2019 CFA program curriculum level i vol 3

2019 CFA PROGRAM CURRICULUM LEVEL I VOLUMES 1-6 đ â 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 by CFA Institute All rights reserved This copyright covers material written expressly for this volume by the editor/s as well as the compilation itself It does not cover the individual selections herein that first appeared elsewhere Permission to reprint these has been obtained by CFA Institute for this edition only Further reproductions by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval systems, must be arranged with the individual copyright holders noted CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute To view a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional should be sought All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only ISBN 978-1-946442-07-9 (paper) ISBN 978-1-946442-31-4 (ebk) 10 Please visit our website at www.WileyGlobalFinance.com FINANCIAL REPORTING AND ANALYSIS CFA® Program Curriculum 2019 • LEVEL I • VOLUME CONTENTS How to Use the CFA Program Curriculum   Curriculum Development Process   Organization of the Curriculum   Features of the Curriculum   Designing Your Personal Study Program   Feedback   ix ix x x xi xiii Financial Reporting and Analysis Study Session Financial Reporting and Analysis (1)   Reading 21 Financial Statement Analysis: An Introduction   Introduction   Scope of Financial Statement Analysis   Major Financial Statements and Other Information Sources   Financial Statements and Supplementary Information   Other Sources of Information   Financial Statement Analysis Framework   Articulate the Purpose and Context of Analysis   Collect Data   Process Data   Analyze/Interpret the Processed Data   Develop and Communicate Conclusions/Recommendations   Follow-­ Up   Summary   Practice Problems   Solutions   6 11 12 29 30 31 32 33 33 33 34 34 37 40 Reading 22 Financial Reporting Standards   Introduction   The Objective of Financial Reporting   Standard-­Setting Bodies and Regulatory Authorities   Accounting Standards Boards   Regulatory Authorities   Convergence of Global Financial Reporting Standards   The International Financial Reporting Standards Framework   Objective of Financial Reports   Qualitative Characteristics of Financial Reports   Constraints on Financial Reports   The Elements of Financial Statements   General Requirements for Financial Statements   Convergence of Conceptual Framework   Effective Financial Reporting   Characteristics of an Effective Financial Reporting Framework   Barriers to a Single Coherent Framework   43 44 44 47 48 50 56 60 61 62 63 64 66 70 72 72 73 indicates an optional segment ii Contents Comparison of IFRS with Alternative Reporting Systems   Monitoring Developments in Financial Reporting Standards   New Products or Types of Transactions   Evolving Standards and the Role of CFA Institute   Company Disclosures   Summary   Practice Problems   Solutions   74 77 77 78 79 82 85 88 Study Session Financial Reporting and Analysis (2)   91 Reading 23 Understanding Income Statements   Introduction   Components and Format of the Income Statement   Revenue Recognition   General Principles   Revenue Recognition in Special Cases   Implications for Financial Analysis   Revenue Recognition Accounting Standards Issued May 2014   Expense Recognition   General Principles   Issues in Expense Recognition   Implications for Financial Analysis   Non-­Recurring Items and Non-­Operating Items   Discontinued Operations   Extraordinary Items   Unusual or Infrequent Items   Changes in Accounting Policies   Non-­ Operating Items   Earnings per Share   Simple versus Complex Capital Structure   Basic EPS   Diluted EPS   Changes in EPS   Analysis of the Income Statement   Common-­Size Analysis of the Income Statement   Income Statement Ratios   Comprehensive Income   Summary   Practice Problems   Solutions   93 94 95 99 100 103 111 112 116 117 120 125 125 126 126 127 128 130 131 132 132 134 140 141 141 143 145 148 151 156 Reading 24 Understanding Balance Sheets   Introduction   Components and Format of the Balance Sheet   Balance Sheet Components   Current and Non-­Current Classification   Liquidity-­ Based Presentation   