“The book has a clear approach and provides a good basis for intermediate financial courses I am also pleased to see more Dutch examples included in the new edition.” Dr Erik van der Veer, Lecturer in Accounting, Business School, University of Amsterdam, The Netherlands “The book is ideally suited for MBA courses in financial accounting and reporting, and a strength of the new edition is that the end-of-chapter assignments now reflect a wider range of difficulty levels.” Dr Jannis Bischof, Lecturer in Accounting and Taxation, Business School, University of Mannheim, Germany Stolowy Lebas Ding FOURTH EDITION “I use this book with my MSc students because it provides a detailed discussion of the topics with an excellent use of examples The new edition also contains more real-life examples which will really help aid student understanding and application.” Dr Ioannis Tsalavoutas, Lecturer in Accounting, Division of Accounting and Finance, University of Stirling, UK Guidance across the complexities of financial accounting is offered from an international and ‘user’ perspective, based on the latest IFRS standards Its comprehensive coverage incorporates original case studies, decisionmaking orientation and genuine financial statements from across the globe, maximizing topicality and relevance for a thorough understanding of real-world business A fresh, contemporary presentation of text design delivers user-friendly tables, figures and diagrams, helping to make theoretical explanations such as the technical aspects of accounting transactions more approachable End-of-chapter assignments have also been enhanced, now targeting a range of difficulty levels This aids students with independent practice and learning at their own standard of ability About the Authors: Hervé Stolowy, Professor, HEC Paris, France Michel J Lebas, Emeritus Professor, HEC Paris, France Yuan Ding, Professor, China Europe International Business School (CEIBS), Shanghai, China > Revised coverage on all the latest IFRS developments and terminology > New real-life case examples and studies > Expanded coverage on international accounting harmonization > Extensive developments on fair value in a completely rewritten Chapter 10 and a major update of Chapter 13 on consolidation > New independent assignments and endof-chapter problems across three levels of complexity to aid independent learning and depth of understanding > Expanded glossary of key terms at the end of the book > Enriched provision of digital support materials, which instructors can share, as needed, with their students Financial Accounting and Reporting: a Global Perspective is suitable worldwide for MBA, professional management and undergraduate level modules in financial accounting and reporting Accounting and Reporting New to this edition: Financial Accounting and Reporting A GLOBAL PERSPECTIVE Now in its fourth edition, the completely revised version of Financial Accounting and Reporting: A Global Perspective can be utilized worldwide by business and management students seeking an essential introduction to the field Financial A GLOBAL PERSPECTIVE Hervé Stolowy • Michel J Lebas • Yuan Ding FOURTH EDITION For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com FINANCIAL ACCOUNTING AND REPORTING A GLOBAL PERSPECTIVE FOURTH EDITION Herve Herve´ Stolowy • Michel J Lebas • Yuan Ding Financial Accounting and Reporting: A Global Perspective Fourth edition Hervé Stolowy, Michel Lebas and Yuan Ding Publishing Director: Linden Harris Publisher: Andrew Ashwin Commissioning Editor: Annabel Ainscow Content Project Editor: Alison Cooke Production Controller: Eyvett Davis Marketing Manager: Amanda Cheung Cover design: Design Deluxe © 2013 Hervé Stolowy, Michel J Lebas and Yuan Ding ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners The publishers and author/s make no claim to these trademarks The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material For product information and technology assistance, contact emea.info@cengage.com For permission to use material from this text or product, and for permission queries, email clsuk.permissions@cengage.com The Author has asserted the right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this Work British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library ISBN: 978-1-4080-6662-1 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed in Singapore by Seng Lee Press 10 – 15 14 13 To Nicole, Natacha, and Audrey For their indefatigable renewed support and immense and lasting patience To my wife, Michael Adler, and to Alfie Each one, in her and his way, provided their support, loving encouragement and the serenity required by this project To Xiaowei and Dale For giving me the serenity and optimism, essential for being an effective teacher and productive researcher BRIEF CONTENTS PART I INTRODUCTION TO FINANCIAL ACCOUNTING 1 Accounting: The Language of Business 2 Introduction to Financial Statements 37 Financial Statements: Interrelations and Construction 88 Accounting Principles and End-of-period Adjustments 120 PART II MAJOR ACCOUNTING TOPICS 161 Regulation of Accounting and Financial Reporting 162 Revenue Recognition Issues 207 Tangible Fixed Assets 250 Intangible Fixed Assets 290 Inventories 321 10 Financial Instruments in the Statement of Financial Position and Fair Value Accounting 348 11 Shareholders’ Equity 385 12 Liabilities and Provisions 421 13 Business Combinations 464 14 Statement of Cash Flows Construction 499 PART III FINANCIAL STATEMENT ANALYSIS 527 15 Analysis of the Statement of Financial Position/Balance Sheet 528 16 Analysis of the Income Statement 554 17 Analysis of the Statement of Cash Flows and Earnings Quality 574 18 Ratio Analysis, Financial Analysis and Beyond 600 Glossary of Key Terms Index iv 643 659 CONTENTS List of Real Companies Referenced About the Authors Preface Acknowledgements Walk Through Tour Digital Support Resources PART INTRODUCTION TO FINANCIAL ACCOUNTING 3.1 3.2 Accounting Financial accounting Users of financial accounting 4.1 4.2 Presentation of the various users Financial reporting standards: how to satisfy the users’ needs Introduction to the accounting process Financial accounting and managerial accounting Qualitative characteristics of useful financial statements 7.1 7.2 7.3 7.4 Relevance Faithful representation Comparability Verifiability 9.1 9.2 9.3 9.4 9.5 Definition of financial accounting Book value of shareholders’ equity Market value of shareholders’ equity The role of accounting in managing value History of accounting: From Sumer to Luca Pacioli A model of business activity Accounting: A language for business 2.2 2.3 8.1 8.2 8.3 xxvii xxix Business creates an agency relationship that calls for reporting Accounting is a living language Accounting is a language with some maneuvering room Timeliness Understandability Book value of shareholders’ equity and market value of the shares xxv Accounting: The Language of Business 2.1 7.5 7.6 xiv xix xxi 10 10 10 12 12 14 15 21 21 21 23 23 24 Sumerian times Accounting in Egypt Accounting in Greece Accounting in Rome Accounting in the Middle-Ages Key points Review (Solutions are on the book website) Review 1.1 Multiple-choice questions Review 1.2 Discussion questions Assignments Assignment 1.1 Multiple-choice questions Assignment 1.2 Discussion questions Assignment 1.3 Xenakis Assignment 1.4 Theodorakis Assignment 1.5 Horn of Abundance Assignment 1.6 Kalomiris Construction Assignment 1.7 Nikopoulos Assignment 1.8 Sheik Selim References Further readings Additional material on the website Notes 24 24 24 24 25 25 26 26 26 26 27 27 28 29 29 29 29 29 30 30 31 31 32 32 32 34 34 34 34 Introduction to Financial Statements 37 Statement of financial position or balance sheet 38 v vi CONTENTS The basic business equation or balance sheet equation 40 2.1 2.2 2.3 2.4 Basic principle: double entry accounting Terminology Transactions Typical transactions Income statement (or I/S or profit and loss account, also known as P&L statement, or simply P&L) 3.1 3.2 3.3 3.4 3.5 Business equation and income statement Elements of the income statement Application to Verdi Impact of transactions on financial statements Balance sheet and value creation Depreciation 4.1 4.2 Principle Application to Verdi Profit appropriation 5.1 5.2 5.3 Principle Application to Verdi Cash, profit and retained earnings Consumption of resources and inventory valuation 6.1 6.2 Goods purchased for resale (merchandise) or for use in a transformation process (raw materials, parts and consumables) Inventory of goods manufactured Financial statement analysis 7.1 7.2 7.3 Trend, common-size analysis and ratio analysis Financial situation ratios Profitability ratios Key points Review (Solutions are on the book website) Review 2.1 Vivaldi Company (1) Review 2.2 Vivaldi Company (2) Review 2.3 Albinoni Company Appendix Assignments Assignment 2.1 Multiple-choice questions Assignment 2.2 Vivaldi Company (3) Assignment 2.3 Busoni Company Assignment 2.4 Corelli Company (1) Assignment 2.5 Corelli Company (2) Assignment 2.6 adidas Group* Assignment 2.7 Stora Enso* References Additional material on the website Notes 1.1 1.2 1.3 40 41 43 53 The production process of accounting information 2.1 53 54 54 57 58 59 59 59 60 61 61 63 63 64 65 69 71 73 73 76 77 78 78 79 79 80 80 80 81 81 81 82 83 84 86 86 86 Financial Statements: Interrelations and Construction 88 Statement of cash flows 89 Accrual basis of accounting Evolution Links between statement of financial position/balance sheet, incomestatement and statement of cash flows 2.2 Double entry bookkeeping and the recording of transactions The accounting process Organization of the accounting system: The chart of accounts 3.1 3.2 3.3 Principles Standardized chart of accounts The importance of account codes 90 90 91 91 92 96 103 103 104 104 Key points 105 Review (Solutions are on the book website) 105 Review 3.1 Beethoven Company (1) 105 Review 3.2 Beethoven Company (2) 106 Review 3.3 Grieg Company (1) 106 Review 3.4 Grieg Company (2) 106 Assignments 107 Assignment 3.1 Multiple-choice questions 107 Assignment 3.2 Industry identification 107 Assignment 3.3 Schumann Company (1) 109 Assignment 3.4 Schumann Company (2) 109 Assignment 3.5 Bach Company 110 Assignment 3.6 Sibelius Company 116 Assignment 3.7 Internet-based exercise 116 Assignment 3.8 Accounting history 116 Assignment 3.9 Lavender