Financial reporting and analysis, 6th edition

www.ebook3000.com FINANCIAL REPORTING & ANALYSIS Lawrence Revsine H Fred Mittelstaedt Late of Northwestern University Deloitte Foundation Professor of Accountancy Mendoza College of Business University of Notre Dame Daniel W Collins Henry B Tippie Research Chair in Accounting Tippie College of Business The University of Iowa W Bruce Johnson Sidney G Winter Professor of Accounting Tippie College of Business The University of Iowa Leonard C Soffer Clinical Professor of Accounting Booth School of Business University of Chicago th EDITION FINANCIAL REPORTING & ANALYSIS Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2012, 2009, and 2005 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-802567-9 MHID 0-07-802567-2 Senior Vice President, Products & Markets: Kurt L Strand Vice President, General Manager, Products & Markets: Martin J Lange Content Production & Technology Services: Kimberly Meriwether David Managing Director: Tim Vertovec Brand Manager: James Heine Director of Development: Ann Torbert Development Editor: Gail Korosa Marketing Manager: Kathleen Klehr Director, Content Production: Terri Schiesl Content Project Manager: Lisa Bruflodt Buyer: Jennifer Pickel Media Project Manager: Shawn Coenen Cover Designer: Studio Montage, St Louis, MO Cover Image: â Tetra Images/Getty Compositor: Aptarađ, Inc Typeface: 10/13.5 Times Printer: R R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Revsine, Lawrence Financial reporting & analysis / Lawrence Revsine [and three others] —6th edition pages cm ISBN 978-0-07-802567-9 (alk paper) Financial statements Financial statements—Case studies Corporations—Accounting I Title II Title: Financial reporting and analysis HF5681.B2R398 2015 657'.3—dc23 2013050959 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com www.ebook3000.com The authors dedicate this work to: Daniel W Collins—Melissa, Theresa, Ann, and my late wife, Mary W Bruce Johnson—Diane and Cory H Fred Mittelstaedt—Laura and Grace Leonard C Soffer—Robin, Michael & Rachelli, Andy, and Leah About the Authors Lawrence Revsine At the time of his passing in 2007, Lawrence Revsine was the John and Norma Darling Distinguished Professor of Financial Accounting, Kellogg Graduate School of Management, Northwestern University A graduate of Northwestern University, he joined its accounting faculty in 1971 Larry was a leading authority on various financial reporting issues and published more than 50 articles in top academic journals He was a consultant to the American Institute of Certified Public Accountants, the Securities and Exchange Commission, and the Financial Accounting Standards Board and served on the Financial Accounting Standards Advisory Council He was also a consultant to industry on external reporting issues and regulatory cases and taught extensively in management development and continuing education programs in the United States and abroad Larry was a master at making accounting come alive in the classroom He had an uncommon knack for creating a sense of mystery and excitement about seemingly mundane accounting topics Each class had a clear message that Larry delivered with great energy and enthusiasm And each class was sprinkled with anecdotes conveyed with an element of wit that only Larry could pull off It was his deep understanding of the subject matter and his dynamic delivery that endeared him to so many Kellogg students over the years Among the many awards he received for teaching excellence are: the American Accounting Association’s Outstanding Educator Award; the Illinois CPA Society’s Outstanding Educator Award; the Sidney J Levy Teaching Award, presented by the Kellogg Dean’s Office; and the 1995 Reunion Class Alumni Choice Faculty Award, given to the Kellogg faculty member who has had the greatest impact on the professional and personal lives of Kellogg alums Larry was passionate about changing the way financial accounting is taught, and he was the driving force behind this book As you read this book, listen carefully and you will hear his voice echo from every page Daniel W Collins Henry B Tippie Research Chair in Accounting, Tippie College of Business, The University of Iowa; BBA 1968, Ph.D 1973, The University of Iowa iv Professor Collins was the recipient of the University of Iowa Board of Regents Award for Faculty Excellence in 2000 and the American Accounting Association (AAA) Outstanding Educator Award in 2001 His research focuses on the role of accounting numbers in equity valuation, earnings management, and the relation between firms’ corporate governance mechanisms and cost of equity and debt financing A frequent contributor to the top academic accounting journals, he has been recognized as one of the top 10 most highly cited authors in the accounting literature over the past 20 years www.ebook3000.com About the Authors Professor Collins has served on the editorial review boards of the Journal of Accounting Research and the Journal of Accounting and Economics He has also served as associate editor of The Accounting Review and as director of publications for the AAA Professor Collins has served on numerous AAA committees including the Financial Accounting Standards Committee and has chaired the Publications Committee, the National Program Committee, and the Doctoral Consortium Committee He also served on the Financial Accounting Standards Advisory Council A member of the American Accounting Association, Professor Collins is a frequent presenter at research colloquia, conferences, and doctoral consortia in the United States, Australia, and Europe He has also received outstanding teaching awards at both Michigan State University and The University of Iowa W Bruce Johnson Sidney G Winter Professor of Accounting, Tippie College of Business, The University of Iowa; BS 1970, University of Oregon, MS 1973, Ph.D 1975, The Ohio State University W Bruce Johnson joined the University of Iowa faculty in 1988 and has served as director of its McGladrey Institute for Accounting Education and Research, accounting group chairman, and associate dean for graduate programs In the latter position, he was responsible for Iowa’s MBA and Executive MBA programs Professor Johnson previously held faculty appointments at the University of Wisconsin, Northwestern University, the University of Chicago, and the China European International Business School (CEIBS) His teaching and research interests include corporate financial reporting, financial analysis, value-driven management systems and investment strategies, executive compensation practices, and forensic accounting He received the Gilbert P Maynard Award for Excellence in Accounting Instruction and the Chester A Phillips Outstanding Professor Award A well-respected author, Professor Johnson’s articles have appeared in numerous scholarly publications and in academic and professional journals He has served on the editorial boards of several academic journals and as a litigation consultant on financial reporting matters He is a former member of the Financial Reporting Executive Committee (FinREC) of the American Institute of Certified Public Accountants and past president of the Financial Reporting and Accounting Section (FARS) of the American Accounting Association (AAA) He has also served as a research consultant to the Financial Accounting Standards Board and on the Research Advisory, Professional Practice Quality, and Outstanding Educator committees of the AAA He is a member of the AAA and Financial Executives International He was formerly senior vice president for Equity Strategy at SCI Capital Management, a money management firm H Fred Mittelstaedt Deloitte Foundation Professor of Accountancy, Mendoza College of Business, University of Notre Dame; BS 1979, MS 1982, Illinois State University, Ph.D 1987, University of Illinois Fred Mittelstaedt joined the University of Notre Dame faculty in 1992 He has served as the Department of Accountancy chairman since 2007 Prior to coming to Notre Dame, he held a faculty appointment at Arizona State University Professor Mittelstaedt has taught financial reporting courses to undergraduates, masters in accountancy students, MBAs, and Executive MBAs While at Notre Dame, he has received v vi About the Authors the Kaneb Undergraduate Teaching Award and the Arnie Ludwig Executive MBA Outstanding Teacher Award His research focuses on financial reporting and retirement benefit issues and has been published in the Journal of Accounting and Economics, The Accounting Review, Review of Accounting Studies, the Journal of Pension Economics and Finance, and several other accounting and finance journals He is a reviewer for numerous academic journals and has served on the Editorial Advisory and Review Board for The Accounting Review In addition, he has testified on retiree health benefit issues before the U.S House of Representatives Committee on Education and the Workforce Professor Mittelstaedt is a past president of the Federation of Schools of Accountancy and is a member of the American Accounting Association and the American Institute of Certified Public Accountants Prior to joining academia, he was an auditor with Price Waterhouse & Co and received an Elijah Watt Sells Award for exceptional performance on the May 1980 Uniform CPA Exam Leonard C Soffer Clinical Professor of Accounting, Booth School of Business, The University of Chicago; BS 1977, University of Illinois at Urbana, MBA 1981, Kellogg School of Management, Northwestern University, Ph.D 1991, University of California at Berkeley Leonard Soffer rejoined the faculty of the University of Chicago in 2007 He was previously an Associate Professor of Accounting and Associate Dean of the Honors College at the University of Illinois at Chicago, where he was named the Accounting Professor of the Year He also has served on the faculty of Northwestern University’s Kellogg School of Management Professor Soffer has taught financial reporting, managerial accounting, and corporate valuation courses to both MBAs and Executive MBAs He previously taught the consolidations and foreign currency translation modules of a nationally recognized CPA review course He also teaches a financial reporting course to executive education students Professor Soffer’s research focuses on the use of accounting information and analyst reports, particularly in the context of corporate valuation His research has been published in The Journal of Accounting Research, The Review of Accounting Studies, Contemporary Accounting Research, Accounting Horizons, Managerial Finance, and The Review of Accounting and Finance He is a co-author of the book Financial Statement Analysis: A Valuation Approach Professor Soffer is a member of the American Accounting Association, The American Institute of Certified Public Accountants, and the Illinois CPA Society He served for 12 years on the Accounting Principles Committee of the Illinois CPA Society, and chaired or cochaired the committee for three years Before entering academia, Professor Soffer worked in accounting and finance positions, most recently in the Mergers and Acquisitions group of USG Corporation He was a winner of the prestigious Elijah Watt Sells Award for his performance on the Uniform CPA Exam www.ebook3000.com Preface O ne of our objectives in writing this book is to help students become skilled preparers and informed consumers of financial statement information The financial reporting environment today is particularly challenging