Financial reporting financial statement analysis and valuation a strategic perspective 9e by wahlen

Financial Reporting, Financial Statement Analysis, and Valuation A Strategic Perspective Wahlen • Baginski • Bradshaw Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 9e www.ebookslides.com 9E Financial Reporting, Financial Statement Analysis, and Valuation A STRATEGIC PERSPECTIVE James M Wahlen Professor of Accounting James R Hodge Chair of Excellence and Accounting Department Chair Kelley School of Business Indiana University Stephen P Baginski Professor of Accounting Herbert E Miller Chair in Financial Accounting J.M Tull School of Accounting Terry College of Business The University of Georgia Mark T Bradshaw Professor of Accounting Chair, Department of Accounting Carroll School of Management Boston College Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Australia • Brazil • Mexico • Singapore • United Kingdom • United States www.ebookslides.com Financial Reporting, Financial Statement Analysis, and Valuation, 9e James Wahlen, Stephen Baginski, Mark Bradshaw Vice President, General Manager: Social Science & Qualitative Business: Erin Joyner Product Director: Jason Fremder Senior Product Manager: John Barans Project Manager: Julie Dierig Content Developer: Tara Slagle, MPS Limited Product Assistant: Aiyana Moore Executive Marketing Manager: Robin LeFevre ª 2018, 2015 Cengage Learning, Inc Unless otherwise noted, all content is ª Cengage ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S copyright law, without the prior written permission of the copyright owner For product information and technology assistance, contact us at Cengage Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Marketing Coordinator: Hillary Johns Senior Content Digitization Specialist: Tim Ross Senior Content Project Manager: Tim Bailey Production Service: Cenveo Publisher Services Senior Art Director: Michelle Kunkler Cover and Internal Designer: Imbue Design Cover Image: Ravil Sayfullin/Shutterstock.com Intellectual Property Analyst: Reba Frederics Project Manager: Betsy Hathaway Library of Congress Control Number: 2017947010 ISBN: 978-1-337-61468-9 Cengage 20 Channel Center Street Boston, MA 02210 USA Cengage is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world Find your local representative at www.cengage.com Cengage products are represented in Canada by Nelson Education, Ltd To learn more about Cengage platforms and services, visit www.cengage.com To register or access your online learning solution or purchase materials for your course, visit www.cengagebrain.com Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Printed in the United States of America Print Number: 01 Print Year: 2017 www.ebookslides.com For our students, with thanks for permitting us to take the journey with you For Clyde Stickney and Paul Brown, with thanks for allowing us the privilege to carry on their legacy of teaching through this book For our families, with love, Debbie, Jessica, Jaymie, Ailsa, Lynn, Drew, Marie, Kim, Ben, and Lucy Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 PREFACE The process of financial reporting, financial statement analysis, and valuation helps investors and analysts understand a firm’s profitability, risk, and growth; use that information to forecast future profitability, risk, and growth; and ultimately to value the firm, enabling intelligent investment decisions This process is central to the role of accounting, financial reporting, capital markets, investments, portfolio management, and corporate management in the world economy When conducted with care and integrity, thorough financial statement analysis and valuation are fascinating and rewarding activities that can create tremendous value for society However, as the recent financial crises in our capital markets reveal, when financial statement analysis and valuation are conducted carelessly or without integrity, they can create enormous loss of value in the capital markets and trigger deep recession in even the most powerful economies in the world The stakes are high In addition, the game is changing The world is shifting toward a new approach to financial reporting, and expectations for high-quality and high-integrity financial analysis and valuation are increasing among investors and securities regulators Many of the world’s most powerful economies, including the European Union, Canada, and Japan, have shifted to International Financial Reporting Standards (IFRS) The U.S Securities and Exchange Commission (SEC) accepts financial statement filings based on IFRS from non-U.S registrants, and has considered whether to converge financial reporting from U.S Generally Accepted Accounting Principles (GAAP) to IFRS for U.S registrants Given the pace and breadth of financial reform legislation, it is clear that it is no longer ‘‘business as usual’’ on Wall Street or around the world for financial statement analysis and valuation Given the profound importance of financial reporting, financial statement analysis, and valuation, and given our rapidly changing accounting rules and capital markets, this textbook provides you with a principled and disciplined approach for analysis and valuation This textbook explains a thoughtful and thorough six-step framework you should use for financial statement analysis and valuation You should begin an effective analysis of a set of financial statements with an evaluation of (1) the economic characteristics and competitive conditions of the industries in which a firm competes and (2) the particular strategies the firm executes to compete in each of these industries Your analysis should then move to (3) assessing how well the firm’s financial statements reflect the economic effects of the firm’s strategic decisions and actions Your assessment requires an understanding of the accounting principles and methods used to create the financial statements, the relevant and reliable information that the financial statements provide, and the appropriate adjustments that you might make to improve the quality of that information Note that in this text we help you embrace financial reporting and financial statement analysis based on U.S GAAP and IFRS Next, you should (4) assess the profitability, risk, and growth of the firm using financial statement ratios and other analytical tools and then (5) forecast the firm’s future profitability, risk, and growth, incorporating information about expected changes in the economics of the industry and the firm’s strategies Finally, you can (6) value the firm using various valuation methods, making an investment decision by comparing likely ranges of your value estimate to the observed market value This six-step process forms the conceptual and pedagogical framework for this book, and it is a principled and disciplined approach you can use for intelligent analysis and valuation decisions Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 iv www.ebookslides.com v Preface All textbooks on financial statement analysis include step (4), assessing the profitability, risk, and growth of a company Textbooks differ, however, with respect to their emphases on the other five steps Consider the following depiction of these steps (5) Forecasts of Future Profitability , Risk, and Growth and (6) Valuation of Firms (4) Assessment of Profitability, Risk, and Growth (1) Industry Economics and (2) Business Strategy (3) Accounting Principles and Quality of Accounting Information Our view is that these six steps must form an integrated approach for effective and complete financial statement analysis We have therefore structured and developed this book to provide balanced, integrated coverage of all six elements We sequence our study by beginning with industry economics and firm strategy, moving to a general consideration of GAAP and IFRS and the quality of accounting information, and providing a structure and tools for the analysis of profitability, risk, and growth We then examine specific accounting issues and the determinants of accounting quality, and conclude with forecasting and valuation We anchor each step in the sequence on the firm’s profitability, risk, and growth, which are the fundamental drivers of value We continually relate each part to those preceding and following it to maintain this balanced, integrated perspective The premise of this book is that you will learn financial statement analysis most effectively by performing the analysis on actual companies The book’s narrative sets forth the important concepts and analytical tools and demonstrates their application using the financial statements of Starbucks Each chapter contains a set of questions, exercises, problems, and cases based primarily on financial statement data of actual companies Each chapter also contains an integrative case involving Walmart so you can apply the tools and methods throughout the text A financial statement analysis package (FSAP) is available to aid you in your analytical tasks (discussed later) Some of the Highlights of This Edition In the 9th edition, the author team of James Wahlen, Stephen Baginski, and Mark Bradshaw continues to improve on the foundations established by Clyde Stickney and Paul Brown Clyde Stickney, the original author of the first three editions of this book and coauthor of the fourth, fifth, and sixth editions, is enjoying his well-earned retirement Paul Brown, a coauthor of the fourth, fifth, and sixth editions, recently announced his Copyright Learning All Rights Reserved May not be copied, scanned, duplicated, whole or in part retirement as 2018 the Cengage president of Monmouth University Jim, Steve, andorMark areininternationally recognized research scholars and award-winning teachers in accounting, financial WCN 02-200-202 www.ebookslides.com vi Preface statement analysis, and valuation They continue to bring many fresh new ideas and insights to produce a new edition with a strong focus on thoughtful and disciplined fundamental analysis, a broad and deep coverage of accounting issues including IFRS, and expanded analysis of companies within a global economic environment The next section highlights the content of each chapter Listed below are some of the major highlights in this edition that impact all chapters or groups of chapters As in prior editions, the 9th edition uses a ‘‘golden thread’’ case company in each chapter We now illustrate and highlight each step of the analysis in each chapter using the financial statements of Starbucks The financial statements and disclosures of Starbucks provide an excellent setting for teaching financial statements analysis because most students are very familiar with the company; it has an effective strategy; and it has many important accounting, analysis, and valuation issues In the material at the end of each chapter, we also use Walmart as a ‘‘golden thread’’ case company The exposition of each chapter has been streamlined