Soap Company case 117 References 118 Further readings 118 Additional material on the website 119 Notes 119 Accounting Principles and End-of-Period Adjustments 120 Accounting principles 121 1.1 Main objective of accounting principles: give a true and fair view Objectivity Quality of information Prudence Periodicity The entity concept 122 123 125 126 127 128 End-of-period entries 129 2.1 Adjusting entries 129 2.2 Value adjustments to fixed asset accounts 132 2.3 Value adjustments to current asset accounts 133 2.4 Reporting adjusting entries 134 Recording of adjusting entries in practice 136 3.1 Revenues earned but not recorded 136 3.2 Revenues recorded but unearned 137 1.2 1.3 1.4 1.5 1.6 CONTENTS 3.3 3.4 Expenses consumed but not recorded Expenses recorded in advance 139 140 142 Correction of errors Ending inventory 142 Closing entries 142 Limitations on the applicability of accounting principles 142 Key points Review (Solutions are on the book website) Review 4.1 Adam Review 4.2 Offenbach Company Assignments Assignment 4.1 Multiple-choice questions Assignment 4.2 Roussel Assignment 4.3 Gounod Company Assignment 4.4 Lalo Company Assignment 4.5 Electrolux* Assignment 4.6 Poulenc Company Assignment 4.7 Debussy Company References Further readings Additional material on the website Notes 143 143 143 145 145 145 150 150 151 155 156 157 158 158 159 159 PART MAJOR ACCOUNTING 161 TOPICS Regulation of Accounting and Financial Reporting Financial reporting standards 1.1 1.2 Necessity of financial reporting standards The International Accounting Standards Board The content of the annual report Financial statements presentation 3.1 3.2 Possible presentations of the statement of financial position/balance sheet Possible presentations of the income statement Notes to financial statements Terminology variations Key points Review (Solutions are on the book website) Review 5.1 Orkla* Review 5.2 Holcim* Assignments Assignment 5.1 Multiple-choice questions Assignment 5.2 Unilever* Assignment 5.3 UMP-Kymmene* (usually referred to as UPM) Assignment 5.4 Nokia* and others 162 163 163 163 168 169 vii References Further readings Additional material on the website Notes 205 Revenue Recognition Issues 207 Revenue recognition 208 208 210 212 212 1.1 1.2 1.3 1.4 Sale of goods Rendering of services Interest, royalties, and dividends Revenue recognition and reporting Accounting for differences in net income calculations originating from diverging financial reporting and tax regulations 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Pre-tax income and taxable income Impact of permanent differences Impact of temporary differences Accounting for and reporting income taxes Recognition of a net deferred tax asset Accounting for net operating losses Changes in tax rates Long-term contracts Reform of accounting standards on revenue recognition and long-term contracts Instalment sales Extraordinary and exceptional items Reporting accounting changes 7.1 7.2 7.3 Changes in accounting policies Changes in accounting estimates Prior period errors Reporting discontinued operations Comprehensive income 9.1 9.2 Principles Examples 10 Government assistance: grants and subsidies 10.1 Grants related to assets 10.2 Grants related to income 10.3 Forgivable loans and repayable grants 205 205 206 214 215 217 217 223 224 224 226 226 227 227 227 228 228 229 229 230 232 232 233 234 234 236 236 169 176 181 184 186 186 186 187 187 187 188 189 189 Key points 237 Review (Solutions are on the book website) 237 Review 6.1 Schultz Accountancy Firm (1) 237 Review 6.2 Schall Company 238 Assignments 238 Assignment 6.1 Multiple-choice questions 238 Assignment 6.2 Schultz Accountancy Firm (2) 239 Assignment 6.3 Nielsen Company 239 Assignment 6.4 UBS AG* and UPM-Kymmene* 240 Assignment 6.5 Harmony Accountancy Firm 241 Assignment 6.6 Apple*: iPhone Revenue Recognition Strategy 243 References 247 Further readings 248 viii CONTENTS Additional material on the website Notes 248 250 Tangible Fixed Assets 249 General principles 251 1.1 Categories of fixed assets 251 1.2 Accounting issues relating to tangible assets 252 1.3 Definition of tangible fixed assets 253 1.4 Cost of acquisition 256 Depreciation 257 2.1 Components of a complex tangible asset 258 2.2 Residual value 258 2.3 Depreciable amount or depreciable base 258 2.4 Useful life (or service life) for accounting purposes 259 2.5 Choice of a depreciation method 260 2.6 Depreciation schedule 268 2.7 Book value (also called ‘net book value’ or ‘carrying amount’) 268 2.8 Recording the depreciation expense 269 2.9 Summary of the income statement impact of the different methods 269 2.10 Reporting depreciation policies 271 Impairment 271 3.1 Principle 271 Assets constructed by and for the enterprise (internally generated assets) 4.1 4.2 4.3 Definition – Principle Valuation Recording of the transactions Particular issues relating to reporting land and buildings 5.1 5.2 Cases in which land is a depreciable asset Land and building Costs subsequent to acquisition Disposal of long-term assets 7.1 7.2 Recording of the sale of an asset Classification in the income statement Financial aspects of tangible assets 8.1 8.2 8.3 Depreciation and cash flow Reporting movements in tangible assets Financial statement analysis Key points Review (Solutions are on the book website) Review 7.1: Gibbons Assignments Assignment 7.1: Multiple-choice questions Assignment 7.2: Discussion questions Assignment 7.3: Reporting in different sectors of activity Assignment 7.4: Reporting in the same sector of activity Assignment 7.5: Choice of depreciation methods Assignment 7.6: Tippett Assignment 7.7: Britten Inc Assignment 7.8: Merck* Assignment 7.9: Honda Motor Co.* References Further readings Additional material on the website Notes 284 Intangible Fixed Assets 290 Definition of intangibles 291 291 293 297 1.1 1.2 Principles Main categories of intangibles Recognition of intangible assets Reporting of changes in intangible assets value 3.1 3.2 Different possibilities exist of changes in intangible assets value Comparison of the approaches of the IASB and the FASB (USA) Accounting for research and development 4.1 4.2 4.3 Definition Elements of the debate over capitalization of R&D Reporting R&D activity Accounting for computer software 5.1 5.2 272 272 273 274 Accounting rules Reporting computer software costs Financial statement analysis 6.1 6.2 6.3 R&D intensity Link between R&D and growth Link between R&D and market value 285 286 288 288 289 289 299 299 300 304 304 304 306 308 308 309 310 310 312 312 275 275 275 276 277 277 277 278 278 279 280 282 282 282 283 283 283 Key points Review (Solutions are on the book website) Review 8.1 Turina Review 8.2 De Falla Assignments Assignment 8.1 Multiple-choice questions Assignment 8.2 Discussion questions Assignment 8.3 Reporting of intangibles Assignment 8.4 Searching for specific intangibles Assignment 8.5 R&D intensity Assignment 8.6 CeWe Color* Assignment 8.7 Granados Company Assignment 8.8 Sanofi* References Further readings Additional material on the website Notes 312 Inventories 321 Classification of inventories 322 322 322 323 312 312 313 313 313 314 314 314 315 315 315 316 319 319 320 320 284 284 284 284 1.1 1.2 1.3 Definition Different types of inventories Weight of inventories in the balance sheet CONTENTS Inventory recording systems 2.1 2.2 2.3 2.4 Perpetual (or permanent) inventory system Periodic inventory system Comparison of recording Presentation of inventories in the income statement by nature Inventory valuation and reported income 3.1 3.2 The basic issue Methods for the valuation of inventory outflows (costing formulae for withdrawals) Inventories and cash flow Decline in value of items in inventories (end of year adjustments) Income statement by nature and income statement by function Disclosure of inventory valuation policies Financial statement analysis pertaining to inventories 326 326 327 328 328 328 328 331 334 334 334 335 337 Key points 339 Review (Solutions are on the book website) 340 Review 9.1 Ericsson* 340 Assignments 341 Assignment 9.1 Multiple-choice questions 341 Assignment 9.2 Discussion questions 341 Assignment 9.3 NorthWest Boards & Bikes 342 Assignment 9.4 WPP plc* and Irish Continental* 342 Assignment 9.5 Stravinsky 342 Assignment 9.6 Repsol* 343 Assignment 9.7 Tchaăkovsky 344 Assignment 9.8 McDonald’s* and others 344 Assignment 9.9 Toyota* 346 References 346 Further readings 346 Additional material on the website 347 Notes 347 10 Financial Instruments inthe Statement of Financial Position and Fair Value Accounting Definition of financial assets and liabilities Cash and cash equivalents Financial asset and liability at fair value through profit or loss 3.1 3.2 3.3 3.4 Definitions Accounting for financial assets at fair value through profit or loss Reporting financial asset at fair value through profit or loss Evolution and debate over regulation and practice Held-to-maturity financial assets Receivables 5.1 5.2 5.3 Accounts receivable or ‘receivables’ Notes receivable Sales returns Available-for-sale financial assets 6.1 6.2 6.3 6.4 Definition Initial recognition Recognition of the evolution of value Special case of unlisted (untraded) financial assets Financial instrument recognition after 2015 Financial statement analysis 349 351 353 353 374 11 Shareholders’ Equity 385 Forms of business organization 1.1 1.2 1.3 Sole proprietorship Partnership Limited liability company Share capital 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 3.4 Definition Nominal or par value Payment of share capital Different categories of shares Share premium Accounting for share capital Reporting share capital Dividends Reserve accounts Reporting retained earnings and reserves Reporting and accounting for shareholders’ equity Accounting for the issuance of shares granted for non-cash capital contributions 354 4.2 354 358 370 374 376 4.1 357 358 358 367 368 370 370 370 370 Key points Review (Solutions are on the book website) Review 10.1: Berg Assignments Assignment 10.1: Multiple-choice questions Assignment 10.2: Mahler Assignment 10.3: Bosch* Assignment 10.4: Bayer* Assignment 10.5: Holmen* Assignment 10.6: Youngor* References Further readings Additional material on the website Notes Profit appropriation 348 ix 4.3 377 377 377 377 378 378 379 380 381 383 383 383 384 386 387 387 387 388 388 388 389 389 391 391 392 393 