Accounting for Fun and Profit Accounting for Fun and Profit A Guide to Understanding Advanced Topics in Accounting Lawrence A Weiss Accounting for Fun and Profit: A Guide to Understanding Advanced Topics in Accounting Copyright © Lawrence A Weiss, 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 250 words, without the prior permission of the publisher First published in 2017 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com ISBN-13: 978-1-63157-513-6 (paperback) ISBN-13: 978-1-63157-514-3 (e-book) Business Expert Press Financial Accounting and Auditing Collection Collection ISSN: 2151-2795 (print) Collection ISSN: 2151-2817 (electronic) Cover and interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India First edition: 2017 10 Abstract Accounting is an economic information system, and can be thought of as the language of business Accounting principles are created, developed, or decreed and are supported or justified by intuition, authority, and acceptability Managers have alternatives in their accounting choices; the decisions are political, and trade-offs will be made Accounting information provides individuals, both inside and outside a firm, with a starting point to understand and evaluate the key drivers of a firm, its financial position, and performance If you are managing a firm, investing in a firm, lending to a firm, or even working for a firm, you should be able to read the firm’s financial statements and ask questions based on those statements This book examines some of the more advanced topics in accounting As such, it assumes that the reader already has some familiarity with basic accounting (A related book covering the basics is Accounting for Fun and Profit: A Guide to Understanding Financial Statements.) The book explains how the user of financial statements should interpret advanced accounting techniques presented, and helps the user conduct in-depth analysis of annual reports The author will show you that accounting, even the advanced topics, can be informative and fun Keywords Advanced Accounting, Comprehensive Income, Consolidations, Deferred Benefits, EPS, Financial Statement Analysis, Foreign Currency Translation, Government Accounting, Leases, Nonprofits Contents Abstract Keywords Acknowledgments Preface Chapter Long-Term Investments and Consolidated Statements Chapter The Time Value of Money Chapter Leases Chapter Deferred Benefits Chapter Advanced Topics Chapter Financial Statement Analysis Chapter Accounting at Governmental and Nonprofit Organizations Index Acknowledgments I am grateful to Bridgette Hayes and Stephanie Landers, who corrected my many editorial mistakes and helped make my prose easier to read I would also like to thank Michael Duh for helping to ensure the numbers are consistent A special thanks is also owed to Prof Mark Bettner for his editorial comments as well as Scott Isenberg and the team at Business Expert Press Finally, I would like to thank my former teachers for setting me on my academic path and all my former students who have made my career such a pleasure Preface If you were building a house, would you hire an architect, give her some money and say, “Build me a house?” If you did, the house might end up on the front cover of an architectural magazine, but it might not be a house you would want to live in I suggest you might benefit from learning a bit about architecture before building a house so that you could work with the architect to build the house you want to live in Any time you hire a professional, it is best to have a basic understanding of what the professional does so you can tell the professional what you want them to If you are managing a firm, investing in a firm, lending to a firm, or even working for a firm, you should be able to read the firm’s financial statements and ask questions based on those statements This book examines some of the more advanced topics in accounting As such, it assumes the reader already has some familiarity with basic accounting (If not, a related book covering the basics of accounting is Accounting for Fun and Profit: A Guide to Understanding Financial Statements.) Many accountants would benefit from reading this book to improve their understanding of why they are doing what they do, and to help them better explain accounting However, the book is designed and meant for nonaccountants (i.e., those who hire accountants) The book takes the perspective of a user of financial information and therefore limits its coverage of some of the technical aspects The book is meant to explain what an accountant means when she uses certain terms, how the user of financial statements should interpret the accounting techniques presented, and help the user conduct in-depth analyses of annual reports Hopefully this book shows that accounting, even the advanced topics, can be fun and informative, or at least that it is not as painful as you may fear CHAPTER Long-Term Investments and Consolidated Statements This