Corporate Financial Reporting and Analysis A Global Perspective Third Edition S. David Young and Jacob Cohen
WILEY
Contents
About the Authors 1 An Introduction to Financial Statements
xvii 1
The three principal financial statements Other items in the annual report Generally Accepted Accounting Principles: the rules of the game The barriers to understanding financial statements Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 1.1 Balance sheet terminology 1.2 Understanding balance sheet relationships 1.3 Interpreting an auditor's opinion
3 8 12 12 15 16 16 17 17 19 19
Case studies: 1.1 Apple: an introduction to financial statement analysis 1.2 PepsiCo: communicating financial performance
21 21 26
Notes
30
2 The Balance Sheet and Income Statement A further look at the balance sheet Assets Liabilities Shareholders' equity A further look at the income statement Other things you should know about the balance sheet and the income statement
31 31 32 35 -36 37 38
viii
CONTENTS
Key lessons from the chapter Key terms and concepts from the chapter Questions Appedix 2.1 The mechanics of financial accounting: the double-entry system
41 41 42 42
Problem 2.1 Preparing a balance sheet and an income statement
53 53
Case study: 2.1 fanMar Fabrics: preparing the balance sheet and income statement
54 54
A Brief Overview of GAAP and IFRS: the Framework for Financial Accounting The core principles of GAAP and IFRS The key characteristics of financial information The key assumptions of financial information Modifying conventions The future of financial reporting Key lessons from the chapter Key terms and concepts from the chapter Questions
56 56 58 59 59 60 61 62 62
Revenue Recognition
64
Introduction Definition: what is revenue? Revenue-recognition principles When does revenue recognition occur? Revenue recognition: the journal entries More on long-term contracts Revenue-recognition controversies Revenue recognition: a checklist The future of revenue recognition Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 4.1 Revenue recognition at and after time of sale 4.2 The percentage-of-completion method _ 4.3 Journal entries for gift cards 4.4 The percentage-of-completion method 4.5 Revenue recognition in different types of businesses
Case studies: 4.1 Kiwi Builders, Ltd. 4.2 Revenue recognition at Starbucks Corporation 4.3 Network Associates (McAfee): a case of "channel stuffing"
81 81 82 91
Notes
94
The Statement of Cash Flows
96
Introduction The reporting of cash flows from operations Preparing the statement of cash flows Does the statement of cash flows tell us anything new? IFRS and the statement of cash flows Analyzing the statement of cash flows Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 5.2 Interpreting the statement of cash flows 5.2 Adjustments on the statement of cash flows 5.3 Preparing and analyzing a statement of cash flows 5.4 Interpreting the role of accounts payable in cash flow from operations 5.5 Manipulating the statement of cash flows 5.6 Analysis of the statement of cash flows 5.7 Cash flow and credit risk 5.8 Preparing and interpreting the statement of cash flows
Case studies: 5.2 Blockbuster Inc.: movie rentals, profits, and operating cash 5.2 Monahan Manufacturing: preparing and interpreting a statement of cash flows 5.3 A tale of three companies: cash flows at Sun Microsystems, Wal-Mart, and Merck 5.4 Inditex: analyzing the statement of cash flows
125 125 135 136 140
Notes
148
Financial Statement Analysis
149
Introduction Business and industry analysis Accounting analysis Financial analysis DuPont analysis
149 150 153 154 158
CONTENTS
A brief digression on inventory ROE and the analysis of financial risk Key lessons from the chapter Key terms and concepts from the chapter Questions Appendix 6.1 An industry and competitive analysis of SAP Group Appendix 6.2 Summary of financial statement ratios Problems: 6.2 Financial statement detective exercise 6.2 Effects of transactions on selected balance sheet figures 6.3 Calculating and interpreting PP&)E turnover ratios 6.4 Financial statement detective exercise in the pharmaceutical industry 6.5 Comprehensive financial ratio analysis 6.6 Profitability analysis for The Home Depot 6.7 Comparative analysis of receivables and inventories
Case studies: 6.2 Profitability analysis and WalMart's suppliers 6.2 LVMH and Warnaco: strategy and financial statement analysis
191 191 192
•
Notes
198
Business Valuation and Financial Statement Analysis
200
Valuation principles Valuation: from theory to practice The economic profit approach to valuation A case study in valuation: SAP Group A brief word on growth rates Relative valuation Key lessons from the chapter Key terms and concepts from the chapter Questions Problems 7.2 Estimating the value of Home Depot 7.2 Explaining differences in pie ratios 7.3 Explaining differences in pie ratios
Case study: 7.2 Valuation based on discounted cash flows: the case of Vardon Golf Ltd.
