Accounting For Dummies 4th Edition_1

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Accounting FOR DUMmIES ‰ 4TH EDITION
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 www.wiley.com 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:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REP- RESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CRE- ATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CON- TAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FUR- THER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFOR- MATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley also publishes its books in a variety of electronic formats. 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. 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. 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 www.dummies.com/register/. 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. Jester, Laura Pence, Pam Mourouzis) Christine Williams Acquisitions Editor: Stacy Kennedy Proofreaders: Laura Albert, John Greenough, Nancy L. Reinhardt Technical Editor: Michael Newman, PhD Indexer: Infodex Indexing Services, Inc. Editorial Manager: Jennifer Ehrlich Editorial Supervisor: Carmen Krikorian Editorial Assistants: Erin Calligan Mooney, Joe Niesen, David Lutton Cartoons: Rich Tennant (www.the5thwave.com) 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 .................................................................1 Part I: Opening the Books on Accounting......................11 Chapter 1: Accounting: The Language of Business, Investing, Finance, and Taxes....13 Chapter 2: Financial Statements and Accounting Standards......................................31 Chapter 3: Bookkeeping and Accounting Systems.......................................................53 Part II: Figuring Out Financial Statements ...................75 Chapter 4: Reporting Revenue, Expenses, and the Bottom Line................................77 Chapter 5: Reporting Assets, Liabilities, and Owners’ Equity....................................97 Chapter 6: Reporting Cash Flows .................................................................................119 Chapter 7: Choosing Accounting Methods: Different Strokes for Different Folks....137 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 Control...........................................205 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 Report...........................271 Chapter 14: How Business Managers Use a Financial Report ..................................293 Chapter 15: Audits and Accounting Fraud ..................................................................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 Introduction..................................................................1 About This Book...............................................................................................1 Conventions Used in This Book .....................................................................2 What You’re Not To Read ................................................................................4 Foolish Assumptions .......................................................................................5 How This Book Is Organized...........................................................................6 Part I: Opening the Books on Accounting ...........................................6 Part II: Figuring Out Financial Statements...........................................7 Part III: Accounting in Managing a Business .......................................7 Part IV: Preparing and Using Financial Reports .................................8 Part V: The Part of Tens.........................................................................8 Glossary...................................................................................................8 Icons Used in This Book..................................................................................9 Where to Go from Here....................................................................................9 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 Accountants......................................................14 Affecting both insiders and outsiders ...............................................14 Overcoming the stereotypes of accountants....................................15 Relating accounting to your personal financial life .........................16 Looking for Accounting in All the Right Places ..........................................17 Taking a Peek into the Back Office...............................................................18 Focusing on Transactions .............................................................................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 flows.........................................25 Respecting the importance of this trio..............................................26 Considering Accounting Careers .................................................................27 Certified public accountant (CPA) .....................................................27 The controller: The chief accountant in an organization................28 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 Statements.................32 Setting up the business example........................................................32 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 U.S. standards .................................................................45 Getting to know the U.S. standard setters ........................................47 Going worldwide...................................................................................48 Noting a divide between public and private companies.................49 Recognizing how income tax methods influence accounting methods.........................................................................50 Following the rules and bending the rules........................................51 Chapter 3: Bookkeeping and Accounting Systems . . . . . . . . . . . . . . . .53 Bookkeeping and Beyond..............................................................................54 Pedaling Through the Bookkeeping Cycle ..................................................54 Managing the Bookkeeping and Accounting System.................................59 Categorize your financial information: The chart of accounts.......59 Standardize source document forms and procedures ....................61 Hire competent, trained personnel....................................................62 Enforce strong — I mean strong! — internal controls .....................63 Complete the process with end-of-period procedures....................65 Leave good audit trails ........................................................................66 Look out for unusual events and developments ..............................66 Design truly useful reports for managers .........................................67 Double-Entry Accounting for Single-Entry Folks........................................68 Juggling the Books to Conceal Embezzlement and Fraud ........................70 Using Accounting Software ...........................................................................72 Part II: Figuring Out Financial Statements ....................75 Chapter 4: Reporting Revenue, Expenses, and the Bottom Line . . . . .77 Presenting a Typical Income Statement ......................................................78 Taking care of some housekeeping details .......................................79 Your job: Asking questions!.................................................................81 Finding Profit ..................................................................................................84