chapter examines what is perhaps the most interesting, and for many the most difficult, element of accounting; the long-term intercorporate investments made by one firm in another for strategic, long-term purposes, and in particular, consolidations It will explain what the accounting terms “goodwill” and “noncontrolling interest” (also called “minority interest”) actually mean and how they are computed Consolidation is an advanced accounting topic It is often covered in the third course offered to those going into the accounting profession and may encompass more than half the course The presentation here is a simplified version of what is actually done Long-Term Intercorporate Investments1 Why would a firm buy another firm’s shares? The objective is, as with any investment, to obtain returns above its cost of capital If the expected cash flows discounted at the appropriate discount rate provide a positive net present value2 (NPV), then an investment provides more than competitive returns If the investment is for long-term strategic purposes, with no intention of selling it in the coming year, it is classified as a long-term asset If a firm does buy another for long-term strategic purposes, why buy shares? Why not simply buy the business itself (the assets and liabilities)? There are many reasons First, buying shares may limit liability Normally, the most a shareholder of a firm (whether that shareholder is an individual or another firm) can lose is the amount invested Imagine you buy shares of a pharmaceutical firm that sells a medication that turns out to have a harmful side effect, is sued, and is ordered to pay more than the value of its assets The pharmaceutical firm will go bankrupt, and the shareholders will lose their investment Normally, the shareholders are not liable for damages beyond the value of the firm itself The court does not pierce the “corporate veil” to demand that the assets of the individual investors be used to complete the payment required by the lawsuit This is a key benefit of the corporate form: owners can shield their personal assets By contrast, in most partnerships, the partners (or at least certain key partners) have unlimited liability, which means their personal assets are at risk.3 Many people argue that the seeds of the financial crisis of 2008 were set when investment banks stopped being partnerships and became corporations As partnerships, the investment banks’ senior managers were partners and were much more cautious about the investments they made As corporations, the investment bank managers were more willing to bet the firm If the bet won, the managers would each receive a portion of a potentially enormous gain If the bet lost, the managers simply had to find another job Another advantage of purchasing shares in an intercorporate investment is the ease of selling and buying Transferring all the assets of one firm to another may be more difficult for several reasons First, assets often cannot be sold without agreement of lenders Second, it may be difficult to transfer the business itself (e.g., the organizational form, the human capital, the distribution networks) Imagine an individual has an employment contract with Firm A, which sells all its assets to Firm B Can Firm A sell the employment contract when it sells its assets to Firm B? The answer, other than for certain sports franchises, is normally no By contrast, when a firm’s shares are purchased, the sale includes all the assets and liabilities of the business, including the corporate structure, employment contracts, and so on Finally, the details of the sale—what is included in the sale and what is not— are much simpler when purchasing shares than when detailing specific assets and liabilities There are also corporate tax reasons which make purchasing shares a preferred method for intercorporate investments Many multinational firms today have multiple operating firms (sometimes more than one in each country where they have operations) These multinational firms often set up a subsidiary, which owns and controls the multinational firm’s intellectual capital (e.g., patents and copyrights), in a country with low income taxes (e.g., Ireland).4 All the operating firms pay a royalty fee to the intellectual capital subsidiary, thereby lowering the taxable profits in high-tax countries and creating profits in the low-tax country In addition, certain countries limit foreign ownership, forcing firms to create local subsidiaries in these countries where the parent firm’s ownership However, unlike for-profits, governmental organizations generally recognize revenue for the various funds not when they are “earned” but rather when they become available to finance the current fiscal period’s expenditures This means revenues are generally counted if they are collected in the current period (following the cash basis of accounting) or expected to be collected shortly after the current period What constitutes “shortly after the