Financial Reporting and Statement Analysis A Strategic Approach

, by Stickney, Clyde P.; Brown, Paul; Wahlen, James M.

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ISBN: 9780324186383 | 032418638X
Cover: Hardcover
Copyright: 7/18/2003

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The premise of the text is that students learn financial statement analysis most effectively by performing the analysis on actual companies. Students learn to integrate concepts from economics, business strategy, accounting, and other business disciplines. The text is designed for courses on financial statement analysis and financial reporting found in accounting, finance, and economics departments.

Chapter 1 Overview of Financial Reporting and Financial Statement Analysis

(70)

Overview of Financial Statement Analysis

(2)

Step 1: Identify the Industry Economic Characteristics

(7)

Tools for Studying Industry Economics

(5)

Value Chain Analysis

(2)

Porter's Five Forces Classification

(2)

Economic Attributes Framework

(1)

Step 2: Identify the Company Strategy

(3)

Framework for Strategy Analysis

(2)

Application of Strategy Framework to PepsiCo's Beverage Segment

(1)

Step 3: Assess the Quality of the Financial Statements

(18)

Balance Sheet-Measuring Financial Position

(6)

Income Statement-Measuring Operating Performance

(6)

Statement of Cash Flows

(4)

Summary of Financial Statements and Notes

(1)

Step 4: Analyze Profitability and Risk

(4)

Tools of Profitability and Risk Analysis

(4)

Step 5: Value the Firm

(35)

Role of Financial Statement Analysis in an Efficient Capital Market

(1)

Sources of Financial Statement Information

(1)

Summary

(1)

Problems and Cases

(20)

Case 1.1 Nike: Somewhere between a Swoosh and a Slam Dunk

(11)

Chapter 2 Asset and Liability Valuation and Income Measurement

(40)

Asset and Liability Valuation

(7)

Historical Value: Acquisition Cost

(1)

Historical Value: Adjusted Acquisition Cost

(1)

Historical Value: Present Value of Cash Flows Using Historical Interest Rates

(2)

Current Values: Current Replacement Cost

(1)

Current Values: Net Realizable Value

(1)

Current Values: Present Value of Cash Flows Using Current Interest Rates

(1)

GAAP Valuations

(1)

Income Recognition

(5)

Treatment 1: Value Changes Recognized on the Balance Sheet and Income Statement When Realized

(2)

Treatment 2: Value Changes Recognized on the Balance Sheet When They Occur but Recognized in Net Income When Realized

(1)

Treatment 3: Value Changes Recognized on the Balance Sheet and the Income Statement When They Occur

(2)

Summary of Asset and Liability Valuation and Income Recognition

(1)

Accounting for Income Taxes

(9)

Overview of Income Tax Accounting

(4)

Measuring Income Tax Expense: A Bit More to the Story

(3)

Reporting Income Taxes in the Financial Statements

(1)

Framework for Analyzing the Effects of Transactions on the Financial Statements

(6)

Overview of Analytical Framework

(4)

Summary of Analytical Framework

(1)

Summary

(1)

Problems and Cases

100

(11)

Chapter 3 Income Flows versus Cash Flows: Key Relationships in the Dynamics of a Business

111

(65)

Income Flows, Cash Flows, and Life Cycle Relations

113

(14)

Net Income and Cash Flow from Operations

113

(4)

Relation between Cash Flows from Operating, Investing, and Financing Activities

117

(2)

Illustrations of Cash Flow Relations

119

(8)

Preparing the Statement of Cash Flows

127

(9)

Algebraic Formulation

128

(1)

Classifying Changes in Balance Sheet Accounts

128

(7)

Illustration of the Preparation Procedure

135

(1)

Summary

136

(2)

Problems and Cases

138

(16)

Case 3.1 W.T. Grant Co.

154

(22)

Chapter 4 Profitability Analysis

176

(86)

Profitability Analysis

178

(1)

Rate of Return on Assets

178

(28)

Disaggregating ROA

181

(1)

Economic and Strategic Factors in the Interpretation of ROA

182

(10)

Analyzing the Profit Margin for ROA

192

(6)

Analyzing Total Assets Turnover

198

(4)

Supplementing ROAR in Profitability Analysis

202

(4)

Rate of Return on Common Shareholders' Equity

206

(5)

Earnings per Common Share

211

(3)

Calculating EPS

211

(3)

Criticisms of EPS

214

(1)

Interpreting Financial Statement Ratios

214

(2)

Comparisons with Corresponding Ratios of Earlier Periods

214

(1)

Comparisons with Corresponding Ratios of Other Firms

215

(1)