Known for being a wellwritten, accessible text, this edition presents each chapter in more concise, direct discussion, so you can get the key insights quickly and efficiently To achieve the streamlining, some highly technical (mainly accounting-related) material has been moved to online appendices that students may access at www.cengagebrain.com The chapters include quick checks, so you can be sure you have obtained the key insights from reading each section In addition, each section and each of the endof-chapter questions, exercises, problems, and cases is cross-referenced to learning objectives, so you can be sure that you can implement the critical skills and techniques associated with each of the learning objectives The chapters on profitability analysis (Chapter 4) and risk analysis (Chapter 5) continue to provide disaggregation of return on common equity along traditional lines of profitability, efficiency, and leverage, as well as along operating versus financing lines The book’s companion website, at www.cengagebrain.com, contains an updated Appendix D with descriptive statistics on 20 commonly used financial ratios computed over the past 10 years for 48 industries These ratios data enable you to benchmark your analyses and forecasts against industry averages The chapters on accounting quality continue to provide broad coverage of accounting for financing, investing, and operating activities Chapter discusses the determinants of accounting quality, how to evaluate accounting quality, and how to adjust reported earnings and financial statements to cleanse low-quality accounting items Then the discussion proceeds across the primary business activities of firms in the natural sequence in which the activities occur— raising financial capital, investing that capital in productive assets, and operating the business Chapter discusses accounting for financing activities Chapter describes accounting for investing activities, and Chapter deals with accounting for operating activities Detailed examples of foreign currency translation and accounting for various hedging activities have been moved to online appendices The chapters on accounting quality continue to provide more in-depth analysis of both balance sheet and income statement quality Each chapter includes relevant new discussion of current U.S GAAP and IFRS, how U.S GAAP compares to IFRS, and how you should deal with such differences in financial statement analysis New material includes recent Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 changes in accounting standards dealing with revenue recognition, leasing, www.ebookslides.com vii Preface 10 11 12 13 and investments in securities End-of-chapter materials contain many problems and cases involving non-U.S companies, with application of financial statement analysis techniques to IFRS-based financial statements Each chapter provides references to specific standards in U.S GAAP using the new FASB Codification system The chapters provide a number of relevant insights from empirical accounting research, pertinent to financial statement analysis and valuation The end-of-chapter material for each chapter contains portions of an updated, integrative case applying the concepts and tools discussed in that chapter to Walmart Each chapter contains new or substantially revised and updated end-of-chapter material, including new problems and cases This material is relevant, realworld, and written for maximum learning value The Financial Statement Analysis Package (FSAP) available with this book has been substantially revised and made more user-friendly Overview of the Text This section describes briefly the content and highlights of each chapter Chapter 1—Overview of Financial Reporting, Financial Statement Analysis, and Valuation This chapter introduces you to the six interrelated sequential steps in financial statement analysis that serve as the organization structure for this book It presents you with several frameworks for understanding the industry economics and business strategy of a firm and applies them to Starbucks It also reviews the purpose, underlying concepts, and content of each of the three principal financial statements, including those of nonU.S companies reporting using IFRS This chapter also provides the rationale for analyzing financial statements in capital market settings, including showing you some very compelling results from an empirical study of the association between unexpected earnings and market-adjusted stock returns as well as empirical results showing that fundamental analysis can help investors generate above-market returns The chapter’s appendix, which can be found on this book’s companion website at www.cengagebrain.com, presents an extensive discussion to help you a term project involving the analysis of one or more companies Our examination of the course syllabi of users of the previous edition indicated that most courses require students to engage in such a project This appendix guides you in how to proceed, where to get information, and so on In addition to the new integrative case involving Walmart, the chapter includes an updated version of a case involving Nike Chapter 2—Asset and Liability Valuation and Income Recognition This chapter covers three topics we believe you need to review from previous courses before delving into the more complex topics in this book n First, we discuss the link between the valuation of assets and liabilities on the balance sheet and the measurement of income We believe that you will understand topics such as revenue recognition and accounting for marketable securities, derivatives, pensions, and other topics more easily when you examine them with an appreciation for the inherent trade-off of a balance sheet versus income statement perspective This chapter also reviews the trade-offs faced by accounting standard setters, regulators, and corporate managers who attempt to simultaneously provide Copyright 2018 Cengage All Rights Reserved May not be copied, scanned, orWe duplicated, whole or in part both reliable andLearning relevant financial statement information also inexamine whether firms should recognize value changes immediately in net income or delay their recognition, sending them temporarily through other comprehensive income WCN 02-200-202 www.ebookslides.com viii Preface n Second, we present a framework for analyzing the dual effects of economic transactions and other events on the financial statements This framework relies on the balance sheet equation to trace these effects through the financial statements Even students who are well grounded in double-entry accounting find this framework helpful in visually identifying the effects of various complex business transactions, such as corporate acquisitions, derivatives, and leases We use this framework in subsequent chapters to present and analyze transactions, as we discuss various GAAP and IFRS topics ABEG ¼ LBEG 1DA 1DL AEND ¼ LEND CCBEG 1DStock CCEND AOCIBEG 1NI –D 1OCI AOCIEND REBEG REEND [A¼Assets, L¼Liabilities, CC¼Contributed Capital, AOCI¼Accumulated Other Comprehensive Income, RE¼Retained Earnings, Stock¼Common and Preferred Capital Stock Accounts, OCI¼Other Comprehensive Income, NI¼Net Income, and D¼Dividends.] n Third, we discuss the measurement of income tax expense, particularly with regard to the treatment of temporary differences between book income and taxable income Virtually every business transaction has income tax consequences, and it is crucial that you grasp the information conveyed in income tax disclosures The end-of-chapter materials include various asset and liability valuation problems involving Biosante Pharmaceuticals, Prepaid Legal Services, and Nike, as well as the integrative case involving Walmart Chapter 3—Income Flows versus Cash Flows: Understanding the Statement of Cash Flows Chapter reviews the statement of cash flows and presents a model for relating the cash flows from operating, investing, and financing activities to a firm’s position in its product life cycle The chapter demonstrates procedures you can use to prepare the statement of cash flows when a firm provides no cash flow information The chapter also provides new insights that place particular emphasis on how you should use information in the statement of cash flows to assess earnings quality The end-of-chapter materials utilize cash flow and earnings data for a number of companies including Tesla, Amazon, Kroger, Coca-Cola, Texas Instruments, Sirius XM Radio, Apollo Group, and AerLingus A case (Prime Contractors) illustrates the relation between earnings and cash flows as a firm experiences profitable and unprofitable operations and changes its business strategy The classic W T Grant case illustrating the use of earnings and cash flow information to assess solvency risk and avoid bankruptcy has been moved to an online appendix Chapter 4—Profitability Analysis This chapter discusses the concepts and tools for analyzing a firm’s profitability, integrating industry economic and strategic factors that affect the interpretation of financial ratios It applies these concepts and tools to the analysis of the profitability of Starbucks The analysis of profitability centers on the rate of return on assets and its disaggregated components, the rate of return on common shareholders’ equity and its disaggregated components, and earnings per share The chapter contains a section on alternative profitability measures, including a discussion of ‘‘street Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 earnings.’’ This chapter also considers analytical tools unique to certain industries, such as airlines, service firms, retailers, and technology firms www.ebookslides.com ix Preface A number of problems and exercises at the end of the chapter cover profitability analyses for companies such as Nucor Steel, Hershey, Microsoft, Oracle, Dell, Sun Microsystems, Texas Instruments, Hewlett Packard, Georgia Pacific, General Mills, Abercrombie & Fitch, Hasbro, and many others The integrative case examines Walmart’s profitability Chapter 5—Risk Analysis This chapter begins with a discussion of recently required disclosures on the extent to which firms are subject to various types of risk, including unexpected changes in commodity prices, exchange rates, and interest rates and how firms manage these risks The chapter provides new insights and discussion about the benefits and dangers associated with financial flexibility and the use of leverage This edition shows you how to decompose return on common equity into components that highlight the contribution of the inherent profitability of the firm’s assets and the contribution from the strategic use of leverage to enhance the returns to common equity investors The chapter provides you an approach to in-depth financial statement analysis of various risks associated with leverage, including short-term liquidity risk, long-term solvency risk, credit risk, bankruptcy risk, and systematic and firm-specific market risk This chapter also describes and illustrates the calculation and interpretation of risk ratios and applies them to the financial statements of Starbucks, focusing on both short-term liquidity risk and long-term solvency risk We also explore credit risk and bankruptcy risk in greater depth A unique feature of the problems in Chapters and is the linking of the analysis of several companies across the two chapters, including problems involving Hasbro, Abercrombie & Fitch, and Walmart In addition, other problems focus on risk-related issues for companies like Coca-Cola, Delta Air Lines, VF Corporation, Best Buy, Circuit City, The Tribune Company and The Washington Post Chapter-ending cases involve risk analysis for Walmart and classic cases on credit risk analysis (Massachusetts Stove Company) and bankruptcy prediction (Fly-By-Night International Group) Chapter 6—Accounting Quality This chapter provides an expanded discussion of the quality of income statement and balance sheet information, emphasizing faithful representation of relevant and substantive economic content as the key characteristics of high quality, useful accounting information The chapter also alerts you to the conditions under which managers might likely engage in earnings management The discussion provides a framework for accounting quality analysis, which is used in the discussions of various accounting issues in Chapters through We consider several financial reporting topics that primarily affect the persistence of earnings, including gains and losses from discontinued operations, changes in accounting principles, other comprehensive income items, impairment losses, restructuring charges, changes in estimates, and gains and losses from peripheral activities The chapter concludes with an assessment of accounting quality by separating accruals and cash flows and an illustration of a model to assess the risk of financial reporting manipulation (Beneish’s multivariate model for identifying potential financial statement manipulators) Chapter-ending materials include problems involving Nestle´, Checkpoint Systems, Rock of Ages, Vulcan Materials, Northrop Grumman, Intel, Enron, and Sunbeam Endof-chapter materials also include an integrative case involving the analysis of Walmart’s accounting quality Chapter 7—Financing Activities This chapter has been structured along with Chapters and to discuss accounting issues in their natural sequence—raising financial capital, then investing the capital in productive assets, and then managing the operCengage Learning Reserved.the May not be copied, scanned, or duplicated, whole or in part ations Copyright of the 2018 business ChapterAll 7Rights discusses accounting principles and inpractices under U.S GAAP and IFRS associated with firms’ financing activities The chapter WCN 02-200-202 www.ebookslides.com Index general and administrative expenses, projecting, 659–660 General Mills, 131 brand name value, 220 return on common shareholders’ equity, 250 General Motors Corporation (GM) bankruptcy, 309 LIFO layer liquidation, 594–595 operating cash flows, 142 general valuation model, 726–728 Generally Accepted Accounting Principles See U.S GAAP geographical diversification, 17, 18 Georgia-Pacific Corporation, ROCE, 250 gift cards, 579 Global Crossing, financial reporting abuses, 36, 350 GMI (gross margin index), 388 Goldman Sachs, industry characteristics effect on financial statement relations, 50 goodwill cost allocation, 505 impairment of, 513–516 intangible assets as, 507 projecting, 674 Google, 352, 875 governance structures, 387 Graham, Benjamin, 197 grant date, 436 grocery store chains, economic characteristics of, gross margin index (GMI), 388 gross method, 587 gross profit, 198–199 growth bankruptcy prediction research, 316 PE ratio measurement issues, 886 growth phase, product life cycle, 129, 130, 131–132 guarantee, 362–363 I-9 independent auditor’s attestation, 36 intangible asset acquisition costs, 504 joint ventures, 545 marketable securities, 152 mixed attribute measurement model, 77, 78 mutually unexecuted contracts, 361 preferred stock, 454 recognition, measurement, and classification of assets, 23–24 recognition, measurement, and classification of liabilities, 24–25 reporting changes in value of inventory, 599 restructuring charges, 372 retrospective treatment, 375 revaluations of assets and liabilities, 374 segment profitability, 197–198 segment reporting, 226 self-construction costs, 502 sources of fair value estimates, 83 statement of cash flows, 123, 136 unrealized gains and losses, 92, 93 upward asset revaluations, 517–518 IASB (International Accounting Standards impairment Board) of goodwill, 513–516 accounting principles and, 20 income adjustments related to, 143 comprehensive income, 31 of intangible assets not subject to IAS 12, 101 amortization, 513 IAS 19, 372 of long-lived assets subject to IAS 2, 852 depreciation and amortization, IAS 7, 124 511–512 present value, 82 losses, of long-lived assets, 369 revenue recognition guidance, 581–592 losses and restructuring charges and, sale of receivables, 365 371–373 statement of cash flow formats, 136 improvements on assets, expenditures for, IBM Software, 485 501 calculating cost of capital, 764 in the money, 436 computing residual income, 857 income software development costs, 501 adjustments for noncash components of, IFRS (International Financial Reporting 139–143 Standards), 20, 101 clean surplus, 747 accounting quality, 352 from continuing operations, 30–31 accrual basis of accounting, 29 H J Heinz, statement of cash flows, 179 from discontinued operations, 31 advertising and marketing costs, 599–600 Halozyme Therapeutics, balance sheets, from equity investees, projecting, AOCI, 442–443 86–87 660–661 asset and liability valuations, 80 Harley Davidson, obligations with estimated pension expense calculation, 613–614 bonds issued with detachable warrants, payment dates and amounts, 360 residual, 209 456–457 Hartford Financial Services Group, 579 shortcut projections for, 695 clean surplus income, 747 Hasbro income recognition comprehensive income, 198 profitability ratios, 251–254 accrual accounting, 89–91 control on manipulation of earnings, 134 risk ratios, 320, 321 approaches to, 91–94 discontinued operations, 373 smoothing changes in accounts evolution of mixed attribute earnings per share, 192 receivable, 705 measurement model, 94 equity method, 526 health care benefits, 619 income statements expense recognition, 592 HealthSouth, financial reporting abuses, 350 Abercrombie & Fitch, 256 fair value, 739 Healy, Paul M., 355 accounting quality in, 351 fair value hedge, 471 hedging analytical framework for effect of financial reporting worldwide, 392 foreign currency, 551–552 transactions on, 105–109 formats of balance sheets, 21 foreign exchange rate risks, 281 approach to measuring income tax goodwill, 504, 674 interest rate swaps, 282 expense, 96–101 impairment of goodwill, 513, 514–515 unrealized gains and losses from, 443 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Arbortech, 420, 424 impairment of long-lived assets, 512 Heineken, threat of substitutes, 12 Citigroup Inc., 409–410 income taxes, 98 held-to-maturity debt securities, 524–525 Hershey Company, The, measures of profitability, 250–251 Hertz, analyzing profitability, 261 Hewlett-Packard Corporation (HP) fixed assets turnover ratios, 247, 248 industry characteristics effect on financial statement relations, 51 Hill, C., 199 historical cost, 80, 81, 88 adjusted, 81, 88 historical exchange rate, 522, 549 hold to maturity, 519 Home Depot, 49 analyzing operating profitability, 245 recognition of value changes for assets and liabilities, 91 statement of cash flows, 179 store-driven forecasts, 702–703 HSBC Finance, industry characteristics effect on financial statement relations, 51 Hurley, 67 hybrid securities, 453–457 www.ebookslides.com I-10 Index classification and format in, 30–31 investing cash flows, 33 Inland Steel, statement of cash flows, 179 Coca-Cola Company, 806 investment decision making and sensitivity In-N-Out Burger, 106–107, 112 common-size, 41 analysis, 760–762, 798–799 in-substance defeasance of debt, 452 complementary nature and relative Starbucks, 848–850 insurance usefulness of, 77 investment factors, bankruptcy prediction reserves, projecting, 676 Hasbro, 252–253 research, 315 statement of cash flows, 154 income recognition, 88–94 investments intangible assets, 23, 24 Lufthansa Airlines, 495 allocating acquisition costs, 505–510 classifying changes in, 155 measuring performance, 27–28 in available-for-sale securities, 442–443 costs of acquiring, 504 Nike, Inc., 69 on balance sheet, 24 impairment not subject to amortization, Nojiri Pharmaceutical Industries, 181 book and market values of long-lived 513 pension expense calculation, 615–617 assets, 510–519 limited-life, 506–507 percentage change, 42 economic attributes framework, 15 projecting, 674 reformulated, 285–286, 287–288 foreign currency translation, 549–554 recognition separately from goodwill, 532 reporting income taxes in, 104 in long-lived operating assets, 498–505 intangible development costs, 503–504 Southwest Airlines, 491 long-term, projecting, 673 integration in value chain, 17, 18 Starbucks Corporation, 41 overview, 497–498 Intel, 49 VF Corporation, 325 by shareholders, 428–430 computing residual income, 857 Walmart Stores, Inc., 62, 65, 266–267, short-term, 366 property, plant, and equipment 710, 812 speculative, 470 projections, 703 Whole Foods Market, Inc., 331 variable-interest entities, 546–549 restructuring charges, 401–403 income tax expense in working capital, 592, 599 supplier power, 13 balance sheet approach to measuring, investments in securities, 519–545 intercompany loans and receivables, 540 101–104 classifying changes in, 154 intercompany payables and receivables, 540 components of, 602–603 consolidation of unconsolidated affiliates intercompany sales and purchases, 540 income statement approach to and joint ventures, 545 interest measuring, 96–101 corporate acquisitions and income taxes, cash, 447 income taxes, 94–105 544–545 costs on debt, 502 effective, 447–448 classifying changes in deferred, 156 majority, active, 529–534 on PBO, 611 corporate acquisitions and, 544–545 minority, active, 526–528 interest coverage ratios, 303–304 financial reporting of, 96–101 minority, passive, 519–526 interest expense, projecting, 680 forecasting provisions for, 684 noncontrolling interests, 540–544 interest income interpreting disclosures, 115–120 overview, 497 on municipal bonds, 97 measuring expense, 101–104 preparing consolidated statements, projecting, 681 reporting in financial statements, 104 535–540 interest rate required disclosures, 602–609 iRobot, 163 risk, 282 Starbucks Corporation, 104–105 isoquants, 215 swap agreements, 282 income taxes payable, 145 internal R&D activities, 499–500 