161 162 162 163 165 166 indicates an optional segment Contents Reading 25 Reading 26 iii Current Assets and Current Liabilities   Current Assets   Current Liabilities   Non-­ Current Assets   Property, Plant, and Equipment   Investment Property   Intangible Assets   Goodwill   Financial Assets   Non-­ Current Liabilities   Long-­term Financial Liabilities   Deferred Tax Liabilities   Equity   Components of Equity   Statement of Changes in Equity   Analysis of the Balance Sheet   Common-­Size Analysis of the Balance Sheet   Balance Sheet Ratios   Summary   Practice Problems   Solutions   167 167 174 178 179 180 181 183 186 190 191 191 192 192 195 196 197 204 206 209 214 Understanding Cash Flow Statements   Introduction   Components and Format of the Cash Flow Statement   Classification of Cash Flows and Non-­Cash Activities   A Summary of Differences between IFRS and US GAAP   Direct and Indirect Methods for Reporting Cash Flow from Operating Activities   The Cash Flow Statement: Linkages and Preparation   Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet   Steps in Preparing the Cash Flow Statement   Conversion of Cash Flows from the Indirect to the Direct Method   Cash Flow Statement Analysis   Evaluation of the Sources and Uses of Cash   Common-­Size Analysis of the Statement of Cash Flows   Free Cash Flow to the Firm and Free Cash Flow to Equity   Cash Flow Ratios   Summary   Practice Problems   Solutions   217 218 219 219 221 Financial Analysis Techniques   Introduction   The Financial Analysis Process   The Objectives of the Financial Analysis Process   Distinguishing between Computations and Analysis   269 270 271 271 272 indicates an optional segment 222 232 232 233 245 246 246 249 254 255 257 259 265 iv Contents Analytical Tools and Techniques   Ratios   Common-­ Size Analysis   The Use of Graphs as an Analytical Tool   Regression Analysis   Common Ratios Used in Financial Analysis   Interpretation and Context   Activity Ratios   Liquidity Ratios   Solvency Ratios   Profitability Ratios   Integrated Financial Ratio Analysis   Equity Analysis   Valuation Ratios   Industry-­ Specific Ratios   Research on Ratios in Equity Analysis   Credit Analysis   The Credit Rating Process   Research on Ratios in Credit Analysis   Business and Geographic Segments   Segment Reporting Requirements   Segment Ratios   Model Building and Forecasting   Summary   Practice Problems   Solutions   274 278 282 288 290 290 291 292 298 303 307 311 318 319 321 323 324 324 326 327 327 328 330 330 333 339 Study Session Financial Reporting and Analysis (3)   343 Reading 27 Inventories   Introduction   Cost of Inventories   Inventory Valuation Methods   Specific Identification   First-­In, First-­Out (FIFO)   Weighted Average Cost   Last-­In, First-­Out (LIFO)   Calculation of Cost of Sales, Gross Profit, and Ending Inventory   Periodic versus Perpetual Inventory Systems   Comparison of Inventory Valuation Methods   The LIFO Method   LIFO Reserve   LIFO Liquidations   Inventory Method Changes   Inventory Adjustments   Evaluation of Inventory Management   Presentation and Disclosure   Inventory Ratios   Financial Analysis Illustrations   345 346 347 348 349 349 349 350 350 352 354 357 357 363 367 368 375 376 376 377 indicates an optional segment Contents Reading 28 Reading 29 v Summary   Practice Problems   Solutions   388 391 407 Long-­Lived Assets   Introduction   Acquisition of Long-­Lived Assets   Property, Plant, and Equipment   Intangible Assets   Capitalising versus Expensing: Impact on Financial Statements and Ratios   Capitalisation of Interest Costs   Capitalisation of Internal Development Costs   Depreciation and Amortisation of Long-­Lived Assets   Depreciation Methods and Calculation of Depreciation Expense   Amortisation Methods and Calculation of Amortisation Expense   The Revaluation Model   Impairment of Assets   Impairment of Property, Plant, and Equipment   Impairment of Intangible Assets with a Finite Life   Impairment of Intangibles with Indefinite Lives   Impairment of Long-­Lived Assets Held for Sale   Reversals of Impairments of Long-­Lived Assets   Derecognition   Sale of Long-­Lived Assets   Long-­Lived Assets Disposed of