by Kenneth W. Boyd and Lita Epstein
Table of Contents
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Book I: Setting Up Your Accounting System
Chapter 1: Grasping Bookkeeping and Accounting Basics
Knowing What Bookkeeping and Accounting Are All About
Distinguishing between bookkeeping and accounting
Taking a panoramic view of bookkeeping and accounting
Wrapping Your Brain around the Accounting Cycle
Working the Fundamental Accounting Equation
Chapter 2: Outlining Your Financial Road Map with a Chart of Accounts
Getting to Know the Chart of Accounts
Connecting the chart of accounts to financial statements
Organizing the accounts
Balancing transactions
Setting Up Your Chart of Accounts
Mulling Over Debits versus Credits
Understanding Double-Entry Accounting
Revisiting the balance sheet equation
Recording journal entries
Figuring out a complex journal entry
Chapter 3: Using Journal Entries and Ledgers
Keeping a Journal
Using journals to record cash transactions
Recording accrual transactions
Exploring other journals
Checking out examples of common journal entries
Bringing It All Together in the Ledger
Realizing what a ledger is
Posting to the ledgers
Viewing an example of a general ledger
Recognizing the purpose of the trial balance
Putting Accounting Software to Work for You
Chapter 4: Choosing an Accounting Method
Distinguishing between Cash and Accrual Basis
The cash basis
The accrual basis
Sorting through Standards for Other Types of Accounting
Managerial accounting
Not-for-profit accounting
Governmental accounting
International accounting
Considering the Conceptual Framework of Financial Accounting
The objective of financial reporting
Characteristics of accounting information
Elements of the financial statements
Financial statement measurements
Book II: Recording Accounting Transactions
Chapter 1: Keeping the Books
Analyzing the Effect of Business Transactions
Revisiting the fundamental accounting equation
Getting familiar with accounts
Defining debits and credits
Knowing more about the transaction methodology
Managing Your Bookkeeping and Accounting System
Categorizing your financial information: The chart of accounts
Standardizing source document forms and processing procedures
Hiring competent personnel
Enforcing strong internal controls
Wrapping Up with End-of-Period Procedures
Tidying up the books
Leaving good audit trails
Staying alert for unusual events and developments
Designing truly useful reports for managers
Chapter 2: Tracking Purchases
Keeping Track of Inventory
Entering initial cost
Managing inventory and its value
Buying and Monitoring Supplies
Staying on Top of Your Bills
Segregating duties to prevent theft
Taking advantage of discounts
Chapter 3: Counting Your Sales
Collecting on Cash Sales
Discovering the value of sales receipts
Recording cash transactions in the books
Selling on Credit
Deciding whether to offer store credit
Recording store credit transactions in the books
Proving Out the Cash Register
Tracking Sales Discounts
Recording Sales Returns and Allowances
Monitoring Accounts Receivable
Accepting Your Losses
Chapter 4: Processing Employee Payroll and Benefits
Staffing Your Business
Completing government forms
Picking pay periods
Determining wage and salary types
Collecting Employee Taxes
Sorting out Social Security tax
Making sense of Medicare tax
Figuring out federal withholding tax
Settling up state and local withholding taxes
Determining Net Pay
Surveying Your Benefits Options
Tax-exempt benefits
Taxable benefits
Dealing with cafeteria plans
Preparing Payroll and Posting It in the Books
Calculating payroll for hourly employees
Doling out funds to salaried employees
Totaling up for commission checks
Putting it together to prepare payroll
Depositing Employee Taxes
Chapter 5: Computing and Reporting Payroll Taxes
Paying Employer Taxes on Social Security and Medicare
Filing Form 941
Knowing how often to file
Completing Unemployment Reports and Paying Unemployment Taxes
How states calculate the FUTA tax rate
Calculating FUTA tax
Filing and paying unemployment taxes to state governments
Carrying Workers’ Compensation Insurance
Maintaining Employee Records
Book III: Adjusting and Closing Entries
Chapter 1: Depreciating Your Assets
Defining Depreciation
Knowing what you can and can’t depreciate
Figuring out the useful life of a fixed asset
Delving into cost basis
Evaluating Your Depreciation Options
Walking through the straight-line method
Accelerating by using declining balance
Calculating sum-of-the-years’-digits
Using the units-of-production method
Seeing how the methods compare
Figuring partial year depreciation
Tackling Taxes and Depreciation
Section 179
MACRS
Chapter 2: Paying and Collecting Interest
Deciphering Types of Interest
Simple interest
Compound interest
Handling Interest Income
Delving into Loans and Interest Expenses
Short-term debt
Long-term debt
Chapter 3: Proving Out the Cash
Why Prove Out the Cash?