xiii Table of Contents Getting Particular about Assets and Liabilities..........................................86 Making sales on credit → Accounts receivable asset......................86 Selling products → Inventory asset ...................................................87 Prepaying operating costs → Prepaid expense asset......................87 Fixed assets → Depreciation expense ...............................................88 Unpaid expenses → Accounts payable, accrued expenses payable, and income tax payable ..................................................89 Summing Up the Financial Effects of Profit.................................................91 Reporting Extraordinary Gains and Losses................................................92 Closing Comments .........................................................................................95 Chapter 5: Reporting Assets, Liabilities, and Owners’ Equity . . . . . . .97 Understanding That Transactions Drive the Balance Sheet.....................98 Presenting a Balance Sheet.........................................................................100 Kicking balance sheets out into the real world ..............................102 Internal balance sheets............................................................103 External balance sheets ...........................................................103 Judging solvency ................................................................................103 Current (short-term) assets ....................................................104 Current (short-term) liabilities ...............................................104 Current ratio..............................................................................105 Preparing multiyear statements .......................................................105 Coupling the Income Statement and Balance Sheet ................................106 Sizing up assets and liabilities ..........................................................108 Sales revenue and accounts receivable...........................................109 Cost of goods sold expense and inventory.....................................109 Fixed assets and depreciation expense...........................................110 SG&A expenses and their three balance sheet accounts..............111 Intangible assets and amortization expense ..................................112 Debt and interest expense ................................................................113 Income tax expense and income tax payable .................................114 Net income and cash dividends (if any)..........................................114 Financing a Business....................................................................................115 Costs and Other Balance Sheet Values......................................................117 Chapter 6: Reporting Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119 Seeing the Big Picture of Cash Flows.........................................................119 Meeting the Statement of Cash Flows .......................................................122 Dissecting the Difference Between Cash Flow and Net Income .............125 Accounts receivable change .............................................................126 Inventory change................................................................................127 Prepaid expenses change..................................................................127 The depreciation factor .....................................................................128 Changes in operating liabilities ........................................................129 Putting the cash flow pieces together .............................................130
xiv Accounting For Dummies, 4th Edition Sailing Through the Rest of the Statement of Cash Flows ......................131 Investing activities .............................................................................131 Financing activities ............................................................................132 Trying to Pin Down “Free Cash Flow”........................................................134 Being an Active Reader ...............................................................................135 Chapter 7: Choosing Accounting Methods: Different Strokes for Different Folks . . . . . . . . . . . . . . . . . . . . . . . . . . .137 Reading Statements with a Touch of Skepticism .....................................138 Recognizing a business’s bias...........................................................138 Contrasting aggressive and conservative numbers.......................139 Figuring Out Why Financial Statements Differ .........................................141 Cash balance .......................................................................................142 Accounts receivable balance ............................................................143 Inventory and cost of goods sold expense .....................................144 Cost of fixed assets, accumulated depreciation, and depreciation expense .............................................................145 Accrued expenses payable liability balance...................................146 Wrapping things up ............................................................................147 Calculating Cost of Goods Sold and Cost of Inventory ...........................148 The FIFO (first-in, first-out) method.................................................149 The LIFO (last-in, first-out) method .................................................150 The average cost method..................................................................152 Recording Inventory Losses under the Lower of Cost or Market (LCM) Rule ..............................................................................153 Appreciating Depreciation Methods..........................................................154 Scanning the Expense Horizon ...................................................................156 Part III: Accounting in Managing a Business...............159 Chapter 8: Deciding the Legal Structure for a Business . . . . . . . . . .161 Studying the Sources of Business Capital.................................................162 Deciding on debt ................................................................................162 Tapping two sources of owners’ equity...........................................163 Recognizing the Legal Roots of Business Entities ...................................165 Incorporating a Business ............................................................................165 Issuing stock shares ...........................................................................166 Offering different classes of stock shares .......................................167 Determining the market value of stock shares...............................169 Keeping alert for dilution of share value.........................................170 Recognizing conflicts between stockholders and managers........172 Considering Partnerships and Limited Liability Companies..................173 Going It Alone: Sole Proprietorships .........................................................176