393 394 394 395 397 Issuance of shares for capital contributions in kind 398 Issuance of new shares due to capitalization of retained earnings or of some reserves 398 Issuance of shares resulting from an increase in capital due to a conversion of liabilities 399 652 GLOSSARY OF KEY TERMS supplies to be consumed in the production process or in the rendering of services’ (IAS 2, IASB 2003: § 6) Inventory trade financing Accounts payable/ Inventory Inventory turnover Number of times the inventory ‘turns’ during the accounting period For finished products, it is calculated as the ratio obtained by dividing the cost of goods sold of a period by the average inventory value of finished goods over the period By extension, and for simplicity reasons and lack of publicly available information, that ratio often includes all inventories in the denominator Dividing 365 by the inventory turnover ratio transforms it in a number of days held in inventory Investee Legal and independent business entity in which an investor is acquiring an interest Synonym of acquiree Investment ratio Capital expenditures/(Depreciation plus sales of long-term assets) Joint arrangement ‘Arrangement of which two or more parties have joint control’ (IAS 28, IASB revised 2011: § 3, IFRS 11, IASB 2011: § 4) Joint control ‘Contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control’ (IAS 28, IASB revised 2011: § 3) ‘Contractually agreed sharing of control [between two or more legal entities] over a [third] economic activity’ (until 2013, IAS 31, IASB 2003: § 3) Joint operation ‘Joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement’ (IAS 28, IASB revised 2011: § 3, IFRS 11, IASB 2011: § 15) Joint venture ‘Joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement’ (IAS 28, IASB revised 2011: § 3, IFRS 11, IASB 2011: § 16) ‘Contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control’ (until 2013, IAS 31, IASB 2003: § 3) Journal Day-to-day chronological register of accounting data describing economic transactions Last-in, first-out (LIFO) Method of valuation of goods withdrawn from inventory, in which withdrawals (to ultimately serve the customer) are valued, at the unit cost of the batch they belong to, using the batches (till exhaustion of the batch) in the reverse order from the one they followed when entering inventory Lease ‘Agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time’ (IAS 17, IASB 2003: § 4) Ledger Grouping of accounts having homogeneous characteristics such as reflecting similar types of transactions Legal forms of organization The legal form adopted by a business determines aspects of the extent of liabilities the investors are exposed to, taxation of profit and a variety of issues such as decisionmaking rules, delegation and the sharing of economic profit The most common legal forms of organization are: (1) Sole proprietorship; (2) partnership; and (3) limited [liability] company Lender Someone who lends money (i.e., allows, in return for a rent or interest, a third party to use, temporarily, its own funds for the third party’s benefit) or gives credit in business matters (i.e., accepts that the cash or consideration it is owed (entitled to), due to previous transaction or contracts, be settled at a later date, thus postponing the drain on the cash of the third party firm and creating de facto a form of financing Liability ‘Present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity [at an agreed upon date] of resources embodying economic benefits’ (Conceptual framework, IASB 2010: § 4.4) Licensing agreement Allows a business to use properties or rights owned by other entities for a fee and for an agreed upon duration It applies specifically to patents and trademarks Limited liability company Incorporated business where liability assumed by the investors does not extend beyond their investment Loans and receivables ‘Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market (…)’ (IAS 39, IASB 2008: § 9) They are valued in the balance sheet at cost Long-term contract Contract linking two parties that span several accounting periods for the purpose of delivering, by one party to the other, an asset at a given date (or on several dates) or provision of a defined service for the duration of the contract against a pre-agreed flow of considerations Long-term debt to equity ratio Long-term debt/ Shareholders’ equity or Long-term debt/(Shareholders’ equity ỵ Debt) Long-term funding or long term capital employed Shareholders equity ỵ Long-term debt Long-term or long-lived Qualifier of an activity or a resource that will create benefits or obligations over a period exceeding 12 months GLOSSARY OF KEY TERMS Loss carry-forward (or loss carry-back) See Carryforward (or carry-back) Lower of cost or market Principle of valuation of resources or liabilities under which an item is valued at its historical cost, or at market value if the latter is lower than the cost Managerial accounting The branch of accounting that deals with providing a rather detailed account of how resources are acquired, managed and used in the various business processes constituting the firm and is thus of particular interest to managers inside the firm Its information and data are proprietary to the firm and of strategic importance Mark to market The fair valuation of an investment in the financial statements by using an active quoted market price Mark to model The fair valuation of an investment without an active quoted market price as obtained from a selected (and publicly described) valuation model or method Market to book ratio Market price per share/Book value per share Matching principle ‘Simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other [linked] events’ (Conceptual framework, IASB 2010: § 4.50) Materiality and aggregation ‘Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements’ (IAS 1, IASB 2007: § 7) ‘An entity shall present separately each material class of similar items An entity shall present separately items of a dissimilar nature or function unless they are immaterial’ (IAS 1, IASB 2007: § 29) Measurement ‘Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement’ (Conceptual framework, IASB 2010: § 4.54) Merchandise Goods purchased for resale without transformation Minority interests See non-controlling interests Monetary assets ‘Money held and assets to be received in fixed or determinable amounts of money’ (IAS 38, IASB 2004: § 8) Movements (changes) in tangible assets Statement providing a reconciliation of the gross and net carrying amount of tangible assets at the beginning and end of the period by listing acquisitions, disposals, and depreciation Multiple-step format (balance sheet) List of subsets of the main categories of assets and liabilities organ- 653 ized so as to identify useful subtotals by separating relevant other sub-categories of assets or liabilities with the intent of providing the user with a richer description of the firm’s business model as reflected in the financial statements Multiple-step format (income statement) Revenue and expense categories are paired so as to highlight, in a stepwise fashion, specific sub-components of total net income Nature See By nature Net assets Assets minus liabilities (same as net worth) Net cash Difference between cash and cash equivalents (assets) and liabilities accounts corresponding to negative cash (such as bank overdrafts) Net income Remainder after all relevant expenses have been deducted from revenues Measure of the wealth created by an economic entity (increased shareholders’ equity) during an accounting period Net profit margin See Return on sales Net (book) value See Book value Net worth Difference between total assets and liabilities (same as net assets) No offsetting principle ‘An entity shall not offset assets and liabilities or income and expenses, unless [explicitly] required or permitted by an IFRS’ (IAS 1, IASB 2007: § 32) For example a bank account with a positive balance with Bank A and a negative bank account balance in Bank B cannot be offset against each other to create a ‘net bank account balance’ This principle is essential to the provision of a rich description of the risks and opportunities facing the business Nominal value Face value of a share (or a bond) Non-cash items Items of the income statement which, by nature, will never generate a real cash flow (depreciation expense, provision expense…) Non-controlling interests ‘The equity in a subsidiary not attributable, directly or indirectly, to a parent’ (IFRS 10, IASB 2011: § 4; until 2013, IAS 27, IASB 2003: § 4) Non-current or long-lived assets Resources that are not supposed to be sold or potentially consumed in their entirety in the the course of normal operating cycle, or resources that are not supposed to be realized (sold or transformed into cash) within twelve months after the reporting period Non-operating items See Exceptional items Notes payable Accounts payable (promise by the customer, recognized in the books of the customer, to pay the supplier) represented by a note issued by the customer and accepted by the supplier or issued by the supplier and accepted by the customer 654 GLOSSARY OF KEY TERMS Notes receivable Accounts receivable (recognition, in the books of the supplier, of a claim the supplier holds over a customer, for their future payment of supplier-provided goods or services) represented by a note issued by the seller and accepted by the customer or issued by the customer (promissory note) Such notes can be sold to a third party Notes to the financial statements The Notes ‘shall: (a) Present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs 117–124 [which deal with ‘Disclosure of accounting policies’]; (b) Disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and (c) Provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them’ (IAS 1, IASB 2007: § 112) Obligation ‘Duty or responsibility to act or perform in a certain way’ (Conceptual framework, IASB 1989: § 60) Offsetting See No offsetting principle Off balance sheet items Items not listed in the balance sheet of the company Operating cash ratio See Cash flow yield Operating leases ‘Lease[s] other than a finance lease’ (IAS 17, IASB 2003: § 4) Operating segment ‘A component of an entity: a That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), b Whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and c For which