This post is part of the Finance for Non-Financial Managers book series of posts, which is the first subset of posts in the larger PMBA series of posts. You can buy Finance for Non-Financial Managers from the author Gene Siciliano for $14.95.
Chapter 2 starts off with an analogy between “taping” (I guess DVRs didn’t catch on until after the book was published) and reviewing a football game, and between the balance sheets and income statements of a business. Income statements are like watching Rashaan Salaam run for a touch down, or like watching John Elway throw an interception (you can tell how long it has been since I watched football, yes?) and the balance sheets are like pausing the VCR (pausing the game at a specific instance in time) to review the play, seeing if Salaam actually did step out of bounds on the 20. As a side note, one of the tips-of-the-trade in this chapter sums up why I have decided to read this book.
The more familiar you are with the concepts of accounting and finance, the more of the “hidden” information you’ll get from your company’s financial reports and the less time it will take you to get it, even though others may miss the point entirely. [Siciliano, Gene. Finance for Non-Financial Managers. New York: McGraw-Hill, 2003.]
After describing the ebb and flow of two particular financial statements, the chapter continues with a brief introduction to the Chart of Accounts. Take away: Buckets make the Accountants’ world go ’round. All transactions are organized into categories and sub categories, with the categories even having their own section headings: Assets, Liabilities, Owners’ Equity, Revenue and Expenses.
Reading the next section regarding the General Ledger brings back nightmares of my Accounting I class in college. In principle, I get that the “Ledger Always Balances”, but I think the nuances (like accounting for depreciation) are what get me flustered. I’ll have to take some extra time during the reading of Chapter 3 (The Balance Sheet) to make sure I have a clear understanding of “why” it makes sense that the Balance Sheet must always balance.
A couple of paragraphs are given to discuss Accrual Accounting. The “rule” of accrual accounting basically states that a transaction is recorded when the binding action occurs, not when payment is sent or received. You bought a new/used book on the 13th, even though you didn’t receive the book until the 15th (which is the quickest bestS3ller1981 could get it shipped to you). Since your agreement was made on the 13th, the 13th is the date the transaction should be accounted for, even though there was no exchange until a couple of days later.
The chapter winds up with a summary of each of: the balance sheet, the income statement, and the statement of cash flows.
To wind up this post, I’d like to point out another reason why I am continuing to read _this_ book in particular. During the football game analogy the author describes a scenario where the reader has just witnessed a ref who seemingly makes a horrible call. To describe the disgust of the reader for the ref’s judgment the author writes, “This time, you’re sure the ref is smoking something…” I enjoy the little infusions of humor into a topic that is not full of buckets of laughs.