports
Limitations of Financial Statements
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
2 Types of Financial Statements 19
Introduction
Elements of Financial Statements
Assets
Liabilities
Equity
Investments by Owners
Distributions to Owners
Revenues
Expenses
Gains
Losses
The Balance Sheet
Assets
Liabilities
Owners’ Equity
Income Statement
Sales
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vi HOW TO READ AND INTERPRET FINANCIAL STATEMENTS
Cost of Goods Sold
Statement of Retained Earnings
Statement of Cash Flows
Notes to the Financial Statements and Supplemental Information
Management’s Discussion and Analysis of Financial Condition and
Results of Operation
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
3 The Balance Sheet: Assets 41
Introduction
Current Assets
Cash
Marketable Securities
Receivables
Inventories
Prepaid Expenses
Long-Term Investments
Cost Method of Valuation
Equity Method of Valuation
Property, Plant, and Equipment
Tangible Fixed Assets
Intangible Assets
Wasting Assets
Other Assets
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
4 The Balance Sheet: Liabilities and 57
Owners’ Equity
Introduction
Liabilities
Current Liabilities
Long-Term Liabilities
Off-Balance-Sheet Financing
Owners’ (or Shareholders’) Equity
Capital Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
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CONTENTS vii
5 The Income Statement 71
Introduction
Income Statement Format
Components of an Income Statement
Comprehensive Income
Cash Versus Accrual Basis of Accounting
Cash Basis
Accrual Basis
Apportionment of Revenues and Expenses
Prepaid Expenses Requiring Apportionment
Unearned and Recorded Revenues Requiring Apportionment
Unrecorded Accrued Revenues
Unrecorded Accrued Expenses
Valuation of Accounts Receivable and Investments
Valuation of Marketable Securities
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
6 The Statement of Cash Flows 83
Introduction
The Usefulness of the Statement of Cash Flows
The Nature of the Statement of Cash Flows
Significant Noncash Financing and Investing Activities
Statement of Cash Flows: Format Alternatives
The Direct Method
The Indirect Method
Free Cash Flow
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
7 Balance Sheet Analysis 93
Introduction
Ratios in Financial-Statement Analysis
Limitations of Financial Ratios
Categories of Financial Ratios
Liquidity Ratios
Activity Ratios
Leverage Ratios
Vertical and Horizontal Analysis
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
8 Income Statement Analysis 111
Sales
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viii HOW TO READ AND INTERPRET FINANCIAL STATEMENTS
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Income
Profitability Ratios
Gross Profit Margin
Operating Profit Margin
Profit Margin
Return on Assets
Return on Equity
Earnings Per Share
Limitations of Financial Ratios
Horizontal and Vertical Analysis
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
9 Analysis of Operational Results 123
Introduction
Cost Behavior
Fixed Costs
Variable Costs
Mixed Costs
Cost-Volume-Profit Analysis
Break-Even Point
The Graphic Presentation of Break-Even
Using Break-Even Analysis
Contribution Margin
Advantages of Cost-Volume-Profit Analysis
Limitations of Cost-Volume-Profit Analysis
The Profit-Volume Graph
Plotting a Profit Line
Recap
Review Questions
Answers to “Think About It…” Questions from This Chapter
Bibliography 137
Glossary 139
Online Resources 147
Post-Test 149
Index 155
FOR QUESTIONS AND COMMENTS:
Please contact Self Study at 1-800-225-3215 or email
About This Course
The ability to read and interpret financial statements is a critical skill for any
manager. How to Read and Interpret Financial Statements, Second Edition, teaches
readers to read, understand, and analyze the financial reports that are funda-
mental to understanding the overall health of a business. Readers will learn to
interpret balance sheets, income statements, and statements of cash flows from
a management perspective. They’ll gain insights into how to view financial
statements in the context of external economic conditions. Readers will learn
how to uncover critical information by applying the right type of analysis—
ratio, vertical, horizontal—to the right statement. Written for today’s practi-
tioner, How to Read and Interpret Financial Statements, Second Edition, highlights
new legislation, rules, and standards of practice that affect accounting and fi-
nance and thereby the interpretation of financial statements. In each chapter,
exhibits, examples, and exercises reinforce the learning and give readers the
chance to apply new concepts and practice new skills.
Michael P. Griffin is an instructor of accounting and finance at the
Charlton College of Business at the University of Massachusetts Dartmouth.
Mr. Griffin received his B.S. in business administration from Providence Col-
lege and an M.B.A. from Bryant College. He is a Certified Public Accountant,
a Certified Management Accountant, a Certified Financial Manager (Institute
of Management Accountants), and a Chartered Financial Consultant (Amer-
ican College). In addition to his teaching experience, Mr. Griffin has held a
variety of positions in the areas of auditing, accounting, and finance and is an
active consultant. He is the author of many books and articles on accounting
and finance topics, including MBA Fundamentals: Accounting and Finance, pub-
lished by Kaplan Publishing. He has also been a content developer for finance
and accounting learning systems (software) for publishers such as McGraw-
Hill and Pearson Education. In addition to his teaching responsibilities at the
Charlton College of Business, Professor Griffin has held the position of As-
sistant Dean and is currently the internship director.
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