discrete financial information is available’ (IFRS 8, IASB 2006: § 5) Ordinary shares Shares that not carry special rights Organization costs incorporation or set-up costs Costs incurred during the process of establishing or incorporating a business Outstanding capital Amount defined by multiplying the number of outstanding shares by the par value It represents the subscribed capital (at par) minus the par value of any share that has been bought back by the corporation (treasury shares) Paid-in capital or contributed capital Part of the capital that has been effectively contributed by the shareholders and is available to the corporation Partnership Legal form of organization of a business, often not incorporated, where associates or partners are fully responsible for all the consequences of the actions of the entire business Par value See nominal value Patent Document granted by a government or an official authority bestowing on the inventor of a product or manufacturing process the exclusive right to use or sell the invention or rights to it Payable days See Average payment period Periodic inventory system Method of valuation of the withdrawals from inventory in which the cost of goods sold is found by deduction: ‘Beginning inventory plus Purchases minus Ending inventory ¼ Cost of goods sold’ It is therefore relying on a periodic (annual) physical counting to establish the quantities of each item existing in the ending inventory Permanent difference Difference between taxable income and pre-tax income linked to differences in rules of recognition of certain transactions (expenses) between the book accounting for reporting to shareholders (following GAAP) and tax deductibility rules (which follows the Tax code of the country) Perpetual inventory system Method of valuation of the withdrawals from inventory in which the cost of goods sold is the sum of the cost of all discrete withdrawals valued using a continuous recording of changes in inventory (each entry leads to an update and each withdrawal is valued at the current Weighted Average cost or appropriate FIFO cost) The value of the theoretical ending inventory is found by deduction, before being confronted (and adjusted if necessary) with a physical count of the existing inventory Post-employment benefits Obligations an employer has towards its personnel after they leave the firm Such obligations to an individual accrue with the passage of time in employment It becomes definitive immediately if the post-employment benefit programme is external to the firm When the firm administers internally the payment of these benefits, the obligation becomes definitive once the duration of employment of the individual in that firm exceeds a predetermined threshold and the individual’s rights are ‘vested’ The cost of funding these benefit plans is a part of the labor compensation expense Such benefits include: pensions, other retirement benefits, post-employment life insurance and postemployment medical care Posting Process of transferring entries from the journal to a ledger Potential cash flow Cash flow from operating activities calculated solely on the basis of cash items Preferred shares Shares granting to its holder a higher or guaranteed dividend or a priority dividend, often at the expense of loss in voting rights GLOSSARY OF KEY TERMS Prepaid expense An asset representing the acquisition of a service for which an invoice has been received but which has not yet been consumed This is, for example, the case of the payment of an insurance premium The expense will be recognized in the income statement by reducing the prepaid expense (as an asset) proportionately to the consumption of the service (usually proportional to passage of time) Prepaid revenue Revenue recognized as cash or receivables but for which the services have not yet been rendered, i.e., a liability Price/earnings ratio Market price per share/earnings per share Profit and loss account (or statement) Also referred to as P&L, this is an alternative name for the income statement Profit appropriation Decision taken by the shareholders regarding the allocation of earnings of the period to dividends and/or to retained earnings Proportionate consolidation ‘Method of accounting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements’ (IAS 31, IASB 2003: § 3) (method eliminated by IFRS 11, IASB 2011) Provision ‘Liability of uncertain timing or amount’ (IAS 37, IASB 1998: § 10) Prudence principle See Conservatism Quick ratio (Cash ỵ marketable securities þ accounts receivable)/Current liabilities R&D intensity R&D expenses/sales revenue R&D per employee R&D expenses/number of employees Rate of return on tangible assets Net income/ Net tangible assets Ratio analysis Process of analysis consisting in measuring of and evaluating the assumed relation between two or more components of financial statements Raw materials Goods or untransformed resources incorporated in the production process that become integrally and physically part of the sellable object resulting from the transformation process Raw materials are distinct in purpose from supplies and energy, for example, which could be the same resources as raw materials but which are consumed in order to facilitate the transformation process creating the product that will eventually be sold Receivables turnover Ratio measuring the number of times receivables turned over during the year: Net sales/Average accounts receivable 655 Recognition of intangible assets ‘An intangible asset shall be recognized if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably’ (IAS 38, IASB 2004: § 21) Recourse If the discounting of a note is without recourse, the note is sold with complete transfer to the buyer of the note of the default risk of the drawer If it is made with recourse, i.e., it is a conditional sale: if the drawer defaults on the maturity date, the discounting financial institution will demand full reimbursement of the note plus fees from the seller of the note who sold it for discounting in the first place Relevance Information is relevant when it has the potential to influence the economic decisions of users by helping them evaluate past, present or future events and either confirm, or amend past evaluations Reliability Information should be ‘reliable, in that financial statements: Represent faithfully the financial position, financial performance and cash flows of the entity; Reflect the economic substance of transactions, other events and conditions, and not merely the legal form; Are neutral, i.e., free from bias; Are prudent; and Are complete in all material respects’ (IAS 8, IASB 2003: § 10) Representation ‘Financial reports represent economic phenomena in words and numbers To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent To be a perfectly faithful representation, a depiction would have three characteristics It would be complete, neutral and free from error’ (Conceptual framework, IASB 2010: § QC12) Research ‘Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’ (IAS 38, IASB 2004: § 8) Reserves (different types) Earnings set aside, on a yearly basis, either due to regulatory, or statutory rules or to discretionary decisions made by the general assembly of shareholders for a specific purpose Examples of reserves are: legal reserve, statutory reserves, regulated reserves, optional (voluntary) reserves, revaluation reserves Reserves are part of shareholders’ equity Residual income Income figure obtained after taking into account the cost of all sources of funds, including a fair (even if nominal) remuneration for 656 GLOSSARY OF KEY TERMS the shareholders, not just the financial costs due to interest-bearing liabilities Residual value ‘Estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life’ (IAS 16, IASB 2003: § 6) Resources See Assets Retained earnings Part of the value created through the firm’s operations (i.e., profit) that shareholders have chosen not to take out of the firm It is a de facto increase in their contribution to the ongoing activity of the firm They are part of shareholders’ equity and could be distributed as dividends if the shareholders decided to so, for example if earnings of a period were insufficient to maintain a level of dividend expected by shareholders Return on assets (ROA) Net income/[(Assets Year ỵ Assets Year 1)/2] Return on capital employed (ROCE) Earnings before interest and tax (EBIT)/Capital employed (where Capital employed is: Average long-term liabilities ỵ Average equity) Return on equity (ROE) Net income/Average equity Return on investment (ROI) For a given well defined project or investment, the ROI is defined by the following ratio: Income generated by the project or investment (generally before tax) divided by Capital employed to fund the project or investment, regardless of whether the funds invested are provided by shareholders or third parties or a combination of both Return on sales (net profit margin) Net income/Sales Return on shareholders’ equity (ROE) Net income/ Average equity Revenue ‘Gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants’ (IAS 18, IASB 1993: § 7) Revenue expenditure Expenses incurred due to the short-term usage – or maintenance – of the revenue generating potential of an asset (examples: minor spare parts, oil and cooling fluids, maintenance expenses, minor repairs expenses) Revenue recognition Recording the impact of a transaction on the revenue component of the income statement Sales return Reversal of a sale when a customer is not satisfied for any reason with the product that was delivered (such as non-conformity of delivery with order, defects, etc.) The sales transaction is reversed and the goods must be re-entered in inventory after control of their quality, or otherwise disposed of through a ‘fire sale’, or shipping to a specialized outlet store, or even scrapped Sales revenue or sales turnover Income from sales of goods and services Sales revenue per employee Sales/Number of employees Scoring models Model generally based on a linear multivariate regression analysis (or using linear discriminant analysis) of several ratios and/or elements of the financial statements that create a unique ‘score’ for a firm at one point in time If the score is (or drifts) above or below certain experiential thresholds, the likelihood of the business failing is declared to be high or low SEC US Securities