current period”? In the United States, the rule is within 60 days of the end of the current fiscal period Note that this 60-day period is required for property taxes and optional for other taxes (i.e., in deciding in what period to include tax revenue for nonproperty taxes, a governmental unit could use either the 60-day rule or the cash basis, as described in its Notes to the Financial Statements) Discounts given for early tax payment are considered revenue reductions, not expenditures Taxes paid in advance are treated as liabilities (cash up and a liability called “tax collected in advance” up) and then recognized as revenues in the period to which they relate How is the sale of a long-term asset treated? For funds, any cash received from the sale of a long-term asset is treated as pure revenue (there is no gain or loss on sale) because the funds not include long-term assets on its Balance Sheets Essentially cash is increased and a revenue called “other financing source: sale of long-term asset” is increased For government-wide statements, the sale of a long-term asset is treated similarly to how it would be treated in a for-profit firm: with an increase in cash, the removal of the long-term asset from the Balance Sheet, and with the balance as a revenue or expenditure When is it (Recorded as) an Expense? Governmental funds generally not use the term “expense” because expenses have a consumption-oriented focus That is, with accrual accounting, expenses are generally a reduction in net economic resources either matched to revenues or recorded in the period incurred By contrast, governmental fund accounting, using a modified accrual approach, is more payment (as opposed to consumption) oriented This means the reduction in financial resources is recorded when the asset is acquired, cash is paid, or the liability is incurred (an exception is usually made for the unmatured principal and interest on long-term debt, which is recorded when it is due) Governmental organizations generally recognize expenditures as they revenues This means they follow the accrual method, and recognize expenditures as incurred, for government-wide statements and the modifiedaccrual method, if paid in the current period or shortly after the current period, for funds For example, consider how governments record the payment of governmental employee salaries A pure cash basis would record the expenditure in the period when paid, while both the accrual and modified accrual methods would record the payment as incurred (because the payment is made either during or shortly after the current fiscal year) But what about vacation pay? Imagine an employee is entitled to four weeks of vacation a year but does not take it and instead accumulates the vacation pay to a future year Would the governmental unit record the amount of vacation owed to the employee as an expenditure and liability in the current fiscal year? Yes for the government-wide statements No for the fund statements (unless the fund was expecting to pay the vacation days very early in the next year) This means that if a government fund has many employees with lots of accumulated vacation days (and thus accumulated vacation pay owed to them), there is a mismatch in the revenues and expenditures as well as an unrecorded liability Regarding the purchase of short-term assets (various types of inventory), governmental fund accounting provides a choice between using the accrual method (but generally only using first-in-first-out or the average method) and using the purchase method (recording the purchase when made, as opposed to when the items are received under the accrual method or when paid for under the cash method) For government-wide (CAFR) reports, the accrual method is used Regarding the purchase of long-term assets, the accrual method is used for government-wide (CAFR) reports In contrast, a cash basis (expenditure when purchased) is used for governmental funds, which means there can be a dramatic difference in the statements of governmental funds that rent instead of purchase long-term assets Short- and long-term liabilities are recorded as in the for-profit world on government-wide statements For governmental funds, long-term liabilities are not included and only certain short-term liabilities are included Thus, the accounting for governmental funds is fairly close to a cash basis of accounting Accounting for Nonprofits Nonprofits prepare their financial statements—the Statement of Financial Position (i.e., Balance Sheet), the Statement of Activities (i.e., Income Statement), and the Statement of Cash Flows—using the accrual method of accounting Although nonprofits account for their resources in separate funds, these are normally not shown to the general public Rather, like for-profits, all their activities are normally combined into one overall statement with perhaps some additional information on specific activities One key difference in the accounting between for-profits