Other Than by a Sale   Presentation and Disclosures   Investment Property   Leasing   The Lease versus Buy Decision   Finance versus Operating Leases   Summary   Practice Problems   Solutions   415 416 417 417 420 Income Taxes   Introduction   Differences between Accounting Profit and Taxable Income   Current Tax Assets and Liabilities   Deferred Tax Assets and Liabilities   Determining the Tax Base of Assets and Liabilities   Determining the Tax Base of an Asset   Determining the Tax Base of a Liability   Changes in Income Tax Rates   Temporary and Permanent Differences Between Taxable and Accounting Profit   Taxable Temporary Differences   Deductible Temporary Differences   Examples of Taxable and Deductible Temporary Differences   507 508 508 509 510 513 513 515 517 indicates an optional segment 423 428 431 435 435 443 444 448 448 450 451 451 451 451 451 452 453 464 467 467 467 486 489 501 518 519 519 520 vi Contents Temporary Differences at Initial Recognition of Assets and Liabilities   Business Combinations and Deferred Taxes   Investments in Subsidiaries, Branches, Associates and Interests in Joint Ventures   Unused Tax Losses and Tax Credits   Recognition and Measurement of Current and Deferred Tax   Recognition of a Valuation Allowance   Recognition of Current and Deferred Tax Charged Directly to Equity   Presentation and Disclosure   Comparison of IFRS and US GAAP   Summary   Practice Problems   Solutions   522 523 Non-­Current (Long-­Term) Liabilities   Introduction   Bonds Payable   Accounting for Bond Issuance   Accounting for Bond Amortisation, Interest Expense, and Interest Payments   Current Market Rates and Fair Value Reporting Option   Derecognition of Debt   Debt Covenants   Presentation and Disclosure of Long-­Term Debt   Leases   Advantages of Leasing   Finance (or Capital) Leases versus Operating Leases   Introduction to Pensions and Other Post-­Employment Benefits   Evaluating Solvency: Leverage and Coverage Ratios   Summary   Practice Problems   Solutions   545 546 546 546 Study Session Financial Reporting and Analysis (4)   605 Reading 31 Financial Reporting Quality   Introduction   Conceptual Overview   GAAP, Decision-­Useful, Sustainable, and Adequate Returns   GAAP, Decision-­Useful, but Sustainable?   Biased Accounting Choices   Departures from GAAP   Differentiate between Conservative and Aggressive Accounting   Context for Assessing Financial Reporting Quality   Motivations   Conditions Conducive to Issuing Low-­Quality Financial Reports   Mechanisms That Discipline Financial Reporting Quality   Detection of Financial Reporting Quality Issues   Presentation Choices   607 608 609 610 611 612 619 620 625 625 626 626 632 633 Reading 30 indicates an optional segment 523 523 524 525 525 528 533 536 538 543 550 554 557 559 561 564 564 565 583 586 590 592 598 Contents Reading 32 vii Accounting Choices and Estimates   Warning Signs   Conclusion   Practice Problems   Solutions   638 655 660 663 667 Financial Statement Analysis: Applications   Introduction   Application: Evaluating Past Financial Performance   Application: Projecting Future Financial Performance   Projecting Performance: An Input to Market-­Based Valuation   Projecting Multiple-­Period Performance   Application: Assessing Credit Risk   Application: Screening for Potential Equity Investments   Analyst Adjustments to Reported Financials   A Framework for Analyst Adjustments   Analyst Adjustments Related to Investments   Analyst Adjustments Related to Inventory   Analyst Adjustments Related to Property, Plant, and Equipment   Analyst Adjustments Related to Goodwill   Analyst Adjustments Related to Off-­Balance-­Sheet Financing   Summary   Practice Problems   Solutions   671 672 673 681 681 686 690 694 697 697 698 698 702 703 706 713 715 717 Glossary G-1 Index I-1 indicates an optional segment I-6 Index depreciation expenses, 441–443, 454 derecognition of debt, 557–559 of long-lived assets, 451–453 derivatives, 186 detection of financial reporting issues, 632–660 accounting choices and estimates, 638–655 cash flow statement effects, 648–651 earnings and balance sheet effects, 639–648 areas of choice/estimate and analyst concerns, 652–655 presentation