Summary

216

(1)

Problems and Cases

217

(27)

Case 4.1 Profitability and Risk Analysis of Wal-Mart Stores

244

(8)

Case 4.2 Specialty Apparel Retailing: The Gap and Limited Brands

252

(10)

Chapter 5 Risk Analysis

262

(80)

Framework for Risk Analysis

263

(2)

Analyzing Short-term Liquidity Risk

265

(6)

Analyzing Long-term Solvency Risk

271

(4)

Analyzing Credit Risk

275

(6)

Analyzing Bankruptcy Risk

281

(15)

The Bankruptcy Process

281

(1)

Models of Bankruptcy Prediction

282

(11)

Synthesis of Bankruptcy Prediction Research

293

(3)

Market Equity Beta Risk

296

(2)

Financial Reporting Manipulation Risk

298

(6)

Motivations for Earnings Manipulation

299

(1)

Empirical Research on Earnings Manipulation

299

(2)

Application of Beneish's Model to Sunbeam Corporation

301

(3)

Summary of Income Manipulation Risk

304

(1)

Summary

304

(1)

Problems and Cases

305

(8)

Case 5.1 Massachusetts Stove Company-Bank Lending Decision

313

(7)

Case 5.2 Fly-By-Night International Group: Can this Company Be Saved?

320

(11)

Case 5.3 Millennial Technologies: Apocalypse Now

331

(11)

Chapter 6 Quality of Accounting Information and Adjustments to Reported Financial Statement Data

342

(86)

Accounting Quality

343

(6)

High Quality Reflects Economic Information Content

344

(2)

High Quality Signals Earnings Persistence Over Time

346

(3)

Discontinued Operations

349

(4)

Extraordinary Items

353

(2)

Changes in Accounting Principles

355

(5)

Items of Other Comprehensive Income

360

(2)

Impairment Losses on Long-lived Assets

362

(3)

Restructuring and Other Charges

365

(6)

Changes in Estimates

371

(3)

Gains and Losses from Peripheral Activities

374

(2)

Restated Financial Statement Data

376

(1)

Account Classification Differences

377

(4)

Financial Reporting Worldwide

381

(2)

Earnings Management

383

(2)

Summary

385

(1)

Problems and Cases

386

(20)

Case 6.1 International Paper: A Recurring Dilemma

406

(6)

Case 6.2 Tanaguchi Corporation-Part A

412

(1)

Appendix 6.1 (Case 6.2) Unconsolidated Financial Statements for Tanaguchi Corporation

413

(6)

Appendix 6.2 (Case 6.2) Comparison of U.S. and Japanese GAAP

419

(6)

Case 6.3 Tanaguchi Corporation-Part B

425

(3)

Chapter 7 Revenue Recognition and Related Expenses

428

(91)

Income Recognition

429

(19)

Criteria for Revenue Recognition

430

(3)

Criteria for Expense Recognition

433

(1)

Application of Revenue and Expense Recognition Criteria

434

(5)

Income Recognition for Long-term Contractors

439

(5)

Revenue Recognition when Cash Collectibility Is Uncertain

444

(4)

Inventory Cost-flow Assumption

448

(11)

FIFO

449

(1)

LIFO

449

(3)

Weighted Average

452

(1)

Conversion from LIFO to FIFO

452

(4)

Stock Price Reaction to Changes in Inventory Cost-flow Assumption

456

(1)

Persistent Earnings and the Cost-flow Assumption

457

(2)

Accounting for Fixed Assets

459

(7)

Fixed Asset Valuation

459

(1)

Depreciable Life

460

(2)

Depreciation Method

462

(2)

Impairment of Fixed Assets

464

(1)

Persistent Earnings and Fixed Asset Reporting

464

(2)

Accounting for Intangible Assets

466

(9)

Accounting for Research And Development Costs

468

(2)

Accounting for Software Development Costs

470

(2)

Accounting for Goodwill

472

(1)

Persistent Earnings and Intangible Asset Reporting

473

(1)

Valuing Intangibles-Is It Possible?

474

(1)

Summary

475

(1)

Appendix 7.1 Accounting for the Effects of Changing Prices

476

(6)

Problems and Cases

482

(12)

Case 7.1 Arizona Land Development Company

494

(9)

Case 7.2 Chiron Corporation-An R&D Puzzle

503

(4)

Case 7.3 Corporãcion Industrial Sanluis: Coping With Changing Prices

507

(4)

Case 7.4 America Online: Past Reporting Vindicated?