xv Table of Contents Choosing the Right Legal Structure for Income Tax ................................178 C corporations ....................................................................................179 S corporations ....................................................................................180 Partnerships and LLCs ......................................................................181 Chapter 9: Analyzing and Managing Profit . . . . . . . . . . . . . . . . . . . . . .183 Helping Managers Do Their Jobs ...............................................................184 Following the organizational structure............................................184 Centering on profit centers ...............................................................185 Presenting a P&L Template.........................................................................186 Reporting operating expenses on the object of expenditure basis .......................................................................187 Reporting operating expenses on their cost behavior basis........187 Separating variable and fixed expenses ..........................................189 Variable expenses .....................................................................189 Fixed expenses..........................................................................190 Stopping at operating earnings ........................................................191 Focusing on margin — the catalyst of profit...................................192 Answering Two Critical Profit Questions ..................................................192 How did you make profit? .................................................................192 How did you increase profit? ............................................................194 Looking More Closely at the Profit Center P&L Report ..........................195 Sales volume .......................................................................................195 Sales revenue ......................................................................................195 Cost of goods sold..............................................................................196 Variable operating expenses.............................................................196 Fixed operating expenses..................................................................197 Using the P&L Template for Decision-Making Analysis...........................198 Tucking Away Some Valuable Lessons ......................................................199 Recognize the leverage effect caused by fixed operating expenses ........................................................................199 Don’t underestimate the impact of small changes in sales price ....................................................................200 Know your options for improving profit .........................................201 Closing with a Boozy Example....................................................................202 Chapter 10: Financial Planning, Budgeting, and Control . . . . . . . . . .205 Exploring the Reasons for Budgeting ........................................................206 Modeling reasons for budgeting.......................................................207 Planning reasons for budgeting........................................................208 Management control reasons for budgeting...................................209 Additional benefits of budgeting, and a note of caution ...............210
xvi Accounting For Dummies, 4th Edition Realizing That Not Everyone Budgets.......................................................212 Avoiding budgeting ............................................................................212 Relying on internal accounting reports...........................................213 Making reports useful for management control ...................213 Making reports useful for decision-making ...........................213 Making reports clear and straightforward ............................214 Watching Budgeting in Action ....................................................................214 Developing your profit strategy and budgeted profit report........216 Budgeting cash flow for the coming year........................................218 Considering Capital Expenditures and Other Cash Needs .....................220 Chapter 11: Cost Concepts and Conundrums . . . . . . . . . . . . . . . . . . . .223 Looking down the Road to the Destination of Costs ...............................224 Are Costs Really That Important? ..............................................................225 Becoming More Familiar with Costs ..........................................................226 Direct versus indirect costs ..............................................................228 Fixed versus variable costs...............................................................229 Relevant versus irrelevant costs ......................................................229 Actual, budgeted, and standard costs .............................................230 Product versus period costs.............................................................231 Assembling the Product Cost of Manufacturers ......................................232 Minding manufacturing costs ...........................................................232 Classifying costs properly .................................................................234 Calculating product cost ...................................................................236 Examining fixed manufacturing costs and production capacity......237 The burden rate ........................................................................237 Idle capacity ..............................................................................238 The effects of increasing inventory........................................238 Puffing Profit by Excessive Production .....................................................240 Shifting fixed manufacturing costs to the future............................240 Cranking up production output........................................................241 Being careful when production output is out of kilter with sales volume.............................................................243 Part IV: Preparing and Using Financial Reports...........245 Chapter 12: Getting a Financial Report Ready for Release . . . . . . . .247 Recognizing Management’s Role................................................................248 Keeping in Mind the Purpose of Financial Reporting..............................249 Staying on Top of Accounting and Financial Reporting Standards .......250 Making Sure Disclosure Is Adequate .........................................................251 Footnotes: Nettlesome but needed ..................................................252 Other disclosures in financial reports .............................................254