Accountants, auditors, and financial analysts must not only know the reporting practices that apply in the United States (U.S GAAP), they must also be aware of the practices allowed in other countries under International Financial Reporting Standards (IFRS) Adding to this challenge is the fact that the Financial Accounting Standards Board (FASB) and its global counterpart—the International Accounting Standards Board (IASB)—have issued in the past few years an unprecedented number of proposed new standards intended to improve financial reporting practices worldwide and to achieve convergence of U.S GAAP and IFRS These proposed new standards will change in fundamental ways when revenue is recognized, how certain assets and liabilities are measured, and how information is presented in financial statements We believe it is essential for students not only to comprehend the key similarities and differences between current U.S GAAP and IFRS, but also to grasp the significant changes to those standards that are on the horizon Our other objective in writing this book is to change the way the second-level course in financial accounting is taught, both to graduate and undergraduate students Typically this course—often called Intermediate Accounting—focuses on the details of GAAP with little emphasis placed on understanding the economics of business transactions or how financial statement readers use the resultant numbers for decision making Traditional intermediate accounting texts are encyclopedic in nature and approach, lack a unifying theme, and emphasize the myriad of intricate accounting rules and procedures that could soon become outdated by new standards In contrast, we wrote Financial Reporting & Analysis, Sixth Edition, to foster a “critical thinking” approach to learning the subject matter Our approach develops students’ understanding of the environment in which financial reporting choices are made, what the options are, how accounting information is used for various types of decisions, and how to avoid misusing financial statement data We convey the exciting nature of financial reporting in two stages First, we provide a framework for understanding management’s accounting choices, the effect those choices have on the reported numbers, and how financial statement information is used in valuation and contracting Business contracts, such as loan agreements and management compensation agreements, are often linked to accounting numbers We show how this practice creates incentives for managers to exploit the flexibility in financial reporting standards to “manage” the reported accounting numbers to benefit themselves or shareholders Second, we integrate current real-world financial statements and events into our discussions to illustrate vividly how financial reporting alternatives and subjective accounting estimates give managers discretion in the timing of earnings and in reporting the components of financial position We believe this approach—which focuses on the fundamental measurement and reporting issues that arise from both simple and complex business transactions, and how financial statements are used for decision making—better prepares students to adapt as business transactions and accounting standards continue to evolve An important feature of our approach is that it integrates the perspectives of accounting, corporate finance, economics, and critical analysis to help students grasp how business transactions get reported and understand the decision implications of financial statement numbers We vii viii Preface cover all of the core topics of intermediate accounting as well as several topics often found in advanced accounting courses, such as consolidations, joint venture accounting, and foreign currency translation For each topic, we describe the underlying business transaction, the GAAP guidelines that apply, how the guidelines are implemented in practice, and how the financial statements are affected We then go a step further and ask: What the reported numbers mean? Does the accounting process yield numbers that faithfully present the underlying economic situation of a company? And, if not, what can financial statement users to overcome this limitation in order to make more informed decisions? A Global Vantage Point discussion then summarizes the key similarities and differences between U.S GAAP and IFRS, and previews potential changes to both Our book is aimed not only at those charged with the responsibility for preparing financial statements, but also those who will use financial statements for making decisions Our definition of financial statement “users” is broad and includes lenders, equity analysts, investment bankers, boards of directors, and others charged with monitoring corporate performance and the behavior of management As such, it includes auditors who establish audit scope and conduct analytical review procedures to spot problem areas in external financial statements To be effective, auditors must understand the incentives of managers, how the flexibility of U.S GAAP and IFRS accounting guidance can be exploited to conceal rather than reveal underlying economics, and the potential danger signals that should be investigated Our intent is to help financial statement readers learn how to perform better audits, improve cash flow forecasts, undertake realistic valuations, conduct better comparative analyses, and make more informed evaluations of management Financial Reporting & Analysis, Sixth Edition, provides instructors with a teaching/learning approach for achieving goals stressed by professional accountants and analysts Our book is designed to instill capacities for thinking in an abstract, logical manner; solving unstructured problems; understanding the determining forces behind management accounting choices; and instilling an integrated, cross-disciplinary view of financial reporting Text discussions are written, and exercises, problems, and cases are carefully chosen, to help achieve these objectives without sacrificing technical underpinnings Throughout, we explain in detail the source of the numbers, the measurement methods used, and how transactions are recorded and presented We have strived to provide a comprehensive user-oriented focus while simultaneously helping students build a strong technical foundation Key Changes in the Sixth Edition The first five editions of our book have been widely adopted in business schools throughout the United States, Canada, Europe, and the Pacific Rim Our book has been used successfully at both the graduate and undergraduate levels, and in investment banking, commercial lending, and other corporate training programs Many of our colleagues who used the first five editions have provided us with valuable feedback Based on their input, we have made a number of changes in this edition of the book to achieve more effectively the objectives outlined above Key changes include the following: • Updated Global Vantage Point sections • Identify key differences between U.S GAAP and IFRS • Discuss financial statement excerpts of companies that follow IFRS • Summarize proposed new accounting standards issued by the FASB and/or the IASB as part of their convergence project • Incorporation of all FASB and IASB standards, exposure drafts, and discussion papers released through July 2013 • New Chapter appendix on Segment Reporting • New or updated company examples throughout the book • New and revised end-of-chapter materials including exercises, problems, and cases tied to Global Vantage Points or to proposed new FASB and IASB standards www.ebook3000.com Preface ix Chapter Revision Highlights Chapter 1: The Economic and Institutional Setting for Financial Reporting • Streamlined discussion of how and why international accounting standards are developed • Explanation of the FASB Accounting Standards CodificationTM project • Expanded description of the FASB Conceptual Framework Chapter 2: Accrual Accounting and Income Determination • Revised discussion of alternative formats for presenting comprehensive income • Revised Global Vantage section that highlights key differences between other comprehensive income (OCI) components under IFRS versus U.S GAAP • Updated exhibits from company reports throughout the chapter • Updated data displays on transitory earnings components (special or unusual items, discontinued operations, and extraordinary items) Chapter 3: Additional Topics in Income Determination • Revised Global Vantage Point section that discusses key differences between IFRS and U.S GAAP on revenue recognition with examples • New discussion of FASB/IASB recent proposals on revenue recognition • Updated exhibits from company reports throughout the chapter Chapter 4: Structure of the Balance Sheet and Statement of Cash Flows • Revised Global Vantage section that highlights key differences in where certain transactions are reported on the cash flow statement under IFRS versus U.S GAAP • New problem material on IFRS versus U.S GAAP cash flow statement items • Updated exhibits from company reports throughout the chapter Chapter 5: Essentials of Financial Statement Analysis • Added new discussion of cause-of-change analysis • Updated exhibits from company reports throughout the chapter • Moved discussion of bankruptcy prediction models from appendix to chapter itself • Added new appendix on Segment Reporting Chapter 6: The Role of Financial Information in Valuation and Credit Risk Assessment • Updated existing exhibits from company reports throughout the chapter Chapter 7: The Role of Financial Information in Contracting • Updated examples throughout the chapter Chapter 8: Receivables • Updated the Global Vantage Point section on IFRS similarities and differences, and the implications of the FASB Exposure Draft on Financial Instruments • Revised discussion on bad debt expense to be consistent with proposed ASU on Revenue Recognition • Introduced a new allowance for doubtful accounts analysis using Krispy Kreme • Updated the troubled debt restructuring discussion regarding what constitutes financial difficulties and concession under ASU 2011-02 • Updated existing company examples throughout the chapter Chapter 9: Inventories • Updated Global Vantage Point section on the differences between U.S GAAP and IFRS and added new case materials • Updated inventory method and LIFO reserve statistics • Provided new examples of inventory write-offs and fraud • Added Whole Foods inventory disclosures to tie to Chapter discussions Chapter 10: Long-Lived Assets • Updated and expanded Global Vantage Point section on the differences between U.S GAAP and IFRS • Expanded discussion of conceptual underpinnings of accounting for long-lived assets • New impairment example using Krispy Kreme • Streamlined discussion of difficulties associated with analyzing historical cost financial statements • New Whole Foods example to tie to Chapter examples • Added and updated new problems and cases • Updated web appendix on current value accounting for IFRS issues; available on www.mhhe.com/revsine6e Chapter 11: Financial Instruments as Liabilities • Updated Global Vantage Point sections on IFRS guidance for liability presentation, long-term debt, hedge accounting, and contingent liabilities • New section on loan guarantees and ASC 460 Chapter 12: Financial Reporting for Leases • Updated Global Vantage Point section on the differences between U.S GAAP and IFRS and the Exposure Drafts jointly developed by the FASB and the IASB • Updated comparison of