Making Sure Ending Cash Is Right
Closing the Cash Journals
Finalizing cash receipts
Finalizing cash outlays
Using a Temporary Posting Journal
Chapter 4: Reconciling Accounts and Closing Journal Entries
Reconciling Bank Accounts
Tracking down reconciling items
Using a computerized system
Posting Adjustments and Corrections
Prepping to Close: Checking for Accuracy and Tallying Things Up
Paying attention to initial transaction details
Summarizing journal entries
Analyzing summary results
Planning for cash flow
Posting to the General Ledger
Checking Out Computerized Journal Records
Chapter 5: Checking Your Accuracy
Working with a Trial Balance
Conducting your trial balance
Dealing with trial balance errors
Testing Your Balance by Using Computerized Accounting Systems
Developing a Financial Statement Worksheet
Replacing Worksheets with Computerized Reports
Chapter 6: Adjusting the Books
Adjusting All the Right Areas
Depreciating assets
Allocating prepaid expenses
Counting inventory
Allowing for bad debts
Recognizing unpaid salaries and wages
Testing an Adjusted Trial Balance
Book IV: Preparing Income Statements and Balance Sheets
Chapter 1: Brushing Up on Accounting Standards
Exploring the Origins of Accounting Standards
Recognizing the Role of the American Institute of Certified Public Accountants (AICPA)
Tying together regulators for audits of publicly traded companies
ASB audit and attestation standards
AICPA Code of Professional Conduct
Checking Out the U.S. Securities and Exchange Commission (SEC)
Getting to Know the Financial Accounting Standards Board (FASB)
Understanding generally accepted accounting principles (GAAP)
Looking online for FASB standards
Pick a standard: Domestic or international
Chapter 2: Preparing an Income Statement and Considering Profit
Understanding the Nature of Profit
Choosing the Income Statement Format
Deciding What to Disclose in the Income Statement
Considering expense disclosure
Presenting the right amount of expense information
Examining How Sales and Expenses Change Assets and Liabilities
Sizing up a business’s financial condition
Noting how accounting transactions affect the income statement and balance sheet
Considering the Diverse Financial Effects of Making a Profit
Introducing T-accounts
Combining activity into one journal entry
Explaining additional transactions related to profit
Reporting Extraordinary Gains and Losses
Segregating the income statement
Considering business disruptions
Questioning whether activity is truly unusual
Correcting Common Misconceptions about Profit
Clearing up profit misconceptions
Comparing to industry standards
Waving the red flag when you see revenue and credit sales increase
Chapter 3: Assessing the Balance Sheet’s Asset Section
Homing in on Historic Cost
Discovering What Makes an Asset Current
Cash
Short-term investments
Accounts receivable
Notes receivable
Inventory
Prepaid expenses
Keeping Track of Noncurrent (Long-Term) Assets
Meeting the tangibles: Property, plant, and equipment (PP&E)
Investigating intangible assets
Exploring the Asset Section of the Balance Sheet
Chapter 4: Digging for Debt in the Balance Sheet’s Liabilities Section
Seeing How Businesses Account for Liabilities
Keeping Current Liabilities under Control
Accounts payable
Payroll and taxes
Unearned revenue
Other short-term liabilities
Planning for Long-Term Obligations
Financing asset purchases with debt versus equity
Managing long-term debt
Anticipating contingent liabilities
Accounting for Bond Issuances
Mulling over bond basics
Examining sample bond transactions
Journaling bond transactions
Chapter 5: Explaining Ownership in the Equity Section of the Balance Sheet
Understanding How Owner Equity Varies among Business Entities
Sole proprietorship
Partnership
Corporation
Distinguishing between Two Types of Capital Stock
Preferred stock
Common stock
Recording stock transactions on the balance sheet
Defining Paid-In Capital
Recording Retained Earnings
Spotting Reductions to Stockholders’ Equity
Paying dividends
Buying back shares: Treasury stock
Exploring Stock Splits