215 215
Notes
217
CONTENTS
8 Accounting for Receivables and Bad Debts Introduction Estimating bad debts Writing off accounts The direct method: an alternative approach What happens when written-off accounts are later collected? The "aging" of accounts receivable Sales returns and allowances Analyzing receivables Key lessons from the chapter Key terms and concepts from the chapter Questions Appendix: 8.1 Accounting for loan loss reserves Problems: 8.2 Bad debts on loans receivable 8.2 Determining bad debt expense from an aging schedule 8.3 Analyzing receivables and the allowance for doubtful accounts 8.4 Provisions for credit losses
Case studies: 8.2 Receivable and bad debts at Toyota 8.2 Johnson Perry 8.3 Citigroup Inc.: accounting for loan loss reserves
237 237 238 241
Notes
251
9 Accounting for Inventory Introduction Inventory valuation: LIFO, FIFO, and the rest The lower of cost or market rule The cost-flow assumptions: an example Inventory cost-flow assumptions: a summary Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 9.2 Calculating inventory under the FIFO and average-cost methods 9.2 Inventories and ratio analysis 9.3 Correcting inventory errors 9.4 The lower of cost or market rule 9.5 Calculating cost of goods sold under FIFO and specific identification
Case studies: 9.2 LIFO accounting at Tamar Chemicals • 9.2 Deere and CNH Global: performance effects of inventory accounting choice
266 266 267
Notes
274
10 Accounting for Property, Plant and Equipment Introduction Initial recognition of PP&E Subsequent expenditures: repair or improvement? Accounting for depreciation Changes in depreciation estimates or methods Asset impairment Fair value vs. historical cost Divestitures and asset sales Intangible assets Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 20.2 Comparing the effects of depreciation choice on financial ratios 20.2 Analyzing depreciation on PPeDE 20.3 Calculating and analyzing amortization expense 20.4 Calculating depreciation expense 20.5 Effects of changes in estimates on depreciation expense 20.6 Interpreting disclosures for property, plant and equipment 20.7 Capitalizing or expensing costs 20.8 Journal entries for depreciation and amortization expense 11 Leases and Off-Balance-Sheet Debt Introduction Capital vs. operating leases Accounting for capital leases Accounting for operating leases Lease accounting: an example Interpreting lease disclosures Off-balance-sheet debt Key lessons from the chapter Key terms and concepts from the chapter Questions
Problem: 22.2 The financial reporting effects of selling receivables
307 307
Case studies: 22.2 Lease accounting at Metro AG 11.2 Pennzoil-Quaker State and the sale of receivables 11.3 Executory contracts
308 308 310 310
Notes
311
12 Accounting for Bonds
312
Introduction Accounting for bond issuance Accounting for bonds sold at par Accounting for bonds sold at a premium Bond redemption before maturity Accounting for bonds issued at a discount Zero-coupon bonds Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 22.2 Journal entries and balance sheet presentation for bonds 12.2 Amortization of bond discount and premium 12.3 Journal entries for bond issuance and subsequent interest payments
13 Provisions and Contingencies Introduction Defining provisions Measuring the provision Disclosure of provisions: interpreting the notes Contingent liabilities Contingent assets The future Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 23.2 Accounting for warranties 13.2 Analyzing and interpreting disclosures on the provision for warranties
Case studies: 23.2 Accounting for contingent assets: the case of Cardinal Health 23.2 Firestone Tire and Rubber Company (A) 23.3 Firestone Tire and Rubber Company (B)
337 337 340 343
Notes
345
14 Accounting for Pensions Introduction A brief word on defined contribution plans Defined benefit plans Unfunded defined benefit plans Funded defined benefit plans American Airlines: an example of defined benefit plan disclosure Key lessons from the chapter Key terms and concepts from the chapter Questions Case study: 24.2 Comprehensive pension review problem: Cathay Pacific Note
15 Accounting for Income Tax Introduction Temporary and permanent differences Deferred taxes and the balance sheet approach The balance sheet approach: an example Interpreting income tax disclosures: the case of Intel Corporation Why deferred income tax is important Key lessons from the chapter Key terms and concepts from the chapter Questions Problems 25.2 Calculating temporary and permanent differences 25.2 Interpreting income tax disclosures 25.3 Deferred income taxes and the statement of cash flows Case study 25.2 Deferred tax assets and the valuation allowance: the case of Ford Motor Company Notes
Introduction Shareholders' equity: an introduction More on contributed capital Accounting for stock transactions Dividends on common stock Stock dividends and stock splits Accumulated other comprehensive income Convertible bonds The statement of shareholders' equity Key lessons from the chapter Key terms and concepts from the chapter Questions Problems 26.2 Effect of selected transactions on net income and shareholders' equity 26.2 Share buybacks 26.3 The financial statement effects of dividend payments and buybacks 26.4 The accounting and economic consequences of stock splits and stock dividends
Case studies: 26.2 Stock options, stock dividends, and stock splits 26.2 Share buybacks: economic rationale and financial reporting effects 26.3 The accounting for convertible bonds 26.4 Why do companies buy back their own shares! The case of the Scomi Group
406 406 407 408 408
Notes
410
17 Marketable Securities and Investments Introduction Investments and marketable securities at Microsoft The market and cost methods The fair value hierarchy Equity method A further look at Microsoft's investments Consolidation Key lessons from the chapter Key terms and concepts from the chapter Questions Problems 27.2 Classification of long-term investments 27.2 The effect of transaction cost on marketable securities and investments
Journal entries and analysis under the equity method Review problem Mark-to-market accounting for trading securities The equity method and the statement of cash flows
427 427 429 429
Case studies: 2 7.2 Stora Enso: accounting for investments 27.2 Coca-Cola and Coca-Cola Enterprises: the equity method in practice
431 431 432
Notes
433
18 Accounting for Mergers and Acquisitions Introduction Purchase price/cost of acquisition Contingent consideration Recognition and measurement of identifiable assets Subsequent adjustments to acquired assets and liabilities Goodwill impairment Noncontrolling interest Key lessons from the chapter Key terms and concepts from the chapter Questions Problems: 28.2 fournal entry for an acquisition 28.2 Analysis of an acquisition 28.3 Accounting for an acquisition: Carrefour and BLC (China) 28.4 Business combinations at Tesco