operating and capital lease obligations by industry • New Whole Foods example for illustrating constructive capitalization to tie to Chapter examples • Added and updated problems and cases tied to FASB/IASB Exposure Draft and existing IFRS 1108 Index Deferred income tax liabilities, 755 calculation of change, 797–799 classification, 764 liability approach, 764–769 sources of, 775–776 Deferring costs, 395 Defined benefit plans, 825, 826–861 accounting issues, 828–861 assets by plan type, 828 cash balance plans, 826–827 determinants of pension funding, 835–837, 845–847, 851–852, 857–858 financial reporting, 830–847 accumulated other comprehensive income disclosure, 856–857 deferred income taxes, 856–857 expected return on plan assets, 833–834 extraction of additional analytic insights from note disclosures, 858–861 General Electric case study, 847–861 interest cost, 833 journal entries for change in funded status, 844–845 journal entries for components of pension cost, 853–856 measurement and disclosure requirements, 829 recognized gains and losses, 837–843 recognized prior service cost, 843–844 service cost, 831–833 401(k) plans, 826 money purchase plans, 826 nature of, 826–827 plan relationships, 827 profit-sharing plans, 826 vesting, 828–829 Defined contribution plans, 828 assets by plan type, 828 nature of, 825–826 relationships, 827 DeFond, M L., 377n, 388n Degeorge, F., 144n Delayed delivery, revenue recognition abuses, 149 Dell Inc., 268 Delphi Corporation, 846 Delta Airlines Inc., 704, 866 Denny’s Inc., 138 Dentsply International, 627–629, 646 Depletion, defined, 565 Depreciation expense, 93, 565–572 capital lease, lessee accounting, 694–695, 722–723 computation of taxable income, 795–796 depreciation, defined, 565 disposition of long-lived assets, 569 double-declining balance (DDB) depreciation, 566–567, 568, 569 financial analysis and depreciation differences, 569–572 Modified Accelerated Cost Recovery System (MACRS), 396, 569, 747, 748 statement of cash flows, 1036, 1041–1042 straight-line (SL) depreciation, 566, 568, 569 sum-of-the-years’ digits (SYD) depreciation, 567–568 temporary differences, 747, 748–751 units-of-production (UP) depreciation, 566, 568 Depreciation process, 565 Derivative securities, 633, 634–641 financial reporting for, 640–641 forward contracts, 634 futures contracts, 634–636, 639 options contracts, 638–639 swap contracts, 637–638 Dharan, B., 912n DHB Industries, 475 Dichev, I., 144n Dichev, L D., 378n Diluted EPS, 80, 81, 906–910 “if-converted” method for computing, 908, 909–910 treasury stock method, 908, 910 DiPiazza, Samuel, Jr., 14 Direct combination costs, intercorporate equity investments, 980 Direct financing leases, 706 compared with operating leases, 713–715 front loading of income, 714–715 guaranteed versus unguaranteed residual values, 713 illustration, 709–713 Direct method, statement of cash flows, 204n, 208, 214–216, 1032–1035 Direct write-off method for uncollectibles, 418 Discontinued operations, 68–71, 328 alternative disclosure, 69 assets considered “held for sale,” 69, 70, 564–565 assets have been sold, 68, 69 proposed reporting changes, 70–71 Discount, bonds issued at, 605, 606–609, 611 Discount amortization, 609 Discounted free cash flow approach to valuation, 310–314, 340–347 Discounted present value, 188, 193–194, 310, 546–547 liabilities, 601–603 long-lived assets, 546–547 Discounting, 1093 collateralized loans, 433, 435 defined, 435 www.ebook3000.com Discount rate, defined benefit plan, 830, 836, 868 Discretionary accounting accruals, 377–379 Disposal group, 68, 69–70 assets considered “held for sale,” 69, 70, 564–565 assets have been sold, 68, 69 disposition of long-lived assets, 569 Dividends, 889, 900–901 legality of, 900–901 preferred stock, 897 statement of cash flows, 1046–1047, 1060–1062 Dodd-Frank Wall Street Reform and Consumer Protection Act, 382 Dollar-value LIFO, 491, 517–522 Donnelly, B., 329n Dopuch, N., 505n Double-declining balance (DDB) depreciation, 566–567, 568, 569 Dow Chemical, 502 DR See Debits (DR) Dreier, David, 917 Dresser Industries, 679–681 Drorak, P., 385n Due diligence, 335 Dugan, M T., 901n Duke Energy Corporation, 395, 408, 414–415 Dun and Bradstreet, 280, 335 Dunbar, Amy, 778n Dunlap, Albert J., 425–426, 427 DuPont (E.I du Pont de Nemours and Company), 491, 492, 502 Dwyer, P., 918n E Earnings announcements, 330–332 current, 325–326 growth opportunities, 326–327 permanent earnings component, 327–328 risk differences, 326 role in valuation, 314–316 sources of variation, 325–330 transitory earnings component, 327–328 value-irrelevant earnings component, 327–328 Earnings before interest and taxes (EBIT), 258 Earnings before interest (EBI), 255–258 Earnings management, 144–151 distribution of annual net income, 144–145 incentives, 400–401 popular devices, 147–149 prevalence, 144–147 revenue recognition abuses, 149–151 stock buybacks, 895 Index Earnings multiple, 316 Earnings per share (EPS), 80–81, 324, 904–911 analytical insights, 909–910 basic, 80, 81 benchmarks, 390–392 catering to Wall Street, 390–392 complex capital structure, 906–909 diluted, 80, 81, 906–910 hedge accounting and, 650 international accounting issues, 911 management compensation tied to, 387–388, 390–392 as meaningful number, 910–911 presentation, 81 simple capital structure, 905–906 Earnings quality, 328, 329–330, 783–786 Earnings restatements, 152–157 announcements, 155 reasons for, 153–154 responsibility for, 153–154 Earnings surprises, 330–332 Eastman Chemical, 650 Easton, P., 339n eBay Inc., 330, 331 Economic performance approach, 29 Economic sacrifice approach, carrying amount of long-lived assets, 546, 547–549 Economics of financial information, 6–14 demand for financial statements, 7–10 supply of financial information, 10–13 disclosure benefits, 11–12 disclosure costs, 12–13 Economic value added, 53n, 386, 413–414 Edwards, A., 774n Efendi, J., 147n Effective interest basis, 608–609 Effective interest method, 694 Effective tax rate, 750 reconciliation with statutory tax rates, 789 statutory tax rate versus, 770–774, 789 Effective yield, 193–194 bond, 605–606 Efficient markets hypothesis, Eichenwald, K., 554n Eisinger, J., 917n Elayan, F., 919n Election dates, 965–966 Electric utilities industry, rate regulation, 394–397 Electronic Arts, 296 Electronic Data Systems Corporation (EDS), 376–377 Eli Lilly, 474 Elkamhi, R., 379n Elliott, J A., 148n, 389n, 390n EMC Corporation, 214–216 Emergency Economic Stabilization Act of 2008 (EESA), 399 Emerging companies, 275 Employee Retirement Income Security Act (ERISA) of 1974, 845–846 Employee stock options, 381, 383–384, 906–908, 911–924 Black-Scholes model, 913, 919n, 920–921 cash flow effect of expensing, 1057–1059 current GAAP requirements, 919–922 demand for financial statements, 8–9 exercise price, 911, 912 historical perspective, 912–913 initial compromise with SFAS No 123, 915–916 joint IASB/FASB memorandum of understanding (Norwalk Agreement), 916–919 opposition to FASB proposal, 913–915 options backdating scandal, 923–924 Employee stock ownership plans (ESOP), 827n Enacted tax rate, 788 Energy Policy and Conservation Act of 1975, 21 England, J D., 389n Enron Corporation, 31, 362, 632–633, 718, 827n, 917, 985 Enterprise-wide disclosures, 284 Entry price, 321 Enzi, Michael, 917n Equity, 187, 194–195 See also Intercorporate equity investments; Owners’ equity disclosure of income tax amounts recognized directly, 791 liability versus, 603–604 trend analysis, 248–253 valuation, 323–332 Equity cost of capital, 311 Equity in undistributed earnings of investees, as temporary (timing) difference between book income and taxable income, 747 Equity investors, 14 Equity method of accounting intercorporate equity investments, 995–999 minority active investments, 954, 961–966 off-balance-sheet liabilities, 631–633 Erickson, M., 747n, 774n ESCO Technologies Inc., 1090 Eshoo, Anna, 917 Established growth companies, 275 Estimates, intentional bias, 148 E-Trade Group, 196 European Commission, 32, 919 European Union (EU), Council of the European Union, 31 Evans, D., 441n 1109 Events of default, 375–376 Exchanges of nonmonetary assets, 572–575 book value, 573–575 cash received, 575 commercial substance criterion, 574 to facilitate sales to customers, 575 fair value not determinable, 574 Executive compensation See Management compensation Executory contracts, 688 Executory costs, 695–696, 700 Exercise price, 911, 912 Exit price, 321 Expected benefit approach, carrying amount of long-lived assets, 546, 547 Expected future benefit pattern, 315 Expected life of options, 919 Expected long-term rate of return, 830 Expected return, defined benefit plan, 833–834, 857–858 Expense matching, 59, 64–65 Expense recognition, 59, 64–65 Expenses adjusting entries, 93–94 defined, 53 matching principle, 58–59, 64–65 revenues versus, 53 External auditors, 152 Extinguishment of debt, 615–616 Extraordinary items, 71–72 Exxon Corporation, 672–673 Exxon Mobil Corporation, 84–85, 502, 542, 545–546 F Face value, 890 bond, 604 Factor, 434 Factoring, 425, 442, 1053–1054 cautions for financial statement analysis, 442–443 with recourse, 433, 434 without recourse (nonrecourse), 433 Fairfield, P M., 67n, 72n, 329n Fair value accounting, 21, 82, 188, 193, 314, 321, 558 accounts receivable, 431–432 bonds payable, 616–620 cash received, 575 commercial substance criterion, 575 employee stock options, 915–916, 919 exchanges of nonmonetary assets, 574 exchange transaction to facilitate sales to customers, 575 fair value adjustment account, 955–956 fair value not determinable, 574 and financial crisis, 397–400 fundamental valuation, 321–323 guidelines, 617 1110 Index Fair value accounting—Cont intercorporate equity investments controlling (majority) interest, 973 minority active investments, 965–966 minority passive investments, 954–961 muting earnings volatility, 617–619 notes receivable, 431–432 opposing views, 619–620 Fair Value Coalition, 399 Fair value hedge, 642, 643–646 Fair value hedge accounting rules, 645 Fair value of plan assets (FVPA), 860 Faithful representation principle, 18, 548, 558 Falkenstein, A., 503n Fama, E F., 310n Fannie Mae (Federal National Mortgage Association), 398, 437, 441 Fastow, Andrew, 985 Federal Deposit Insurance Corporation (FDIC), 398 Federal Home Loan Mortgage Corporation (Freddie Mac), 148, 398, 437 Federal National Mortgage Association (Fannie Mae), 398, 437, 441 Federal Trade Commission (FTC), 21 FedEx Corp., 50–51 Feinstein, Dianne, 915 Feltham, G., 320n Fiat S.A., 28–29 Fields, T., 388n Finance leases, 719–722 See also Capital lease approach Financial Accounting Standards Board (FASB), 7, 19–22, 24, 33, 40–41, 56–57 acquisition method, 970–975 convertible debt, 928–930 criteria for capital lease treatment, 690–692 earnings in valuation process, 315–316 employee stock options, 913–915, 918n fair value rules, 399, 400 general purpose financial reporting, 890n intercorporate equity investments, 1000–1002 joint IASB/FASB memorandum of understanding (Norwalk Agreement), 916–919 joint IASB/FASB project on fair value measurement and disclosure, 323 joint IASB/FASB project on revenue recognition, 162–164 lease accounting, 690–692, 703–704, 720, 722–723 mandatorily redeemable preferred stock, 897–898 other postretirement benefits (OPEB), 862 pension and other postretirement benefit (OPEB) accounting, 829, 858, 859, 867 receivables accounting, 451 Financial advisors, 15 Financial assets intercorporate equity investments, 995–999, 1000–1002 securitization, 436–442 