Computing Earnings per Share
Simple capital structure
Complex capital structure
Chapter 6: Coupling the Income Statement and Balance Sheet
Rejoining the Income Statement and Balance Sheet
Seeing connections between accounts
Using transactions to explain the connections
Introducing Operating Ratios
Comparing expected with actual operating ratios
Generating balance sheet amounts by using ratios
Adding Fixed Assets, Depreciation, and Owners’ Equity
Dealing with fixed assets and depreciation
Tacking on owners’ equity
Completing the Balance Sheet with Debt
Going over the debt section of the balance sheet
Tying in the new equity section
Book V: Reporting on Your Financial Statements
Chapter 1: Presenting Financial Condition and Business Valuation
Clarifying the Values of Assets in Balance Sheets
Considering options for balance sheet valuation
Comparing two balance sheet valuations
Introducing Business Valuation
Grasping the practical applications of business valuations
Considering a CVA designation
Comparing Business Valuation Methods
Replacing assets: Replacement value
Using future earnings and cash flow
Chapter 2: Laying Out Cash Flows and Changes in Equity
Understanding the Difference between Cash and Profit
Seeing how noncash transactions affect profit
Distinguishing costs from expenses
Realizing the Purpose of the Statement of Cash Flows
Walking through the Cash Flow Sections
Figuring cash operating results
Showing cash investing transactions
Accounting for financing activities
Recognizing Methods for Preparing the Statement of Cash Flows
Using the direct method
Starting indirectly with net income
Interpreting the Statement of Cash Flows
Looking Quickly at the Statement of Changes in Stockholders Equity
Chapter 3: Analyzing Financial Statements
Judging Solvency and Liquidity
Understanding the risks of late payments
Recognizing current assets and liabilities
Brushing up on current and quick ratios
Understanding That Transactions Drive the Balance Sheet
Analyzing three types of balance sheet transactions
Reviewing changes in balance sheet accounts
Measuring Profitability
Understanding trend analysis
Focusing on return on investment
Homing in on return on equity
Exploring Activity Measures
Accounts receivable turnover
Inventory turnover
Comparing Horizontal and Vertical Analysis
Using horizontal analysis
Implementing vertical analysis
Using Common Size Financial Statements
Chapter 4: Reading Explanatory Notes and Disclosures
Realizing How Corporations Should Govern Themselves
Identifying Corporate Characteristics
Reviewing Common Explanatory Notes
Leveling the playing field among financial statements
Explaining significant accounting policies
Looking for important event disclosures
Putting the Onus on the Preparer
Chapter 5: Studying the Report to the Shareholders
Why Private and Public Companies Treat Annual Reports Differently
Fulfilling Three Purposes
Serving a marketing and PR function
Stating financial performance and goals
Meeting regulatory requirements
Reading the Annual Report to Shareholders
Meeting the chair of the board of directors
Highlighting key financial data
Touting company achievements
Looking into the future
Getting to know key management and board members
Walking through Form 10-K
Facing page: Identifying the affected company
Part I: Finding out more about the registrant
Part II: Revealing the company’s financial performance
Part III: Identifying management and corporate governance
Part IV: Exhibits, financial statement schedules, and signature
Book VI: Planning and Budgeting for Your Business
Chapter 1: Incorporating Your Business
Securing Capital: Starting with Owners
Contrasting two sources of equity
Leveraging equity capital with debt
Recognizing the Legal Roots of Business Entities
Incorporating a Business
Issuing stock shares
Offering different classes of stock shares
Determining market value of stock shares
Keeping alert for dilution of share value
Recognizing conflicts between stockholders and managers
Chapter 2: Choosing a Legal Structure for a Business
Differentiating between Partnerships and Limited Liability Companies
