Contents
PART ONE
Corporate Financial Reporting and
Analysis Environment
1 Introduction
Authorities
Financial Accounting Standards Board
Securities and Exchange Commission
American Institute of Certified Public
Accountants
Intemational Accounting Standards
Committee
Basic Issues
Historical Cost vs. Current Values
Cookbook vs. General Standards
Disclosure vs. Recognition
Expanding the Accounting Model
Tax Accounting
Management Accounting
Financial Reporting Decisions
Financial Analysis
PART Two
Corporate Financial Reporting
Fundamentals
2 Basic Accounting Concepts
Significance to Users
Basic Concepts
Business Entity
Going Concem
Monetary
Accounting Period
Consistency
Historical Cost
Realization
Matching of Costs and Revenues
Dual Aspect
Reliability of Evidence
Disclosure
Conservatism
Materiality
Substance over Form
Limitations
Application
Case 2-1: Cape Cod Novelty Shop
3 Primary Financial Statements
Statement Analysis
Statement Objectives
General Requirements
Statement of Financial Position
Assets
Current Assets
Investments
Property
Other Assets
Liabilities
Current Liabilities
Long-Term Liabilities
Deferred Credits
Accumulated Provisions
Owners' Equity
Income Statement
Elements
Basic Conventions
Expenditures and Expenses
Statement Fonnat
Interrelationship
Changes in Owners' Equity
Other Considerations
Notes to Financial Statements
Auditor's Report
Interim Statements
Forecasts
Sununary of Financial Results
Management Discussion and Analysis
Text
Appendix A Basic Accounting Mechanics
Case 3-1: Marion Boats, Inc.
Case 3-2: Superior Clamps, Inc.
4 Intercorporate Equity Investments
Ownership Interests of Less than 20%
Marketable Equity Securities
Other Than Investment
Ownership Interests of More than 20%
Cost and Equity Methods lllustrated
Consolidated Financial Statements
Consolidation
Accounting Concepts Peculiar to
Consolidated Statements
Proportional Consolidation
Equity Method Adjustments
Consolidation Procedures
Financial Analysis Considerations
Case 4-1: Productos Azteca (A)
Case 4-2: Productos Azteca (B)
5 Statement of Cash Flows
Basic Structurc of the Statement of Cash
Flows 85
Computing Cash Flow from Operations
Computing Cash Flow from Investing and
Financing Activities
Financial Analysis Using the Cash Flow
Statement
Case 5-1: Northrop Corporation Statement of
Cash Flow
PART TREE
Role of Certified Public Accountants'
Opinion in Corporate Reporting
and Analysis
6 Independent Auditor's Report
The Auditing Profession
The Auditor's Report
Forms of the Audit Report
The Auditor's Work
The Audit Plan
Evaluation of Intemal Controls
Auditing Procedures
Audit Committee
Detecting Financial Statement Fraud
Case 6-1: Elevator Service, Incorporated
Case 6-2: Eagle Tools, Incorporated
Case 6-3: Intemational Oil
Case 6-4: Precision Instrument
Corporation
PABT FOUR
Basic Financial Statement Analysis
Techniques
7 Financial Statement Analysis
A Business Analysis
Financial Reporting Bias
Financial Ratio Analysis
Liquidity Ratios
Solvency Ratios
Funds Management Ratios
Profitability Ratios
Linking Ratios
A Waming
Common Stock Ratios
Eamings per Share
Price-Eamings Ratio
Book Value per Share
Dividend Yield
Growth Analysis
Sustainable Growth Rate Equations
Basis of Comparison
Transnational Financial Statement
Analysis
Fonnats
Language
Different Terminology
Currencies
Accounting Principles
Disclosure
TaxCode
Legal
Cultural
Efficient Markets
Critical Skill
Case 7-1: Assessing a Company's Future
Financial Health
Case 7-2: First Investments, Inc : Analysis of
Financial Statements
Case 7-3: Identify the Industries
Case 7-4: Scranton Fumiture Company
8 Quality of Earnings Analysis
Quality of Eamings Concept
Key Detenninants
Financial and Operating
Considerations
Industry
Relationship to Earnings Multiples
Assessing Quality
Two Common Applications
The Signals
Not Now, but Later
Current Signals
Lowering the Cost
Other Applications and Measurements
Management Appraisal
Relative Quality
Adjusted or Not Adjusted
Volatility and Risk
A Useful Tool
Case 8-1: The News Corporation Limited:
Quality of Eamings Analysis
Case 8-2: Kendall Square Research
Corporation (A)
Case 8-3: National Electric Corporation
9 Growth Rate Analysis
Optimum Strategies
Exceptions
Other Strategies
Financial Strategies
Sustainable Growth Rate Equations
Actual versus Indicated
Sources of Growth
Eamings-per-Share Growth
Analysis of Income Changes
Real versus Nominal
Additional Analysis
Appendix A Measurement of Growth
Case 9-1: Butler Lumber Company
Case 9-2: The Home Depot, Inc.