financial crisis of 2008, 441–442 guarantor, 437 securitization entity (SE), 437–440 structure, 438 transferor, 436 Financial crisis of 2007-2008, 397–400 controversy, 398–400 convertible debt, 925 impairment of financial assets, 1001 meltdown, 397–398 securitization and, 441–442 Financial difficulties, indicators, 444 Financial Executives International, 41 Financial flexibility, 15, 335 Financial performance, linking management compensation to, 380, 386–390 Financial ratios, 239, 255–280 cash flow/credit analysis, 272–277 debt ratings, 338–339 default risk, 277–280 leverage analysis, 262–263 liquidity analysis, 266–270 profitability analysis, 255–261 solvency analysis, 266, 270–272 Financial reporting accounting changes, 74–80 adversarial nature of, 23–27 aggressive approach, 24–27 economics of financial information, 6–14 demand, 7–10 supply, 10–13 importance of, 2–3 international accounting issues, 27–34 lessee accounting capital lease versus operating lease, 699–704 tax accounting versus, 718 lessor accounting direct financing versus operating leases, 713–715 tax accounting versus, 718 pensions and other postretirement benefits (OPEB) See Pensions and other postretirement benefits (OPEB) rules of, 16–22 tax reporting versus, 553 Financial statement analysis, 239–308 accounting quality, 240–242 benchmark comparison, 240 cause-of-change analysis, 239, 243–246 www.ebook3000.com cautions for factoring, assignment, and securitization, 442–443 common-size statements, 196–197, 239, 246–254 cross-sectional analysis, 240 financial ratios, 239, 255–280 international accounting issues, 264–265 pro forma projections, 347–353, 916, 982 regulatory accounting principles (RAP), 392–397 segment reporting, 281–288 time-series analysis, 68, 239–240, 982 trend statements, 239, 246–254 Whole Foods Market, 242–261 Financial statement forecasts (projections), 347–353 illustration, 348–353 nature of, 347–348 pro forma, 347–353, 916, 982 Financing activities, 203, 204, 276, 1032 in preparing statement of cash flows, 1046–1047 simultaneous noncash investing activities and, 1051, 1052 Financing profit, sales-type leases, 707 Finger, C., 315n Finished goods inventory, 267, 469, 477 Finn, M W., 390n Firm commitment fair value hedge, 642, 643–646 nature of, 642 First-in first-out (FIFO) inventory accounting, 241, 329, 396, 470–471, 482–483 eliminating realized holding gains, 502–503, 515–517 inventory holding gains, 132, 484–488 First Solar, Inc., 1083, 1085–1086 Fitch Inc., 336 Fitch Ratings, 438n, 439n, 441 Fixed assets See Long-lived assets Fixed-charge coverage, 374–375 Fixed costs, 476 Fixed GAAP, 376–377 Fixed-price contracts, 158 Floating-rate debt, 613–615 Floor, 507 Foehr, Matthew J., 544n Folami, L B., 867n Foley, F., 774n Food Lion, Inc., 407–408 Foot Locker, Inc., 404 Ford Motor Company, 28–29, 332, 502, 762–763, 866 Forecasting, 310 financial statement forecasts, 347–353, 916, 982 hedge accounting for forecasted transaction, 643, 644, 649 Index Foreign currency exposure hedge, 643, 644, 649 Foreign currency transactions intercorporate equity investments, 987–988 translation adjustments, 1049–1050, 1051 Foreign exchange (currency) swaps, 638 Foreign subsidiaries, 989–994 nonfreestanding, 989–992, 993 self-contained, 989, 992–994 Forelle, Charles, 923, 923n, 924n Form 20-F, 34 Forward contracts, 634 Foster, G., 13n, 21n, 332n 401(k) plans, 826 Foust, D., 918n Fowler, Karl, 666 Franchising continuing (periodic) fees, 138, 141 defined, 138 discounted cash flow in valuing, 340–343 finalizing loans, 372–374 financing decision, 343 initial franchise fee, 138, 139–140 revenue recognition for franchise sales, 138–141 valuing a business opportunity, 340–343 Francis, J R., 346n, 389n, 847n Frank, M., 764n Frankel, M., 502n Frankel, R., 347n Fraud risk factors, 15 Freddie Mac (Federal Home Loan Mortgage Corporation), 148, 398, 437 Free cash flow, 310–314 Free from material error principle, 18, 548 Fremgen, J., 478n Frisby Technologies, 405 Frischmann, P J., 899n Full capitalization approach, 558 Fully funded pension plans, 827 Functional currency choice, 989 Fundamental analysis, Fundamental valuation, defined, 309 Fundamental value, 14 Funding, pension plan defined, 826 determinants of defined benefit plan funding, 835–837, 845–847, 851–852, 857–858 fully funded, 827 funding ratios, 847 overfunded, 827, 846, 850 underfunded, 827, 850 Funding ratios, 847 Future cash inflows, 546 future cash flow effects of debt, 627–630 Future deductible amounts, 755 Futures contracts, 634–636 options contracts versus, 639 Future taxable amounts, 755 Future value, 1093–1094 G Gain contingencies, 654 Gain on sale of property or equipment, statement of cash flows, 1036–1037, 1042–1043, 1045 Ganguin, B., 335n Gaver, J J., 390n Gaver, K M., 390n Ge, W., 329n General Accounting Office (GAO), 42 General Electric Company, 541–542, 918 defined benefit plans, 839–840, 847–861 other postretirement benefits (OPEB), 861–867 Generally accepted accounting principles (GAAP), 16–19, 35–42 contingent liabilities, 655–656 convertible debt, 926–927, 931 corporate dividend distributions, 900–901 current institutional structure, 40–42 deferred tax assets and liabilities, 764–669 defined benefit plan reporting, 835 derivative instruments, 640–641 early developments, 36–37 earnings in valuation process, 315 emergence, 37–39 employee stock options, 912, 919–922, 924 hedge accounting, 641–649, 651 hierarchy, 22 intercorporate equity investments, 954–955 inventory accounting, 511–512 lease accounting, 702–704, 705, 719–722 long-lived asset accounting, 547–549, 576–580 long-term debt, 620–621 mandatorily redeemable preferred stock, 898n owners’ equity, 890 pensions and other postretirement benefits (OPEB), 868 receivables accounting, 449–451 revenue recognition, 60–64 understatement of internally developed intangible assets, 557 General Motors, 180–181, 768–769 General Motors Bonus Plan, 381 Generosity factor, 826 Gleason, Annie, 683 1111 Gleason, C., 154n Global Crossing, 31 Godfrey, Arthur, 745 Goedhart, M., 312n, 317n Going concern, 444 Goldman Sachs, 398 Goldsmith-Pinkham, P., 441n Goldwyn, Sam, 371 Goods available for sale, historical versus current costing, 486 Goodwill, 193, 313–314, 556 acquired acquisition method, 973–975 majority interest, 973–975, 976 minority passive investments, 964–965 as temporary (timing) difference between book income and taxable income, 747 implied, 973–975 Google Inc., 817–818, 922 Grace period, 375–376 Graham, J R., 146n, 391n, 392n, 774n Granite Construction, 596 Grant date, employee stock option, 919–920 Grantham, R., 859n Grayson, Alan, 400 Great Depression, 36 Green, R., 1031n Greenberg, R., 315n Greenspan, Alan, 916 Gross accounts receivable approach to uncollectibles, 419 Groupe Casino, 682–683, 945 Group statements, 31 Grove, Andy, 918n Growth opportunities, 326–327 Grullon, G., 893n Guarantor, 437 Guay, W., 910n H Hall, W K., 261n Hamm, S., 24n Hampton Hotels, 138 Han, J., 396n Hand, J R M., 389n, 625n Hanlon, M., 774n Hanna, D., 148n, 389n Hansen Natural Corporation, 652–653 Harley-Davidson, Inc., 13n, 284–288 Harris Teeter Supermarkets (HTSI), 260, 261 Hartzell, J., 774n Harvey, C R., 146n, 391n, 392n Hay Group, Inc., 381n HealthSouth, 31 Healy, P M., 262n, 347n, 378n, 388n 1112 Index Hedge accounting, 641–649 cash flow, 643, 644, 646–649 considerations, 642, 644 fair value, 642, 643–646 foreign currency exposure, 643, 644, 649 international accounting issues, 651 matching process, 641 Hedged item, 642, 644 Hedge effectiveness, 649–650, 651 Hedging, 633–650 derivative instruments, 633, 634–641 effectiveness, 649–650, 651 hedge accounting, 641–649 international accounting issues, 651 Hedging instrument, 642, 644 Held for sale, 69, 70 assets, 192, 564–565 liabilities, 193 Held-to-maturity securities intercorporate debt investments, 1004–1005 intercorporate equity investments, 995–999 Hershey Co., 291 Hess Corp., 502 Hillman Companies, Inc., 898 Hire purchase contracts, 721–722 Historical cost, 188 amortized, 613 carrying amounts for long-lived assets, 547, 548–549 debt carried at amortized, 621–625 fair value accounting, 318 Historical cost accounting, 486 Historical exchange rate, 988 H.J Heinz Company, 1047–1051 Hoechst AG, 31 Hof, R D., 911n Holding gains, 485 inventory, 484–488, 502–503 Holthausen, R., 323n Home Depot, 261 Honda Motor Company, 28–29 Horngren, C., 478n Hribar, P., 895n Hsieh, D A., 505n Hughes, P J., 389n I IBM, 305–308 “If-converted” method for computing EPS dilution, 908, 909–910 Ikenberry, D., 893n Illinois Tool Works, 364–365 Imhoff, E A., Jr., 702n Implied goodwill, 973–975 Imputed interest defined, 429 on notes payable, 625–627 on trade notes receivable, 427–431 Income from continuing operations, 66–67, 328 Income recognition, 58 Income statement, 65–74 analysis of income statement and balance sheet accounts, 212 categories of transitory income statement items, 72–74 common-size, 246–248 comprehensive income, 81–82, 83 continuing operations, 66–67, 328 discontinued operations, 68–71, 328 extraordinary items, 71–72 format and classification, 65–74 other comprehensive income (OCI), 82, 83, 85–87 special or unusual items, 67–68 trend statements, 246–248 Income tax expense, calculation, 799 Income tax reporting, 745–824 See also Taxable income deferred income taxes asset valuation allowances, 759–764 deferred income tax assets, 755–757, 764 deferred income tax liabilities, 755, 764 interperiod tax allocation, 751–755, 793–801 when tax rates change, 764–769 financial versus tax accounting book income/taxable income, 745–746 incentives, 553 for leases, 718 temporary (timing) and permanent differences, 746–751 income tax note disclosures, 770–778 assessing earnings quality, 783–786 company versus individual deferred items, 776, 777 current versus deferred portion of current period tax provision, 770 deferred taxes and cash flow, 776–778 improving interfirm comparability, 786–788 sources of deferred tax asset and liabilities, 775–776 statutory versus effective tax rates, 770–774, 789 intercorporate equity investments, minority passive investments, 959–960 international tax issues, 788–792 investment tax credit (ITC), 20–21, 39 LIFO conformity rule, 396, 501–502, 512–513 net operating losses carrybacks, 757–759 carryforwards, 757–759 preferred stock dividends, 897 www.ebook3000.com regulation through, 396–397 tax deductibility of management compensation, 914, 921 tax rates deferred income tax accounting when tax rates change, 764–769 differences across countries, 773–774 effective, 750, 770–774 enacted, 788 statutory, 749, 770–774, 789 substantively enacted, 788 uncertain tax positions, 778–782 assessing disclosures, 782 making changes or resolving uncertain tax positions, 781–782 related to permanent difference, 779–780 related to timing of deductibility, 780–781 Incremental borrowing rate, 693n, 722 Indefinite-lived intangible assets, 556, 561, 580 Indenture, 334, 604 Independent auditors, 15 Independent Film Development Corporation, 202 Indirect method, statement of cash flows, 204, 1032, 1035–1039, 1063–1065 Indus International, Inc., 184–185 IndyMac Bank, 846 Inflation, LIFO reserves, 493 Information asymmetry, 6–7 Initiation fees, revenue recognition abuses, 150 In-process research and development (IPR&D), 980 Input market, 546 Insiders, owners as, 890 Installment sales computation of taxable income, 796–797 as temporary (timing) difference between book income and taxable income, 747 Installment-sales method, 62, 134–136 IFRS rules, 161–162 interest on