511

(8)

Chapter 8 Liability Recognition and Related Expenses

519

(123)

Principles of Liability Recognition

520

(1)

Principles of Liability Valuation

521

(1)

Application of Criteria for Liability Recognition

522

(4)

Controversial Issues in Liability Recognition

526

(8)

Issuance of Hybrid Securities

526

(1)

Off-Balance-Sheet Financing Arrangements

527

(7)

Leases

534

(12)

Operating Lease Method

535

(1)

Capital Lease Method

536

(2)

Choosing the Accounting Method

538

(2)

Effects on Lessor

540

(3)

Lease Accounting for Tax Purposes

543

(1)

Converting Operating Leases to Capital Leases

543

(3)

Impact of Accounting for Operating Leases as Capital Leases

546

(1)

Derivative Instruments

546

(18)

Nature and Use of Derivative Instruments

548

(1)

Accounting for Derivatives

549

(3)

Illustrations of Accounting for Derivatives

552

(9)

Summary of Examples

561

(1)

Disclosures Related to Derivative Instruments

561

(2)

Accounting Quality Issues and Derivatives

563

(1)

Retirement Benefits

564

(15)

Pensions

564

(12)

Analysts' Treatment of Pensions

576

(1)

Impact of Actuarial Assumptions

577

(1)

Signals about Earnings Persistence

578

(1)

Postretirement Benefits Other than Pensions

579

(1)

Income Taxes

580

(14)

Review of Income Tax Accounting

580

(3)

Required Income Tax Disclosures

583

(7)

Assessing a Firm's Tax Position

590

(1)

Analyzing PepsiCo's Income Tax Disclosures

591

(3)

Summary of Income Taxes

594

(1)

Understanding Reserves in the Financial Statements

594

(4)

Nature of a Reserve Account

596

(1)

Use of Reserve Accounts

596

(2)

Summary of Reserves

598

(1)

Summary

598

(1)

Problems and Cases

599

(29)

Case 8.1 American Airlines and United Airlines: A Pension for Debt

628

(9)

Case 8.2 CIFRA: Remodeling the Financial Statements

637

(5)

Chapter 9 Intercorporate Entities

642

(96)

Corporate Acquisitions

643

(9)

Overview of the Purchase and Pooling-of-Interests Methods

644

(1)

Illustration of the Purchase Method

645

(5)

Corporate Acquisitions and Income Taxes

650

(1)

Corporate Disclosures on Acquisitions

651

(1)

Investments in Securities

652

(21)

Accounting for Investments

652

(1)

Percentage of Voting Stock

653

(1)

Minority, Passive Investments

654

(5)

Minority, Active Investments

659

(2)

Majority, Active Investments

661

(9)

Primary Beneficiary of a Variable Interest Entity

670

(2)

Income Tax Consequences of Investments in Securities

672

(1)

Foreign Currency Translation

673

(12)

Functional Currency Concept

674

(1)

Translation Methodology-Foreign Currency Is Functional Currency

674

(5)

Translation Methodology-U.S. Dollar Is Functional Currency

679

(1)

Implications of Functional Currency Determination for Analysis

680

(4)

Foreign Currency Translation and Income Taxes

684

(1)

Accounting for Stock-based Compensation

685

(4)

Summary

689

(1)

Problems and Cases

689

(23)

Case 9.1 Fisher Corporation

712

(15)

Case 9.2 Clark Equipment Company: Analyzing a Joint Problem

727

(7)

Case 9.3 Loucks Corporation: Obtaining Security in Translation

734

(4)

Chapter 10 Forecasting Pro Forma Financial Statements

738

(69)

Overview

739

(1)

Introduction to Forecasting

739

(2)

Preparing Pro Forma Financial Statements

741

(6)

General Forecasting Principles

742

(1)

Six-Step Forecasting Game Plan

743

(2)

Practical Tips for Implementing the Six-Step Game Plan

745

(1)

Using FSAP to Prepare Pro Forma Financial Statements

746

(1)

Step 1: Project Sales and Other Revenues

747

(5)

Projecting Sales

747

(4)

Projecting Other Revenues

751

(1)

Step 2: Project Operating Expenses

752

(2)

Step 3: Project the Assets on the Balance Sheet

754

(9)

Step 4: Project Liabilities and Shareholders' Equity

763

(7)

Step 5: Project Interest Expense, Interest Income, Income Tax Expense, and the Change in Retained Earnings

770

(5)

Closing the Loop: Solving for Co-Determined Variables

774

(1)

Step 6: Projecting the Statement of Cash Flows

775

(3)

Shortcut Approaches to Forecasting

778

(4)

Analyzing Pro Forma Financial Statements

782

(2)

Sensitivity Analysis and Reactions to Announcements

784

(1)