Partnerships
Limited liability company (LLC)
Limiting liability: Professional corporations and LLPs
Understanding how partnerships and LLCs distribute profits
Going It Alone: Sole Proprietorships
Describing a sole proprietorship
Understanding liability and financial reporting
Choosing the Right Legal Structure for Income Tax
C corporations
S corporations
Partnerships and LLCs
Summing up the legal structure issue
Chapter 3: Drawing Up a Business Plan to Secure Cash
Outlining the Basic Business Plan
The executive summary
The market assessment
The operational overview
The financial summary: Performance and required capital
Developing a Business Plan
Recognizing the evolution of business plans: BOTE, WAG, and SWAG
Getting the process going
Analyzing and streamlining information with SWOT and KISS
Incorporating Third-Party Information into Your Plan
Gathering the info
Riding the CART concept: Complete, accurate, reliable, and timely
Chapter 4: Budgeting for a Better Bottom Line
Brushing Up on Budgeting Basics
Meeting the master budget
Understanding key budgeting concepts
Planning strategically
Recognizing Factors That Impact Your Budgeting Process
Experience counts
Timing is everything
People get you headed in the right direction
Sales projections pay off
The Nuts and Bolts of Budgeting
Understanding the budgeting financials
Reviewing revenue and production budgets
Chapter 5: Mastering and Flexing Your Budgeting
Budgeting with Cash or Accrual Accounting
Cash basis accounting: Using your checkbook to budget
I accrue, you accrue, we all accrue with accrual accounting
Budgeting to Produce the Income Statement and Balance Sheet
The well-balanced balance sheet
The incredible income statement
Flexing Your Budget: When Plans Change
Controlling your business
Dealing with budget variances
Implementing a flexible budget
Chapter 6: Planning for Long-Term Obligations
Managing Long-Term Debt
The many faces of notes payable
Treasury bonds defined
The dark side of debt-free
Accounting for Bonds
Valuing bonds payable
Figuring out the present value of a bond
Issuing at face value
Book VII: Making Savvy Business Decisions
Chapter 1: Estimating Costs with Job Costing
Understanding How Job Costing Works
Cost objects: The sponges that absorb money
Charging customers for direct and indirect costs
Implementing job costing in manufacturing: An example
Taking a Closer Look at Indirect Costs by Using Normal Costing
Budgeting for indirect costs
Following a normal job costing system
Following the Flow of Costs through a Manufacturing System
Control starts with control accounts
Walking through a manufacturing cost example
Applying the methodology to other control accounts
Chapter 2: Performing Activity-Based Costing
Avoiding the Slippery Slope of Peanut Butter Costing
Recognizing a single indirectcost allocation
A fly in the peanut butter: Dealing with different levels of client activity
Undercosting and overcosting
Designing an Activity-Based Costing System
Refining your approach
Grouping costs by using a cost hierarchy
Testing your ABC design
Using Activity-Based Costing to Compute Total Cost, Profit, and Sale Price
Allocating indirect costs evenly by product
Analyzing and reallocating cost activities
Changing allocations to cost pools
Changing prices after ABC
Chapter 3: Examining Contribution Margin
Computing Contribution Margin
Figuring total contribution margin
Calculating contribution margin per unit
Working out contribution margin ratio
Preparing a Cost-Volume-Profit Analysis
Drafting a cost-volume-profit graph
Trying out the total contribution margin formula
Practicing the contribution margin per unit formula
Eyeing the contribution margin ratio formula
Generating a Break-Even Analysis
Plotting the break-even point
Using the formula approach
Shooting for Target Profit
Observing Margin of Safety
Using a graph to depict margin of safety
Calculating the margin of safety
Taking Advantage of Operating Leverage
Graphing operating leverage
Looking at the operating leverage formula
Chapter 4: Accounting for Change with Variance Analysis