and nonprofits is that nonprofits must classify whether there are any restrictions on the use of their assets Nonprofits must report what portion of their fund balance (assets less liabilities) is unrestricted, temporarily restricted, and permanently restricted That is, nonprofits must disclose the funds they received from donors without restrictions as well as those which can only be used in certain specific ways, for certain specific purposes, or in certain specific amounts (e.g., only the earnings on the donation can be used but not the amount donated itself) The presentation of this information in the Statement of Financial Position (i.e., the Balance Sheet) is left to the organization, which can decide to present it in separate rows or columns.4 A second difference is the recording of contributions as opposed to other revenue-generating transactions where goods or services are provided by the nonprofit (e.g., selling branded clothing) Often payments to nonprofits involve a combination For example, when joining a museum, the fee paid may include both a gift to the museum but also unlimited free access In these cases, the nonprofit must determine and allocate each portion of the contribution Another interesting revenue issue for nonprofits is pledges or promises made by donors for future contributions Most nonprofits would not record these as contributions until made, as they are normally not enforceable if the donor changes their mind However, nonprofits are allowed to include pledges in the period in which the pledges are made, but only in those cases where the nonprofit has sufficient past experience to predict the likelihood the pledge will actually be received (this is somewhat analogous to a forprofit accounts receivable and allowance for doubtful accounts) An offsetting revenue and expenditure issue occurs when services used by the nonprofit are donated In this case, U.S rules mandate they be included in both revenue and expenses when they are both of a professional nature (e.g., legal services) and something the nonprofit would have otherwise had to pay for Thus, the donated value of someone serving food at a soup kitchen would not be included because even though it may be something the nonprofit would have otherwise paid for, it is not a professional service Another offsetting revenue and expense occurs when donations are made to a nonprofit with a requirement that they be passed on to another organization These are treated in a similar fashion to the governmental accounting for trusts Both the contribution and offsetting expense are normally not recorded.5 How about long-term donated gifts such as buildings or collectibles? Long-term assets such as buildings must be valued and included both as a contribution and an asset that then must be accounted for in the same fashion as in a for-profit firm (i.e., reduced over time) For long-term collectibles, nonprofits can choose to exclude them in certain cases (i.e., exclude them by not listing them as contributions and assets to be reduced over time).6 Assessing the Performance of Governmental and Nonprofit Organizations Many elements of ratio analysis used in examining for-profits also apply in understanding the performance and effectiveness of governmental and nonprofit organizations However, there are also differences in assessing organizational performance due to the different missions of the organizations, how revenues are generated, how expenditures are incurred, and the organizational form Using the same categories as in for-profits: Profitability: Governments and nonprofits not generate profits, but they can generate surpluses or deficits.7 Unlike for-profits, where a larger profit is generally better, governments are often required to operate with a balanced budget That is, governments are not supposed to (and often not legally allowed to) run deficits (deficits mean current citizens or residents are overconsuming at the expense of future citizens or residents), while large surpluses are seen as overtaxation By contrast, nonprofits can have surpluses when they are building up funding and have deficits in times of need Thus, rather than profitability, governments and nonprofits are evaluated on the level of any surplus or deficit compared to the level of services provided That said, the rate of growth in government or nonprofit revenues versus expenditures (a ratio also used for for-profits) may be a useful additional ratio Activity or efficiency: With for-profit firms an examination of days receivable, days inventory, days payable, and asset turnover over time and in relation to other firms can indicate how well a firm is being run For governments and nonprofits some measure of their cost effectiveness in delivering services is required This may be much harder to measure and often cannot be done directly from the financial statements Consider the difference in trying to compute the unit cost of providing national security, health