Overview

Finance and Accounting for Nonfinancial Managers, Third Edition, introduces the reader to financial terminology, relates financial measures to operating information, enables the student to understand and apply financial measures to operating performance, and ties all of this to the current business environment. Today’s managers, whether supervisors or senior executives, are expected to understand and use financial and operational measures, prepare and utilize budgets, respond to inquiries about the financial consequences of actions taken by them or by their department or team, and understand and use financial and accounting terminology—the common language of business measurement. Written in a conversational, easy-to-understand tone, the course treats finance and accounting from the perspective of users of financial information—it enhances their ability to communicate effectively with subordinates, other managers, senior executives, and accounting and finance professionals. It offers managers the ability to use and analyze financial information to improve the performance of their operations and to identify—and avoid—potential problems.

The third edition includes discussion of the continuing transition of financial reporting to an international standard as well as consideration of the effects on accounting and finance resulting from the Recession of 2007-2009. New sections on how to read an annual report and navigating the shifts in the marketplace are also included. This edition has been updated throughout to provide managers with the most current and complete information available.

Selected Learning Objectives

Participants will learn how to:

Prepare budgets

Read, understand, and use financial and operational measures

Manage short-term assets

Relate department performance to the big picture

TOC

Contents

About This Course xi

How to Take This Course xiii

1 Introduction to Finance 1

Overview

The Vocabulary of Finance

The Elements of Finance

Bookkeeping

Accounting

Planning

Cash Management

The Basic Financial Statements

The Balance Sheet

The Income Statement

Statement of Cash Flows

Statement of Retained Earnings

The Structure of Business and the Impact of Financial Statements

Proprietorship

Partnership

Corporation

Other Business Structures

How to Read an Annual Report

The Company-Produced Annual Report

Cover Material Plus the Form 10-K

Communication of the Annual Report

Recap

Review Questions

2 Introduction to Accounting 25

Overview

The Purpose of Accounting

The Accounting System

Who Uses Accounting Information?

Basic Terminology

Financial Statements

The Chart of Accounts

The Accounting Cycle

Using Journal Entries to Record Transactions

Closing Procedures

More Financial Concepts

Preparing Financial Statements

The Key Financial Statements

Trial Balance

Recap

Review Questions

3 Financial Analysis: Using Ratios 49

Overview

Analysis of Financial Information

The Purpose of Business

Who Performs Financial Analysis?

The Power of Ratios

Comparative Analysis

Trend Analysis

Traditional Ratio Analysis

Liquidity Ratios

Activity Ratios

Profitability Ratios

Operating Profit Margin

Debt Management Ratios

DuPont Analysis

A Different Perspective

Creating Other Ratios

Conflicting Information

Recap

Review Questions

4 Managing Operating Performance 73

Overview

Making Your Information Useful

The Key Financial Statements

Ratios That Help Tell the Company’s Story

Effect Ratios

Crossover Indicators and Causal Ratios

Recap

Review Questions

5 Managing Short-Term Assets 95

Overview

The Management of Cash

Reasons for Holding Cash

Techniques for Managing Cash

The Management of Other Short-Term Assets

Managing Marketable Securities

Managing Accounts Receivable

Managing Inventory

Prepaid Expenses

Other Current Assets

Recap

Review Questions

6 Relating Risk and Return, Valuation, 111

and Time Value of Money

Overview

Risk

Defining Risk

Risk Aversion vs. Risk Taking

Possibility of Loss

The Determination of Interest Rates

Types of Risk

Characteristics of Different Types of Risks

Default Risk

Inflation Risk

Maturity Risk

Liquidity Risk

Estimating Interest Rates

Interest Rates and the Economy

The Role of the Federal Reserve on Interest Rate Determination

Capital Asset Pricing Model

Relating Risk and Return

Extending the Theory

Time Value of Money

Valuation

An Illustrative Example

Assessing Investments

Valuing an Investment

Recap

Review Questions

7 Capital Investment Decision Making 133

Overview

Calculating the Cost of Capital

The WACC Model

Initial Exercise in Estimating Financing Requirements

Calculating the Cost of Capital

Capital Budgeting

Types of Capital Investment Projects

Applying Cost of Capital

Determining Investment Cost

Determining the Cash Flows of a Project

Determining the Terminal Cash Flows

Evaluating Capital Investment Projects

Payback Period

Discounted Payback Period

Net Present Value (NPV)

Internal Rate of Return (IRR)

Modified Internal Rate of Return (MIRR)

Time Value of Money Calculations Using Excel

Recap

Review Questions

8 Managing Long-Term Assets 157

Overview

Considering Asset Classification

The Investment in Fixed Assets

Depreciation

Fixed Asset Accounting

Acquisition of Fixed Assets

Other Long-Term Assets

Recap

Review Questions

9 Managing Liabilities 169

Overview

The Liabilities of the Business

Short-Term or Current Liabilities

Accounts Payable

Notes Payable

Taxes Payable

Accruals

Long-Term Debt

Access to Credit

Choosing a Bank Lending Officer

The “C’s” of Credit

Character

Capacity

Capital

Cash Flow

Collateral

Conditions

Competition

Credibility

Competence

Communications

Covenants

Coverage

Banking Relationships

Defining Debt

Bank Structure Dictates Loan Interest Rates

The Cost of Bank Funds

Operating Expenses

Loan Losses

Profit Criteria

Comparison to Traditional Business Cost Structure

Bank Debt Pricing

Loan Pricing Example

Recap

Review Questions

10 The Equity in the Business 199

Overview

Equity and Business Structure

Preferred Stock

Common Stock

Additional Paid-in Capital

Retained Earnings

Other Equity Accounts

Stock Repurchase Plans

The Investment Marketplace

Accounting for Equity

Recap

Review Questions

11 Financial Planning 213

Overview

The Essence of Financial Planning

Business Planning—A Continuous Process

Roles of the Key Players

Overview of the Financial Planning Process

Planning Sequence

The Business Planning Process

Business Plan

Strategic Plan

The Operative Plan or Annual Budget

Projecting the Financial Future

Estimating Financial Requirements

Capital Budgets

Cash Budgets

Recap

Review Questions

12 Corporate Governance and Financial 235

Integrity

Overview

Sarbanes-Oxley

Defining Corporate Governance

The Major Corporate Scandals Preceding Sarbanes-Oxley

Enron

WorldCom

Scandal Summary

Post-SOX Financial Failures

Bernard Madoff

American International Group (AIG)

Goldman Sachs

Dell Computer

The Response of the Federal Government to the Financial Crisis

The Broader Aspects of Corporate Governance

EVA and MVA

Executive Compensation

Recap

Review Questions

13 Relating Departmental Performance to 251

the Big Picture

Overview

The Inverted Triangle: Finance from Broad to Specific

The Company

Subsidiary

Division

Department

Group

Individuals

The Relationship Between Budgets and Actuals

Navigating the Shifts in the Marketplace

Recap

Review Questions

Appendix A: Time Value of Money Tables 263

Appendix B: The Sarbanes-Oxley Act of 2002 269

Glossary 273

The Final Exam 285

Index