xvii Table of Contents Putting a Spin on the Numbers (But Not Cooking the Books) ...............256 Window dressing for fluffing up the cash balance .........................257 Sanding the rough edges off profit ...................................................258 The pressure on public companies ........................................259 Compensatory effects ..............................................................259 Two profit histories ..................................................................260 Management discretion in the timing of revenue and expenses......................................................261 Going Public or Keeping Things Private ...................................................263 Reports from publicly owned companies .......................................263 Reports from private businesses .....................................................264 Dealing with Information Overload............................................................265 Browsing based on your interests....................................................265 Recognizing condensed versions .....................................................266 Using other sources of business information.................................267 Statement of Changes in Owners’ Equity ..................................................267 Chapter 13: How Lenders and Investors Read a Financial Report . . . .271 Knowing the Rules of the Game .................................................................272 Becoming a More Savvy Investor...............................................................273 Comparing Private and Public Business Financial Reports....................274 Analyzing Financial Statements with Ratios .............................................276 Gross margin ratio..............................................................................278 Profit ratio ...........................................................................................280 Earnings per share (EPS), basic and diluted...................................280 Price/earnings (P/E) ratio .................................................................282 Dividend yield .....................................................................................283 Book value and book value per share..............................................284 Return on equity (ROE) ratio............................................................286 Current ratio .......................................................................................287 Acid-test ratio .....................................................................................287 Return on assets (ROA) ratio and financial leverage gain ............288 Frolicking Through the Footnotes .............................................................289 Checking for Ominous Skies in the Auditor’s Report ..............................291 Chapter 14: How Business Managers Use a Financial Report . . . . .293 Building on the Foundation of the External Financial Statements ........294 Seeking out problems and opportunities ........................................294 Avoiding information overload.........................................................294 Gathering Financial Condition Information ..............................................295 Cash......................................................................................................296 Accounts receivable...........................................................................297 Inventory .............................................................................................298 Prepaid expenses ...............................................................................298 Fixed assets and accumulated depreciation...................................299
xviii Accounting For Dummies, 4th Edition Accounts payable ...............................................................................300 Accrued expenses payable ...............................................................300 Income tax payable ............................................................................301 Interest-bearing debt..........................................................................302 Owners’ equity....................................................................................303 Culling Profit Information............................................................................303 Margin: The catalyst of profit ...........................................................304 Sales revenue and expenses .............................................................305 Digging into Cash Flow Information...........................................................306 Distinguishing investing and financing cash flows from operating cash flows .............................................................307 Managing operating cash flows ........................................................308 Chapter 15: Audits and Accounting Fraud . . . . . . . . . . . . . . . . . . . . . . .311 Exploring the Need for Audits ....................................................................312 What’s in an Auditor’s Report ....................................................................313 The clean (unqualified) opinion .......................................................313 Other kinds of audit opinions ...........................................................314 Who’s Who in the World of Audits.............................................................315 Standing Firm When Companies Massage the Numbers, or Not ...........316 Discovering Fraud, or Not...........................................................................318 Who Audits the Auditors?...........................................................................319 Part V: The Part of Tens .............................................321 Chapter 16: Ten Accounting Tips for Managers . . . . . . . . . . . . . . . . . .323 Reach Break-Even, and Then Rake in Profit..............................................323 Set Sales Prices Right...................................................................................324 Distinguish Profit from Cash Flow .............................................................325 Call the Shots on Accounting Policies.......................................................326 Budget Wisely ...............................................................................................327 Get the Accounting Information You Need ...............................................328 Tap into Your CPA’s Expertise.....................................................................329 Critically Review Your Fraud Controls ......................................................329 Lend a Hand in Preparing Your Financial Reports...................................330 Sound Like a Pro in Talking about Your Financial Statements ...............331 Chapter 17: Ten Tips for Reading a Financial Report . . . . . . . . . . . . .333 Get in the Right Frame of Mind ..................................................................333 Decide What to Read ...................................................................................335 Improve Your Accounting Savvy ................................................................336 Judge Profit Performance............................................................................336
xix Table of Contents Track Profit into Earnings per Share .........................................................337 Confront Extraordinary Gains and Losses................................................338 Compare Cash Flow and Profit ...................................................................339 Look for Signs of Financial Distress ...........................................................340 Recognize the Risks of Restatement and Fraud .......................................340 Remember the Limits of Financial Reports ..............................................341 Glossary: Slashing Through the Accounting Jargon Jungle............................................................343 Index........................................................................357