care, transportation, educational services, and so on This is clearly much more subjective than computing the amount of inventory held per dollar of revenue Thus, benchmarking across governmental units and nonprofits is critical to determining effectiveness However, even when this data is available it remains highly subjective For example, one key metric often used in evaluating nonprofits is the percentage spent on administrative fees (e.g., anything over 35 percent is considered excessive) However, this fails to account for the differences in organization size A nonprofit that is run in the state of Maine is probably much smaller than one run in the state of New York, and even if the former is well run it is likely to have a much higher percentage of administrative fees than the latter Liquidity or short-term financial stability: This is the ability to pay debts as they come due in the next year Similar ratios to those used by forprofit firms can be used, and it can also be helpful to add days cash on hand (cash equivalents/monthly expenses) and bills outstanding to monthly expenses (accounts payable/monthly expenses) Leverage or long-term financial stability: This is an assessment of whether the organization will be able to repay its debts over the long term, and similar ratios to those used by for-profit firms can be used Other ratios: Similar to the for-profit world, a wide range of other metrics can be used, including changes in the number of employees, the nature of management, and so on However, when evaluating long-term revenues and expenditures for governments and nonprofits, different metrics should be considered An evaluation of a for-profit firm will include the evaluation of its products, markets, and competitors By contrast, additional demographics are required to evaluate governmental and nonprofit organizations For example, a municipality may look at the number of students it will have to educate over time when it is planning the building and operations of its school system The growth (or shrinkage) in required programs and services as well as some revenue concentration (revenue source/total revenue) ratios may be included in order to evaluate these additional demographics Benchmarking: As with for-profits, benchmarking is done using trends over time, comparison to strategic plans and to budgets, as well as comparisons to similar organizations These benchmarks are also often available from various societies (e.g., The Association of American Colleges), special groups that provide data (e.g., Charitywatch.org), as well as rating agencies (the same ones that provide ratings in the “forprofit” world—Standard and Poor’s, Moody’s Investor Services and Fitch) The Bottom Line Differences in the accounting for governmental and nonprofit organizations compared to the accounting used at for-profit firms stem from their different missions For-profits are primarily about making money (in additional to social and environmental concerns), while governments and nonprofits are supposed to be about providing goods and services to a targeted audience Accounting at for-profit firms follow the accrual method Accounting for government-wide and nonprofit organizations use a similar approach with a slightly altered financial presentation (e.g., there are no owners or profits), while governmental funds (i.e., budgetary units) use a modified accrual approach _ 1Many people refer to charitable organizations as nonprofits or not-for-profits For simplicity, they are referred to as nonprofits here 2One view of a for-profit organization is that management should focus on increasing the wealth of the owners Another view is the firm has a duty of care to stakeholders beyond simply the owners This latter view includes what is called “triple-bottom-line” accounting which encompasses financial, environmental, and social goals 3The Financial Accounting Standards Board (FASB) develops accounting and reporting standards for nongovernmental organizations The Governmental Accounting Standards Board (GASB) develops accounting and reporting standards for governmental organizations (state and local governmental entities) The FASB and GASB are private, nonprofit organizations whose boards are composed of seven full time members, who sever all ties with their former organizations, and who serve for up to two five-year terms Both the FASB and GASB are subject to oversight from the Financial Accounting Foundation (also a private, nonprofit organization) 4Nonprofits are allowed to include restricted contributions with unrestricted contributions in cases where the restriction is met in the same period a contribution is given to the organization 5An exception occurs if the nonprofit has the power to decide to which other organization to give the funds or when the funds will go to a related organization 6The collectibles must be held for public exhibition, education or research; must be unencumbered and preserved; and if sold the proceeds must