income-decreasing accruals, 382, 384 J P Morgan Chase & Co., acquisition of International Accounting Standards Board income-increasing accruals, 380, 384 Washington Mutual, 532 See IASB independent auditor attestation, in financial JCPenney, ROCE, 249 International Financial Reporting Standards statements, 36–37 JetBlue, profitability ratios, 237, 238 See IFRS indirect method, 124, 136, 138 Jewel-Osco, 246 international risks, 278 adjustments for, 138–139 Johnson & Johnson, 48 Interpublic Group, industry characteristics industry industry characteristics effect on financial effect on financial statement relations, 55 descriptive statistics for MB ratios across, statement relations, 50 introduction phase, product life cycle, 129, 878–880 value chain analysis and financial 130, 131 LIFO inventory method, adoption of, statement relationships, 58 inventory 595–596 joint ventures, 545 classifying changes in, 153–154 relation between systematic risk and, Jolt Company, The, bankruptcy, 309 cost of sales, 593–599 732–733 Jordan’s Furniture, 82 measurement and reporting of, 366–367 industry, economic characteristics of, 8–16 operating working capital adjustments, 144 commercial bank, 10 Kellogg Company projections, 672 electric utility, 9–10 industry characteristics effect on financial reporting changes in the value of, grocery store chain, statement relations, 50 598–599 pharmaceutical company, 8–9 life cycle of firm, 128 sale of, 107 tools for studying, 10–16 relations among cash flows from inventory management, 581 industry concentration ratios, 11–12 operating, investing, and financing inventory turnover, 231–233 industry diversification, 17, 18 activities, 164 working capital turnover ratios, 297–298 industry risks, 278 Kelly Services inventory valuation, 107–108 IndyMac Bancorp, bankruptcy, 309 industry characteristics effect on financial Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 investing activities section, statement of cash inflation, effect on revenue forecasts, 642 statement relations, 51 flows, 127 initial present value, 88 profitability analysis, 258–259 www.ebookslides.com Index KFC, 50 knowledge assets, 86 Kroger computing residual income, 858 profit margin and asset turnover dimensions, 223 relation between net income and cash flow from operations, 164 I-11 maintenance costs, 501 majority, active investments, 529–534 management approach, 198 Management Assessment Report, 37 management discussion and analysis (MD&A), 36, 352 managers compensation, relation between LIFO adoption and, 596 and independent auditor attestation, lagged earnings per share, 884 36–37 last-in, first-out inventory method See LIFO MD&A section of financial statements, LBO (leveraged buyout), valuing, 784–785 36 leases, 367–368, 458–468 role in achieving quality, 352 bundled deliverables in, 579 mandatorily redeemable preferred stock, 454 capital lease method, 459–460 manipulation of cash flows, 135 capital obligations, 737 manipulation of earnings, 134 choosing accounting method, 460–466 manufacturing financing with long-term debt, 446–447 accrual basis of accounting for, 29 new lease standard, 466–468 economic attributes framework, 15 off-balance-sheet financing, 363 operating cycle, 28–29 operating lease method, 459 margin of safety, 307 Lechmere, 174 market efficiency and inefficiency with Lee, Charles M.C., 887, 901–903 respect to earnings, degree of, 899–901 Lehman Brothers market equity beta accounting scandal, 395 adjusting to reflect new capital structure, bankruptcy, 309 735–736 leverage, 289, 291 measuring systematic risk, 277, 317–318, financial, 211–212, 317 731, 733 operating, 217–219, 317 market multiples, 867 leverage index (LVGI), 388 of accounting numbers, 867–869 leveraged buyout (LBO), valuing, 784–785 benchmarking relative valuation, 886–890 liabilities factors affecting, 903 accounting quality in recognition and market price, 436 measurement of, 357–365 per share, 445 changes in pension, 443 market risk premium, 736–737 classifying changes in other current, 155 market value conceptual framework for free cash flows, approach, 82, 88 774–775 for debt, 739 defined, 24 of long-lived assets, 510–519 mixed attribute measurement model, 76–77 method, 454 operating, forecasting on balance sheet, marketable securities, classifying changes in, 662–677 152–153 operating working capital adjustments, 145 market-based valuation projecting total, 679 market multiples of accounting numbers, recognition, valuation, and classification 867–869 of, 24–25 market-to-book and value-to-book ratios, revaluations of, 374 869–881 total, forecasting, 679 overview, 865–867 valuation, 77–88 PE ratios, 881–895 liabilities portion of balance sheet, 21 reverse engineering, 895–897 liabilities to assets ratio, 301 VE ratios, 882–883 liabilities to shareholders’ equity ratio, 301 marketing liability (actuarial) gains and losses, 612 costs, 599–600 life cycle economic attributes framework, 15 cash flow activities and, 128–134 market-related fair value, 611 decline phase, 129–130, 133–134 market-to-book ratios See MB ratios growth phase, 129–132 Marks & Spencer, industry characteristics introduction phase, 129–131 effect on financial statement relations, 55 maturity phase, 129–130, 132–133 mark-to-market accounting, 83 Macy’s Inc., 49 LIFO (last-in, first-out) inventory method, Mars’, 128 operating leases, 363 366–367 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Marvel Entertainment, Inc., acquisition by operating profitability, 245 characteristics of adopters of, 594–595 Walt Disney Company, 573–575 securitization of receivables, 395 conversion to FIFO from, 596–598 expense recognition, 594 financial statement quality, 354–355 layer liquidation, 594–595 retrospective treatment, 375 LIFO layer liquidation, 594–595 LIFO reserve, 596 Limited Brands, 48, 480 limited-life intangible assets amortization for, 507–509 useful life of, 506–507 lines of credit, 294 liquidating dividends, 431, 750–751 liquidity risk, analyzing short-term, 293–300 litigation charge, Starbucks Corporation, 606 loans analyzing credit risk, 305–309 bridge, 784 effective rate of return, 448 related-party transactions, 540 Texas Instruments, 305–306 Toys‘‘R’’Us, 305 W T Grant Company, 305 logit analysis, bankruptcy prediction models using, 313 long-lived assets cost allocation, 505–510 impairment of, 510–519 replacement of, 509–510 long-lived operating assets, investments in, 497, 498–505 long-lived resources, 832 long-lived tangible assets, useful life of, 506–507 long-term assets, projecting, 674 long-term contracts, revenue recognition, 587–592 long-term debt classifying changes in, 155–156 financial reporting of, 449–450 financing with, 446–449 projecting, 678–679 long-term debt to long-term capital ratio, 301 long-term debt to shareholders’ equity ratio, 301 long-term investments, projecting, 673 long-term liabilities, projecting, 677 long-term solvency risk, 276, 301–304 loss contingency, 362 low-cost leadership, 17, 222 lower-of-cost-or-market rule, 367 Lowe’s Companies, 49, 163–164 Lufthansa Airlines additional data, 496 case studies, 489–496 consolidated balance sheet, 493–494 consolidated income statement, 495 LVGI (leverage index), 388 www.ebookslides.com I-12 Index maturity phase, product life cycle, 129, 130, balance sheet, 68 Molson Coors Brewing Company 132–133 case study, 66–74 industry characteristics effect on financial May Department Stores Company, valuing growth, 66–67 statement relations, 50 leveraged buyout candidates, 803 income statement, 69 variable-interest entities, 562–564 Maydew, Edward L., 77–78 industry economics, 66–67 monetary assets, 23 MB (market-to-book) ratios, 445 interpreting income tax disclosures, monetary/nonmonetary translation method, articulation of, 894–895 118–120 552–553 empirical data on, 878–880 marketing, 67 Monsanto Company, disclosures regarding empirical research results on predictive product lines, 66 fixed assets, 557–558 power of, 880–881 statements of cash flows, 69–70 Monster Worldwide, profitability data, and VB ratios may differ from 1, reasons strategy, 67 238–239 why, 874–875 Nippon Steel, industry characteristics effect Montgomery Ward, statement of cash McDonald’s, 18 on financial statement relations, 56 flows, 173–174 benchmarking relative valuation, 886 noise, 351 Moody’s, 48, 241 industry characteristics effect on financial Nojiri Pharmaceutical Industries, multiple discriminant analysis (MDA), statement relations, 51 statement of cash flows, 179–181 bankruptcy prediction using, 310–313 profitability analysis, 261, 262–263 NOL (net operating loss) carryforwards, municipal bonds, interest income on, 97 rivalry among existing firms, 12 606–607 mutually unexecuted contracts, 361 McGrath RentCorp, statement of cash nominal vs real dividends, 746–747 Mylan Laboratories, value chain analysis flows, 139, 140 non-cash components of income and financial statement relationships, 58 MD&A (management discussion and adjustments, 139–143 analysis), 36, 352 non-cash transactions, 146 natural resources MDA (multiple discriminant analysis), noncontrolling interests, 540–544 costs of acquiring, 502–504 bankruptcy prediction using, 310–313 computing weighted-average cost of depletion, 507–509 measurement error, 351 capital for Starbucks, 789 negative book value of common Merck, industry characteristics effect on cost of equity capital attributable to, shareholders’ equity, 853–854 financial statement relations, 51 738–739 negative net financing obligations, 285 mergers, statutory, 529, 530–533 income adjustments related to, 141 Nestle´ MGM Mirage, industry characteristics effect projecting, 681–682 industry characteristics effect on financial on financial statement relations, 50 noncurrent assets, 367–369 statement relations, 56 Michelin, 128 changes in value, 368–369 threat of substitutes, 12 microeconomic theory, 221–222 control, 367–368 Nestle´ Group, 395 Microsoft Corporation, 48, 485 fair value, 368 net approach, 587 accounts receivable turnover, 246 probability, 368 net asset, 611 accruals and earnings quality, 382 nondiversifiable risk, 277 net income, 27–28, 88, 93 See also earnings analyzing effect of transactions on non-GAAP earnings, 200–201 alternative approaches to analyzing, 191 financial statements, 108–109 nonmonetary assets, 23 balance sheets and cash flows, relation to, computing residual income, 857 tangible and intangible, 23 134–149 excess cash, 285 nonrecurring income items, projecting, 661 cash flows from operations, relation share repurchases, 434 nonrecurring losses, 30–31 between, 147–149 software development costs, 501 nonsystematic risk factors, 731 effect of income taxes on, 97 supplier power, 13 nontaxable reorganization, 544 firm life cycle, 129 MicroStrategy, Inc non–working capital accruals, 382 forecasting, 684–685 bundled service deliverables, 580 NOPAT (net operating profit after taxes), free cash flows measurement starting statement of cash flows, 