PAKT FlVE
Measurement and Analysis of Income
lO Revenue Recognition
Recognition
Revenue Recognition Methods
Nonmonetary Transactions
Right of Retum
Product Financing Agreements
Inappropriate Interest Rates
Accounting for Bad Debts
Direct Write-Off Method
Bad Debt Estimation Method
Pinancial Statement Presentation
Warranties and Service Guarantees
Realization Controversy
Analytical Considerations
Case l0-l: D.C. Electrical, Inc.
Case 10-2: Accounting for Frequent
Fliers
Case l0-3: Patten Corporation
11 Extraordinary and Unusual Items,
Discontinued Operations, and
Accounting Changes
Current Presentation
Two Points of View
Extraordinary Items
Unusual Events and Transactions
Disccontinuance or Disposal of a Business
Segment
Accounting Principle, Estimate, and Entity
Changes
Principle Changes
Changes in Accounting Estimates
Changes in the Entity
Materiality
Correction of an Error
Financial Analysis
Case ll-l: Agro Feed Products
Incorporated
12 Basic and Diluted Earnings per
Share
Dual Presentation: A Summary
Investors' Preference
Legal Considerations
Simple Capital Structures
lllustration
Diluted Eamings per Share
Computation Example
Treasury Stock Method
Computation Example
Weighted Average Computations
Dividends-per-Share
Financial Analysis
Case 12-1: Lustra S.p.A. (A)
Case 12-2: Lustra S.p.A. (B)
Case 12-3. Lustra S.p.A. (C)
rART SlX
Asset and Expense Reporting and
Analysis
13 Income Taxes
Tax Expense Components
Different Approaches
First-Year Taxes
Second-Year Taxes
Deferred Tax Asset
FASB Statement No.
Balance Sheet Approach
Comprehensive Approach
Examples
Valuation Allowance
Enacted Change in Tax Laws or Rates
Tax Allocations
Exemptions
Display
Financial Analysis
Case 13-l: Grand Metropolitan PLC
14 Long-Lived Fixed Assets
Capitalization Criteria
Cost Basis
Expenditures Subsequent to Acquisition and
Use
Maintenance and Repairs
Bettennents, Improvements, and
Additions
Land
Wasting Assets
Altemative Measurement Proposals
Depreciation
Computing Depreciation
Estimating the Useful Life of Fixed
Assets
Residual Value
Depreciation Methods
Straight-Line Depreciation
Accelerated Depreciation
Units-of-Production Depreciation
Accounting for Depreciation
Group Depreciation
Depreciation and Federal Income Tax
Depreciation Schedule Revisions
Depreciation Method Changes
Additions
Asset Write-Downs
Written-Up Assets
Accounting for Retirements
Capital Investment Decisions
Depletion
Depreciation Decisions
Asset Impainnents
Analysis of Fixed Assets
Depreciation Analytical Considerations
Case 14-1: Electrical, Mining, and Industrial
(EMl) Corporation
Case 14-2: United Kingdom Properties
Trust
15 Changing Prices
Measures of Innflation
Business Considerations
Purchasing Power
Performance Measurement
Adjustments
Intemal Measurements
Accounting Requirements
Real Analysis
Controversial Method
Appendix A Cruzeiro Corporation
Example
Case 15-1: Discount Mart
Case 15-2: Telefonos De Mexico
S.A. de C.V.
16 Intangible Assets
Authoritative Sources
Role of Judgment
Financial Analysis
Management Signals
Coping with Diversity
Case 16-1: SKA (Sweden)
Case 16-2 Stone and Sons Limited
Case 16-3 Homeamings Reverse Mortgage
Group (A)
Case 16-4 Homearnings Reverse Mortgage
Group (B)
17 Inventory
Inventory Pricing
Periodic and Perpetual Inventory
Systems
Cost or Market, Whichever Is Lower
Inventory Analysis
Case 17-1 Summit Distributors
Case 17-2 Daniel Dobbins Distillery,
Inc
18 Business Combinations
Purchase Method
Purchase Method lllustration
Goodwill
Only from Acquisition Date
Principal Issues
Pooling of Interests Method
Pooling of Interests lllustration
APB Opinion No. 76
Ninety Percent Test
Accounting Mechanics
Reporting Requirements
Continuing Controversy
Financial Analysis
Case 18-1 Comptrex' Associates, Inc.
