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TE
AM
FL
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The
Fast Forward
MBA in Finance
SECOND EDITION
THE FAST FORWARD MBA SERIES
The Fast Forward MBA Series provides time-pressed business profes-
sionals and students with concise, one-stop information to help them
solve business problems and make smart, informed business decisions.
All of the volumes, written by industry leaders, contain “tough ideas
made easy.” The published books in this series are:
The Fast Forward MBA Pocket Reference, Second Edition
(0-471-22282-8)
by Paul A. Argenti
The Fast Forward MBA in Selling
(0-471-34854-6)
by Joy J.D. Baldridge
The Fast Forward MBA in Financial Planning
(0-471-23829-5)
by Ed McCarthy
The Fast Forward MBA in Negotiating and Dealmaking
(0-471-25698-6)
by Roy J. Lewicki and Alexander Hiam
The Fast Forward MBA in Project Management
(0-471-32546-5)
by Eric Verzuh
The Fast Forward MBA in Business Planning for Growth
(0-471-34548-2)
by Philip Walcoff
The Fast Forward MBA in Business Communication
(0-471-32731-X)
by Lauren Vicker and Ron Hein
The Fast Forward MBA in Investing
(0-471-24661-1)
by John Waggoner
The Fast Forward MBA in Hiring
(0-471-24212-8)
by Max Messmer
The Fast Forward MBA in Technology Management
(0-471-23980-1)
by Daniel J. Petrozzo
The Fast Forward MBA in Marketing
(0-471-16616-2)
by Dallas Murphy
The Fast Forward MBA in Business
(0-471-14660-9)
by Virginia O™Brien
The
Fast Forward
MBA in Finance
SECOND EDITION




JOHN A. TRACY




John Wiley & Sons, Inc.
Copyright © 1996, 2002 by John A. Tracy. All rights reserved.

Published by John Wiley & Sons, Inc., New York.
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, photo-
copying, recording, scanning or otherwise, except as permitted under Sec-
tions 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 Rose-
wood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744.
Requests to the Publisher for permission should be addressed to the Permis-
sions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York,
NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail:
PERMREQ@WILEY.COM.

This publication is designed to provide accurate and authoritative informa-
tion in regard to the subject matter covered. It is sold with the understand-
ing that the publisher is not engaged in rendering professional services. If
professional advice or other expert assistance is required, the services of a
competent professional person should be sought.

Wiley also publishes its books in a variety of electronic formats. Some con-
tent that appears in print may not be available in electronic books.

ISBN: 0-471-20285-1

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1
for
Richard and Robert, my dog track buddies,
who have helped me more than they know.
CONTENTS




xiii
PREFACE


PART 1
FINANCIAL REPORTING OUTSIDE
AND INSIDE A BUSINESS

3
CHAPTER 1”GETTING DOWN TO BUSINESS
Accounting Inside and Out 4
Internal Functions of Accounting 6
External Functions of Accounting 6
A Word about Accounting Methods 8
End Point 9

CHAPTER 2”INTRODUCING FINANCIAL
11
STATEMENTS
Three Financial Imperatives, Three Financial
Statements 11
Accrual-Basis Accounting 13
The Income Statement 16
The Balance Sheet 18
The Statement of Cash Flows 21
End Point 24


vii
CONTENTS


CHAPTER 3”REPORTING PROFIT
27
TO MANAGERS
Using the External Income Statement
for Decision-Making Analysis 27
Management Profit Report 31
Contribution Margin Analysis 35
End Point 36

CHAPTER 4”INTERPRETING FINANCIAL
39
STATEMENTS
A Few Observations and Cautions 39
Premises and Principles of Financial Statements 41
Limits of Discussion 46
Profit Ratios 47
Book Value Per Share 49
Earnings Per Share 51
Market Value Ratios 53
Debt-Paying-Ability Ratios 55
Asset Turnover Ratios 58
End Point 59



PART 2
ASSETS AND SOURCES OF CAPITAL

63
CHAPTER 5”BUILDING A BALANCE SHEET
Sizing Up Total Assets 63
Assets and Sources of Capital for Assets 66
Connecting Sales Revenue and Expenses
with Operating Assets and Liabilities 69
Balance Sheet Tethered with Income Statement 75
End Point 76

79
CHAPTER 6”BUSINESS CAPITAL SOURCES
Business Example for This Chapter 80
Capital Structure of Business 81
Return on Investment 86
Pivotal Role of Income Tax 89
Return on Equity (ROE) 91

viii
CONTENTS


Financial Leverage 92
End Point 95

97
CHAPTER 7”CAPITAL NEEDS OF GROWTH
Profit Growth Plan 98
Planning Assets and Capital Growth 99
End Point 105

PART 3
PROFIT AND CASH FLOW ANALYSIS

CHAPTER 8”BREAKING EVEN
109
AND MAKING PROFIT
Adding Information in the Management Profit Report 109
Fixed Operating Expenses 112
Depreciation: A Special Kind of Fixed Cost 113
Interest Expense 116
Pathways to Profit 116
End Point 122

125
CHAPTER 9”SALES VOLUME CHANGES
Three Ways of Making a $1 Million Profit 126
Selling More Units 129
Sales Volume Slippage 133
Fixed Costs and Sales Volume Changes 134
End Point 136

CHAPTER 10”SALES PRICE
139
AND COST CHANGES
Sales Price Changes 139
When Sales Prices Head South 144
Changes in Product Cost and Operating Expenses 146
End Point 148

149
CHAPTER 11”PRICE/VOLUME TRADE-OFFS
Shaving Sales Prices to Boost Sales Volume 150
Volume Needed to Offset Sales Price Cut 154
Thinking in Reverse: Giving Up Sales Volume
for Higher Sales Prices 157
End Point 159

ix
CONTENTS


CHAPTER 12”COST/VOLUME TRADE-OFFS
161
AND SURVIVAL ANALYSIS
Product Cost Increases: Which Kind? 161
Variable Cost Increases and Sales Volume 163
Better Product and Service Permitting Higher
Sales Price 165
Lower Costs: The Good and Bad 166
Subtle and Not-So-Subtle Changes in Fixed Costs 169
Survival Analysis 170
End Point 177

CHAPTER 13”PROFIT GUSHES: CASH FLOW
179
TRICKLES?
Lessons from Chapter 2 179
Cash Flow from Boosting Sales Volumes 180
Cash Flows across Different Product Lines 185
Y
Cash Flow from Bumping Up Sales Prices 185
FL
End Point 188

PART 4
AM


CAPITAL INVESTMENT ANALYSIS

CHAPTER 14”DETERMINING INVESTMENT
TE



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