Accounting For Dummies

1 Accounting FOR. Dummies .. 4TH EDITION. By John A. Tracy, CPA. Accounting For Dummies , 4th Edition Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774. Copyright 2008 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http://.

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4 Some content that appears in print may not be available in electronic books. Library of Congress Control Number: 2008926448. ISBN: 978-0-470-24600-9. Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1. About the Author John A. Tracy (Boulder, Colorado) is Professor of Accounting , Emeritus, at the University of Colorado in Boulder. Before his 35-year tenure at Boulder, he was on the business faculty for four years at the University of California in Berkeley. Early in his career he was a staff accountant with Ernst & Young. John is the author of several books on Accounting and finance, including The Fast Forward MBA in Finance, How To Read a Financial Report, and Small Business Financial Management Kit For Dummies with his son Tage Tracy. John received his BSC degree from Creighton University. He earned his MBA. and PhD degrees at the University of Wisconsin in Madison. He is a CPA (inac- tive) in Colorado. Dedication For our grandchildren Alexander, Ryan, Mitchel, Paige, Katrina, Claire, Eric, MacKenzie, Madison, Tanner, Karsen, and Brody.

5 Author's Acknowledgments I'm deeply grateful to everyone at Wiley Publishing who helped produce this book. Their professionalism, courtesy, and good humor were much appreci- ated. I supplied some words, and the editors and production staff at Wiley molded them into the finished product. Out of the blue, I got a call in 1996 from Kathy Welton, then Vice President and Publisher for the Consumer Publishing Group of the For Dummies books. Kathy asked if I'd be interested in doing this book. It didn't take me very long to say yes. Thank you again, Kathy! I can't say enough nice things about Pam Mourouzis, who was project editor on the first edition of the book. The book is immensely better for her insights and advice. The two copyeditors on the book Diane Giangrossi and Joe Jansen did a wonderful job. Mary Metcalfe provided valuable suggestions on the manuscript. Thanks to Holly McGuire and Jill Alexander who encour- aged me to revise the book. The second edition benefited from the editing by Norm Crampton and Ben Nussbaum.

6 I thank Stacy Kennedy, acquisitions editor, for asking me to do this and the previous revision. Joan Friedman was the project editor on this and the previous edition. Evidently, Wiley assigned me the best editor they have. Joan kept a steady hand on the tiller as we sailed through the choppy waters of the revisions. Joan was a delight to work with, and it goes without saying that she made the book much better. Thank you most sincerely Joan, and I. hope to work with you again on the next revision. One reason I like to write books goes back to an Accounting class in my undergraduate days at Creighton University in Omaha. I took a course taught by the Dean of the Business School, Dr. Floyd Walsh. I turned in a term paper, and he said that it was very well written. I have never forgotten that compli- ment. I think my old Prof would be proud of this book and might even give me an A on the assignment. Publisher's Acknowledgments We're proud of this book; please send us your comments through our Dummies online registration form located at Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Composition Services Media Development Project Coordinator: Katie Key Project Editor: Joan Friedman Layout and Graphics: Brooke Graczyk, (Previous Editions: Norm Crampton, Melissa K.)

7 Jester, Laura Pence, Pam Mourouzis) Christine Williams Acquisitions Editor: Stacy Kennedy Proofreaders: Laura Albert, John Greenough, Technical Editor: Michael Newman, PhD Nancy L. Reinhardt Editorial Manager: Jennifer Ehrlich Indexer: Infodex Indexing Services, Inc. Editorial Supervisor: Carmen Krikorian Editorial Assistants: Erin Calligan Mooney, Joe Niesen, David Lutton Cartoons: Rich Tennant ( ). Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A. Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services Contents at a Glance Introduction.

8 1. Part I: Opening the Books on Chapter 1: Accounting : The Language of Business, Investing, Finance, and Chapter 2: Financial Statements and Accounting Chapter 3: Bookkeeping and Accounting Part II: Figuring Out Financial Statements ..75. Chapter 4: Reporting Revenue, Expenses, and the Bottom Chapter 5: Reporting Assets, Liabilities, and Owners' Chapter 6: Reporting Cash Flows ..119. Chapter 7: Choosing Accounting Methods: Different Strokes for Different Part III: Accounting in Managing a Business ..159. Chapter 8: Deciding the Legal Structure for a Business ..161. Chapter 9: Analyzing and Managing Profit ..183. Chapter 10: Financial Planning, Budgeting, and Chapter 11: Cost Concepts and Conundrums ..223. Part IV: Preparing and Using Financial Reports ..245. Chapter 12: Getting a Financial Report Ready for Release ..247. Chapter 13: How Lenders and Investors Read a Financial Chapter 14: How Business Managers Use a Financial Report ..293. Chapter 15: Audits and Accounting Fraud.

9 311. Part V: The Part of Tens ..321. Chapter 16: Ten Accounting Tips for Managers ..323. Chapter 17: Ten Tips for Reading a Financial Report ..333. Glossary: Slashing Through the Accounting Jargon Jungle ..343. Index ..357. Table of Contents About This Conventions Used in This Book ..2. What You're Not To Read ..4. Foolish Assumptions ..5. How This Book Is Part I: Opening the Books on Accounting ..6. Part II: Figuring Out Financial Part III: Accounting in Managing a Business ..7. Part IV: Preparing and Using Financial Reports ..8. Part V: The Part of Icons Used in This Where to Go from Part I: Opening the Books on Accounting ..11. Chapter 1: Accounting : The Language of Business, Investing, Finance, and Taxes ..13. Accounting Is Not Just for Affecting both insiders and outsiders ..14. Overcoming the stereotypes of Relating Accounting to your personal financial life ..16. Looking for Accounting in All the Right Places ..17. Taking a Peek into the Back Focusing on Transactions.

10 21. Taking the Pulse of a Business: Financial Statements ..23. Meeting the balance sheet and the Accounting equation ..24. Reporting profit and loss, and cash Respecting the importance of this Considering Accounting Careers ..27. Certified public accountant (CPA) ..27. The controller: The chief accountant in an A springboard to other careers ..29. xii Accounting For Dummies , 4th Edition Chapter 2: Financial Statements and Accounting Standards ..31. Introducing the Information Content of Financial Setting up the business The income statement ..33. The balance sheet ..35. The statement of cash flows ..37. How Profit and Cash Flow from Profit Differ ..40. Gleaning Key Information from Financial Statements ..41. How's profit performance?..41. Is there enough cash? ..42. Can you trust the financial statement numbers? Are the books cooked?..43. Why no cash distribution from profit? ..44. Keeping in Step with Accounting and Financial Reporting Standards ..45. Recognizing standards.