be used to purchase other collectibles 7A deficit, or deficit spending, is the amount by which expenditures (total outlays) exceed revenues (total receipts) in a given year This is different from the amount of debt, which is the amount owed by the governmental or nonprofit organization For example, for the fiscal year ending September 30, 2015, the United States had a deficit of $520 billion (total gross receipts of $3.33 trillion versus total net costs of $3.85 trillion) with an accumulated deficit of $18.2 trillion (total assets of $3.2 trillion versus total liabilities of $21.4 trillion, of which $13.2 trillion is the nation’s debt, $6.7 trillion is owed for future benefits to federal employees and veterans, and $1.5 trillion is other liabilities) Index Accounting accrual versus modified accrual, 152–153 fair value, 80, 93–94, 110n16 for governmental organizations, 149–151 for long-term intercorporate investments, 3–5 for nonprofits, 155–157 Accounting Standards Codification Topic 840 (ASC 840), 53 Accounting value, 15 Accrual versus modified accrual accounting, 152–153 Accumulated other comprehensive income, 76–77, 90 Activity/efficiency, 158–159 Activity ratios, 103 Actuary, 69n4, 76 Adjusted debt-to-asset ratio, 62 Advertising expenses, 105 Agency fund, 151 Allied Crude Vegetable Oil Refining Company, 98–99 Altman, Edward, 125 Amortization, 77 Andersen, Arthur, 129 Annual deferred benefit expense, 72–76 Annual Retirement Benefit, 67n1 Apple, 48, 49 Balance Sheet, reconciliation, 76–78 Bankruptcy prediction models, 125–129 Bargain purchase option (BPO), 53 Beaver, William, 125 Benchmarking, 159–160 Black–Scholes–Merton formula, 80 Boeing Corporation, 70–76 Bond ratings, 71n7 Capitalizing operating leases process, 60 Capital leases, 53, 54, 65 conversion of operating leases to, 60–64 Capital projects fund, 151 Cash basis, 155 Cash flow margin, 122 Cash flows, 46–48 Churn, 121 Coca-Cola, Collectibles, 157 Common size financial statements, 105 Compounding and discounting, 33–35 Comprehensive annual financial report (CAFR), 149 Comprehensive income, 73, 92 Consolidated Balance Sheet, 14–22 Consolidated Income Statement, 22–27 Consolidated year-end Balance Sheet, 27–30 Consolidations, 1, 12–14 Contingent shares, 86 Contribution plans, 67 Convertibles, 86 Corporate raiders, 72n8 “Corporate veil”, Cost method, of accounting for intercorporate investments, 5–9, 12 Coverage ratios, 105 Credits and debits, 13n11, 15n13 Customer acquisition cost (CAC), 120 Debits and credits, 13n11, 15n13 Debt service fund, 151 Deferred benefits, 67–84 Deficit spending, 158n7 Defined benefit plans, 68, 74 Descartes rule, 44n9 Discounting and compounding, 33–35 Disney, Dividends, 5, 6, 9n10 Dot-com bubble, 97n1 DuPont analysis, 106 Earnings per share (EPS), 85–90 Economic and accounting values, 15 Employee stock options, 78–83 Enron activity ratios, 112–113 board of directors and executives, 122–123 cash flows, 114–115 DuPont analysis, 114 executive compensation at, 115 financial statements and ratios for, 97, 98, 107–115, 139–141 growth and financing, 123–125 key lessons from, 130–131 leverage ratios, 113 liquidity ratios, 113–114 profitability ratios, 111–112 scandal, 129 subsidiaries cash flow statement summary, 133 subsidiaries consolidated Balance Sheet, 133–135 subsidiaries consolidated Income Statement, 132 Enterprise fund, 151 Equity earnings, 24 Equity Funding Corporation of America, 99 Equity method, of accounting for intercorporate investments, 9–12 Equivalent annual cost, 46–47 Ernst & Young LLP (E&Y), 144 Exchange transactions, 153 Expected return on pension fund, 73 Expenses, 154–155 Fair market values, 21, 74 Fair value accounting, 80, 93–94, 110n16 Fastow, Andrew, 108, 139 Financial Accounting Standards Board (FASB), 54, 152n3 Financial analysis, components of, 99–100 Financing leases, 53, 54 Firm’s cost of capital, 39 First-in-first-out (FIFO) to last-in-first-out (LIFO) adjustments, 94–96 Fitch, 83, 123, 160 Foreign currency translations, 90–91 For-profit organizations, 149 Full consolidation, 19 Funds, governmental, 151 Future value (FV), 34–35 Gains and losses, effect of, 74 General/unrestricted fund, 151 Generally Accepted Accounting Principles (GAAP), US, 53 General Motors, 68, 70–76 Goodwill, 21 Governmental Accounting Standards Board (GASB), 152n3 Governmental funds, 151 Governmental organizations accounting for, 149–151 assessing performance of, 157–160 Hagopian, Kip, 82n15 Haircut, 142n39 Health care benefits, 67 Holding firm, 3n4 HubSpot activity ratios, 118–119 Balance Sheets, 137–138 cash flows, 119–120, 137 DuPont analysis, 119 executives and the board of directors, 123 financial statements and ratios for, 98, 115–123, 135–136, 138 growth and financing, 125 Income Statements, 136 key lessons from, 131 leverage and liquidity ratios, 119 other ratios, 120–121 profitability ratios, 117–118 by the numbers, 121–122 Hurdle rate, 39 Income Statement, reconciliation, 76–78 Intel, 83 Intercorporate