and Exchange Commission (regulating the US securities market) Semi-finished goods Items that are finished with regard to one stage of production but are nonetheless not sellable in that condition They will generally be integrated in a finished product at a later date Shareholder Any person, company, or other institution that owns at least one share in a company Share capital Historical value (at par) of the contributions to the firm all shareholders have made in the beginning and during the life of the firm by making external resources available to the firm and giving up control over these resources (cash, effort or ideas, physical assets, etc.) Share dividend (also known as stock dividend) Dividends paid out by giving shares of the firm (or portion of shares) to the shareholders in lieu of cash The issue of share dividends can be in lieu of dividends for all shareholders or as a possibility offered to individual shareholder to opt and forego her or his right to a dividend and increase the number of shares it holds Share premium Difference between the issue price and the par value of a share Significant influence ‘Power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies’ (IAS 28, revised 2011: § 3, until 2013, IAS 28, IASB 2003: § 2) Single-step format (balance sheet) Balance sheet presented with assets, on one hand, and shareholders’ equity and liabilities on the other Single-step format (income statement) Simplified version of the income statement Expenses and revenues are each considered as one category Sole proprietorship Entity in which the single capital provider holds claim to 100 per cent of the GLOSSARY OF KEY TERMS future wealth creation of the business and bears all the risks of the venture Specialized ledger Grouping of accounts having homogeneous characteristics such as reflecting similar types of transactions (e.g., sales, purchases) Specific identification method Method of inventorymovements valuation in which the cost, upon withdrawal from inventory, of items that are not ordinarily interchangeable or fungible is absolutely identical, item by item, to the one they had when entering in inventory Stakeholders Any party that has a ‘stake’ in the outcome and output resulting from the activity of an entity They include a variety of parties: investors, employees, customers, suppliers, government, etc Statement of cash flows ‘The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities’ (IAS 7, IASB 1992: § 10) Financial statement providing information about the historical changes in cash and cash equivalents of an entity and classifying cash flows during the period in three sections: operating, investing and financing activities Statement of comprehensive income Statement reporting the sum of the net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from ‘available for sale securities’ and foreign currency translation gains or losses Statement of financial position Official name, under IFRS, for balance sheet Statement of financial structure Statement formalizing the cash equation which relates three main concepts; working capital, working capital need and net cash Statement of intermediate balances Income statement structured and presented so as to highlight the key sequential intermediate balances that describe the value (income) creation process such as commercial margin, value added and gross operating profit Stock option plan Motivational device in which the corporation grants employees (if certain conditions are met) the right to acquire a specified personalized number of shares of the corporation at a predetermined invariant price and for a specified time window Straight-line method Method of depreciation in which the depreciable value of an asset is depreciated evenly over its useful life Subscribed or issued capital Part of the capital authorized that the shareholders have agreed to purchase and pay when called to so 657 Subsidiary ‘Entity (…) that is controlled by another entity (known as the parent)’ (IFRS 10, IABS 2011: Appendix A, until 2013, IAS 27, IASB 2003: § 4) Substance over form ‘If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form’ (Conceptual framework, IASB 1989: § 35) The capitalization of financial leases is an example of the application of this principle Tangible assets (also called ‘tangible long-lived assets’, ‘tangible fixed assets’, ‘property, plant and equipment’, ‘plant assets’, or ‘operational assets’) ‘Tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period’ (IAS 16, IASB 2003: § 6) Tangible asset turnover Net sales/Average net tangible assets (net book value) However this ratio, reflecting the productivity of the tangible fixed assets, is structurally flawed since its value will naturally increase year on year because of the declining denominator, thus providing misleading signals A better measure would be to use the gross (historical) value (or even better the replacement value) of the tangible assets as the denominator, as opposed to the net tangible assets in the commonly used formula mentioned earlier Taxable income Difference between taxable revenue and deductible (or tax deductible) expenses or costs Temporary difference Difference between taxable income and pre-tax income linked to the timing of recognition of revenues or expenses Term See By Term Trademark (or trade name or brand name) Distinctive, exclusive and proprietary identification (symbol, logo, design, word, slogan, emblem, etc.) of a manufactured product or of a service that distinguishes it from similar products or services provided by other parties Trade payable Obligation of a business to a creditor (generally a supplier or vendor) usually arising from the purchase of goods and services on credit Transaction types They are: sale of goods, rendering of services, interest, royalties, dividends Transfer fees Fee paid by a professional sports team to another to acquire one of their players Acquisition value of soccer, football or basketball players at the time of a transfer between teams Treasury shares (own shares) Shares of a company acquired by itself These shares lose their voting 658 GLOSSARY OF KEY TERMS rights Treasury shares can be used for such purposes as consideration in the context of an acquisition (thus reducing the impact of the acquisition on cash), attribution to deserving employees in the context of a stock option plan or outside of it, or simply retired to reduce the float of shares in the open market, thus mechanically increasing the value of the shares outstanding Trend analysis Comparison over time of the evolution of a specific expense or revenue item or a particular asset or liability item Trial balance List of the debit and credit footings for each account in the general ledger True and fair view Objective of financial statements not defined in the accounting standards T-account Simplified two-column account form that resembles capital letter ‘T’ It is used to visualize the different elements of transactions Uncalled capital Part of the subscribed capital that has not been called up Unearned revenue A liability recognizing that a customer has paid before the product or service was delivered A prepayment or a down payment lead to the recognition of a liability called unearned revenue, balancing the cash received It is generally considered as part of short-term liabilities The liability will be drawn down as the service is rendered, or the goods are delivered, or as a percentage of the completion of the contract Unit of measurement Financial accounting only records transactions expressed in financial units Unusual income Equivalent to exceptional income (see Exceptional items) Useful life ‘Either: (a) the period of time over which an asset is expected to be available for use by an entity; or (b) the number of production [output] or similar units expected to be obtained from the asset by an entity’ (IAS 16, IASB 2003: § 6) Users (of financial information) Investors, managers and any and all stakeholders in the firm Valuation difference Difference between the fair (market) value of each identifiable asset or liability and their book value Value added Creation or increase in value, resulting from the entity’s current professional activities, over and above that of goods and services provided by third parties and consumed by the firm Vertical format (balance sheet or income statement) Continuous list of account balances Weight of tangible assets Net tangible assets/Total assets Weighted average cost method (WAC) Method of valuation of goods withdrawn from inventory Under this method, goods are considered to be totally fungible Withdrawn units are valued at the average cost per unit of available goods The average is updated after each new addition to inventory, or once a month (in which case the previous month’s average is used to value withdrawals and an adjustment to COGS must be entered as part of the end of period entries) Work-in-process (WIP) Products still in the manufacturing process at the close of the day; or Services rendered but not invoiced In either case it is an asset Work-in-progress (WIP) In a long-term contract, the accumulated costs incurred to date not yet billed to the customer It is an asset Working capital Shareholders’ equity plus long-term (financial) debt minus fixed (non-current) assets or, alternatively, currents assets (including cash) minus current liabilities (including bank overdrafts) Working capital need(s) It is a measure of the shortterm funds needed by a business in carrying its affairs that results from the differences in timing between cash outflows created by expenses and cash inflows created by revenues When the cash flow need (or needs) is negative, it is called ‘financing source’ The formula for its calculation is: Current assets (excluding net cash) minus Current liabilities (excluding bank overdrafts) INDEX Abercrombie & Fitch 135, 309 Academie Franỗaise accelerated depreciation 215 account codes 104 accounting definition of 10 history of 25–8 as a language for business 4–9, 35 accounting changes 8–9, 228–30 accounting estimates 229 accounting periods 127 accounting policies 228–9 accounting principles 121–8, 142 accounting process 11, 15–21, 96–103 accounting standards 14–15, 163–8, 227 accounting strategies accounts see financial statements accounts manipulation 580–3 accounts payable 428 accounts receivable 358–69 collectibility of 