Corporate financial reporting and analysis

Contents About the Authors Chapter 1: An Introduction to Financial Statements The three principal financial statements Other items in the annual report Generally Accepted Accounting Principles: the rules of the game The barriers to understanding financial statements Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case studies Notes Chapter 2: The Balance Sheet and Income Statement A further look at the balance sheet Assets Liabilities Shareholders’ equity A further look at the income statement Other things you should know about the balance sheet and the income statement Key lessons from the chapter Key terms and concepts from the chapter Questions Appendix 2.1 The mechanics of financial accounting: the double-entry system The accounting process in practice Key terms and concepts from the appendix Key lessons from the appendix Problem Case study Chapter 3: A Brief Overview of GAAP and IFRS: the Framework for Financial Accounting The core principles of GAAP and IFRS The key characteristics of financial information The key assumptions of financial information Modifying conventions The future of financial reporting Key lessons from the chapter Key terms and concepts from the chapter Questions Chapter 4: Revenue Recognition Introduction Definition: what is revenue? Revenue-recognition principles When does revenue recognition occur? Revenue recognition: the journal entries More on long-term contracts Revenue-recognition controversies Revenue recognition: a checklist The future of revenue recognition Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case studies Notes Chapter 5: The Statement of Cash Flows Introduction The reporting of cash flows from operations Preparing the statement of cash flows Does the statement of cash flows tell us anything new? IFRS and the statement of cash flows Analyzing the statement of cash flows Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case studies Notes Chapter 6: Financial Statement Analysis Introduction Business and industry analysis Accounting analysis Financial analysis DuPont analysis A brief digression on inventory ROE and the analysis of financial risk Key lessons from the chapter Key terms and concepts from the chapter Questions Appendix 6.1 An industry and competitive analysis of SAP Group A competitive strategy analysis of SAP Group Appendix 6.2 Summary of financial statement ratios Problems Case studies Notes Chapter 7: Business Valuation and Financial Statement Analysis Valuation principles Valuation: from theory to practice The economic profit approach to valuation A case study in valuation: SAP Group A brief word on growth rates Relative valuation Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case study Notes Chapter 8: Accounting for Receivables and Bad Debts Introduction Estimating bad debts Writing off accounts The direct method: an alternative approach What happens when written-off accounts are later collected? The “aging” of accounts receivable Sales returns and allowances Analyzing receivables Key lessons from the chapter Key terms and concepts from the chapter Questions Appendix: 8.1 Accounting for loan loss reserves Problems Case studies Notes Chapter 9: Accounting for Inventory Introduction Inventory valuation: LIFO, FIFO, and the rest The lower of cost or market rule The cost-flow assumptions: an example Inventory cost-flow assumptions: a summary Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case studies Notes Chapter 10: Accounting for Property, Plant and Equipment Introduction Initial recognition of PP&E Subsequent expenditures: repair or improvement? Accounting for depreciation Changes in depreciation estimates or methods Asset impairment Fair value vs historical cost Divestitures and asset sales Intangible assets Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Chapter 11: Leases and Off-Balance-Sheet Debt Introduction Capital vs operating leases Accounting for capital leases Accounting for operating leases Lease accounting: an example Interpreting lease disclosures Off-balance-sheet debt Key lessons from the chapter Key terms and concepts from the chapter Questions Problem Case studies Notes Chapter 12: Accounting for Bonds Introduction Accounting for bond issuance Accounting for bonds sold at par Accounting for bonds sold at a premium Bond redemption before maturity Accounting for bonds issued at a discount Zero-coupon bonds Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Note Chapter 13: Provisions and Contingencies Introduction Defining provisions Measuring the provision Disclosure of provisions: interpreting the notes Contingent liabilities Contingent assets The future Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case studies Notes Chapter 14: Accounting for Pensions Introduction A brief word on defined contribution plans Defined benefit plans Unfunded defined benefit plans Funded defined benefit plans American Airlines: an example of defined benefit plan disclosure Key lessons from the chapter Key terms and concepts from the chapter Questions Case study Note Chapter 15: Accounting for Income Tax Introduction Temporary and permanent differences Deferred taxes and the balance sheet approach The balance sheet approach: an example Interpreting income tax disclosures: the case of Intel Corporation Why deferred income tax is important Key lessons from the chapter Key terms and concepts from the chapter Questions Problems Case study Notes Chapter 16: Accounting for Shareholders’ Equity cost leadership differentiation SAP Group (case study) completed contract method comprehensive income conservatism consistency of financial information consolidation constructive obligation contingent assets contingent consideration contingent liabilities contra-asset account contributed capital convertible bonds convertible preferred stock cookie-jar reserves copyright (intangible asset) cost-flow assumption cost leadership cost of acquisition cost of goods sold (COGS) cost-recovery method coupon rate creative accounting cumulative dividend preference current assets current liabilities current ratio customer lists (intangible asset) customer loyalty programs date of declaration date of payment date of record days inventory held DCF-Economic Profit equivalency debt covenants debt-equity choice debt-equity ratio declaration date deferred income deferred payment deferred revenue deferred tax asset deferred tax liability deferred tax valuation allowance deferred taxes example importance of defined benefit plans defined contribution plans depreciation depreciable basis of the asset estimated useful life depreciation method changes in double-declining-balance prospective basis straight-line method derecognition of receivables differentiation direct method for bad debts disaggregation principle discounted cash flow (DCF) divestitures dividend income dividend payout ratio dividend yield ratio dividends on common stock dot-com boom double-declining balance method double-entry system DuPont analysis earn-out clause earned capital earned revenue Earnings before Interest and Tax (EBIT) earnings management earnings per share (EPS) EBITDA EBITDA interest coverage economic profit approach to valuation economic value added effective interest amortization zero-coupon bonds Employee Retirement Income Security Act (ERISA) enterprise value entity assumption environmental liabilities equity income equity, other components expenditure expensing face value fair value for liabilities and assets Financial Accounting Standards Financial Accounting Standards Board (FASB) financial analysis financial income financial leverage financial liabilities financial risk financial statement analysis accounting analysis business and industry analysis DuPont analysis financial analysis financing cash flows finished goods inventory first-in-first-out (FIFO) first in still here fiscal year Five-forces (Porter) model SAP Group (case study) foreign currency translation adjustments franchise fraud free cash flow free operating cash flows (FOCF) free operating cash flows to total debt ratio funded defined benefit plans amortization of unrecognized gains or losses effect of plan curtailments or settlements interest costs plan asset returns prior service costs service cost gain on disposal Generally Accepted Accounting Principles (GAAP) core principles going concern assumption goodwill impairment gross accounts receivable approach gross profit held-to-maturity investments hidden reserves see cookie-jar reserves historical cost historical cost rule hold, bill and identifiable assets, recognition and measurement impairment loss in-process research and development (IPR&D) income, comprehensive income statement income tax, accounting for case study: Intel Corporation deferred tax assets deferred tax liabilities deferred vs current taxes tax rates deferred tax, importance of deferred taxes and balance sheet approach example permanent differences temporary differences bad debts expense deferred revenue equity income installment sales long-term contracts prepaid expenses incompleteness of statements indirect method industry analysis installment sales intangible assets finite-lived indefinite-lived intellectual capital interest-bearing debt interest coverage International Accounting Standards Boards (IASB) International Accounting Standards IAS 17 IAS 19 IAS 30 International Financial Reporting Standards (IFRS) Internet domain names inventory inventory, accounting for cost-flow assumptions definition lower of cost or market rule valuation inventory shrinkage inventory turnover ratio invested capital invested capital turnover investing cash flows issued capital issued shares journal entries revenue recognition last-in-first-out (LIFO) conformity rule LIFO layer problem liquidation process LIFO reserve last in, still here (LISH) leases accounting for capital leases accounting for operating leases capital vs operating example interpreting lease disclosures Lernout & Hauspie leverage ratios liabilities current noncurrent liability account liquidity loan forbearance loan loss disclosures loan loss reserves, accounting for basics loan loss disclosures long-term assets long-term contracts loss from goodwill impairment loss on disposal lower of cost rule magnitude of investment benefit management discussion and analysis (MD&A) managerial balance sheet manufacturing overhead mark-to-market accounting mark to model market capitalization market rate market value rule marketable securities and investments consolidation equity method fair value hierarchy market and costs methods Microsoft investments matching principle materiality maturity bond redemption before measurable revenue mergers and acquisitions contingent consideration goodwill impairment noncontrolling interest (NCI) (minority interest) purchase price/cost of acquisition recognition and measurement of identifiable assets contingent liabilities current assets, liabilities, and PP&E goodwill in-process research