Chapter 11

Inside Information for Managers Only


Recognizing the managerial limits of external financial statements

Examining the additional information needed for managing assets and liabilities

Identifying the in-depth information needed for managing profit

Providing additional information for managing cash flow

If you’re a business manager, I strongly suggest that you read the preceding chapter before continuing with this one. Chapter 10 discusses how a business’s external, nonmanagerial lenders and investors read an external financial report. These stakeholders are entitled to regular financial reports so they can determine whether the business is making good use of their money. The chapter explains key ratios that the external stakeholders use for interpreting the financial condition, profit performance, and cash flows of a business — which are equally relevant for the managers of the business.

tip Business managers should understand the financial statement ratios in Chapter 10. Every ratio does double duty; it’s useful to the outside lenders and investors of the business and equally useful to its internal managers. For example, the profit ratio and return on assets ratio are extraordinarily important to both the external stakeholders and the managers of a business — the first measures the profit yield from sales revenue, and the second measures profit on the assets ...

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