360–4 no-offsetting principle 359–60 reporting 364–6 accrual principle 8, 54, 90, 127 accrued liabilities 434–5 accumulated depreciation 59–60, 269 Acer Inc 502 acid test 603, 608 Acme Bank 124 Acme Manufacturing Enterprises Ltd 453 acquisitions 472–3 acres 36 Activision Blizzard Inc 502, 555 activities 54 adidas Group 83–4, 136 adjusting entries 129–42 current asset accounts 133–4 fixed asset accounts 132–3 recording of 136–42 reporting 134–6 Aeroflot 180, 549–51 aging schedule of receivables 360, 362, 384 Agfa Gevaert 634–5 Air Canada 180 Air Command Systems International SAS 485 Air Liquide 123, 411 Air Products and Chemicals 411 Airgas 411 Albeniz NA 294–5 Albinoni Company 79 Alliance Boots GmbH 486 allowance method for uncollectibles 362 Alpha Company 354 Alsbridge 606 Altman’s Z Score 624–5 Aluminum Corporation of China 292, 408 Amgen 310 amortization 358, 441 Amper Programas de Electronica Y Communicaciones SA 485 analysis of transactions 11 Anheuser-Busch InBev 466 annual accounts see financial statements annual reports 163, 168–9, 611–13 Apple Inc 25, 35, 214, 243–7, 249, 310, 578, 579 A/R (accounts receivable) 358–69 ARC (European Accounting Regulatory Committee) 167 ArcelorMittal SA 325–6, 396–7, 430–1, 461–2 assets 41, 171–3 see also current assets; financial assets; fixed assets; intangible assets; long-lived assets; non-current assets; operating assets; tangible assets assets turnover 608, 609 associates 469 Atos Origin 227, 280 Atrium Auditorium Inc 237 Australia 167 authorized capital 389 available cash flow 576–7 available-for-sale financial assets 370–4 average collection period 74, 603, 608 average days of inventory available 338 average days of sales 375 average equity 641 average payment period 75, 608, 609 Bach Company 110–15 bad receivables 384 Badings Company 496 balance sheet see statement of financial position balance sheet equation 38–54 Bang & Olufsen 292, 352, 433–4 Bank of Ningbo 381 Barber Company 405 Barry Callebaut AG 36, 36 Bartok Company 587 Bayer 236, 273, 306, 309, 310, 360, 379–80 Bayer CropScience 180, 190, 197, 204 Beethoven Company 105–6 Benetton 180 Benihana Inc 135, 136, 344, 520 Bernstein AG 556, 556–8 Bernstein Company 415–16 Berwald Company 438 Best Buy 243, 369, 369 Beta Company 354 beta factor (b) 599 big bath accounting 581 bills of exchange 367 biotechnology 599 Bizerte Home Furniture Company 629– 32 bonds 437–41 book retailers 8–9 book value 24–5, 36, 59, 268 Borodine Company 327–8 borrowing costs 273 Bosch 180, 272, 326, 356, 378–9 Bosmans Company 496 Boston Consulting Group 621 Boticcelli Markets 237 bottom line 56 Bouygues Company 272 BP plc 538, 552 Brahms Company 181 brands 294 British Airways 260 Britten Corp 275 Britten Inc 2845 Bruăckner GmbH 362, 364 buildings 2756 see also tangible fixed assets Bulgari 135 Bull Group 212–13, 212–13, 310 bushels 36 business combinations 464–92, 467–8 business entities, sources of information 611–13 business equation 38–54 business governance 625–8 business models 2–4 business organization 386–8 business publications 613 Busoni Company 81 BYD Company Limited 584 659 660 INDEX Cable and Wireless Worldwide plc 466 called-up capital 389 Canada 167 capital 385–6 see also share capital; working capital capital expenditure 255 capital increases 409 capital intensity ratios 280–1 capital providers 5–7 capital receivable 389 capital reduction 401 capital structure ratio 75–6 capitalization of research and development 304–6 capitalization of reserves 398–9 capitalized interest 273 capitalized leased assets 451 Carrefour 55 carrying amount see book value cash 351–3, 500, 505 cash accounting cash burn 599 cash equivalents 351–2, 505 cash flow adequacy 579 cash flow as percentage of sales 577–8 cash flow return on investment (CFROI) 621 cash flow yield 578 cash flows see also statement of cash flows arising from financing activities 502–3 classification of 503 inventories 334 tangible fixed assets 278–9 cash leverage ratio 578 cash liquidity ratio 578 cash pump cycle 3–4 cash ratio 74, 608 cash value added (CVA) 621 Cegos 606 CeWe Color Holding AG 315 CFROI (cash flow return on investment) 621 Chapter 11 protection 87 Charbonnages de France 323 chart of accounts 103–4 China Communications Construction 190, 198, 204, 306, 308, 571–2 China Dangdang Inc China Eastern Airlines 180, 489, 563–6 China International Marine Containers 495 China National Offshore Oil Corporation (CNOOC) 466 China Petroleum & Chemical Corporation 251, 352, 359, 537–8, 552, 5902 China Unicorn 21314 Chocoladefabriken Lindt & Spruăngli AG 36 chronological analysis 73, 529, 555–7 Chugoku Power Electric 180, 546–7, 567 Cimpor 180 Citic Securities 381 Citylink Telecommunications Holding Ltd 485 Civil Aviation Administration of China 573 civil year-end closing 11 closing dates 11 closing entries 142 Club Me´diterrane´e 180, 251, 296, 302– 3, 389, 403, 455, 569–70 CNOOC (China National Offshore Oil Corporation) 466 Cobham 456–7, 505 COGS (cost of goods sold) 332–3 commercial margin 560 commercial paper 367 Common Era calendar 36 common-size analysis 73, 530–2, 557– 66 Compagnie Ge´ne´rale des Eaux 568 comparability of financial statements 23–4 compensation expenses 448 comprehensive income 232–4, 406 computer software 294, 308–10 conservatism 126–7 consistency of presentation 128 consolidated financial statements 468–9 see also financial statements consolidation deferred taxation 489 foreign currency 489 methods 471–87 equity method 481–3 full consolidation 473–81 group sales revenue 486–7 net income 486–7 proportionate consolidation 483–5 process 488–9 consumption of goods and services from third parties 561 Continental AG 605 contingent liabilities 435–7 contributed capital 389 control 466, 469, 470, 498 Copland Company 413 copyright 294 Corelli Company 81–2 Corona 466 corporate governance 625–8 corporate social responsibility 628 correction of errors 142 cost of goods sold (COGS) 332–3 cost of inventories 328–9 costs subsequent to acquisition 276 creative accounting 581 credit terms 361 credits 94–6 cross-sectional comparisons 605–6 cumulative dividends 420 cuneiform 36 current assets 41, 133–4, 641 current cost 123 current liabilities 422, 427–9, 641 current period ‘production’ 560–1 current ratio 73–4, 603, 607 customer lists 294–5 cut-off dates 130 CVA (cash value added) 621 Daimler 262 Darden Restaurant Inc 352 data 552 databases of financial statements 613 DCNS 486 De Falla Company 313 debits 94–6 debt 463 debt maturity 206 debt ratio 411, 608 debt to equity ratio 75, 451, 608 debt to tangible net worth 608 Debussy Company 157–8 deferred charges 295 deferred taxation accounting 224 defined benefit plans 450–1 defined contribution plans 449–50 delegation Dell 466 Delta Air Lines 180, 190 depletion 258, 289 depreciation 59–61 declining balance method 263–5 income statement 269–70 land 275–6 long-lived assets 54, 132–3 methods 260–8 policies 271 productive-output method 266–7 service-quantity method 267–8 straight-line method 261–2 sum-of-the-years’-digits method 265 tangible fixed assets 257–71, 278–9 taxation 215 depreciation expense 59, 60, 269, 289 depreciation method depreciation schedule 268 derivates 384 Deutsche Bank 466 Deutsche Post Bank 466 Diageo 466 Diedrich Coffee 345 Diehl Aerospace GmbH 485 Diehl Aircabin GmbH 485 diluted earnings per share 615–16 direct write-off method 364 discontinued operations 230–2 discounting 36, 367 disputed accounts 360 dividend pay-out ratio 608 dividend yield ratio 608 dividends distribution 62, 394 in kind 405–6 INDEX revenue recognition 212 statement of cash flows 518 double entry bookkeeping 40, 92–6 doubtful accounts 360 doubtful receivables 384 DpiX LLC 486 DPS Business School Inc 239 Dr Reddy’s Laboratories Ltd 180 drafts 367 Dukas Company 146–9 DuPont formula 610–11 Dvorak Company 521, 546 EADS N.V 359, 366, 372–4 earnings 42–3, 575 earnings from operations before interest, taxes depreciation, amortization and rent (EBITDAR) 562 depreciation and amortization (EBITDA) 561–2 earnings from operations before interest and taxes (EBIT) 562, 609 earnings management 580–1 earnings per share 608, 613–16 earnings quality 579, 583–4, 599 easyJet 190, 195, 202, 562 EBIT (earnings from operations before interest and taxes) 562, 609 EBITDA (earnings from operations before interest, taxes, depreciation and amortization) 561–2 EBITDAR (earnings from operations before interest, taxes, depreciation, amortization and rent ) 562 E-Commerce China Dangdang Inc 8–9 economic value added (EVA) 410, 618– 21 EDF Group 260, 582 Electrolux 155–6 Elettronica SpA 486 EMI 466, 502 EMIS 292 employee benefits 447–51, 448 ending inventory 142 end-of-period entries 129–36 ENI 108, 394, 552 enterprise governance 625–8 entity concept 128 environmental liability 437 EPS (earnings per share) 608, 613–16 equipment 289 equity 386 equity capital see shareholders’ equity equity method of consolidation 481–3 equity ratio 410–11, 412 Ericsson 340, 365–6, 376, 391, 411, 589–90, 606 error correction 142 ESG GmbH 486 ethics 628 European Accounting Regulatory Committee (ARC) 167 European Union 167 EVA (economic value added) 410, 618–21 Everylease PLC 458 Everyone Thrift Bank 124 EVN AG 296, 495–6 exceptional income 562 exceptional items 227–8 excess cash flow 576–7 expense recognition 215 expenses classification of 177–9 consumed but not recorded 140 definition 42 end-of-period entries 131–2 income statements 55–6 recorded in advance 140–2 tangible fixed assets 254–6 taxation 215 experiential benchmarks 606–7 extraordinary items 227–8 ExxonMobil 267, 498, 536–7, 539, 542, 543–5, 552 Facebook 391, 420 factoring 367 fair value option 167, 357–8 faithful representation 23 Fiat 352, 430 Fibria Celulose S.A 189, 190, 192, 200 FIFO (first-in, first-out) 331–2, 347 Filia Co 493 finance leases 125, 442–4 financial accounting definition of 10–12 managerial accounting 21 users of 12–15 financial assets amortized cost of 358 available-for-sale 370–4 definition 349–51 at fair value through profit or loss 353–8, 384 held for trading 353, 357, 376 held-to-maturity 358 financial footprint 611 financial instruments 167, 348–50, 374–6 financial leverage 75, 609 see also leverage financial liabilities see also non-current liabilities amortized cost of 358 definition 350–1 at fair value through profit or loss 353–8, 384 held for trading 353 financial publications 613 financial reporting standards 14–15, 