160–162 288 point, 781 midyear discounting, 759 free cash flows measurement starting pension accounting, 613–614 MillerCoors, 12 point, 781 portions attributable to equity claimants Ming, Jin, 316 Nordstrom, gift cards, 579 other than common shareholders, 853 minority normal earnings, 837 retained earnings and, 442–445 active investments, 526–528 Northrop Grumman Corporation, goodwill shortcut projections for, 695 interest, 540 impairment charge, 400 vs cash flows, 125 passive investments, 519–526 notes payable, 155, 446–450, 451 net obligation, 611 mixed attribute measurement model, 76–77 notes to financial statements, 35–36 net operating assets, value of, 786–787 complementary nature and relative accounting quality in, 352 net operating loss (NOL) carryforwards, usefulness of income statement and Citigroup Inc., 411–418 606–607 balance sheet, 77 Oracle Corporation, 488 net operating profit after taxes See NOPAT pension expense calculation with, evolution of, 94 net realizable value, 84, 88, 600 614–615 IFRS, 78 net settlement, 470 notional amount, 470 U.S GAAP, 78 NewMarket Corporation, disclosures Nucor Corporation Mollydooker Wines regarding fixed assets, 557–558 accounts receivable and inventory analyzing effect of transactions on Nichols, D Craig, 45–46, 898, 899–901 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 turnover ratios, 247, 248 financial statements, 107 Nike, Inc calculating ROA, 244 historical cost valuation, 81 acquisition of Umbro, 120, 515, 516 www.ebookslides.com Index conversion from LIFO to FIFO, 596–597 identifying cost structure, 703–704 projecting gross margins, 703–704 I-13 PBO (projected benefit obligation), 610, 611–612 PCAOB (Public Company Accounting Oversight Board), 36 PE (price-earnings) ratios, 868, 881–895 obligations articulation of, 894–895 arising from advances from customers, benchmarking relative valuation, 886–890 360–361 descriptive data on, 887–889 contingent, 362–363 empirical properties of, 893–895 with estimated payment dates and incorporating earnings growth into, amounts, 359–360 890–893 with fixed payment amounts but measurement issues, 885–886 estimated payment dates, 359 from practical perspective, 884–886 with fixed payment dates and amounts, from theoretical perspective, projecting 357–359 firm value from permanent earnings, under mutually unexecuted contracts, 883–884 361 variation across firms, causes of, 889 obligations incurred, 832 Peet’s Coffee, 12, 241 Occidental Chemical Corporation, 399 PEG (price-earnings-growth) ratio, 892–893 occupancy costs Penman, Stephen, 893–894 profit margin analysis, 225 Penman decomposition, 284 projecting, 655–656 pension assets off-balance-sheet financing arrangements, defined benefit plan, 610–611 363–365 and liabilities, changes in, 443 Ohlson, James A., 313, 316 pension obligation, defined benefit plan, 610 Old Navy, 169 pensions, 609–620 Olin Corporation, disclosures regarding economics of accounting in defined fixed assets, 557–558 benefit plan, 610–613 Omnicom Group, industry characteristics expense calculation, 614–615 effect on financial statement relations, 51 gain and loss recognition, 618 100% dividend payout, 745–746 impact of actuarial assumptions, 618–619 zero residual income, 838–839 income adjustments related to, 141–142 online advertising, 580 income statement effects, 615–617 online sales, 580–581 other postretirement benefits, 619 operating activities reporting income effects, 613–614 expense recognition, 592–601 signals about earnings persistence, income taxes, 601–609 619–620 overview, 577–578 PepsiCo pensions and other postretirement alternative accounting standards, 395 benefits, 609–620 business life cycle, 130 revenue recognition, 578–592 contingent obligations, 363 operating activities section, statement of cross-sectional analysis, 241 cash flows, 127 operating cash flows, 143, 144 Pacific Gas & Electric adjustments for indirect method, restructuring and impairment charges, industry characteristics effect on financial 138–139 372–373 statement relations, 51 format alternatives, 136–138 threat of substitutes, 12 statement of cash flows, 179 inequal reconciling adjustments, percentage change analysis, 197 paid-in capital account projections, 682 145–147 percentage change financial statements, 42 Panera Bread Company noncash components of income percentage-of-completion method, 588 benchmarking relative valuation, 886 adjustments, 139–143 performance obligations common-size analysis of profitability, operating working capital adjustments, identifying in contracts, 582–583 195–196 143–145 new method for revenue recognition, cross-sectional analysis, 241 overview, 124 583–592 financial ratios, 240 operating assets, 284 period costs, 593 gross profit, 199 conceptual framework for free cash flows, periodic activities and performance, 30 inventory turnover, 232 774–775 peripheral gains and losses, 370–371 percentage change analysis, 197 forecasting on balance sheet, 662–677 permanent differences, 98 rivalry among existing firms, 12 investments in long-lived, 498–505 perpetuity-with-growth model, 753, 754, ROCE, 209 net, value of, 786–787 757, 891–892 par method of accounting for treasury stock, operating cash flow and accrual Petroleo Brasileiro, 108 435 components, partitioning earnings into, pharmaceutical companies, economic parent, 529 379–386 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 characteristics of, 8–9 Parmalat, financial reporting abuses, 350 operating cash flow to current liabilities Phillips-Van Heusen, 244 passive investments, minority, 519–526 ratio, 297 operating cash flow to total liabilities ratio, 304 operating cash flows, 33 operating cycle, 28–29, 293–294 operating expenses profit margin analysis, 225–226 projecting, 654–662 operating factors, bankruptcy prediction research, 315 operating income profitability analysis, 198–199 projecting, 661–662 operating lease method, 459 operating leases, 363, 737 converting to capital leases, 462–466 operating leverage, 217–219, 317 operating liabilities, 284 conceptual framework for free cash flows, 774–775 forecasting on balance sheet, 662–677 operating ROA, 288–299 operating working capital adjustments, 143–145 options overhang, 439 Oracle Corporation accounts receivable turnover, 246 acquisition of Sun Microsystems, Inc., 325–326 industry characteristics effect on financial statement relations, 57 share-based compensation, 485–489 other comprehensive income income adjustments related to, 141 items, 442–443 pension accounting, 613–614 reporting items of, 198 other noncurrent liabilities, classifying changes in, 156 other than temporarily impaired securities, 525–526 out of the money, 436 www.ebookslides.com I-14 Index Pizza Hut, 50 real earnings management, 355 profitability analysis, 37–43 See also ROA; point-of-sale transaction, 578–579 real vs nominal dividends, 746–747 ROCE Porter, Michael E., 10 realization, 91 alternative definitions of profits, 197–201 Porter’s five forces classification framework, reasonably estimable, concept of, 362 common-size analysis, 195–196 10–13 receivables earnings per share, 192–195 portfolios, use of valuation models to form, related-party transactions, 540 effects of R&D expense on, 500 901–903 sale of, 363–365 overview, 189–192 positive residual income, 840–841 transfers of, 457–458 PE ratio variation across firms, 889 postretirement benefits, 619 reclamation costs, 503 percentage change analysis, 197 potential earnings management, 524 reconciliation of tax rates, 604–605 Starbucks Corporation, 236 power of buyer, 12–13 refinancing agreements, 450 statement of cash flows in, 126 power of supplier, 13 reformulated balance sheets, 285–286 tools of, 38–43 PP&E See property, plant, and equipment reformulated income statements, 285–286, profitability ratios, 42–43 predicting future earnings growth, 893–895 287–288 Accenture, 238–239 predictive power of market-to-book ratios, registration statement, 47 Airtran, 237, 238 empirical research results on, 880–881 Regulation G, U.S Securities and Exchange American Airlines, 237, 238 preferred equity capital, cost of, 738 Commission, 200–201 JetBlue, 237, 238 preferred stock, 211, 429, 454 related-party transactions, 527, 540 Monster Worldwide, 238–239 computing weighted-average cost of relevance, 79, 80 summary of, 243 capital for Starbucks, 789 rent Target Corporation, 237 cost of capital, 738 projecting operating expenses, 655 VisionChina Media, 238–239 Walmart Stores, Inc., 237 projecting, 682 statement of cash flows, 154 profits prepaid expenses rents, 220 alternative definitions of, 197–201 operating working capital adjustments, reporting fraud, model to detect likelihood comprehensive income, 198 145 of, 386–392 operating income, EBIT, EBITDA, and projections, 672 reporting unit, 513 other measures, 198–199 Prepaid Legal Services (PPD), 117 representational faithfulness, 79, 80 pro forma, adjusted, or street earnings, prepayments from customers, 360–361 repurchases, share, 434–435 199–201 present value, 81–82, 88, 845 required income, 837, 845 segment profitability, 197–198 press releases, 353–354 research and development (R&D) costs, projected benefit obligation (PBO), 610, price differential, 896 239 611–612 price-earnings ratios See PE ratios accounting for, 499–500 projected financial statements, analyzing price-earnings-growth (PEG) ratio, reserves, 442–446 credit risk with, 307 892–893 tax information regarding, 608–609 property, plant, and equipment (PP&E), 24 Priceline.com, 580–581, 587 residual income, 209, 870 acquisition of, 499 prices, projecting, 642 consistency in value estimates based on classifying changes in, 154 principal–agent relationships, revenue free cash flows, dividends, and, projecting, 657–662, 673 recognition, 587 854–855 Starbucks Corporation, 506–507 principles of accounting, 20 continuing, 842–844 useful life estimations, 506–507 prior service cost, 611–612, 614 declining, 840 proportion of depreciable assets consumed, 509 pro forma earnings, 199–201 overview, 837–838 proportionate consolidation, 545 probability, 368 positive, 840–841 prospectus, 47 probability cutoff, 362 zero, 838–839 Public Company Accounting Oversight probit regressions, 387 residual income valuation model, 830–832 Board (PCAOB), 36 Procter & Gamble, industry characteristics avoiding common mistake with, 843–844 purchase commitments, 361 effect on financial statement relations, 51 consistency in residual income, product differentiation strategy, 17 dividends, and free cash flows product life cycle valuation estimates, 854–855 qualified audit opinion, 316 decline phase, 129–130, 133–134 converting into VB ratio model, 870 quality, accounting, 19–20 growth phase, 129–132 under different accounting treatments, quality of earnings, 135 introduction phase, 129–131 841–842 quality of financial statements See financial maturity phase, 129–130, 132–133 with finite horizon earnings forecasts and statements, quality of ROA