installment contracts, 136 journal entries, 135 Institutional Brokers Estimate System (I/B/E/S), 146 Insubstance defeasance, 389 Intangible assets, 193 indefinite-lived assets, 556, 561, 580 long-lived assets, 555–558 international accounting issues, 578–579, 580 types, 555–556, 580 Intel, 480, 818–819 Intercorporate debt investments, 1004–1007 Intercorporate equity investments, 953–1030 controlling (majority) interest investments, 966–975 Index foreign currency transactions, 987–988 foreign subsidiaries, 989–994 historical approaches, 975–985 acquisition method, 977, 979, 982–985 pooling-of-interests method, 975–976, 981, 984–985 purchase method, 976–980, 982–984, 1018 international accounting issues, 994–1002 consolidated financial statements, 999–1000 financial assets, 995–999, 1000–1002 joint ventures, 1000 special purpose entities (SPEs), 1000 variable interest entities (VIEs), 1000 minority active investments, 954, 961–966 minority passive investments, 954–961 statement of cash flows adjustments, 1050, 1051 variable interest entities, 985–986 Interest-based amortization, 723 Interest capitalization, 551–553 Interest cost, defined benefit plan, 833 Interest coverage ratio, 272 Interest expense, 1093 avoidable interest, 551–553 changes for statement of cash flows, 1039 convertible debt, 928 interest, defined, 601 statement of cash flows, 1060–1062 Interest income computation of taxable income, 795 statement of cash flows, 1060–1062 Interest rate “collar,” 638n Interest rate implicit in the lease, 693n Interest rates bonds payable, 604 stock prices and, 380 “teaser,” 398 Interest rate swaps, 637, 647–648, 650 Interfirm comparability, tax notes to improve, 786–788 Internal auditors, 152 Internal Revenue Code (IRC), 396 Internal Revenue Service (IRS), 396–397 International Accounting Standards Board (IASB), 7, 20, 31–34 exposure draft on income taxes, 792 fair value rules, 399, 400 hedge accounting, 651 joint IASB/FASB memorandum of understanding (Norwalk Agreement), 916–919 joint IASB/FASB project on fair value measurement and disclosure, 323 joint IASB/FASB project on revenue recognition, 162–164 lease accounting, 722–723 receivables accounting, 451 revenue recognition, 60 International Accounting Standards Commission (IASC), 20, 31 International Accounting Standards (IAS), long-lived asset accounting, 576–578 International Financial Reporting Standards (IFRS), 20, 22, 30–31, 34 balance sheet presentation, 198–200 contingent liabilities, 655–656 convertible debt, 930–931 hedge accounting, 651 income tax reporting disclosure of income tax amounts recognized directly in equity/other comprehensive income, 791 IASB exposure draft, 792 recognizing deferred tax assets, 788–789 reconciliation of statutory and effective tax rates, 789–791 uncertain tax positions, 791–792 installment sales, 161–162 intercorporate equity investments, 995–999 inventory accounting, 488, 511–512 lease accounting, 719–722 long-lived asset accounting, 576–580 long-term construction accounting, 158–161 long-term debt, 620–621 other comprehensive income (OCI), 85–87 owners’ equity reporting, 903–904 pensions and other postretirement benefits (OPEB), 868 receivables accounting, 450–451 revenue recognition and measurement, 157–158 statement of cash flows, 214–216, 1032 Internet resellers gross versus net basis, 150–151 revenue recognition abuses, 150–151 Interperiod income tax allocation comprehensive, 793–801 deferred income taxes, 751–755 defined, 746 In-the-money options, 908 Intraperiod income tax allocation, 70 defined, 746 sources of deferred tax assets and liabilities, 775–776 Intrinsic stock price estimate, 344–347 Inventories, 469–544 changes for statement of cash flows, 1037 consignment sales, 149, 475 cost flow assumptions, 469–472, 481–493 empirical evidence on policy choice, 504–506 first-in first-out (FIFO) accounting, 241, 329, 396, 470–471, 482–483, 484–488, 502–503, 515–517 1113 last-in first-out (LIFO) accounting, 241, 329, 471, 483–502, 503–506 lower of cost or market method, 191, 506–511 specific identification, 481–482 weighted average, 470 costs included in, 475–481 absorption costs, 476–480 manufacturing costs, 476 variable costs, 476–480 vendor allowances, 480–481 defined, 191, 469 determination of inventory quantities, 472–475 periodic inventory system, 472–475, 504 perpetual inventory system, 472–475 finished goods, 267, 469, 477 international accounting issues, 488, 511–513 inventory errors, 522–523 items included in, 475 raw materials, 267, 469, 477 statement of cash flows, 1044–1045 work-in-process, 267, 469, 477 Inventory holding gains and losses, 132, 484–488 Inventory turnover ratio, 267–268, 500–501 Investing activities, 203, 204, 275, 1032 in preparing statement of cash flows, 1045–1046 simultaneous noncash financing activities and, 1051, 1052 Investment banks, 606 Investment property, 578 leases as, 720 Investments, 193 Investment tax credit (ITC), 20–21, 39 J Jaffee, J F., 276n, 310n Jagolinzer, A., 389n Jefferson-Pilot Corporation, 982–984 Jenkins, N., 154n Jennings, R., 506n Jensen, M., 147n, 380n Jet Blue Airways, 704 Jiambalvo, J., 377n Jiffy Lube International, 138 Johnson, B., 154n Johnson, G., 315n, 517n Johnson, M., 1031n Johnson, W B., 332n, 506n, 706n, 867n, 895n Joint costs, 549 Joint ventures, 631–633, 967, 1000 Jordan, B D., 634n Journal entries cash flow hedge, 647–648 changes in defined benefit plan funded status, 844–845 1114 Index Journal entries—Cont closing, 96–97 components of pension cost, 853–856 cost recovery method, 137 installment sales method, 135 minority passive investments, 956–961 percentage-of-completion method, 127 posting, 94–95 J.P Morgan, 36 Justice Department, 27 K Kanjorski, Paul, 399–400 Kansas City Southern, 704 Kaplan, R S., 386n Kapstone Paper and Packaging Corporation, 294–295 Kasnik, D., 919n Keiretsu, 30 Keller, T., 548n Kellogg Company, 683–685 Kennedy Administration, 21 Kimbrough, M., 557n Kimmel, P D., 898n, 899n Kinney, W., 332n Kmart, 481 Koller, T., 312n, 317n, 347n Kothari, S P., 315n, 323n, 332n, 910n Kozlowski, Dennis, 372 Kraft, K A., 281n, 482n, 569n Kraken Group, 666 Kranhold, E K., 414n Kravet, T., 774n Krispy Kreme Doughnuts, 363–364, 390, 403–404 analysis of uncollectible accounts receivable, 420–421 asset impairment recognition and disclosure, 561, 562 loan guarantees, 654–655 Kroger Company, 292–293, 471, 501, 502, 704 Krull, L., 774n Kumar, Sunjay, 415 L Laing, Jonathan R., 144n, 426n Lakonishok, J., 893n Landsman, W R., 867n Larcker, D., 389n Largay, J., 277n Last-in first-out (LIFO) inventory accounting, 241, 329, 396, 471, 483–484 adjusting cost of goods sold from LIFO to FIFO, 489–491, 497–499 dollar-value LIFO, 491, 517–522 eliminating LIFO ratio distortions, 499–501 inventory holding gains, 132, 484–488 LIFO conformity rule, 396, 501–502, 512–513 LIFO dangers, 503–504 LIFO liquidation, 486, 493–499, 517–518 LIFO reserve disclosure, 488–493, 497 tax implications, 501–502 Lavelle, L., 911n, 918n Layaway sales, revenue recognition abuses, 149–150 Lease accounting, 687–744 capital lease approach, 688, 690–715, 718 constructive capitalization, 722, 724–729 evolution, 687–690 international accounting issues, 719–723 joint FASB/IASB exposure draft, 722–723 lessee accounting, 690–706 capital lease treatment, 688, 690–706 capital versus operating leases, 718 disclosures, 689, 704, 705–706, 720–721 FASB criteria for capital lease treatment, 690–692, 703–704 lessee, defined, 687 operating lease treatment, 688, 690–706, 691, 699 lessor accounting capital versus operating leases, 708–715 decision tree, 707, 710 direct financing lease, 706, 708, 709–715 disclosures, 718–719, 720–721 lessor, defined, 687 sales-type lease, 706, 707, 710, 715–716 operating lease approach, 687–706 sale and leaseback, 716–718 Securities and Exchange Commission (SEC) initiative, 689–690 Lease payment, 687 LeClere, M J., 505n Lee, C., 347n Lee, C J., 505n Lee, D., 1031n Lehman Brothers, 264–265, 398, 441, 846 Lemmon, M., 919n Lemons, 11, 11n Lenders, demand for financial statements, Lennox International, 295 Leone, Marie, 214n, 314n, 652n Lessee See also Lease accounting, lessee accounting defined, 687 www.ebook3000.com Lessor See also Lease accounting, lessor accounting defined, 687 Lev, B., 315n, 323n, 329n, 557n Leverage analysis, 262–263 lease accounting, 689, 703 Levitt, Arthur, 144, 144n, 147–149 Liabilities, 601–686 accrued, 193 balance sheet presentation, 187, 193–194, 601–603 bonds payable, 604–625 book value versus market value after issuance, 613–616 cash flow characteristics, 604–605 extinguishment of debt, 615–616 fair value accounting, 616–620 floating-rate debt, 613–615 graphic presentations, 611–612 international accounting issues, 620–621 issued at discount, 606–609 issued at par, 605–606 issued at premium, 609–611 managerial incentives and financial reporting, 621–625 contingent, 652–656 gain contingencies, 654 international accounting issues, 655–656 loan guarantees, 654–655 loss contingencies, 652–654 current, 193, 602–603 as debt versus equity, 603–604 defined, 601 hedges, 633–650 derivative instruments, 634–641 effectiveness, 649–650 hedge accounting, 641–649 international accounting issues, 603, 620–621, 651, 655–656 mandatorily redeemable preferred stock, 897–898 monetary, 601, 602–603, 988 noncurrent, 193, 602–603 nonmonetary, 601 notes payable, 193 future cash flow effects of debt, 627–630 imputed interest, 625–627 off-balance-sheet, 241–242, 631–633 from retiring long-lived assets, 563–564 trend analysis, 248–253 Liability approach, deferred income tax assets/liabilities, 764–769 Liability valuation account, 608 Lie, Erik, 923, 923n Lieberman, Joe, 915n Index LIFO conformity rule, 396, 501–502, 512–513 LIFO liquidation, 255, 486, 493–499, 517–518 LIFO reserves, 488–493, 497 Limited liability, 890 Lincoln National Corporation, 982–984 Lindahl, F W., 505n Linsmeier, Thomas, 633n Lipe, R C., 328n, 702n Lipin, S., 144n Liquidity, 188, 266–270 Litigation costs, 13 loss contingencies due to, 652–654 Liu, C., 867n Livedoor, 27 Loan charge-offs, 394 Loan guarantees, 654–655 Loan loss provision, 394 Locke, Gary, 765n London Interbank Offered Rate (LIBOR), 613–615 London Stock Exchange (LSE), 29 Longer-term investment potential, 958–959 Long-lived assets, 192–193, 545–600 amortization, 565 asset impairment, 558–562 amortizable intangible assets, 558–560, 579 financial assets, 998 indefinite-lived intangible assets, 556, 561 international accounting issues, 579–580 Krispy Kreme case study, 561, 562 management judgments and, 561–562 tangible assets, 558–560 assets held for sale, 564–565 carrying amount, 546–555 capitalization criteria, 553–555 computing avoidable interest, 551–553 discounted present value, 546–547 economic sacrifice approach, 546, 547–549 expected benefit approach, 546, 547 GAAP approach, 547–549 tax versus financial reporting incentives, 553 defined, 545 depletion, 565 depreciation, 565–572 disposition of long-lived assets, 569 double-declining balance (DDB) depreciation, 566–567, 568, 569 financial analysis and depreciation differences, 569–572 straight-line (SL) depreciation, 566, 568, 569 sum-of-the-years’ digits (SYD) depreciation, 567–568 units-of-production (UP) depreciation, 566, 568 exchanges of nonmonetary assets, 572–575 book value, 573–575 cash received, 575 commercial substance criterion, 574 to facilitate sales to customers, 575 fair value not determinable, 574 intangible assets, 193, 555–558, 578–579 international accounting issues, 576–580 impairments, 579–580 intangible