163–8, 227 financial statements see also consolidated financial statements; financial statements analysis; income 661 statements; statement of cash flows; statement of financial position comparability 23–4 databases of 613 definition 10–11, 12, 89 faithful representation 23 filing of 613 limited liability companies 12–15 notes to 181–4 presentation 169–81 qualitative characteristics 21–4 relevance 21–3 timeliness 24 transactions 58 understandability 24 verifiability 24 financial statements analysis 71–7 see also financial statements financial instruments 374–6 intangible assets 310–12 inventories 337–9 liabilities 451–2 shareholders’ equity 409–13 tangible fixed assets 280–1 first-in, first-out (FIFO) 331–2, 347 fixed assets see also long-lived assets categories of 251–2 definition 125 depreciation 59–60 financial 467 intangible 290–320 reporting 125 tangible 250–89 value adjustments to 132–3 football player transfer fees 295 Ford Motor Company 225, 498, 599, 628 forgivable loans 235–6 formats of presentation 169 formats of reporting 163 Fortis 627 franchises 294 free cash flow 576–7 Fresenius 387 fringe benefits 448 Frisch’s Restaurants, Inc 345 full consolidation 473–81 functional fixation hypothesis 599 FVO (fair value option) 167, 357–8 GAAP (generally accepted accounting principles) 35, 121, 206 Gade Company 221, 222 Galleria Group SA 630–1 General Electric 498, 582, 599, 618 general ledger 99, 119 generally accepted accounting principles (GAAP) 35, 121, 206 Gerry Weber International AG 416–17 Gershwin Corporation 391–2, 395, 398, 399, 401 Gibbons Co 282 Gilbert Company 416 662 INDEX Glazunov GmbH 334 Glencore 466 Glinka Company 332, 334 Godounov, Inc 144 going concerns 128 goodwill 87, 290, 293–5, 300–1, 479–81 Goodyear Tire and Rubber Company 605 Google 35, 310, 326, 606 Gounod Company 150–1 governance 625–8 government assistance 2346 Granados Company 31516 Graphit Kropfmuăhl 180 Grieg Company 106–7 gross operating profit 561–2 gross profit 178 gross profit margin 608 gross profit rate 608 Guangbo Group 381 Guanshen Railway Company Limited 180 Haas Company 524–5 Haeffner PLC 453, 455–6 Hai Tong Securities 381 Hammurabi code 36, 159 Hansen Medical 209 harmonization 163, 167 Harmony Accountancy Firm 241–3 hedge accounting 167 Heineken 251, 352 held-to-maturity financial assets 358 Hellenic Petroleum SA 234 Hennes & Mauritz Hewlett-Packard 326 historical cost 123, 124 history of accounting 25–8 H&M (Hennes & Mauritz) 3, 55, 241 Hol Company 490–2 Holcim 187 Holmen 180, 380, 412, 417 Home Shopping Network (HSN) 209 Honda Motor Co 286–7, 495 horizontal analysis 73, 529, 555–7 HP (Hewlett-Packard) 326 HSN (Home Shopping Network) 209 IAG (International Airlines Group) 206, 271, 274, 276 IAS (International Accounting Standards) 164–5, 166–7 IASB (International Accounting Standards Board) 163–9, 300–1 IASC (International Accounting Standards Committee) 164 Iberia 206, 352, 359, 426 ICTV (International Commercial Television) 209 IFRS (International Financial Reporting Standards) 9, 35, 165–6 impairment, allowance for 362 impairment loss 271–2 income 56 income smoothing 581 income statements 53–9 analysis of 554–66 business equation 54 classification of expenses 177–9 common-size analysis 557–66 depreciation 269–70 disposal of tangible fixed assets 277–8 elements of 54–6 international model 179 inventories 328, 334–5 nature vs function 181 personnel compensation expenses 180 presentation 176–81 research and development (R&D) 306 statement of cash flows 91 trend analysis 555–7 United States 180 value creation 59 Inditex 3, 55, 108 influence 466 information 552 Infosys Technologies Limited 551–2 intangible assets see also intangibles definition 290–1 financial statement analysis 310–12 recognition of 297–8 reporting 299–303 value changes 299–303 intangible fixed assets 290–320 see also intangible assets intangibles 291–7 see also intangible assets Interbrew 180 interest 212, 273 interest coverage ratio 451, 608 intermediate balances 554, 559 internally generated assets 272–5 International Accounting Standards (IAS) 164–5, 166–7 International Accounting Standards Board (IASB) 163–9, 300–1 International Accounting Standards Committee (IASC) 164 International Airlines Group (IAG) 206, 271, 274, 276 International Commercial Television (ICTV) 209 International Financial Reporting Standards (IFRS) 9, 35, 165–6 International Organization of Securities Commissions (IOSCO) 168 inventories 321–2 cash flows 334 classification of 322–6 decline in value of items 334 definition 322 financial statement analysis 337–9 goods manufactured 69–71 income statement 328, 334–5 recording systems 326–8 statement of financial position 323–6 tangible fixed assets 254 valuation 328–33 valuation policies 335–7 inventory trade financing 451 inventory turnover 74, 337, 603, 608 inventory valuation 64–71, 328–33 investment ratio 579 investments 86, 467 IOSCO (International Organization of Securities Commissions) 168 Irish Continental Group 251, 342, 616–17 I/S see income statement ISS International Service System 251 issued capital 389 Ives Company 415 Jana Partners 498 Jazztel 180 Jet Airways 180 Johnson & Johnson 108 joint arrangements 469, 471 joint control 469, 471 joint operations 469, 472 joint ventures 469, 472 journals 11, 96–8 Kalomiris Construction, Inc 32 Kellwood Company 381 Kerry 326 key ratios 607–9 Kmart 87 Kodak 502 Koninklijke Ahold NV 468 Koninklijke Wessanen 180 KPN 135 Kunzen SA 235 LaBarge, Inc 211 Lakme Corp 144 Lalo Company 151–5 LAN Airlines land 275–6 see also tangible fixed assets Lang Syne Enterprise Inc 456 Larsson Company 428, 448 last-in, first-out [LIFO] 331–3 Lavender Soap Company 117–18 leased assets 441–6, 451 ledgers 98–9, 359–60 legal mergers 489–92 lenders Lentz Company 472–85 leverage 411, 463 see also financial leverage leverage ratio 75–6 liabilities 421–52 see also financial liabilities accrued 434–5 INDEX classifications of 171–3 current 422, 427–9, 641 definition 38, 41, 422 environmental 437 financial statement analysis 451–2 litigation 436 non-current 422, 425–7 reporting 429–31 shareholders’ equity 427 statement of financial position 425 licensing agreements 294 LIFO (last-in, first-out) 331–3 limited liability companies 12–15, 387–8 Lindblad Company 444 Linde 359, 411 Lindt 36 liquidation value 123 liquidity 603, 608 Liszt Company 507–8, 511–12, 514, 516–17, 519, 577–8 litigation liabilities 436 Lloyd Webber Company 278 logists 36 longitudinal ratio analysis 604–5 long-lived assets 41, 54, 59, 132–3, 290, 502, 561 see also fixed assets long-term contracts 210, 226–7 long-term debt to equity ratio 75, 451, 608 long-term debts 429 long-term funding 171 long-term liabilities see non-current liabilities long-term solvency ratios 608 L’Oreal 326 loss carry-back 225 loss carry-forward 225 lower of cost or market 24–5, 126, 271 Lufthansa 446 McDonald’s Corporation 344 Mahler Company 378 managerial accounting 10, 21 Marcus SA 484 margin on sales 560 mark to market for financial instruments 126–7 market price and dividend ratios 608 market to book ratio 411–12, 608 market value added (MVA) 618–21 market value of shares 25 matching principle 56, 127, 209 Mater Co 493 materiality 23 and aggregation 125 materialization of transactions 11 maturity of debts 206 Meals Inc 242 measurement 123–4 Meder Company 472–85 medical equipment sales 209 Menotti Company 414 Merck KGaA 285–6 mergers 489–92 Meta Abe Brewery 466 Metro AG 189–90, 193, 201 Michelin 108, 605 Micro Server Incorporated 458 Microsoft 310, 351–2, 576, 578–9, 606, 639 minority interests 87, 476–9 Mitsubishi Electric 437, 585 Mitsui Chemicals, Inc 538 mobile phones 36 Morton’s restaurant group 345 Motorola Mobility 326 Motorola Solutions 606 Mountain Province Diamonds 426 Moussorgski Company 334 Mozart Company 354, 356 Mutter Co 494–5 Mutter GmbH 453 MVA (market value added) 618–21 net book value see book value net cash 351, 533–6 net income 43, 562 see also earnings consolidation methods 486–7 net loss 562 net operating losses 224–5 net profit margin 76–7, 608 Nexen 466 Nielsen Company 239–40 Nikopoulos, Inc 32 Nilsson Company 458 Ningbo Foreign Trade Co., Ltd 381 Nippon Steel 326 Nokia 35–6, 73, 189–91, 199, 249, 310, 411, 417, 606 nominal value 388–9 non-cash items 509–10 non-controlling interests 87, 476–9 non-current assets see long-lived assets non-current liabilities 422, 425–7 non-operating income 562 no-offsetting principle 124–5, 359–60 Norsk Hydro 326 North Petrol 635–9 NorthWest Boards and Bikes 342 notes payable 428 notes receivable 367–8 notes to financial statements 181–4 NTPC Ltd 9, 35 objectivity 123–5 Oerlikon 336–7 Offenbach Company 145 offsetting 124–5, 359–60 Olympic Sports Club 237 Ona Group 180 Oncothyreon 599 operating assets 41 operating cash flows 501–2 operating cash ratio 578 operating cycle management ratios 74–5 663 operating leases 442–3, 446 operating net income before taxes 562 operating profit 562 ordinary shares 389 organization costs 294 Orkla 186–7, 352 outstanding capital 389 paid-in capital 389 Pang Da Automobile Trade Co., Ltd 584 par value 388–9 partnerships 387 past events 422 patents 294 payable days 75 payroll taxes 448 P/E (price/earnings ratio) 608, 617 pensions 449–51 PER (price/earnings ratio) 608, 617 percentage of control 471 percentage of interest 471 period earnings see earnings periodic inventory 67–9 systems 327–8 periodicity 12, 127 Pernod Ricard 352, 359 perpetual inventory 65–6, 69, 87 systems 326–7, 328 Philips 135, 231–2, 292, 325, 352, 359, 393, 502 Pirelli 251, 292, 326 P&L see income statement pooling of interests 468 Porsche 466, 479 POSCO (Korea) 325–6 post-employment benefits 449 posting 99 potential cash flow 509–10 Poulenc Company 156–7 preferred shares 390–1 present obligation 422 present value 124 pre-tax income 215–16 price/earnings ratio 608, 617 prior period errors 229–30 private equity firms 384 private limited companies 387 Procter & Gamble 224, 531–2, 558–9, 569–70, 592–3 profit and loss account see income statement profit appropriation 61–4, 393–7 profitability ratios 76–7, 608 promissory notes 367 proportionate consolidation 472, 483–5 provisions 421–2, 432–4, 435–7 prudence 126 public limited companies 387–8 Puccini & Co 65–7, 69 Purcell Company 261, 263, 264, 267–9, 269–70, 274, 277 purchase accounting 467–8 pyramids of ratios 609–11 664 INDEX quality of earnings 579, 583–4, 599 quality of information 