Case 18-2 Medaphis Corporation
PART SEVEN
Long-Term Financial Commitment
Reporting and Analysis
19 Financial Instruments
Characteristics of Long-Term Debt
Financial Consideration
Valuation
Investment Risk
Rating Agencies
Bond Ratings
Rating Considerations
Indenture
Asset Protection
Future Eaming Power
Financial Resources
Management
Issuer's Accounting
Amortization of Bond Premium and
Discount
Extinguishment before Maturity
Extinguishment of Liabilities
Troubled Debt Restructuring
Convertible Debt
Conversion
Debt Issued with Stock Warrants
Classification of Short-Tenn Debt Expected
to Be Refinanced
Classification of Obligations That Are
Callable
Inappropriate Interest Rates
Impaired Loans
Transfers of Financial Assets
Buyer's Accounting
Interest Income
Troubled Debt Restructuring
FASB Statement No.
Derivatfve Financial Instruments
Disclosure Standards
Financial Analysis and Decision Models
Cash Flow Focus
Case 19-1 Franklin Corporation
Case l9-2 First Securities, Inc.
20 Case 19-3 Bishay Industries
Leases
Leasing Practice
Lease Accounting
Lessee's Statements
Lessor's Statements
Sale and Leaseback
Financial Analysis
Case 20-1 Teltronica S.A.
Case 20-2 Security Plus, Inc.
21 Retiree Benefits
Pension Plans
Valuation
Assumptions
Benefit Formulas
Funding Instruments and Agencies
Employee Retirement Income Security
Act
Income Tax Considerations
Vesting
Pension Accounting
Key Terms
Net Periodic Pension Cost
Accounting lllustrated
Other Plans
Settlements and Curtailments
Postretirement Benefits
FASB Statement No.
Scope
Obligation
Net Periodic Postretirement Benefit Cost
Accounting lllustrated
Immediate Recognition
Delayed Recognition
Curtailments and Settlements
Multiemployer Plans
Deferred Compensation Contracts
Financial Analysis
Case 21-1 Intemational Paper (A)
Case 2l-2 Intemational Paper (B)
PART ElGHT
stocKnoiaers Equity Keporting and
Analysis
22 Stockholders' Equity
Stockholders' Equity
Common Stock Accounis
Preferred Stock
Treasury Stock
"Greenmail"
Dividends
Legal Obligation
Stock Dividends and Splits
Stock-Based Compensation
Summary
Intrinsic Value Method Explained
Fair Value Method
Other Plans
Intrinsic Value Method Explained
Fair Value Method Explained
Disclosure Requirements
Stock Purchase Loans
Employee Stock Ownership Plans
Other Accounts
Stockholders' Equity Analysis
Stockholders' Book Value
Other Information
Buybacks
Changing Nature of Debt and Equity
Distinction
Case 22-1 Nutra Foods
PART NlNE
Special Reporting and Analysis Issues
23 Foreign Activities
Exchange Rates
Foreign Currency Transactions
Consolidated Statements
Stable Exchange Rate
Fluctuating Exchange Rate
FASB Statement No. 52
Functional Currency
Current-Rate Method
Remeasurement
Economic Hedges
Highly Inflationary Economies
Measurement and Motivation
Statement Analysis
Controversial Subject
Case 23-1 A. B, Deutz GmbH
24 Disaggregated Business Disclosures
Management Unit
Oil and Gas Reserves
Tnvcctor .Slirvevs 85
Corporate Viewpoint
Common Costs
Transfer Prices
Analytical Value and Techniques
Case 24-1 Value Investment
Management
25 Interun Period Reports
Inherent Problems
Too Short
Limited Time
Altemative Objectives
APB Opinion 28
Revenues
Product Costs
Other Costs
Extraordinary and Unusual Items
Role and Limitations
Case 25-1 Champion Intemational
26 Contingencies
FASB Statement No. 5
Accounting Entries
Loss Contingencies Subsequent to the Balance
Sheet Date
Accounts Receivable and Warranty
Obligations
Self-lnsurance
Litigation, Claims, and Assessments
Threat of Expropriation
Catastrophe Losses
Indirect Guarantees of Indebtedness
Contingency Gains
Restructuring
Environmental Remediation Costs
Objections
Financial Analysis
Case 26-1 Global Industries, AG
27 Intemational Accounting Standards and
Transnational Financial Analysis
Intemational Accounting Standards
Transnational Financial Analysis
Formats
Language
Different Tenninology
Currencies
Accounting Principles
Disclosure
TxCode
Legal
Cultural
Coping with Accounting Diversity
Leam the Range of Differences
Lowering the Cost of Information
Pushing Costs Even Lower
Step l: Classify Accounting Policy
Step 2: Complete the Worksheet
U.S. GAAP Model Preferred
Case 27-1 Daimler-Benz AG
Appendix Present Value Tables
Indexes
Case Index
Subject Index
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