choices, 633–638 warning signs, 655–660 capitalization policies, 657 cash flow and net income relationship, 657 company culture, 659–660 context for judging signs, 658–659 deferred costs, 657 inventories, 656–657 revenue, 655–656 development costs internal, 431–435 and taxable/deductible temporary differences, 521 and tax bases of assets, 514–515 development phase (intangible assets), 182 diluted earnings per share, 134–140 with antidilutive securities, 139–140 defined, 132 if-converted method, 134–136 for stock options, 139 treasury stock method, 137–139 in valuation ratios, 319–321 diluted shares, 18 diminishing balance depreciation, 123–124 direct financing leases defined, 484, 578 and financial statements, 480–485, 582–583 initial recognition and measurement of, 578–580 US GAAP on, 577, 578 direct-format statements benefits of, 223 under IFRS, 226–228 for Telefónica Group, 226–228 direct method for cash flow from operating activities, 648 direct method for overall statement of cash flows, 241–242 adjustments to net income, 241–242 converting indirect and, 245–246 defined, 23, 222 direct write-off method, 120 disciplining mechanisms for financial reporting quality, 626–632 auditors, 629–630 market regulatory authorities, 627–629 and motivation for manipulation, 631–632 private contracts, 630 disclaimer of opinion, 28 disclosure(s) of bonds with warrants, 563–564 of debt and financial instruments, 555–557 of debt covenants, 560–561 of debt extinguishment, 558–559 and financial reporting quality, 659 and financial reporting standards, 79–83 disclosures relating to accounting policies, 79–81 disclosures relating to changes in accounting policies, 81–83 at General Electric, 82 at Volkswagen, 80–81 of income tax information, 528–533 and financial analysis, 532–533 Micron Technology, Inc., 528–533 interim period, 115n.26 of inventory information, 376 of investment property, 466–467 of leases, 570–577 of LIFO liquidations, 364–366 of long-term debt, 561–564 market regulators’ requirements of, 628 and monitoring of financial reporting standards, 79–83 in notes to financial statements, 70 of pension plans, 585–586 and presentation of long-lived assets, 453–466 Daejan Holdings PLC, 465–466 fixed asset turnover and average age of depreciable assets, 462–464 Vodafone Group Plc, 455–460 of revaluation model for long-lived assets, 447–448 of revenue recognition, 115–116 disclosure management, 618n.8 discontinued operations, on income statements, 126 discount, bonds at, 549–553 discretionary cash flow to debt, 325 disposal, of long-lived assets, 452–453 diversification, as credit analysis factor, 691 dividend-payout ratio, 319, 321 dividends, on cash flow statement, 241 dividends per share, 319 dividends receivable, 514, 521 DOH see days of inventory on hand donations, 516, 521, 522 double-declining balance depreciation acceleration factor in, 123 on financial statements, 644–647 of long-lived assets, 436–440 other depreciation methods vs., 436–440, 644–647 doubtful accounts, 120, 653 DSO see days of sales outstanding Dun & Bradstreet, 282 DuPont analysis, 313–318 Dynegy Inc., 650 E earnings accounting choices/estimates and, 639–648 announcements of, 8–11 price to earnings ratio, 319–320 quality of, 608, 609, 618 retained, 193 sustainability of, 610–612 earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted, 634 earnings before interest and taxes (EBIT), 18, 99 earnings management, 618 earnings per share (EPS) basic, 132–134, 319, 320 changes in, 140–141 defined, 18 diluted, 134–140 with antidilutive securities, 139–140 defined, 132 if-converted method, 134–136 for stock options, 139 treasury stock method, 137–139 in valuation ratios, 319–321 EBITDA per share, 319, 320 on income statements, 95n.5, 131–141 interpretation of, 320–321 and simple vs complex capital structure, 132 earnings reports, 659 earnings smoothing, 612 earnings statements, 96 EBIT see earnings before interest and taxes EBITDA see earnings before interest, taxes, depreciation, and amortization EBITDA interest coverage, 325 EBITDA per share, 319, 320 EBIT interest coverage, 325 economic goodwill, 184 Ecuador, 58 EDGAR see Electronic Data Gathering, Analysis, and Retrieval