and development (IPR&D) intangible assets negative goodwill (bargain purchase) restructuring provisions subsequent adjustments minority interest modifying conventions Modigliani-Miller (M&M) model multiple-element contractual arrangements negative goodwill (bargain purchase) net net book value net income net operating assets net operating profit after tax (NOPAT) margin net present value net property and equipment see property, plant and equipment net realizable value nominal value noncontrolling interest (NCI) (minority interest) noncurrent (long-term) assets noncurrent liabilities noninterest-bearing liabilities (NIBL) NOPAT margin notes (footnotes) see also bonds obsolescence risk off-balance-sheet (OBS) debt financing Ohlson’s O-score onerous contract operating cash operating cash flows operating cycle operating income operating leases, accounting for operating profit opportunity cost of capital option pricing theory other components of equity other comprehensive income (OCI) outstanding shares over-performance period overprovisioning paid-in capital see contributed capital par value see face value Parmalat passive investment past events patents payment date pensions, accounting for defined benefit plan disclosure example: American Airlines defined benefit plans defined contribution plans definition funded defined benefit plans amortization of unrecognized gains or losses effect of plan curtailments or settlements interest costs plan asset returns prior service costs service cost unfunded defined benefit plans percentage-of-completion method point of sale postclosing trial balance preferred stock prepaid expenses prepaid pension cost (asset account) present obligation price-to-book product-maintenance contracts profit after tax profit before tax property, plant and equipment (PP&E) asset impairment depreciation depreciable basis of the asset estimated useful life depreciation method changes in double-declining-balance prospective basis straight-line method divestitures and asset sales fair value vs historical cost initial recognition intangible assets finite-lived indefinite-lived repair or improvement turnover provisions defining disclosure: notes measuring purchase price/cost of acquisition quick ratio ratio analysis raw materials inventory realizable revenue realized revenue receivables, analyzing definition receivables-to-sales ratio record date reinvested earnings relative valuation relevance of financial information reliability of financial information of statements reporting cash flow research and development residual income residual (salvage) value restructuring provisions retained earnings return on any newly invested capital (RONIC) return on equity (ROE) financial risk analysis and return on invested capital (ROIC) revenue, definition revenue recognition checklist controversies during production future of journal entries long-term contracts principles reversals (of provisions) reverse stock split round trips royalty agreements sales and marketing sales returns and allowances sales revenue approach salvage value Sarbanes-Oxley Act securitization of receivables share buybacks share capital see contributed capital share premium share repurchases shareholders’ equity (book value) contributed capital (paid-in or share capital) direct investment earned capital indirect investment statement of shrinkage, inventory significant influence software specific identification split accounting stated value statement of cash flows analysis net income and cash flow from operations (CFFO) operating, investing, and financing cash flows IFRS and preparation reporting cash flow from operations statement of changes in shareholders’ equity statement of recognized gains and losses stock dividends stock issuance stock splits stock transactions, accounting for earned capital retained (reinvested) earnings share repurchases stock issuance treasury stock reissuance straight line amortization straight-line method zero-coupon bonds subsequent adjustments substance over form rule T-account tax income tax liabilities taxes, deferred technical default times interest earned timing of investment benefit trade payables (accounts payable) trade receivables (accounts receivable) trade secrets trademarks trading security transaction entries Treasury shares treasury stock reissuance trial balance true and fair view turnover ratios uncertainty of investment benefit uncollectible accounts underprovisioning underwriter undiscounted cash flows unearned revenue unfunded defined benefit plans useful life valuation case study (SAP Group) financial forecasts terminal value economic profit approach from theory to practice growth rates inventory principles relative value in use warranties working capital requirement (WCR) work-in-process inventory writing off receivables later collection zero-coupon bonds effective interest method straight-line method ... Financial Statement Analysis Introduction Business and industry analysis Accounting analysis Financial analysis DuPont analysis A brief digression on inventory ROE and the analysis of financial risk... (USA) and a Chartered Financial Analyst His primary areas of expertise are corporate financial reporting and value-based management, with works published in a wide variety of academic and professional... accounting, financial statements analysis, mergers and acquisitions, corporate restructuring, and business law Cohen is a recipient of Outstanding Teaching Awards from the INSEAD MBA for both core and