long-lived assets, 578–579 tangible long-lived assets, 576–578 long-term asset turnover, 258 obligations from retiring long-lived assets, 563–564 tangible assets, 576–578 Long-term asset turnover, 258 Long-term construction accounting international accounting issues, 158–161 as temporary (timing) difference between book income and taxable income, 747 Long-term debt, 193–194 See also Bonds payable Long-term debt to assets, 270–271 Long-term debt to tangible assets, 270–271 Long-term incentives, 380–381, 383–385 Long-term loans, credit risk assessment, 333 Long-term pension risk ratio, 861 Loss contingencies, 652–654 Lower of cost or market method, 191, 506–511 applications, 509 ceiling, 507 contracting origins, 509–510 evaluation of lower of cost or market rule, 510–511 floor, 507 scenarios, 507–509 Lublin, J., 144n Lufthansa Group, 823–824 Lundholm, R., 317n, 347n LVMH Group, 577–578 Lys, T., 13n, 147n, 323n, 388n, 975–976, 976n M MACRS (Modified Accelerated Cost Recovery System), 396, 569, 747, 748 Macy’s, 704 Magliolo, J., 394n, 421n Majority, 282 Majority interest, 966–975 acquisition method, 967–970 consolidation accounting, 966–970 goodwill, 973–975 issue of control, 966 noncontrolling (minority) interest, 967 1115 Malkin, L., 640n Management approach, 281–283 Management compensation, 379–392 annual (short-term) incentives, 380, 381–383, 389–390 augmenting cash compensation, 912 base salary, 380, 381 bonus plans, 380, 381–383 debt-for-debt swaps, 621–625 debt-for-equity swaps, 621–625 demand for financial statements, 8–9 financial reporting for debt, 621–625 incentives tied to accounting numbers, 380, 386–392 long-term incentives, 380–381, 383–385 proxy statements and, 385–386 stock options See Employee stock options Management discretion, 241 asset impairment recognition and disclosure, 561–562 discretionary accounting accruals, 377–379 Management Discussion and Analysis (MD&A), 286, 385 Managers, response to potential debt covenant violations, 377–379 Mandatory conversion, 906 Mandatory redemption, 604 preferred stock, 897–899 Mandatory reporting, Manufacturer’s profit, sales-type leases, 707 Manufacturing costs, 476 Manville Corporation, 23 Marathon Petroleum Corp., 502 Maremont, M., 144n, 424n Marked-to-market, 132–133, 643 Market price, 321, 385 Market price (production) method, 132–133 Market-related value, 830 Market risks, 633 See also Hedging Market value, bond book value versus, 613–616 extinguishment of debt, 615–616 floating-rate debt, 613–615 Market value method, for convertible debt accounting, 927 Mark-to-market accounting, 21, 399 Marquardt, C., 919n Martin, R., 332n Matching principle, 58–59, 64–65 Materiality principle, 17, 18 Mature companies, 275 Maturity structure, 188 Maturity value, bond, 604 Maydew, E., 747n, 774n McCaffey, John L., 255 McCann, David, 1037n McConnell, P., 151n, 748n 1116 Index McDonald’s Corporation, 118–119, 138, 302, 402 McGinty, T., 399n McGough, R., 867n McKay, P A., 650n McNichols, M., 421n Measurable event, 60–64, 123 Meckling, W., 380n Meek, G., 29n Mellors, F., 826n Mentor Graphics Corporation, 291 Mergers See Intercorporate equity investments Merrill Lynch, 398 MGM Resorts International, 552–553 Microsoft Corporation, 24, 142, 368–370, 410–411, 894, 918, 918n Milgrom, P., 380n Millar, J A., 901, 901n Millennium bonds, 679–681 Miller, J., 858n Miller, M H., 310n, 690n Minder, Thomas, 409–410 Minimum capital requirements, 393–394 Minimum lease payments, 693 Minority active investments, 954, 961–966 cost versus book value, 963–965 equity method, 962, 965–966 Minority passive investments, 954–961 available-for-sale securities, 958–959, 960–961 fair value accounting, 954–961 goodwill, 964–965 impairment of investments, 960–961 income tax effects, 959–960 trading securities, 955–958 Mittelstaedt, H F., 858n, 867n Mock, R., 484n, 513n Modified Accelerated Cost Recovery System (MACRS), 396, 569, 747, 748 Mohrman, M B., 377n Molson Coors Brewing Company, 668–669 Monahan, S., 339n Monetary assets, 190, 987 Monetary liabilities, 601, 988 noncurrent, 602–603 Money purchase plans, 826 Moody, John, 336 Moody’s Investors Services, 278, 336, 355, 438n, 439n Morgan Stanley, 264, 398 Morgenson, G., 239n, 480n, 867n, 894n Mortgage-backed securities (MBS), 397–400, 441–442, 960–961 Mortgage bonds, 604 Motorola, 818–819, 899 Motorola Solutions, Inc., 188–195, 201 Moyer, S., 421n Mulford, C W., 523n, 1054n Murphy, K., 380n Mutually underperformed contract, 687 Myers, R., 337n Myers, S C., 310n, 912n N National Beverage Corporation, 896 National City Bank, 36 National Coal Corporation, 596–597 Negative abnormal earnings, 317 Negative covenants, 375 Negative plan amendment, 864–865 Neiman Marcus, 261 Nelson, E., 144n Nelson, K., 315n Net assets, 58, 59 Net carrying value, 609 Net contract position, 163 Net income cash flows versus accrual earnings, 204–209 distribution of annual, 144–145 Net operating income after taxes (NOPAT), constructive capitalization of leases, 728–729 Net operating loss carrybacks, 757–759 carryforwards, 757–759 Net realizable value, 132, 188, 191, 417–427, 507, 512, 546–547 defined, 417n returns and allowances, 417, 421–422 uncollectibles, 417–421 Net work, 376 Neutrality principle, 18, 548 News Corporation, 313–314 New York Mercantile Exchange (NYMEX), 634 New York Stock Exchange (NYSE), 29, 36 Niedzielski, J., 650n Nike Inc., 943–944 NINJA loans, 398 Nobes, C., 29n Noise, 327–328 Nominal rate, bond, 604 Nominal value, 890 Noncash additions, 99 Noncash deductions, 99 Noncontrolling (minority) interests, 195, 967 acquisition method, 970–975 minority active investments, 961–966 minority passive investments, 954–961 Noncurrent assets, held for sale, 192 Noncurrent liabilities, held for sale, 193 Nonmonetary assets, 190, 988 Nonmonetary liabilities, 601 Nonparticipating preferred stock, 896 Nonrecourse, factoring, 433 www.ebook3000.com Nonrecurring income statement items, 72–74 Nonrefundable up-front fees, revenue recognition abuses, 150 Nordstrom, 261, 268, 269 Norfolk Southern Corporation, 704 Norris, F., 16n, 397, 399n, 441n Nortel, 846 Northern Trust Corporation, 330, 331 Norton, D P., 386n Norwalk Agreement, 916–919 Notes payable, 193 convertible See Convertible debt defined, 334 future cash flow effects of debt, 627–630 imputed interest, 625–627 Notes receivable See also Uncollectibles amortized cost, 450–451 collateralized borrowing, 433, 435 fair value accounting, 431–432 financial asset securitization, 436–443 imputing interest, 427–431 international accounting issues, 450–451 troubled debt restructuring, 443–450 Notes to financial statements, 200–202 income tax note disclosures, 770–778 assessing earnings quality, 783–786 company versus individual deferred items, 776, 777 current versus deferred portion of current period tax provision, 770 deferred taxes and cash flow, 776–778 improving interfirm comparability, 786–788 sources of deferred tax asset and liabilities, 775–776 statutory versus effective tax rates, 770–774, 789 pension benefit note disclosures, 848–849, 858–861, 862–864 related-party transactions, 202 subsequent events, 201–202 Summary of Significant Accounting Policies, 200–201 Novartis AG, 48–49, 264, 885–886 Nucor Corporation, 296–297, 502 O Obama, Barack, 382, 765 O’Brien, T., 144n Obsolescence write-offs, 1049 O’Connell, V., Off-balance-sheet financing, 689 Off-balance-sheet liabilities, 241–242, 631–633 See also Lease accounting Ohlson, J., 280, 280n, 317n, 320n, 323n Olsen, C., 332n Olsson, P., 346n Index Operating activities, 203, 204, 208, 214–216, 274–275, 1032 distortion or manipulation of cash flows, 1053–1059 in preparing statement of cash flows, 1040–1045 Operating and financial flexibility, 188 Operating cycle, 57, 188, 266, 268–269 Operating lease approach capital lease approach versus, 1055–1057 evolution of lease accounting, 687–690 lessee accounting, 688, 689 comparison with capital lease approach, 691 constructive capitalization, 722, 724–729 disclosure, 704, 705–706, 719–723 financial statement effects, 699–704 international accounting issues, 719–722 lessor accounting, 688, 708–709, 713–715 capital versus operating leases, 708–709 international accounting issues, 719–722 sale and leaseback, 716–718 Operating leases, 240–241 Operating risks, 633 See also Hedging Operating segment, 282 Options contracts, 638–639 See also Employee stock options Oracle Corporation, 142–143, 602–603 Ordinary annuity, 605, 1096–1097, 1100 Original effective yield rate, 194 Ormazabal, G., 439n Ostrower, J., 264n Oswald, D R., 346n Other comprehensive income (OCI), 82, 83, 642, 829n, 838–839 accumulated, 195 international accounting issues, 85–87, 995 minority passive investments, 958–961 Other postretirement benefits (OPEB), 861–868 assessing OPEB liability, 866 defined, 861 evaluating financial reporting, 867 General Electric case, 861–868 Output market, 546 Overfunded pension plans, 827, 846, 850 Owners’ equity, 889–951 See also Earnings per share (EPS) appropriate income measurement, 889–896 company repurchase of stock, 892–895 nature of the “firm,” 890–892 compliance with contract terms and restrictions, 889, 896–900 convertible debt, 924–931 analytical insights, 927–928 background, 925 financial reporting issues, 926–927 international accounting issues, 930–931 settlement in cash, 928–930 employee stock options, 906–908, 911–924 current GAAP requirements, 919–922 historical perspective, 912–913 initial compromise with SFAS No 123, 915–916 joint IASB/FASB memorandum of understanding (Norwalk Agreement), 916–919 opposition to FASB proposal, 913–915 options backdating scandal, 923–924 financial statement presentation, 902–903 financing transactions, 890–892 international accounting issues, 903–904 legality of corporate distributions to owners, 889, 900–901, 914–915 linkage to equity valuations, 889, 902–903, 915 preferred stock, 896–900 revaluation surplus account, 577 P Palepu, K., 262n, 347n, 378n Palmrose, Z., 21n, 154n Papa John’s International, Inc., 1009 Parent, 966 Parent company, 31 Park, C W., 388n Parker, R., 29n Parmalat, 27 Parrino, R., 379n Participating preferred stock, 896 Par value bond, 604 bonds issued at, 605–606, 611 common stock, 194, 890 preferred stock, 896 Patel, A V., 281n, 482n, 569n Patel, J., 144n Patents, 556 Patient Protection and Affordable Care Act of 2010, 765 Payment default, 377 Pegg, J., 151n Penman, S., 262n, 312n, 317n, 320n Pension, 825 Pension Benefit Guaranty Corporation (PBGC), 846, 846n Pension plan, 825 Pension Protection Act of 2006 (PL 109-280), 846 1117 Pensions and other postretirement benefits (OPEB), 825–888 See also Defined benefit plans; Defined contribution plans assessing OPEB liability, 866 changes for statement of cash flows, 1038 definitions, 825–826 evaluation of pension and postretirement benefit financial reporting, 867 gains and losses due to uncertainty, 835–837 General Electric case study, 847–867 health care reform and deferred tax assets, 765 international accounting issues, 868 rights and obligations, 825–827 temporary (timing) difference between book income and taxable income, 747 Pension trust, 825 Pepsico, 816, 976n Percentage-of-completion method, 62, 124–129 comparative account balances, 130 journal entries, 127 Performance-based pay plans, 384–385 Performance obligations, 163 Period costs, 64, 65, 476 Periodic inventory system, 472–475, 504 Permanent differences, 192 between book income and taxable income, 746, 748 defined, 746 examples, 748 nature of, 769–770 uncertain tax position related to, 