analysis, 216–217 continuing value computations, quick ratio, 296–297 product prices, effect of buyer power on, 13 842–844 product segment pretax profitability illustrations of, 838–842 R&D (research and development) costs, 239 analysis, Starbucks Corporation, 228 implementation issues, 850–854 accounting for, 499–500 profit margin intuition for, 837–838 rate of inventory growth, 595 ROA analysis, 215–216, 223–229 picking stocks and forming portfolios, rate of return, 447 ROCE analysis, 213–214 901–903 on equity capital, Starbucks, 788 Starbucks Corporation, 206–207, theoretical and conceptual foundations on pension investments, 618 223–229 for, 835–842 rate of return on assets (ROA) Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 trade-offs between assets turnover, valuation of Starbucks, 844–850 disaggregation of ROCE, 288–299 resources consumed, 832 220–223 effects of R&D expense on, 500 www.ebookslides.com Index I-15 restaurant industry, Starbucks positioning Rock of Ages, Inc., 394–395 unsystematic risk, 317 relative to, 223 Royal Dutch Shell, dividends-based usefulness of statement of cash flows for, restoration costs for natural resources, valuation, 765 159–162 502–503 RSUs (restricted stock units), 439–441 risk management, disclosures regarding, restricted stock, 439–441 Ryanair, 174 278–283 restricted stock units (RSUs), 439–441 risk ratios, 43 restructuring charges Abercrombie & Fitch, 320–321 Saab Automobile, bankruptcy, 309 impairment losses and, 371–373 Coca-Cola Company, 322 SAI (selling and administrative expense income adjustments related to, 143 Hasbro, 320, 321 index), 388 Intel Corporation, 401–403 Walmart Stores, Inc., 332 sale of inventory, 107 restructuring liability, 372 risk-adjusted expected rates of return, sale of receivables, 363–365 retailers 729–742 sales profitability analysis, 237 cost of common equity capital, 730–736 cyclicality of, 219–220 revenue recognition, 584 cost of debt capital, 737–738 mix data for Starbucks, 227 retained earnings, 431 cost of equity capital attributable to online, 580–581 classifying changes in, 156 noncontrolling interests, 738–739 projecting operating expenses as forecasting, 686 cost of preferred equity capital, 738 percentage of, 654–655 net income and, 442–445 evaluating use of CAPM, 736–737 related-party transactions, 540 retrospective treatment, 375–376 using CAPM to compute, 734–735 revenue recognition, 584–587 return on assets See ROA weighted-average cost of capital, variability of, 317–318 return on common equity See ROCE computing, 739–742 sales growth index (SGI), 388 return on plan assets, 612 risk-neutral share value, 897 sales returns, 600 revaluations rivalry among existing firms, Porter’s five sales revenue, 96 of assets and liabilities, 374 forces classification framework, 11–12 Sam’s Club, 579 of long-lived operating assets, 443 ROA (return on assets) SAP AG, 441, 486 revenue growth, Starbucks Corporation adjustments for nonrecurring or special Sarbanes-Oxley Act of 2002, 36–37 Americas, 646–648 items, 203–204 Satyam China/Asia Pacific segment, 648–649 benefits and limitations of using ratios, accounting scandal, 395 CPG , foodservice, and other segments, 240–242 financial reporting abuses, 350, 387 652 calculation of, 204–206 Sazaby League, Ltd., 203 Europe, Middle East, and Africa, 650–651 disaggregating, 206–207 scandals, accounting, 395 forecasts, 652–653 economic and strategic determinants of, Sears, 457–458 215–220 other stores segment, 651 SEC See Securities and Exchange median, profit margin, and assets revenue recognition, 578–592 Commission turnover for industries, 215–216 application of new method for, 583–592 securities overview, 191, 201–202 difficulty of applying general principles classifying changes in marketable, profit margin for, 223–229 for, 578–581 152–153 relating to ROCE, 210–212 IASB and FASB’s guidance for, 581–583 hybrid, 453–457 Starbucks Corporation, 202–204, 205, overview, 578 investments, classifying changes in, 154 223–235 revenues Securities and Exchange Commission (SEC), summary of analysis, 235 accrual basis of accounting, 29 18, 20, 387 supplementing in profitability analysis, earned, 832 control on manipulation of earnings, 134 235–239 firm life cycle, 128–129 financial reporting worldwide, 392 total assets turnover, 230–235 on income statements, 27–28 Form 10-K, 18, 47, 278–283, 351–352, trade-offs between profit margin and operating working capital adjustments for 392, 492 assets turnover, 220–223 deferred, 143–144 Form 10-Q quarterly report, 47 Robert Morris Association, 241 projecting, 642–653 Regulation G, 200–201 ROCE (return on common equity), 42–43 shortcut projections for, 695 security analysts, 2, 898–903 analyzing total assets turnover, 230–235 reverse engineering, 867, 895–897 segment profitability, 197–198 benchmarks for, 208–210 reverse stock split, 432 analysis, Walmart Stores, 265 benefits and limitations of using ratios, Richardson, Scott A., 384 data, Starbucks Corporation, 226–229 240–242 risk analysis, 37–43 self-construction costs, 502 disaggregating, 213–214 bankruptcy risk, 309–316 selling, general, and administrative expenses economic and strategic determinants of, chapter overview, 275–277 See SG&A 215–220 credit risk, 305–309 selling and administrative expense index financial flexibility, assessing with disclosures regarding, 278–283 (SAI), 388 disaggregation of, 283–293 financial flexibility analysis, 283–293 sensitivity analysis, 699 overview, 191, 207–208 long-term solvency risk, 301–304 investment decision making and, relating ROA to, 210–212 PE ratio variation across firms, 889 760–762, 798–799, 848–850 relation to MB ratios, 881 short-term liquidity risk, 293–300 Starbucks, 848–850, 878 variations in VB and MB ratios, 874–875 statement of cash flows in, 126 service cost, 611 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Roche Holding, industry characteristics systematic risk, 316–318, 730–734 service firms, profitability analysis, 238–239 effect on financial statement relations, 56 tools of, 38–43 ServiceMaster, statement of cash flows, 179 www.ebookslides.com I-16 Index settlement of troubled debt, 453 average age of depreciable assets, Singapore Airlines seven-step forecasting game plan, 638–641 509–510 peripheral gains and losses, 371 accumulated other comprehensive average industry ratios, 242 useful lives of assets, 507 income or loss, 683 balance sheets, 21, 22, 26, 39–40, Sirius XM Radio Inc., statement of cash coaching tips for implementing, 640–641 667–670, 687–689 flows, 170–171 common stock, preferred stock, and book value of equity and projection of six-step analytical framework See also additional paid-in capital, 682 residual income, 845–846 financial statements, quality of dividends and share repurchases, business life cycle, 130 company strategies, identifying, 16–18 685–686 capitalization of operating leases, 465 forecasting future financial statements, financial assets, 677–678 cash balance projections, 666, 671 43–44 interest expense, 680 cash turnover ratio, 234 general valuation model, role in, interest income, 681 cash-settled share-based plans, 441 726–728 net income, 684–685 common equity issuance, 430 industry economic characteristics, noncontrolling interests, 681–682 common equity share value, 847–848 identifying, 8–16 operating assets and liabilities on balance common equity value per share, 759–760 overview, 3–4 sheet, 662–677 common stock, preferred stock, and profitability and risk analysis, 38–43 operating expenses, 654–662 additional paid-in capital projections, share pricing linked to, 5–7 overview, 638–640 682 value of firms, 43–44 provisions for income taxes, 684 common stock transactions, 852–853 Sloan, Richard G., 380, 384 retained earnings, 686 common-size analysis of profitability, Smithfield Foods, 92, 107–108 revenues, 642–653 195–196 software development costs, accounting for, short-term and long-term debt, 678–679 common-size financial statements, 38–41 500–501 total liabilities, 679 competitive advantages, 16 solvency risk, analyzing long-term, 301–304 SG&A (selling, general, and administrative) comprehensive income, 31–32 Sony Corporation, identifying cost expenses computing required rate of return on structure, 704–705 expense recognition, 599–601 equity capital for, 735 sources of financial statement information, projecting, 654, 659–660 contingencies, 308 47–48 SGI (sales growth index), 388 continuing dividends beyond year five, Southern Copper Corporation (SCCO), share premium, 429 757 113–114 share prices conversion from LIFO to FIFO, 596 Southwest Airlines Co., 48 association between earnings and, cost allocation methods, 508–509 additional data, 492 45–47 cost of sales projections, 655–656 case study, 489–496 effect of earnings announcements, 830 cross-sectional analysis, 241 computing residual income, 858 linking six-step analytical framework to, current and noncurrent deferred income consolidated balance sheet, 490–491 5–7 tax asset projections, 672–673 consolidated income statement, 491 market multiples, 867–868 current assets, 24 leasing activities, 462, 463–465 share repurchases, 434–435 current assets turnover ratio, 234 relation between net income and cash flow from operations, 164 forecasting, 685–686 current ratio, 295 special-purpose entity (SPE), 363–364, share-based compensation debt ratios, 302–303 367–368, 429, 546–549 alternative, 439–442 defined contribution plans, 609 specialty retailing apparel industry, 48 excess tax benefits from, 142–143 depreciation and useful lives, 506–507 speculative investment, 470 shareholders depreciation expense projections, spread, 289, 291 annual report to, 47 657–659 Standard & Poor’s, 48 common equity, free cash flows for, derivatives disclosures, 472–473 standard setters’ role in quality, 352–353 779–780 dirty surplus items, 851 Star Market, 246 common equity, valuation models for disaggregating ROA, 206 Starbucks Coffee Espan˜a, S.I., 141 free cash flows for, 785–786 disaggregating ROCE, 213–214 Starbucks Coffee Korea, Ltd., 141 corporate acquisitions, 544 discount rates, 788–789 Starbucks Corporation, 7–8 distributions to, 431–435 discount rates for residual income, 845 accounts payable projections, 675–676 dividends, 743 discounting residual income to present accounts receivable projections, 671 equity valuation and disclosure, 25–26 value, 846–847 accounts receivable turnover, 230–231 investments by, 428–430 dividend projections, 685 accrued liabilities projections, 676 Shaw’s, 246 dividends in year one through year five, accumulated other comprehensive short interest, 387 757 income, 445, 683 shortcut approaches to forecasting, 695–696 dividends-based valuation model, adjustments for nonrecurring or special short-term borrowing, 155, 294 756–760 items, 203–204 short-term debt, projecting, 678–679 earnings per share, 194 Altman’s Z-score, 312 short-term investments, measurement and economic attributes framework, 15–16 amortized