Setting Up Standard Costs
Establishing direct materials standards
Determining direct labor standards
Calculating the overhead rate
Adding up standard cost per unit
Understanding Variances
Computing direct materials variances
Calculating direct labor variances
Computing overhead variances
Looking past the favorable/unfavorable label
Teasing Out Variances
Interpreting variances in action
Focusing on the big numbers
Tracing little numbers back to big problems
Chapter 5: Making Smart Pricing Decisions
Differentiating Products
Taking All Costs into Account with Absorption Costing
Pricing at Cost-Plus
Computing fixed markups
Setting a cost-plus percentage
Considering problems with cost-plus pricing
Extreme Accounting: Trying Variable-Cost Pricing
Working out variable-cost pricing
Spotting the hazards of variable-cost pricing
Bull’s-Eye: Hitting Your Target Cost
Calculating your target cost
Knowing when to use target costing
Book VIII: Handling Cash and Making Purchase Decisions
Chapter 1: Identifying Costs and Matching Costs with Revenue
Defining Costs and Expenses in the Business World
Satisfying the Matching Principle
Identifying Product and Period Costs
Discovering Which Costs Are Depreciated
Handling real property depreciation
Allocating costs between land and buildings
Expensing repairs and maintenance
Preparing a Depreciation Schedule
Deciding When to Recognize Revenue
Going over the revenue recognition principle
Recognizing revenue and cash flow
Chapter 2: Exploring Inventory Cost Flow Assumptions
Discovering How Inventory Valuation Affects the Financial Statements
Comparing merchandising and manufacturing companies
Connecting inventory to revenue
Logging Inventory for Service Companies
Classifying Inventory Types
Accounting for merchandising company inventory
Accounting for manufacturing company inventory
Getting to Know Inventory Valuation Methods
Understanding guidelines used for all methods
Specific identification
Weighted average
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Comparing inventory cost-flow assumptions
Preparing an Inventory Worksheet
Chapter 3: Answering the Question: Should I Buy That?
Identifying Incremental and Opportunity Costs
Keeping It Simple: The Cash Payback Method
Using the cash payback method with equal annual net cash flows
Applying the cash payback method when annual net cash flows change each year
It’s All in the Timing: The Net Present Value (NPV) Method
Calculating time value of money with one payment for one year
Finding time value of money with one payment held for two periods or more
Calculating NPV with a series of future cash flows
Measuring Internal Rate of Return (IRR)
Considering Qualitative Factors
Chapter 4: Knowing When to Use Debt to Finance Your Business
Understanding the Basics of Debt Capital
Debt maturity
Debt security
Other debt attributes
Determining When Debt Is Most Appropriate
When you can offer security or collateral
When business is stable
When you have financial strength
Using Loans, Leases, and Other Sources of Debt
Borrowing from banks
Making friends with asset-based lenders
Leasing as a source of capital
Tapping government programs and the SBA
Using other sources of debt-based capital
Getting Creative with Capital
Generating internal cash flow
Leveraging unsecured creditors
Going after government aid, gifts, and grants
Partnering up
Chapter 5: Interpreting Your Financial Results as a Manager
Gauging the Relative Importance of Information
Reviewing Profit and Earnings
Judging profit performance
Testing earnings per share (EPS) against change in bottom line
Judging the Company’s Cash Position
Tackling Extraordinary Gains and Losses
Recognizing the Risks of Restatement
Remembering the Limits of Financial Reports
Book IX: Auditing and Detecting Financial Fraud
Chapter 1: Mulling Over Sarbanes-Oxley Regulation
Pre-SOX Securities Laws
The Securities Act of 1933: Arming investors with information
The Securities Exchange Act of 1934: Establishing the SEC
Other securities laws
The Scope of SOX: Securities and Issuers