Summary

785

(1)

Problems and Cases

786

(11)

Case 10.1 Massachusetts Stove Company: Analyzing Strategic Options

797

(10)

Chapter 11 Valuation: Cash-flow-based Approaches

807

(72)

Introduction and Overview

808

(1)

Rationale for Cash-flow-based Valuation

809

(2)

Overview of Cash-flow-based Valuation

811

(1)

Measuring Periodic Free Cash Flows

811

(12)

Continuing Value of Future Free Cash Flows

823

(4)

Discount Rates

827

(10)

Cash-flow-based Valuation Equations

837

(3)

Illustrations of Cash-flow-based Valuation

840

(1)

Valuation of a Single Project

840

(14)

Valuation of PepsiCo

842

(1)

Valuation of PepsiCo Using Free Cash Flows to All Debt and Equity Capital Stakeholders

843

(5)

Valuation of PepsiCo Using Free Cash Flows to Common Equity Shareholders

848

(6)

Evaluation of Present Value of Cash Flows Valuation Method

854

(1)

Summary

854

(1)

Problems and Cases

854

(9)

Cases

863

(1)

Case 11.1 Holmes Corporation: LBO Valuation

863

(16)

Chapter 12 Valuation: Earnings-based Approaches

879

(33)

Introduction and Overview

880

(1)

Rationale for Earnings-based Valuation

881

(3)

Earnings-based Valuation: Practical Advantages and Common Concerns

884

(2)

Theoretical and Conceptual Foundations for Residual Income Valuation

886

(4)

Residual Income Model with Finite Horizon Earnings Forecasts and Continuing Value Computation

890

(2)

Valuation of PepsiCo Using the Residual Income Model

892

(6)

Discount Rates for Residual Income

893

(1)

PepsiCo's Book Value of Equity and Residual Income

893

(2)

Discounting PepsiCo's Residual Income to Present Value

895

(1)

Necessary Adjustments to Compute Common Equity Share Value

896

(1)

Sensitivity Analysis and Investment Decision-Making

896

(2)

Residual Income Model Implementation Issues

898

(4)

Dividends Valuation Model

902

(4)

Application of the Dividends Valuation Model to PepsiCo

904

(2)

Causes of Differences in Residual Income, Dividends, and Free Cash Flow Value Estimates

906

(1)

Summary Comments on Valuation

907

(1)

Problems and Cases

908

(3)

Cases

911

(1)

Chapter 13 Valuation: Market-based Approaches

912

(50)

Introduction and Overview

913

(2)

Market Multiples of Accounting Numbers

915

(1)

Market-to-Book and Value-to-Book Ratios

916

(9)

A Theoretical Model of the Value-to-Book Ratio

916

(5)

Reasons Why VB Ratios and MB Ratios May Differ from One

921

(1)

Empirical Data on MB Ratios

922

(1)

Empirical Research Results on the Predictive Power of MB Ratios

922

(3)

Application of the Value-to-Book Model to PepsiCo

925

(4)

Price-Earnings and Value-Earnings Ratios

929

(14)

A Theoretical Model for the Value-Earnings Ratio

929

(1)

Price-Earnings Ratios

930

(12)

Summary of VE And PE Ratios

942

(1)

Using Market Multiples of Comparable Firms

943

(1)

Price Differentials

944

(4)

Computing PDIFF for PepsiCo

945

(3)

Reverse Engineering

948

(2)

Reverse Engineering PepsiCo's Stock Price

948

(2)

The Relevance of Academic Research for the Work of the Security Analyst

950

(5)

Level of Aggregation Issue

951

(1)

Theory Development and Practice Feed Each Other

951

(1)

Has the Theory of Capital Market Efficiency Gotten in the Way?

952

(1)

Striking Evidence on the Degree of Market Efficiency and Inefficiency with Respect to Earnings

953

(2)

Summary

955

(1)

Problems

956

(5)

Cases

961

(1)

Appendix A Statements and Notes for PepsiCo, Inc. and Subsidiaries

962

(43)

Appendix B Management's Discussion and Analysis of Results of Operations and Financial Condition for PepsiCo, Inc. and Subsidiaries

1005

(24)

Appendix C Output of Analysis Spreadsheet in Financial Statement Analysis Package (FSAP) for PepsiCo, Inc. and Subsidiaries

1029

(8)

Appendix D Output of Forecasts and Valuations Spreadsheets in Financial Statement Analysis Package (FSAP) for PepsiCo

1037

(32)

Index

1069

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Financial Reporting and Statement Analysis A Strategic Approach

Summary

Table of Contents

Supplemental Materials