investments cost method of accounting for, 5–9, 12 equity method of accounting for, 9–12 long-term, 1–5 Interest on the projected benefit obligation, 73 Internal rate of return (IRR), 39–45 Internal services fund, 151 International Accounting Standards Board (IASB), 54 International Financial Reporting Standards (IFRSs), 54, 95 Lay, Ken, 108, 122, 141 Leases, 51–65 Lehman Brothers, 142–147 Lehrer, Tom, 144n44 Lessee, 51 Lessor, 51 Leverage ratios, 51n1, 104 Leverage/long-term financial stability, 159 Lifetime customer value (LTV), 120–121 Limited liability partnership (LLP), 2n3 Linklaters, 143 Liquidity ratios, 104–105 Liquidity/short-term financial stability, 159 Long-term assets, 157 Long-term intercorporate investments, 1–3 accounting for, 3–5 Long-term leases, 53 Majority, Mark-to-market accounting See Fair value accounting Market-to-book ratio, 89 Marketo, 118n24 McDade, Bart, 146 McLean, Bethany, 109 Midaxo, 117 Minority active, Minority interest, 19 Minority passive, Moody’s, 83, 123, 160 MSCORE (prediction model), 128–129 Net book value, 15, 19 Net present value (NPV), 1n2, 36–38 deferred benefits, 71–72 and internal rate of return (IRR), 41–45 Nixon, Richard, 99n6 Noncontrolling/minority interest, 19 expense, 26 Nonexchange transactions, 153 Nonprofits accounting for, 155–157 assessing performance of, 157–160 Off-Balance Sheet, 52, 124 Operating leases, 53, 124 conversion to capital leases, 60–64 Pachydermus Corp., 86–88 Parent firm, 3n4, Pass-through costs, 55 Payback, 45–46 Pension benefit obligation (PBO), 70 interest on, 73 Pension payments, 67 Perpetuities, 48–49 with growth, 49 Prediction, using accounting data, 125–129 Present value (PV), 34–35, 48 Price–earnings (P/E) ratio, 89 Prior service costs, 73–74 Procter and Gamble (P&G), 45–46 Profitability, 158 Profitability ratios, 100–102 Profit margins, 100 Proportional/partial consolidation, 19 Purchase price discrepancy, 20–21 Ratio analysis See Financial analysis Reasonable discount rate, 71 Repo 105, 142–147 Required discount rate, 36 Research and development expenses, 105 Return on assets (ROA), 100–101 Return on equity (ROE), 102, 106 Returns, 100, 102–103 Revenues, 153–154 Risk-free rate, 71 Sale and leasebacks, 64–65 Sale of long-term asset, 154 Sarbanes-Oxley (SOX) law, 97 Schlich, William, 144 Securities and Exchange Commission (SEC), 55, 80 Service cost, 73 Skilling, Jeff, 108, 109, 122 Software as a Service (SaaS), 120 Special Purpose Entities (SPEs), 124–125 Special revenue fund, 151 Standard & Poor’s, 83, 123, 160 Statement of Comprehensive Income, 92 Stock options, 78–81 arguments against expensing, 81–83 Subsidiary, 3n4 Time value of money, concept of, 33 Triple-bottom-line accounting, 149n2 Trust fund, 151 Unrealized intercompany profits, 24 U.S Generally Accepted Accounting Principles (GAAP), 53 Vacation pay, 155 von Braun, Wernher, 145n45 Weighted average, 85–86 Whole Foods Market, Inc (WFM), 51, 55–56 annual report, 57–60 consolidated financial information, 57–58 NPV of operating leases, 62 selected financial statements notes, 59 Window dressing, 106–107, 143n40 Working capital, 114n20 Year-end consolidated Balance Sheet, 27–30 Z-score, 125–126 OTHER TITLES IN OUR FINANCIAL ACCOUNTING AND AUDITING COLLECTION Mark S Bettner and Michael Coyne, Bucknell University, Editor • Executive Compensation: Accounting and Economic Issues by Gary Giroux • Using Accounting and Financial Information: Analyzing, Forecasting, and Decision-Making by Mark Bettner • Pick a Number: Internationalizing U.S Accounting by Roger Hussey and Audra Ong • International Auditing Standards in the United States: Comparing and Understanding Standards for ISA and PCAOB by Asokan Anandarajan and Gary Kleinman • Accounting for People Who Think They Hate Accounting by Anurag Singal • Accounting for Fun and Profit: A Guide to Understanding Financial Statements by Lawrence A Weiss • Audit Committee Formation in the Aftermath of 2007-2009 Global Financial Crisis, Volume I: Structure and Roles by Zabihollah Rezaee • Audit Committee Formation in the Aftermath of 2007-2009 Global Financial Crisis, Volume II: Responsibilities and Sustainability by Zabihollah Rezaee • Audit Committee Formation in the Aftermath of the 2007-2009 Global Financial Crisis, Volume III: Emerging Issues by Zabihollah Rezaee Announcing the Business Expert Press Digital Library Concise e-books business students need for classroom and research This book can also be purchased in an e-book collection by your library as • • • • • a one-time purchase, that is owned forever, allows for simultaneous readers, has no restrictions on printing, and can be downloaded as PDFs from 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Many accountants would benefit from reading this book to improve their understanding. .. examines some of the more advanced topics in accounting As such, it assumes that the reader already has some familiarity with basic accounting (A related book covering the basics is Accounting