cost, 451 reporting of, 366 equity investment projections, 673 analysis of comparable companies using short-term liquidity risk, 276 equity method, 528 market multiples, 910 analyzing, 293–300 fair value measurement, 452 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 annual report to shareholders, 47 Simmons Bedding, bankruptcy, 309 financial asset projections, 677–678 assets turnover analysis, 230–235 simple capital structure, 192 financial leverage, 212 www.ebookslides.com Index I-17 financial statement information on share repurchases, 434 operating activities, 577 website, 48 shareholders’ equity, 25–26 operating assets and liabilities financial statement ratios, 190 shortcut projections for total revenues projections, 666–677 fixed assets turnover, 234 and net income, 695 operating cash flow to total liabilities forecast horizon, selecting, 750 short-term and long-term debt ratio, 304 forecasting financial statements, 641 projections, 678–679 operating expense projections, 655–662, forward PE ratio, 885, 891–892 short-term investment projections, 671 663–664 free cash flows to all debt and equity short-term liquidity risk, 294 operating income projections, 661–662 capital stakeholders, 794–795 standard setters’ role in quality, 352 operating leases, 363 free cash flows to common equity, statements of cash flows, 33–35, 124–125, operating leverage, 219 790–793 127–128, 139–145 options overhang, 439 general and administrative expense stock dividends and splits, 434 PE ratios, 884, 885, 886, 890, 891–892 projections, 659–660 store operating expense projections, PEG ratio, 892–893 gift cards, 579 656–657 percentage change analysis, 197 goodwill, 505 stored-value card liability projections, percentage change financial statements, goodwill projections, 674 676–677 42 gross profit, 199 strategy framework, applying to, 17–18 peripheral gains and losses, 370 impairments, 515 testing validity of forecasts, 696–699 Porter’s five forces framework, 10–13 implied statement of cash flows, time-series analysis, 240–241 positioning relative to industry, 223 690–692 total asset projections, 675, 695–696 prepaid expenses and other current asset income from continuing operations, total dividends, 757–758 projections, 672 30–31 total liabilities projections, 679 product life cycle, 217 income from equity investee projections, value chain analysis, 14–15 product segment pretax profitability 660–661 value-earnings model, 882–883 analysis for, 228 income statements, 27–28, 41 value-to-book model, 875–878 profit margin analysis, 223–229 income tax disclosures, 602–608 weighted-average cost of capital, 742, profitability analysis, 236 income tax provision projections, 684 788–789 profitability ratios, 42–43 income taxes, 104–105 working capital investments, 599 projecting net income attributable to independent auditor’s assurance opinion, working capital turnover ratios, 298, 299, common shareholders, 684–685 37 300 projection of residual income, 845–846 insurance reserve projections, 676 Starbucks Japan, 203, 206, 226, 281, 528 property, plant, and equipment, 24 intangible asset acquisition costs, 504 Starwood Hotels, profitability analysis, property, plant, and equipment intangible asset projections, 674 259, 260 projections, 657–659, 673 intangible assets, 24 stated rate of interest, 447 quick ratio, 297 interest coverage ratio, 303–304 statement of cash flows, 33–35 reacting to announcements, 699–700 interest expense projections, 680 Abercrombie & Fitch, 256–257 reformulated balance sheets, 286–287 interest expenses, 450 accounting quality in, 351 reformulated income statements, interest income projections, 681 Aer Lingus, 174, 176–177 287–288 inventory projections, 672 algebraic formulation, 150–152 relation between net income and cash inventory reserves, 599 Ambarella, 132 flows, 148–149 inventory turnover, 231–232 analyzing credit risk, 306–307 required rate of return on equity capital, investments, 497–498, 499 Apollo Group, 175–176 788 liabilities, 25 Arbortech, 420–421, 425 residual income valuation model, liabilities obligations, 359, 360–361 Atlas African Industries Limited, 132 844–850 lines of credit, 294 cash flow activities and firm life cycle, retained earning projections, 686 long-term asset projections, 674 128–134 retained earnings, 442 revenue projections, 643–653, 695 long-term investment projections, 673 Cedar Fair L.P., 133 revenue recognition, 584, 585, 586–587, long-term liability projections, 677 classifying changes in balance sheet 592 management report, 37 accounts, 152–157 reverse engineering stock price, MB ratio, 869 Coca-Cola Company, The, 165–166, 896–897 MD&A, 36 807–808 risk disclosures, 279–282 measuring dividends for, 748–749 CVS Caremark, 136, 137–138 risk ratios, 43 midyear discounting, 759 forecasting, 689–695 ROA analysis, 202–204, 205, 223–235 monetary assets, 23 Gap Inc., 169–170 ROCE, 208–209, 210, 291, 875 net income projections, 695 Hasbro, 253 sales mix data, 227 noncontrolling interests projections, illustration of preparation procedure, segment data, 226–229 681–682 157–159 segment profitability, 198 non-GAAP EPS, 200–201 implied, 149–150 sensitivity analysis, 699 nonrecurring income item projections, interest expenses on, 450 sensitivity analysis and investment 661 McGrath RentCorp, 139, 140 decision making, 760–762, 798–799, notes payable, 447–448 measuring free cash flows, 776–778 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 848–850 notes to financial statements, 35–36 MicroStrategy, Inc., 160–162 share repurchase projections, 685–686 occupancy cost projections, 655–656 Montgomery Ward, 173–174 www.ebookslides.com I-18 Index net income, relation between cash flows Tesla Motors, 130 subsidiaries, 529 from operations and, 147–149 forecast horizon, selecting, 750 cost of equity capital attributable to Nike, Inc., 69–70 statement of cash flows, 166, 168–169 noncontrolling interests, 738–739 operating section, 135–147 testing forecasting validity, 696–699 foreign entities, 550 overview, 123 Texas Instruments substitutes, threat of, 12 preparing, 147–149 fixed assets turnover ratios, 247, 248 Subway, 12 purpose of, 124–126 loans, 305–306 successful efforts, 503 relations among cash flow activities, statement of cash flows, 166, 167 Sun Microsystems, Inc., 108 127–128 Thomas, Jacob, 899, 901 inventory turnover ratios, 246–247 Sirius XM Radio Inc., 170–171 Thomson Reuters, 830 risk and bankruptcy prediction ratios, Starbucks Corporation, 124–125, threat of entrants, 12 325–326 127–128, 139–145 threat of substitutes, 12 statement of cash flows, 179 Sunbeam Corporation, 172–173, 3M Company Sunbeam Corporation 403–404 calculating free cash flows, 801 applying Beneish Manipulation Index to, Tesla Motors, 166, 168–169 industry characteristics effect on financial 389–392 Texas Instruments, 166, 167 statement relations, 51 statement of cash flows, 172–173, usefulness for accounting and risk Tiffany & Co 403–404 analysis, 159–162 accounting classification differences, 377 SunTrust Banks, Inc., 559 Walmart Stores, Inc., 62–63, 185–186, cash operating cycle, 300 Supervalu, 245, 246 267–268, 710–711, 814 inventory turnover, 232 supplier power, 13 statutory merger, 529, 530–533 Tim Hortons, 12, 241 supply, in economic attributes framework, statutory tax rate, 201–202, 604–605, 738 Time magazine, 579 15 Steak ’n Shake time-series analysis, 43, 240–241 sustainable earnings, 197 equity valuation for, 860, 861 time-value element, 436 sustainable growth in dividends, 751 using market multiples to assess values timing of revenue recognition, 578 systematic risk, 277 and market prices, 905 Tingyi, 143 marketwide, 730–734 stock TJX, Inc., 165, 244 measuring, 316–318 classifying changes in common, 156 total accruals to total assets (TATA), 389 relation between cost of equity capital preferred, 211, 429, 454 total assets and, 733 restricted, 439–441 projecting, 675 RSUs, 439–441 shortcut projections for, 695–696 Taco Bell, 50 treasury, 435 total assets turnover tangible assets, 23, 374 stock appreciation rights, 441 disaggregating ROCE, 213–214 useful life of long-lived, 506–507 stock dividends, 431–434 ROA analysis, 230–235 tangible development costs, 503–504 stock options, 435–439 total dividends, Starbucks Corporation, tangible equity, 504 illustration of accounting for, 437–439 757–758 tangible fixed assets, depreciation for, options overhang, 439 total liabilities, projecting, 679 507–509 stock prices, 866 total net dividends, 747 Target link between changes in earnings and, Toyota Motor, industry characteristics effect calculating cost of capital, 764 317–318 on financial statement relations, 57 comparing profitability and risk ratios market multiples, 867–868 Toys‘‘R’’Us, loans, 305 with Walmart Stores, 269–274 relative usefulness of financial statements trading securities computing residual income, 857 to explain, 77 accounting for minority, passive credit cards, 231 reverse engineering, 867, 895–897 investments in, 520–523 cross-sectional analysis, 241 stock returns general discussion, 520 profitability ratios, 237 abnormal, 383 trailing-12-months earnings per share, 884 TATA (total accruals to total assets), 389 correlation between net income, cash transaction price, determining, 582–583 tax rate reconciliation, 604–605 flow, and EBITDA and, 386 transactions, analyzing effect on financial tax reporting, 96, 508–509 stock splits, 431–434 statements, 75, 105–109 taxes stock-based compensation transfers of receivables, 457–458 calculating ROA, 201–202 income adjustments related to, 140 transitory earnings, 886 debt capital, 738 Starbucks Corporation, 606 translation methodology deferred income, classifying changes in, Stora Enso, accounting classification foreign currency is functional currency, 156 differences, 377–379 550–552 excess benefits from share-based store operating expenses U.S dollar is functional currency, compensation, income adjustments profit margin analysis, 225–226 552–553 related to, 142–143 projecting, 656–657 translation of foreign financial statements, income, 94–105, 544–545 stored value cards, 360–361 443 LIFO inventory method, 595 projecting liabilities, 676–677 treasury stock, 435 technological feasibility, 500–501 straight-line method, 508–509 classifying changes in, 156 technology-based firms, profitability analysis Starbucks Corporation, 685 strategy analysis, 16–18, 126 for, 239 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 Tribune Company, 328–329 for Starbucks Corporation, 17–18 temporarily impaired securities, 525–526 Tribune Group, bankruptcy, 309 Street earnings, 199–201 temporary differences, 98, 102 www.ebookslides.com Index troubled debt, accounting for, 452–453 turnover ratios, 297–298 income taxes, 98 independent auditor’s attestation, 36 intangible asset acquisition costs, 504 joint ventures, 545 LIFO, 595 long-term leases, 460, 462 marketable securities, 152 mixed attribute measurement model, 77, 78 modification