779–780 Permanent earnings component, 327–328 Perpetual inventory system, 472–475 Peterson, C A., 901, 901n Petrino, R J., 281n, 482n, 569n Pettit, J., 311n Pfizer Inc., 201, 202, 993–994 Phillips, John, 778n Phillips, K., 488n Picconi, M., 867n Pincus, M., 505n Pittards, PLC, 235–236 Pizza Hut, 138 Plumlee, M., 29n Political costs, 13 Pooling-of-interests method, intercorporate equity investment, 975–976, 981, 984–985 Popov, L., 379n Porter, M E., 261n Positive abnormal earnings, 317 Posting, 94–95 Potential dilution, 906–907 Potomac Electric Power Company, 196 Predictive value, 17 1118 Index Preferred stock, 890n, 896–900 adjustable-rate, 896 common stock versus, 899–900 convertible, 902–903, 906 cumulative, 896–897 as debt versus equity, 604 dividends, 897 mandatorily redeemable, 897–899 participating/nonparticipating, 896 trust preferred security, 898–899 voting rights, 953 Premium, bonds issued at, 605, 609–611 Prepaid expenses changes for statement of cash flows, 1037 as temporary (timing) difference between book income and taxable income, 747 Prepayments adjusting entries, 92–93 statement of cash flows, 1044 Present value, 1094–1101 annuity due, 605, 1097–1098, 1101 ordinary annuity, 1096–1097, 1100 tables, 1099–1101 Present value accounting, 549 asset impairment, 579–580 defined benefit plan calculations, 831 imputing interest, on notes payable, 625–627 imputing interest, on trade notes receivable, 427–431 liabilities arising from retiring long-lived assets, 563–564 Price/earnings (P/E) ratio, 316, 325–330 Price index, 518n Primary beneficiary, 439n Principal, 1093 Principal-agent relationship, 372 Principal amount, bond, 604–605 Principal payment, preferred stock, 899 Principles-based approach, 32 Prior period adjustments, 154–157 Prior service cost, recognized, 843–844 Pritsch, G., 379n Procter & Gamble Co., 827n, 918 Product costs, 64, 476 Production phase, 62 Product warranties, 601 common components of revenue contracts, 164 computation of taxable income, 796 as temporary (timing) difference between book income and taxable income, 747, 784–786 Profitability analysis, 255–261 Profit margin, 256, 257 Profit performance expense recognition/matching, 64–65 revenue recognition, 60–64 bundled (multiple-element) sales, 142–143 franchising, 138–141 prior to sale, 124–133 sales with right of return, 141 subsequent to sale, 134–138 Profit-sharing plans, 826 Pro forma projections, 347–353, 916, 982 Pro forma pro rata basis, 26 Projected benefit obligation (PBO), 832–833, 851–852 Property, plant, and equipment, 192–193 See also Asset impairment; Longlived assets asset retirement, 1050–1051 changes for statement of cash flows, 1036–1037, 1050–1051 statement of cash flows, 1036–1037, 1042–1043, 1045–1046 Property dividends, 900 Property rights approach, lease accounting, 690, 722 Proprietary view of the firm, 552 Prospective approach, reporting accounting changes, 74 Protective covenants, 334 Proxy contests, Proxy statements, 385–386 Public Company Accounting Oversight Board (PCAOB), 5, 20, 41–42 Public debt, credit risk assessment, 334 Public entities defined, 281n segment reporting, 281–288 Publix Super Markets, Inc., 292–293, 704, 1076–1077 Pukthuanthong, K., 919n Pulliam, S., 399n Pungaliya, R., 379n Purchase method acquisition method versus, 982–984, 1018 intercorporate equity investments, 976–980, 982–984 Q Quaker Oats Company, 976n Qualifying special purpose entity (QSPE), 438–440 Quality of information, 6–7 Quantitative thresholds, 282 Quick ratio, 266, 270 Qwest Communications, 704 R Rajan, M U., 386n Rajgopal, S., 146n, 391n, 392n Ramakrishnan, R., 327 Ramesh, K., 315n, 378n www.ebook3000.com RAP See Regulatory accounting principles (RAP) Rapoport, M., 768n Rate of return, 10, 187 Rate of return assumption, defined benefit plan, 838 Rate regulation, electric utilities industry, 394–397 Ratio proportionality, foreign currency and translated dollars, 993 Raw materials inventory, 267, 469, 477 Realized holding gains, 485, 515–517 Reason, T., 652n Receipts, 637 Receivables, 417–468 See also Uncollectibles accounts receivable amortized cost, 450–451 factoring, 425, 433, 434, 442 fair value accounting, 431–432 international accounting issues, 450–451 net realizable value, 417–427 changes for statement of cash flows, 1037 disclosure requirements, 442–443 notes receivable amortized cost, 450–451 collateralized borrowing, 433, 435 fair value accounting, 431–432 financial asset securitization, 436–443 imputing interest, 427–431 international accounting issues, 450–451 troubled debt restructuring, 443–450 Recognized gains or losses, defined benefit plan, 837–843 Recourse, factoring, 433 Recoverable amount intangible asset impairment, 580 tangible asset impairment, 579 Recovery of investment criterion, 692 Rego, S., 764n Regulatory accounting principles (RAP), 392–397 banking industry capital requirements, 393–394 electric utility industry rate regulation, 394–396 regulatory assets and liabilities, 393 taxation, 396–397 Regulatory agencies, demand for financial statements, 9–10 Regulatory assets and liabilities, 393 Reilly, D., 323n, 488n, 768n Reiter, S A., 847n Related-party transactions, 202 Relevance principle, 17 Remeasuring nonfreestanding foreign subsidiaries, 989–992, 993 Index Rental income, computation of taxable income, 796 Replacement cost, 547 Replacement cost accounting, 485, 506 Reportable segments, 282 Reporting entity, changes in, 75, 80 Report of the National Commission on Fraudulent Financial Reporting (Treadway Commission), 42 Repurchase of stock, 892–895 Research and development (R&D) expenses, 556–558 development, defined, 579 intercorporate equity investments, 980 research, defined, 579 Residential mortgage-backed securities (RMBS), 337 Residual value, 687 Residual value guarantees, 693, 696–697, 713 Restricted retained earnings, 902 Restricted stock, 384, 922 Restructuring “Big Bath” charges, 147–148 defined, 443 troubled debt, 443–450 Retained earnings, 194–195 restricted, 902 Retrospective approach, reporting accounting changes, 74–77 Return on assets (ROA), 187, 255–261, 440 competitive advantage, 258–261 constructive capitalization of leases, 728–729 management compensation tied to, 387 Return on common equity (ROCE), 187, 195, 262–263 abnormal earnings and, 320–321 Returns and allowances defined, 417 estimating, 421–422 Revenue recognition, 58, 60–64 abuses, 149–151 critical event condition, 60, 123 earnings management, 144–151 premature or aggressive, 149 existing accounts receivable as sales, 422–427 international accounting issues, 157–164 long-term construction accounting, 158–161 measurability condition, 60–64, 123 prior to sale, 124–133 commodities, 130–133 completed-contract method, 129–130 completed-transaction (sales) method, 131, 133 market price (production) method, 132–133 percentage-of-completion method, 124–129 process overview, 63 specialized sales transactions, 138–143 bundled (multiple-element) sales, 142–143 franchise sales, 138–141 sales with right of return, 141 subsequent to sale, 134–138 cost recovery method, 136–138 installment sales method, 134–136, 161–162 Revenues adjusting entries, 93 cash-basis, 54–55 defined, 53 expenses versus, 53 matching principle, 58–59, 64–65 Revenues received in advance, as temporary (timing) difference between book income and taxable income, 747 Revised Model Business Corporation Act of 2004, 900–901 Revolving loans, credit risk assessment, 333 Revsine, L., 310n, 989n Rich, Jeffrey, 923, 924 Richardson, S., 144n, 145n, 146n, 154n, 332n Richardson, V., 154n Ricoh Company Ltd., 463 Riedl, E J., 561n Rigas, John, 234–235 Right of return, 141 Rimbey, J N., 901, 901n Risk (uncertainty), 310 risk differences, 326 Rite Aid Corporation, 1081–1083 RJR Nabisco Holdings Corporation, 947–948 Roberts, J., 380n Roberts, M L., 901n Robinson, L., 774n Roll, R., 919n Romero, S., 554n Roosevelt, Franklin D., 36 Ross, S A., 276n, 310n, 634n Roxio, Inc., 177–178 Royal Ahold, 27 Royal Dutch Shell plc, 598–600 Roychowdhury, S., 479n Rules-based approach, 32 Russell, Arthur, 24 Ryan, S., 400n, 441n, 634n S Safety margin, 378 Safeway, Inc., 260, 261, 704 Safra Republic Holdings S.A., 679–681 Saks Inc., 481 Salary continuation See Pensions and other postretirement benefits (OPEB) 1119 Sale and leaseback, 716–718 Sale of receivable (factoring), borrowing versus, 436–442 Sale of receivables (factoring), 425, 433, 434, 442 Sales changes for statement of cash flows, 1036–1037 exchange transactions to facilitate, 575 Sales cycles, 333 Sales returns and allowances, 421–422 Sales revenue approach to uncollectibles, 418 Sales-type leases, 706, 707, 710, 715–716 Salomon Brothers, 835n Salton, Inc., 625–627 Samson, W D., 901n Samsonite Corporation, 899–900 Sandberg, J., 554n Sangiorgi, F., 441n Santayana, George, Sarbanes-Oxley Act (SOX) of 2002, 1, 5, 20, 153 compliance, 42 Section 906, 42 Satyam Computer Systems, 27 SBC Communications, 393 Schipper, K., 329n Schneider, C., 917n Scholes, M., 421n, 747n, 774n, 912n Scholz, Susan, 152n, 154n Schrand, C., 329n, 763n Schroeder, Michael, 427n Schuetze, W P., 40n Schulte, R., 478n Schultz, E E., 867n Sears, 704 Seasonal lines of credit, 333 Section 906 (SOX), 42 Secured bonds, 334 Secured credit, 333 Securities Act of 1933, 36–37, 152 Securities and Exchange Commission (SEC), 22, 24, 27, 34 Accounting Series Releases, 39 comparative income data, 68 differentiating between common stock and preferred stock, 899–900 Electronic Data Gathering and Retrieval (EDGAR) system, 19 establishment, 5, 36 Financial Reporting Releases, 37 lease accounting initiative, 689–690 mandatorily redeemable preferred stock, 897–898 Regulation FD, 11 Regulation S-X, 37, 68n Staff Bulletins, 37 Securities Exchange Act of 1934, 5, 36, 37, 42, 152 1120 Index Securitization, cautions for financial statement analysis, 442–443, 1053–1054 Securitization entity (SE), 437–440, 986 Sefcik, S E., 389n Segal, D., 315n Segment reporting, 281–288 definition of reportable segment, 281–283 Harley-Davidson, Inc., 284–288 required disclosures, 283–284 Seiz, R., 919n Seniority, public debt, 334 Sensitivity analysis, 343 Serial bonds, 604 Service activation fees, revenue recognition abuses, 150 Service cost, defined benefit plan, 831–833 Servpro, 138 Settlement, troubled debt restructuring, 444, 445, 450 Settlement losses (gains), 865 7-Eleven Inc., 138 Seven Group Holdings Limited, 1083, 1085 Shackelford, D., 421n Share dilution, 894, 894n Shareholders’ equity, 902–903 See also Owners’ equity Shaw, W., 389n Sheraton Corporation of America, 548, 578 Shevlin, T., 332n, 747n, 774n Shkonda, K., 1054n Shopko, 1023–1024 Short-term investments, 190 Short-term loans, credit risk assessment, 333 Short-term pension risk ratio, 861 Short-term speculation, 955–956 Siegel, J., 329n Sigma fund, 190 Signals, debt covenants, 373–374 Silvers, Damon, 323n Simko, P J., 506n Simon, A., 484n, 513n Simple capital structure, 905–906 Simple interest, 1093 Singapore Airlines, 740 Sinking fund provisions, 334 Sirius XM Radio Inc., 822 Skinner, D J., 378n, 390n, 394n Slack, 378 Sloan, Alfred P., 381n Sloan, R G., 317n, 347n, 389n, 390n Slotting fees, 480–481 Smith, C W., 380n, 634n Smithfield Foods, 924–925, 927 Smithson, C W., 634n, 647n Snap-On, Inc., 658–660 Society of Actuaries, 835n Soffer, L., 312n, 317n, 347n Soffer, R., 312n, 317n, 347n Software development costs, 557–558, 1054–1055 Sokobin, J., 441n Solomon, D., 554n Solvency, 188, 266, 270–272 Sorter, G., 478n Sougiannis, T., 557n Southwest Airlines, 633, 704 Spatt, C., 