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rate of return equals net income divided by the amount of money
invested. It can be applied to a particular product or piece of
equipment, or to a business as a whole.
SALVAGE VALUE. The amount management estimates a piece of
equipment will be worth at the end of its useful life, either as a
trade-in or if it were sold for scrap.
SELLING EXPENSES. What was spent to run the sales part of a
company, such as sales salaries, travel, meals, and lodging for sales-
people, and advertising.
SPECIFIC INVOICE PRICES. An inventory valuation method in
which a company values the items in its ending inventory based
on the specific invoices on which they were bought.
STOCK. Certificates that signify ownership in a corporation.
A share of stock represents a claim on a portion of the company™s
assets.
STOCKHOLDERS™ (OR OWNERS™) EQUITY. The value of the
owners™ interests in a company.
STRAIGHT-LINE DEPRECIATION. A depreciation method that
depreciates an asset the same amount for each year of its esti-
mated life.
SUM-OF-THE-YEARS™ DIGITS. An accelerated depreciation
method that makes the sum of the digits in an asset™s expected
life the denominator for a series of yearly depreciation fractions.
The numerators of these fractions are the asset™s years of life in
reverse order. An increasingly smaller depreciation fraction is
applied to the asset™s (cost“salvage) value each year.
UNITS OF PRODUCTION. A depreciation method that relates a
machine™s depreciation to the number of units it makes each
accounting period. The method requires that someone record
the machine™s output each year.
VARIABLE EXPENSES. Those that vary with the amount of goods
92 THE AGILE MANAGER™S GUIDE TO UNDERSTANDING FINANCIAL STATEMENTS


you produce or sell. These may include utility bills, labor, etc.
VERTICAL ANALYSIS. A financial analysis technique that relates
key amounts on the income statement and balance sheet to a
100 percent or base figure for the present and previous year. It
shows the percentage change from last year to this year, making
it easier to spot problems that require analysis.
WEIGHTED AVERAGE. An inventory valuation method that cal-
culates a weighted average cost per unit for all the goods avail-
able for sale. Multiplying that figure by the total units in ending
inventory gives you the inventory™s value.
Index

Accounts receivable, 31, 58“60 balance sheet, 63“64; vertical
Accrual-based accounting, 39“40 analysis of income statement, 62
Acid-test ratio, 55“56
Annual Statement Studies, 47 Balance sheet, 28“35; distinguish-
Assets, 29“31; current, 29“32; ing features, 29; why it balances,
defined, 28; figuring cost of, 79; 34“35
property and equipment, 32; Basic accounting equation, the, 28
salvage value of, 80 Book value of common stock, 57
Avaricious Industries, 19“20; bal-
ance sheet of, 30; balance sheet Cash-based accounting, 40
of dissected, 29“34; book value Cash flow: importance of, 38“40
of, 34; calculating inventory Cash flows: from financing, 43“44;
value under weighted average, from investing, 42“43; from
74; calculating inventory value operations, 41“42
under FIFO, 71; calculating Cash-flow statement, 38“44; de-
inventory value under LIFO, 72; fined, 38; relationship to balance
calculating value of inventory, sheet, 43“44; uses of, 40
69; cash-flow statement of, 39; Collection period, average, 59“60
dissecting the cash-flow state- Cost: of an asset, 79
ment of, 41“44; income state- Cost of goods sold, 19, 21“23
ment dissected, 21“24; income Creditors: and financial statements,
statement of, 22; ratio analysis 11“12
of, 48“63; vertical analysis of Current assets: defined, 29“31
93
94 THE AGILE MANAGER™S GUIDE TO UNDERSTANDING FINANCIAL STATEMENTS


Current liabilities, 32“33 inventory on, 68“76; what™s in
Current ratio, 53“55 them for you, 13“15
Financing activities, 43“44
Days sales in receivables, 58“60 Forecasting: using the cash-flow
Debt-to-equity ratio, 56“57 statement, 40
Declining balance method of de-
preciation, 82“83 General and administrative ex-
Defending proposals: with financial penses: defined, 23
statements, 14 Generally Accepted Accounting
Depreciation, 78“84; and Principles, 24, 41
MACRS, 83“84; declining Government: and financial state-
balance method of, 82“83; de- ments, 13
fined, 32; philosophy of, 78; Gross profit, 19, 23
physical, 78“79; straight line,
80“81; sum-of-the-years™ digits Income statement, 18“25; defined,
method of, 83; technological, 18; what it shows, 18“19
79; units of production method Intel, 50
of, 81“82 Inventory, 31“32; defined, 21;
Doubtful accounts, 31 just in time, 53; turnover, 51“
Dun & Bradstreet, 47 53; turnover too high, 53; turn-
over too low, 52; valuing, 68“
Earnings per share: defined, 24 76
Equity. See Stockholders™ equity Inventory valuation: and consis-
tency, 75; and impact on net
FIFO, 68“70; calculating Avari- income, 75“76; and taxes, 75“
cious Industries™ inventory with, 76; comparing methods, 75“76;
71 FIFO, 68“70; LIFO, 70“73;
Financial analysis, 46“65; using specific invoice method, 68;
both the income statement and under different methods, 69;
balance sheet, 57“60; using the weighted average method, 73“75
balance sheet, 53“57; using the Investing activities, 42“43
income statement, 48“53; verti-
cal analysis, 60“64 Jargon, 20“21; in financial state-
Financial statements: analysis of, ments, 14
46“65; and depreciation, 78“84; Just-in-time inventory management,
balance sheet, 28“35; cash-flow 53
statement, 38“44; comparing
and evaluating, 14“15; fre- Land: depreciation and, 32
quency of, 18; income state- Liabilities, 32; current, 32“33;
ment, 18“25; notes to, 24“25; defined, 28
purpose of, 10“15; valuing LIFO, 70“73; calculating Avari-
95
Index


cious Industries™ inventory value parable data, 47“48; interpret-
with, 72 ing, 50“51
Retained earnings: defined, 34
MACRS, 83“84 Return on stockholders™ equity,
Managers: and financial statements, 57“58
10 Return on total assets, 58
Modified Accelerated Cost Recov- Robert Morris Associates, 47
ery System, 83“84
Sales: components of, 20
Net income, 19; defined, 24 Salvage value of an asset, 80
Net sales, 21 Specific invoice prices (for valuing
Net worth: Defined, 28“29 inventory), 68
Notes to financial statements, Stock, shares of, 33“34
24“25 Stockholders: and financial state-
Notes receivable, 31 ments, 10“11
Stockholders™ equity, 28“29,
Operating expenses, 19; defined, 33“34
23 Straight-line method of deprecia-
Owner™s equity. See Stockholder™s tion, 80“81
equity Sum-of-the-years™ digits method of
depreciation, 83
Par value: defined, 33“34
Profit-and-loss statement. See In- Trump, Donald, 11“12
come statement
Promissory notes, 31 Unions: and financial statements,
Property and equipment, 32 12“13
Units of production method of
Quarterly statements: importance depreciation, 81“82
of, 18
Vertical analysis, 60“64; of the
Ratio analysis, 46“60; using both balance sheet, 62“64; of the
the income statement and bal- income statement, 61“62; value
ance sheet, 57“60; using the of, 60“61
balance sheet, 53“57; using the
income statement, 48“53 Weighted average: calculating Avari-
Ratio of net income to net sales, cious Industries™ inventory value
48“50 with, 74
Ratio of net sales to net income, 51 Weighted average method to value
Ratios: figuring, 50; finding com- inventory, 73“75
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