of terms of debt, 453 mutually unexecuted contracts, 361 other comprehensive income, 683 preferred stock, 454 purchase commitments, 361 R&D costs, 239, 499 reclassification of long-term debt, 450 recognition, measurement, and classification of assets, 23–24 recognition, measurement, and classification of liabilities, 24–25 reporting assets and liabilities, 21 reporting changes in the value of inventory, 599 restructuring charges, 372 retrospective treatment, 375 revaluations of assets and liabilities, 374 sale of receivables, 365 segment profitability, 197–198 segment reporting, 226 self-construction costs, 502 software development costs, 500–501 sources of fair value estimates, 83 statement of cash flows, 123, 136 stock dividends, 432 stock splits, 432 unrealized gains and losses, 92, 93 useful life, 506–507 I-19 value See also fair value changes in, 368–369 common equity in all-equity firm, 744 common equity in firm with debt financing, 744–745 continuing dividends, 753–755 of firms, 43–44 of inventory, reporting changes in, 598–599 of net operating assets, 786–787 value chain analysis, 14–15 degree of integration in, 17, 18 value-earnings (VE) ratio, model applied to Starbucks, 882–883 value-to-book ratio See VB ratios variable consideration, sales with, 585–586 variable interests, 547 variable-interest entities (VIEs), 546–549 VB (value-to-book) ratios application of model to Starbucks, 875–878 and MB ratios may differ from 1, reasons why, 874–875 model with finite horizon earnings forecasts and continuing value, 872–874 theoretical model of, 869–872 VE (value-earnings) ratio, model applied to Starbucks, 882–883 Verizon Communications Inc., industry characteristics effect on financial statement relations, 50 vesting date, 436 VF Corporation, ROCE decomposition, 323–325 VIEs (variable-interest entities), 546–549 Visa Inc., 164 VisionChina Media, profitability ratios, 238–239 Vulcan Materials Company, unusual income statement items, 399–400 Umbro, 67 acquisition by Nike, Inc., 120, 515, 516 uncertain revenue timing, 579 uncertain tax positions, information regarding, 608–609 uncollectible receivables, 600 unconsolidated affiliates, consolidation of joint ventures and, 545 underlyings, 470 undiversifiable risk, 277, 317 unexpected return on plan assets, 613 United, 579 United Van Lines, 111 University of Phoenix, 174 unlevered market beta, 735 unrealized gains and losses, 92, 93 from changes in pension assets and liabilities, 443 from hedging activities, 443 from investments in available-for-sale securities, 442–443 revaluations of, 374 from revaluations of long-lived operating assets, 443 from translation of foreign financial statements, 443 unrecognized assets, 86 unsystematic risk, 317 UPS, 48 upward asset revaluations, 517–518 U.S dollar, as functional currency, 552–553 U.S GAAP (Generally Accepted Accounting Principles), 20 accounting quality, 352 accrual basis of accounting, 29 advertising and marketing costs, 599–600 AOCI, 442–443 Valero Energy, 245 asset and liability valuations, 87–88 validity of forecasts, testing, 696–699 valuation See also free-cash-flows-based available-for-sale securities, 520 valuation bonds issued with detachable warrants, adjustments, 31 456–457 W T Grant Company dividends-based, 743–755 brand name value, 220 application of Altman’s bankruptcy equivalence among dividends, cash flows, cash flows from interest expense, 450 prediction model to, 313–315 and earnings, 728–729 clean surplus income, 747 bankruptcy, 305 firm, calculating with statement of cash comprehensive income, 198 Wahlen, James M., 45–46, 355, 898, 899–901 flows, 126 control on manipulation of earnings, 134 Walgreens fundamental concepts, 773, 866 dirty surplus items, 851 projecting revenues, cost of goods sold, general valuation model, 726–728 discontinued operations, 373 and inventory, 701 inventory, 107–108 earnings per share, 192 value chain analysis and financial valuation models, using to form portfolios, equity method, 526 statement relationships, 58 901–903 expense recognition, 592 Walmart Stores, Inc., 26, 326 valuation of assets and liabilities, 77–88 fair value, 739 accounting quality, 408–409 accounting quality, 79–80 fair value hedge, 471 balance sheets, 61, 64–65, 265–266, 709, contrasting illustrations of, 84–87 financial reporting worldwide, 392 813 income recognition, 88–94 functional currency, 550 buyer power, 13 nonrecognition of certain assets, 84–87 goodwill, 504, 674 case studies, 60–66, 263–274 primary alternatives, 80–84 guarantees, 362 comparing profitability and risk ratios relevance and representational impairment of goodwill, 513–514 with Carrefour and Target, 269–274 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 faithfulness, 79, 80 impairment of intangible assets, 513 competitive advantages, 16 credit cards, 231 U.S GAAP and IFRS, 87–88 impairment of long-lived assets, 511, 512 www.ebookslides.com I-20 Index cross-sectional analysis, 241 dividends-based valuation of common equity, 768–769 financial statement forecasts, 708–715 forecast horizon, selecting, 750 free-cash-flows valuation of common equity, 811–816 income statements, 62, 65, 266–267, 710, 812 inventory projections, 672 investment activities, 572–573 leases, 485 operating activities, 632 profitability and risk analysis of, 263–274 profitability ratios, 237 residual income valuation of common equity, 862–863 risk analysis, 331–332 self-construction costs, 502 statement of cash flows, 62–63, 185–186, 267–268, 710–711, 814 tax reporting, 122 valuation method for monetary asset, 112–113 valuation method for nonmonetary asset, 112 valuation of common equity using market multiples, 910–912 Walt Disney Company, The acquisition of Marvel Entertainment, Inc., 573–575 case studies, 573–575 VIEs, 546 Warner Music Group, 133–134 warranties, 586 warranty expense, 97, 359–360, 601 Washington Mutual acquisition by J P Morgan Chase & Co., 532 bankruptcy, 309 Washington Post Company, The, bankruptcy prediction models, 328–329 Waste Management accounting fraud, 501 accounting scandal, 395 Watts, Susan, 316 wealth creation, 728, 832 wealth distribution, 728, 831 websites, financial statement information on, 48 weighted-average cost of capital, computing, 739–742 inconsistent estimates of, 854–855 iteratively, 741 for Starbucks, 742, 788–789 Whirlpool, calculating cost of capital, 764 Whole Foods Market, Inc balance sheets, 330 financial flexibility, 329–331 income statements, 331 profit margin and asset turnover dimensions, 223 Wiess, Ira S., 77–78 working capital accruals, 382 adjustments in, 138, 143–145 investments in, 592, 599 turnover ratios, 297–300 World Council for Corporate Governance, 387 WorldCom accounting scandal, 395 financial reporting abuses, 20, 36, 350 Wyeth, value chain analysis and financial statement relationships, 58 Xerox Corporation, 579 Yahoo! Finance, 485 yield, 447 yield to maturity, 737 yield-to-maturity, 447 Yum! Brands computing residual income, 858 industry characteristics effect on financial statement relations, 50 Zacks Investment Research, 830 Zavgren, Christine V., 313 zero dividend payout, 745–746 declining residual income, 840 zero residual income, 839 zero residual income 100% dividend payout, 838–839 zero dividend payout, 839 Z-score, Altman’s, 311–312 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 www.ebookslides.com SUMMARY OF KEY FINANCIAL STATEMENT RATIOS (Indicates Page in Text Where Ratio Is Initially Discussed) PROFITABILITY RATIOS Return on Assets (ROA) ¼ (Page 201) Profit Margin for ROA ¼ (Page 206) Net Income ỵ Tax RateịInterest Expenseị ỵ Noncontrolling Interest in Earnings Average Total Assets Net Income ỵ Interest Expense net of taxesị ỵ Noncontrolling Interest in Earnings Sales Sales Total Assets Turnover ¼ Average Total Assets (Page 206) Return on Common Equity (ROCE) Net Income À Noncontrolling Interest in Earnings À Preferred Stock Dividends Average Common Shareholders’ Equity (Page 207) ¼ Profit Margin for ROCE ¼ (Page 213) Net Income À Noncontrolling Interest in Earnings À Preferred Stock Dividends Sales Average Total Assets Capital Structure Leverage ¼ Average Common Shareholders’ Equity (Page 213) FINANCIAL FLEXIBILITY ROCE ¼ Operating ROA ỵ (Leverage Spread) (Page 288) Operating ROA ẳ (Page 288) Net Income ỵ Tax RateịInterest Expenseị ỵ Noncontrolling Interest in Earnings Average Net Operating Assets Average Financing Obligations Leverage ¼ Average Common Shareholders’ Equity (Page 292) Spread ¼ Operating ROA À Net Borrowing Rate (Page 292) Net Financing Expense (After Tax) Net Borrowing Rate ¼ Average Financing Obligations (Page Copyright 292) 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 www.ebookslides.com RISK RATIOS Short-Term Liquidity Risk Current Assets Current Ratio ¼ Current Liabilities (Page 295) Quick Ratio ¼ (Page 296) Cash and Cash Equivalents þ Short-Term Investments þ Accounts Receivable Current Liabilities Cash Flow from Operations Operating Cash Flow to Current Liabilities Ratio ¼ Average Current Liabilities (Page 297) Sales Accounts Receivable Turnover ¼ Average Accounts Receivable (Page 297) Cost of Goods Sold Inventory Turnover ¼ Average Inventories (Page 297) Purchases Accounts Payable Turnover ¼ Average Accounts Payable (Page 297) Long-Term Solvency Risk Total Liabilities Liabilities to Assets Ratio ¼ Total Assets (Page 301) Total Liabilities Liabilities to Shareholders’ Equity Ratio ¼ Total Shareholders’ Equity (Page 301) Long-Term Debt Long-Term Debt to Long-Term Capital Ratio ẳ Long-Term Debt ỵ Total Shareholders Equity (Page 301) Long-Term Debt Long-Term Debt to Shareholders’ Equity Ratio ¼ Total Shareholders Equity (Page 301) Interest Coverage Ratio Net Income ỵ Interest Expense ỵ Income Tax Expense ỵ Net Income Attributable to Noncontrolling Interests ¼ Interest Expense (Page 303) Cash Flow from Operations Operating Cash Flow to Total Liabilities Ratio ¼ Average Total Liabilities Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part (Page 304) WCN 02-200-202 www.ebookslides.com This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN, author, title, or keyword for materials in your areas of interest Important notice: Media content referenced within the product description or the product text may not be available in the eBook version Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-202 ... Valuation Approach 725 CHAPTER 12 Valuation: Cash-Flow-Based Approaches 771 CHAPTER 13 Valuation: Earnings-Based Approach 829 CHAPTER 14 Valuation: Market-Based Approaches 865 APPENDIX A Financial. .. Return and the Dividends Valuation Approach Chapter 12: Valuation: Cash-Flow-Based Approaches Chapter 13: Valuation: Earnings-Based Approaches Chapter 14: Valuation: Market-Based Approaches The chapter...www.ebookslides.com 9E Financial Reporting, Financial Statement Analysis, and Valuation A STRATEGIC PERSPECTIVE James M Wahlen Professor of Accounting James R Hodge Chair of Excellence and Accounting Department