441n Special or unusual items, 67–68 Special purpose entities (SPEs), 437n, 632–633, 718, 985–986, 999, 1000 See also Securitization entity (SE) Specific identification, 481–482 Speculation, 132 Sponsor, 825 Sprint Nextel Corporation, 704 Srivastava, A., 147n Standard Industrial Classification (SIC) codes, 786 Standard & Poor’s Corp., 277–278, 336–339, 438n, 439n Stand ready obligation, 654–655 Stanley Black & Decker, Inc., 1077–1078 Starbucks Corporation, 820–821, 946–947 Stated interest rate, bond, 604 Stated (par) value, 896 Statement of cash flows, 202–214, 1031–1092 cash flows versus accrual earnings, 204–209 common-size, 253–254 deriving cash flow information, 209–214 distortion of operating cash, 1053–1059 accounts receivable sale (securitization) versus collateralized borrowing, 1053–1054 capitalizing versus expensing, 1054 capital versus operating leases, 1055–1057 changes in working capital accounts, 1053 software development costs, 1054–1055 stock option expense, 1057–1059 financing activities, 203, 204, 276, 1032, 1046–1047 international accounting issues, 214–216, 1059–1062 investing activities, 203, 204, 275, 1032, 1045–1046 operating activities, 203, 204, 208, 214–216, 274–275, 1032, 1040–1045 other elements, 1039–1040 preparing cash flows from financing activities, 1046–1047 cash flows from investing activities, 1045–1046 cash flows from operating activities, 1040–1045 www.ebook3000.com projected, 353 reconciliation between statements, 1047–1052 statement format, 1032–1040 direct method, 204n, 208, 214–216, 1032–1035 indirect method, 204, 1032, 1035–1039, 1063–1065 trend statements, 253–254 Statement of financial position See Balance sheet Stater Brothers Holdings, 292–293 Statutory tax rate, 749 effective tax rate versus, 770–774, 789 reconciliation with effective tax rates, 789 Stern Stewart & Company, 386 Stevenson, R B., Jr., 12n Stewardship, Stewart, G B., III, 317n Stickney, C., 277n, 347n Stock buybacks, 892–895 Stock-for-stock exchange, 981 Stock options See Employee stock options Stock price earnings management, 144–151 earnings surprises, 330–332 interest rates and, 380 intrinsic stock price estimate, 344–347 linking management compensation to, 380 overvaluation, 147 Straight-line (SL) depreciation, 566, 568, 569 Strike price, 923 Structured financing arrangements, 985–986 Studebaker Corporation, 846 Study Group on Establishment of Accounting Principles (Wheat Committee), 39 Subordinated debt, defined, 443 Subprime loans, 441–442, 718 Subscription warrants, 906, 907–908 Subsequent events, 201–202 Subsidiaries, 966 foreign, 989–994 unconsolidated, 631–633 Substantively enacted tax rate, 788 Subway, 138 Summary of Significant Accounting Policies, 200–201 Sum-of-the-years’ digits (SYD) depreciation, 567–568 Sunbeam Corporation, 425–427 Sunoco Inc., 502 Supercuts, 138 Supervalu, 259, 260–261, 261n, 704 Suppliers, demand for financial statements, Swanson, E., 147n Swaps debt-for-debt, 621–625 debt-for-equity, 621–625 Index interest-rate, 637, 647–648, 650 swap contracts, 637–638 Swartz, Mark, 372 Sweeney, A P., 377n Sweeney, R J., 67n, 72n Synthetic leases, 718 T T-account analysis, 88–99 adjusting entries, 92–94 as analytical technique, 97–99 closing entries, 96–97 credits, 90–92 debits, 90–92 posting journal entries, 94–95 Take-or-pay contracts, 986 Take-Two Interactive Software, Inc., 1091–1092 Tangible assets asset impairment, 558–560, 579–580 international accounting issues, 576–578, 579–580 Tangible net worth, 240 Target Corporation, 594–596, 704 Taxable income, 191–192, 745–751 See also Income tax reporting computation, 795–797 defined, 745 permanent differences between taxable income and, 745–746, 748 temporary (timing) differences between taxable income and, 745–751 Tax deductibility, uncertain tax position related to timing of, 780–781 Taxes See Income tax reporting; Taxable income; Tax position Taxes payable, 797 Tax incentive to overfund pension plans, income tax reporting, 846 Tax position, 778 uncertain, 778–782 assessing disclosures, 782 defined, 778–779 international tax issues, 791–792 making changes or resolving, 781–782 related to a permanent difference, 779–780 related to timing of deductibility, 780–781 Tax Reform Act of 1993, 384–385 Taylor, D., 439n Taylor, E., 410n TCBY Enterprises, 374–375 Technical default, 377 Technological feasibility, 556, 1054–1055 Tecumseh Products Company, 295 Telstra Corporation Limited, 1083, 1084 Temporal method, nonfreestanding foreign subsidiaries, 989–992, 993 Temporary (timing) differences, 192 between book income and taxable income, 746–751 defined, 746 examples, 747 problems caused by, 748–751 10-K filing, 40 10-Q filing, 40 Terminal value, 346 Term lending agreements, 333 Tesoro Corp., 502 Thaler, R., 332n Thiagarajan, R., 329n Thomas, J K., 327, 332n, 847n Thompson, R B., II, 506n Thompson Financial (First Call), 80 Thorne-Jenkins, N., 895n Throughput agreements, 986 Tiemann, J., 441n Tier I capital, 466n Tiffany & Company, 297 Timeliness principle, 19 Time-series analysis, 68, 239–240, 982–984 Time value of money, 1093–1101 future value, 1093–1094 present value, 1094–1101 Timing differences, 192 Titman, S., 774n TiVo, 556 Toshiba Corporation, 48 Total liabilities, 272 Toyota Motor Company, 33 Traceable costs, 64 Trade receivables See Accounts receivable Trading securities, 190, 955 intercorporate debt instruments, 1007 intercorporate equity investments, 955–958, 995–999 minority passive investments, 955–958 Transferor, 436 Transitory earnings component, 327–328 Translating self-contained foreign subsidiaries, 989, 992–994 Treadway Commission, 15, 42 Treasury stock method, 908, 910 Tredegar Industries Inc., 939 Trend analysis, 248–253 improved, 497–499 LIFO-to-FIFO adjustment, 497–499 Trend statements, 239, 246–254 balance sheets, 248–253 income statements, 246–248 statement of cash flows, 253–254 Trezevant, R., 502n Triggers accounting changes as, 376–377 debt covenants as, 373–374 impairment testing, 973, 974 loss level for write-down, 559 Troubled, defined, 444 1121 Troubled debt restructuring, 443–450 continuation with modification, 444, 445–449 defined, 443–444 GAAP rules, 449–450 indicators of financial difficulty, 444 settlement, 444, 445, 450 True and fair view, 29 Trust preferred security, 898–899 Trybol AG, 409–410 Tuna, I., 144n, 145n, 146n, 154n, 332n Tweedie, David, 46 Twite, G., 774n Tyco International, 372 Type A leases, 722–723 Type B leases, 722–723 U Unbiased expectations, 330–331 Uncertain tax position, 778–782 assessing disclosures, 782 defined, 778–779 international tax issues, 791–792 making changes or resolving, 781–782 related to a permanent difference, 779–780 related to timing of deductibility, 780–781 Uncollectibles adequacy of allowance for uncollectible account balance, 419–421 defined, 417 direct write-off method, 418 estimating, 417–419, 653 gross accounts receivable, 419 loss contingencies, 653 sales revenue approach, 418 writing of bad debt, 418, 419 Unconsolidated subsidiaries, 631–633 Under Armour, 823 Underfunded pension plans, 827, 850 Understandability principle, 19 Unearned revenues, adjusting entries, 93 Union Pacific Corporation, 704, 886–888 United Airlines, 371, 704 U.S Constitution, Sixteenth Amendment, 36 U.S Department of the Treasury, increase in incidence of accounting irregularities, 152–153 United States Steel Corp., 502 Units-of-production (UP) depreciation, 566, 568 Universal Hospital Services, Inc (UHS), 155–157 Unrealized holding gains, 485 Unrealized holding losses, 618 Unsecured credit, 333 UPS, 116–117 Upton, C W., 690n 1122 Index V Valero Energy Corp., 502 Valuable property rights, 695 Valuation abnormal earnings approach, 317–321, 340–347 business, 309, 310–321 cash flow assessment, 309, 310–314, 340–347 earnings, 314–316, 323–332 equity, 323–332 fundamental, 309, 321–323 international accounting issues, 323 intrinsic stock price estimate, 344–347 value-relevance, 310, 323–332 Value-irrelevant earnings component, 327–328 Value-relevant attribute, 310, 323–332 VanDerhei, J., 846n Variable costs, 476–480 Variable interest entities (VIEs), 439n, 633, 985–986, 999, 1000 Vasvari, F., 339n Vendor allowances, 480–481 Verifiability principle, 19, 548 Verizon Communications Inc., 704 Vermaelen, T., 893n Vesting, 828–829, 919, 921 Vickery, J., 441n Vincent, L., 329n, 388n, 389n, 975–976, 976n Visa Inc., 672–673 Vodafone Group Plc, 903–904, 1060, 1061 Volatility, defined, 920 Volcker, Paul A., 917n Voluntary Employees Beneficiary Association (VEBA) trust, 862n Voting rights, 953 W W T Grant, 277 Wachovia, 398 Wahlen, J., 421n Walgreen Co., 501, 502, 743–744 Walmart, 196, 204, 205, 266–269, 271, 475, 594–596, 704 Walters, P., 1060n Walther, B., 13n, 323n Wang, Charles, 415 Wang, S., 396n Warfield, T D., 898n, 899n Wargo, Al, 650 Warrants, 906, 907–908 Warranty expense See Product warranties Washington Mutual, 398 Waste Management Inc., 1022–1023 Watson, J., 315n Watts, R L., 19n, 315n, 323n, 380n Wealth transfer gain, 623 Weber, J., 378n, 911n Weber, R., 774n Weighted-average cost of capital (WACC), 311n Weighted average inventory costing method, 470 Weil, R L., 503n Wellington International Airport Limited, 105–106 Wellman, Avraham, 652–653 Wells, P., 315n Wessels, D., 312n, 317n Westerfield, R W., 276n, 310n, 634n Wheeler, J., 774n Whisenant, S., 329n Whole Foods Market, 19, 242–261, 291 cash flow/credit analysis, 272–277 cause-of-change analysis, 243–246 common-size balance sheets, 248–253 common-size cash flow statements, 253–254 common-size income statements, 246–248 credit risk, 265–266 debt ratios, 271 default risk, 277–280 depreciating long-lived assets, 569–572 intrinsic stock price estimate, 344–347 lessee disclosure, 704, 705–706, 722, 724–729 leverage analysis, 262–263 LIFO-to-FIFO adjustment, 491, 492 liquidity analysis, 269–270 management compensation linked to economic value added (EVA), 386, 413–414 www.ebook3000.com profitability analysis, 255–261 shareholders’ equity, 902–903 solvency analysis, 266, 271–272 trend statements, 246–254 Wilford, D S., 634n Willet, E R., 36n Wilson, G P., 421n Wilson, P., 421n, 1031n Wilson, Ryan, 774n, 778n Winklevoss, H E., 859n Winn Dixie, 918 Wolfson, M., 421n, 747n, 774n Wong, F., 763n WorkCover Queensland, 86 Worker, Homeownership, and Business Assistance Act of 2009, 758 Working capital accounts, changes in, 1053 Work-in-process inventory, 267, 469, 477 WorldCom, 1–2, 3–6, 15, 31, 153, 554–555, 917 Worthy, F S., 144n Wright, D W., 702n Write-down of assets See Asset impairment Write-offs for bad debts, 419 due to obsolescence, 1049 restructuring, 1049 for uncollectibles, 418 Wu, M., 154n Wysoki, P., 332n Y Yield, effective, 193–194 Yohn, T L., 67n, 72n Z Zarowin, P., 315n Zeckhauser, R., 144n Zeff, S A., 21n, 35n, 41n, 128n, 548n, 705n, 912n Zero-coupon/zero-yield convertible debt, 928 Zhou, R., 332n Zimmerman, J., 380n Zion, D., 151n Zmijewski, M., 280, 280n Z-scores, 278–280 ... Commission, and the Financial Accounting Standards Board and served on the Financial Accounting Standards Advisory Council He was also a consultant to industry on external reporting issues and regulatory... Data Revsine, Lawrence Financial reporting & analysis / Lawrence Revsine [and three others] 6th edition pages cm ISBN 978-0-07-802567-9 (alk paper) Financial statements Financial statements—Case... teaching and research interests include corporate financial reporting, financial analysis, value-driven management systems and investment strategies, executive compensation practices, and forensic