Determining what a security is
Defining an issuer
Figuring out how stock exchanges work
Unveiling the SOX surprise
The Post-SOX Paper Trail
Form 10-K
Form 10-Q
Form 8-K
Chapter 2: Preventing Cash Losses from Embezzlement and Fraud
Setting the Stage for Protection
Preventing loss with internal controls
Recognizing the dual purpose of internal accounting controls
Struggling with fraud committed by the business
Putting Internal Controls to Work
Going down the internal controls checklist
Considering some important details of internal control
Recognizing Limitations of Internal Controls
Keeping internal controls under control
Finding fraud that slips through the net
Chapter 3: Assessing Audit Risk
Using the Audit Risk Model
Listing the financial statements
Introducing audit risk
Inherent risk: Recognizing the nature of a client’s business
Control risk: Assessing a client’s ability to detect and correct problems
Detection risk: Figuring out your chances of overlooking inaccuracies
Following Risk Assessment Procedures
Recognizing the nature of the company
Examining the quality of company management
Asking employees for information
Analyzing processes and paperwork
Observing the client at work
Figuring Out What’s Material and What Isn’t
Distinguishing errors from fraud
Explaining the triangle of fraud
Evaluating Your Audit Risk Results
Tailoring the audit to a low-risk situation
Responding to a high-risk assessment
Documenting audit risk results
Chapter 4: Collecting and Documenting Audit Evidence
Management Assertions: Assessing the Information a Client Gives You
Defining financial statement presentation and disclosure
Monitoring classes of transactions
Analyzing account balances
Eyeing the Four Concepts of Audit Evidence
The nature of the audit evidence
The competence of the audit evidence
The sufficiency of the audit evidence
The evaluation of the audit evidence
Applying Professional Judgment
Exercising skepticism
Brainstorming with audit team members
Using Your Audit Program to Request the Right Evidence
Documenting the Audit Evidence
Types of documentation
Ownership and retention of the audit documentation
Chapter 5: Auditing a Client’s Internal Controls
Defining Internal Controls
Identifying the Five Components of Internal Controls
Determining When You Need to Audit Internal Controls
Defining substantive strategy and control testing strategy
Figuring out which strategy is best
Testing a Client’s Reliability: Assessing Internal Control Procedures
Considering external factors
Evaluating how management assesses its controls
Using questionnaires to evaluate internal controls
Designing your tests of controls
Using sampling to test internal controls
Knowing when internal controls are sound or flawed
Documenting your conclusion
Limiting Audit Procedures When Controls Are Strong
Tailoring Tests to Internal Control Weaknesses
Timing a Client’s Control Procedures
Setting a timeline for the client
Conducting interim versus year-end audits
Chapter 6: Getting to Know the Most Common Fraud Schemes
Frauds Committed by Businesses
Preying on vulnerable populations
Picking investors’ pockets
Doing business with bribes
Laundering money
Perpetrating construction fraud
Dealing in subprime and predatory lending
Taking advantage of employees
Frauds Committed against Businesses
Employee theft
Vendor and customer fraud
Insurance fraud
Real estate and mortgage fraud
Bilking the Government
Tax fraud
Contract fraud
Medicare and Medicaid fraud
Social Security fraud
Introducing the Ponzi Scheme
Chapter 7: Cooked Books: Finding Financial Statement Fraud
Exploring the Financial Statement Fraud Triangle
Understanding the incentive behind financial statement fraud
Seeing the fraud opportunity
Coming up with a rationalization for the fraud
Spotting the Common Methods of Fraud
Hidden liabilities
Cookie jar reserves
Off–balance sheet transactions
Notes no one can comprehend
Uncovering Financial Statement Fraud
Comparative techniques
Ratio analysis
Beneish model
Data mining
About the Authors
Cheat Sheet
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