125 Quest Software 466 quick ratio 603, 608 rate of return on tangible assets 280 ratio analysis 73, 601–11 ratios, pyramids of 609–11 Ravel Company 133–4 R&D see research and development realizable value 123 receivables see accounts receivable receivables days 74 receivables turnover 375 Recipharm 495–6 recording 11 relevance of financial statements 21–3 repayable grants 235–6 replacement cost 123 reporting accounting changes 228–30 accounts receivable 364–6 acquisitions 472–3 adjusting entries 134–6 to business partners to capital providers 5–7 cash flows from operating activities 504–5 consolidation methods 485–6 depreciation policies 271 discontinued operations 230–2 financial assets at fair value through profit or loss 354–7 intangible assets 299–303 leased assets 446 liabilities 429–31 non-controlling interests 477–8 research and development (R&D) 306–8 reserves 394–5 retained earnings 394–5 revenue recognition 212–14 share capital 392–3 shareholders’ equity 395–7 statement of cash flows 519 tangible fixed assets 279–80 taxation 214–26, 223–4 treasury shares 403–4 Repsol YPF 180, 251, 292, 301, 343, 397, 456–7 research and development (R&D) capitalization of 304–6, 320 definition 303 financial intensity 310–11 growth 312 market value 312 personnel intensity and effectiveness 311 reporting 306–8 reserve accounts 394 reserve-replacement ratio 553 reserves 51, 63–4, 394–5, 398–9 residual income 618 resources 56 consumption of 64–71 retained earnings 42, 51, 63–4, 394–5 return on assets (ROA) 77, 608, 609–10 return on capital employed (ROCE) 77, 608, 610–11 return on capital invested 617–21 return on equity (ROE) 77, 410, 412, 608, 609, 613–16 return on investment (ROI) 77 return on sales 76–7, 608, 609 return on shareholders’ equity see return on equity (ROE) return to investors, measures of 613–21 revenue 42, 54–5, 130–1, 136–9 revenue expenditure 254–5 revenue recognition 208–14, 227, 248 revolving overdraft authorization 526 Richemont 326, 330 Ricoh 123 risk-free rate 36 ROA (return on assets) 77, 608, 609–10 ROCE (return on capital employed) 77, 608, 610–11 Roche 292, 310 ROE (return on (shareholders) equity) 77, 410, 412, 609, 613–16 ROI (return on investment) 77 Rottneros 412 Roussel Company 150 Royal Ahold 468 royalties 212 Russia 167 RWE 390 Saint Gobain 292, 459–60 sale of goods 208–10 sales per employee 608 sales returns 368–9 sales revenue see revenue sales tax 428 sales turnover 54 Sandvik 182–4, 306, 307, 310, 412–13, 424 Sanofi 316–19 SAP 292 Sarbanes-Oxley Act (SOX) 628 Satyam 180, 466 Sauer-Danfoss 337 Scania 262 Schall Company 238 Schultz Accountancy Firm 237–8, 239 Schumann Company 109–10 scoring models 624–5, 641 Scout AG 453 Securitas 251, 292 Securities and Exchange Commission (SEC) 167–8 securitization 384, 463 segment reporting 621–4 semi-finished goods 21 serial bonds 438 services rendered contracts 210–11, 249 Sesa Goa 466 settlement of a present obligation 422 settlement value 123 set-up costs 294 Shanghai Baosteel 466 Shankar Inc 455 share capital 42, 388–93 share dividends 405–6 share options plans 404–5 share premium 391 shareholder value creation 601 shareholders shareholders’ equity 385–413 book value of 24–5 changes in 406–8 definition 38, 41–2 financial statement analysis 409–13 liabilities 427 shares categories of 389–91 issuance costs 400 market value of 25 non-cash capital contributions issues 397–9 repurchases 401 Sheik Selim 32–3 Shenzhen Expressway Limited 504, 584, 613 short-term employee benefits 448 short-term liquidity ratios 73–4, 607–8 Sibelius Company 116 Siemens Aktiengesellschaft 307, 309, 311, 324, 353, 606 significant influence 469, 470, 498 simplified balance sheet 539–42 Sinopec 251, 352, 359, 537–8, 543–5, 552, 590–2 SK Telecom 180 Slovnaft 180 small equipment 255 Smart Apparel Group Limited 381 Smetana Company 523–4, 548, 569, 588 soccer player transfer fees 295 sole proprietorship 387 Sony Corporation 325, 352, 359, 425, 426, 589, 606 Soprano Family 103 source documents 96 South Petrol 635–9 Southwest Airlines 180, 566 SOX (Sarbanes-Oxley Act) 628 specialized ledgers 98–9 specific write-down 362 stakeholders 35 Staples 251 start-up companies 599 statement of cash flows 89–91, 499–520 see also cash flows accounts manipulation 580–3 analysis 574–89 available cash flow 576–7 big bath accounting 581 INDEX cash flow adequacy 579 cash flow as percentage of sales 577–8 cash flow yield 578 cash leverage ratio 578 cash liquidity ratio 578 cash paid for income taxes 513 cash paid for interest 513 cash paid for other operating expenses 513 cash paid-out in relation to cost of merchandise sold 513 cash received from customers 512 cash received from investment income 513 changes in inventories, receivables and payables 510 construction of 507–19 creative accounting 581 dividends 518 earnings management 580–1 excess cash flow 576–7 financing activities 502–3, 517 free cash flow 576–7 gain on sale of equipment 510, 514 income smoothing 581 income statement 91 investing activities 502, 516–17 investment ratio 579 manufacturing firms 514–16 new share capital 517–18 non-cash items 509–10, 519–20 operating activities 501–2, 503–5, 509–16 operating cash ratio 578 potential cash flow 509–10 purchase of equipment 516 repayment of loans 517 reporting 519 sale of equipment 517 statement of comprehensive income see income statements statement of financial position 38–53 analysis of 528–45 cash equation 532–6 classifications of assets and liabilities 171–3 common-size analysis 530–2 international model 174 inventories 323–6 liabilities 425 by nature 174–5 presentation 169–75 structure 532 trend analysis 529 United Kingdom 174–5 United States 174–5 statement of financial structure 532, 542–5 statement of intermediate balances 559–60, 563–6 Stenborg Company 453 Sterlite 466 Stern Stewart & Co 320, 410, 601, 618, 641 STMicroelectronics NV 589 stock dividends 405–6 stock options plans 404–5 Stone Oil Industries Co 453 Stora Enso 84–6, 359, 436, 456–7, 478–9 Stravinsky Company 342 subscribed capital 389 subsidiaries 469 subsidiarity 498 subsidiary ledgers 359–60 substance over form 125–6 Sudstrom AB 453 Sulzer 352, 359, 435 supporting documents 96 T-accounts 58–9, 86 tangible asset turnover 280 tangible assets 252–3 see also tangible fixed assets tangible fixed assets 250–89 average age and life of 281 capital intensity ratios 280–1 cash flows 278–9 components of 258 cost of acquisition 256–7 costs subsequent to acquisition 276 definition 253–6 depreciable amount 258–9 depreciation 257–71, 278–9 disposal of 277–8 expenses 254–6 financial statement analysis 280–1 impairment loss 271–2 internally generated 272–5 inventories 254 reporting 279–80 residual value 258 useful life 259–60 tangible long-lived assets see long-lived assets taxable income 214–23 taxation deferred 489 depreciation 215 expense recognition 215 expenses 215 long-term contracts 226–7 loss carry-back 225 loss carry-forward 225 net operating losses 224–5 reporting 214–26, 223–4 revenue recognition 215 warranty costs 215 taxes payable accounting 2234 Tchaăkovsky Company 344 TCL 368 TDA Armements 485 TechMahindra 466 Technicolor SA 400 Telefo´nica 180, 326 665 term bonds 438 terminology 184–5 Tessitura Inc 103 Thales 457, 485 Thales Air Systems SA 485 Thales Australia Ltd 485 Theodorakis 31 third party evaluation (TPE) 249 time horizon of viability 36 timeliness of financial statements 24 time-series comparisons 604–5 Tippett Company 284 TNT 466, 498 Tochter Co 494–5 Toray Industries 338, 356–7, 404, 437, 623–4 total ‘production’ in the period 560–1 Total SA 538–9, 543–5, 552 Toyota Motor Corporation 346, 602 TPE (third party evaluation) 249 TPV Technology Limited 231 ‘trade payable 428 trade working capital 533 trademarks 294 transactions 11, 58–9 transfer fees 295 transformation process of resources 3, 34 treasury shares 389, 401–4 trend analysis 73, 529, 555–7 trial balance 99–101 Trigano 180, 189–90, 194, 201 true and fair view 122–3 Turina Company 312–13 turnover 249 UBS AG 240–1 ULMA Construccio´n Polska SA 633–4 uncalled capital 389 understandability of financial statements 24 Unilever 188 United Continental Holdings 190, 196, 203, 206 United Internet 426, 459 United States goodwill 300–1 IFRS (International Financial Reporting Standards) 168 income statement 180 Securities and Exchange Commission (SEC) 167–8 statement of financial position 174–5 uniting of interests 468 units of measurement 123 Universal Music 466 unlisted equity investments 370–1 unusual income 562 UPM-Kymmene 189, 240–1 UPS 123, 466 valuation 11–12, 123–4 see also inventory valuation 666 INDEX valuation differences 293, 479 value added 206, 561, 573 value added taxes (VAT) 428 value creation 601 value management 25 value propositions Van Rennes Company 490–2 VAT (value added taxes) 428 VC (Venture Costas) 15–21 vendor-specific objective evidence (VSOE) 249 Venture Costas 15–21, 24 Venture Xenakis 30–1 Verdi 43–52, 57–63, 92–103 verifiability of financial statements 24 vertical analysis 73, 530–2, 557–66 Vivaldi Company 78–9, 81 Vivendi 502, 555, 568, 584, 627 Vivendi Universal 555, 568, 584, 627 Vodafone 466 Volkswagen 466, 479, 602 Volvo Group 297, 326 VSOE (vendor-specific objective evidence) 249 Wharf (Holdings) Limited 594–7 Wheelock and Company 594 Wipro Ltd 171, 570–1 working capital 533–6 working capital ratio 73–4, 603, 607 WPP 251, 342 WAC (weighted average cost method) of inventory valuation 331–2 Walgreens 466 Walmart 55, 92, 108, 119, 292, 359 warranty costs 215 Washington Mutual 627 weight of tangible assets 280 weighted average cost method (WAC) of inventory valuation 331–2 Wesfarmers 504 Weyerhaeuser 352, 426 Xenakis 30–1 Xstrata 466 Yak Technology 381 Youngor 381–3 Ypioca 466 zero-coupon bonds 438 Zygafuss Agglomerated Enterprises Co 453 Zymogenetics 599 ... European Accounting Association (EAA), the American Accounting Association (AAA), and Canadian Academic Accounting Association (CAAA) He is past president of AFC and current co-editor of Comptabilite´... Financial Instruments inthe Statement of Financial Position and Fair Value Accounting Definition of financial assets and liabilities Cash and cash equivalents Financial asset and liability at fair... Finance and operating leases Capitalization of finance leased assets Example of accounting for leased assets Operating leases Sale [of an asset] and leaseback transactions Reporting lease agreements