System effective interest rate, 547, 551 Egypt, 59 Egyptian Financial Supervisory Authority, 51n.10 Electronic Data Gathering, Analysis, and Retrieval System (EDGAR), 52 El Salvador, 58 Employee Benefits (IAS 19), 584n.17 employees cash to, 237–238 net income/revenue per employee, 322 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), 679 ending inventory and inflation, 355–356 and inventory valuation method, 346, 350–352 in periodic vs perpetual inventory systems, 352–354 enforcement, by market regulators, 628 Enron, 619, 626 EPS see earnings per share Equatorial Guinea, 59 equity on balance sheets, 162, 192–196 components of, 192–195 statement of changes in equity, 195–196 Index I-7 Conceptual Framework on, 64 debt-to-equity ratio, 304, 305, 587 defined, 162 and financial position, free cash flow to equity, 254–255 owners’, 12, 162 return on equity, 309 and accounting standards, 678–680 decomposition of, 313–318 defined, 308 and ratio analysis, 280 shareholders’, 162, 427 statement of changes in equity, 195–196 Apple Inc., 195–196 and balance sheet, 195–196 defined, 12 for financial statement analysis, 20, 21 tax charged to, 525–527 total debt to total debt plus equity ratio, 326 total liabilities-to-equity ratio, 363 equity analysts, 30 Equity Funding Corp., 619 equity investments analysis, 318–323 actions based on, 33 industry-specific ratios, 321–323 research on ratios in, 323 valuation ratios, 319–321 screening, 694–697 example, 695 ratio-based, 697 Ernst & Young, 608 ESC see European Securities Committee ESMA see European Securities and Market Authority estimates and earnings/balance sheets, 640–641 in financial reporting, 45–46 EU see European Union Europe, 55, 58 see also specific countries and regions European Commission, 48, 55 European Financial Reporting Advisory Group, 55 European Parliament, 55 European Securities and Market Authority (ESMA), 55, 627 European Securities Committee (ESC), 55 European Union (EU), 55, 74 Evian, 329 expected loss impairment method, 187 expenditures, capital, 325, 417, 418 expense recognition on income statements, 16, 96–97, 116–125 and amortisation, 124 applications, 120–124 for doubtful accounts, 120 and financial analysis, 125 general principles, 117–120 and inventory costs, 117–118 for warranties, 120–121 expenses accrued, 176 amortisation, 444 Conceptual Framework on, 65 depreciation, 441–443, 454 income tax, 368 interest, 471n.32, 550–554 other operating, 238 prepaid, 173–174 tax, 368, 509 and warranties, 120–121 Expenses: Compensation–Retirement Benefits (ASC 715), 679 expensing of costs capitalisation of costs vs., 423–428 on financial statements, 423–428 for ongoing purchases, 427 eXtensible Business Reporting Language (XBRL), 282 external sources of information, for financial statement analysis, 29–30 extractive industries, 621–622 extraordinary items, on income statements, 126–127 F face value, 546–549 FactSet, 281 fair value of bonds payable, 554–557 Conceptual Framework on, 66 defined, 162n.1, 169, 417n.2 financial assets at, 187–188 of financial liabilities, 554–555 and long-term asset acquisition, 417 Fair Value Measurement (IFRS 13), 417n.2 Fair Value Measurements and Disclosures (ASC 820), 417n.2 fair value reporting, for bonds payable, 554–557 FASB see Financial Accounting Standards Board Fastow, Andrew, 626 FCA see Financial Conduct Authority FCFE see free cash flow to equity FCFF see free cash flow to the firm Federal Financial Supervisory Authority, 47 FFO interest coverage see funds from operations interest coverage FFO to debt see funds from operations to debt FIFO method see first-in, first-out method finance leases accounting/reporting by lessee, 566–577 accounting/reporting by lessor, 577–583 defined, 468 direct financing leases defined, 484, 578 and financial statements, 480–485, 582–583 initial recognition and measurement of, 578–580 US GAAP on, 577, 578 financial statement impact of, 580–583 operating leases vs for lessees, 471–480, 566–577, 582–583 for lessors, 480–485, 577–583 on long-lived assets, 467–485 on non-current liabilities, 564–583 recognition and measurement of, 567–569, 578–580 sales-type leases defined, 484, 578 financial statement impact of, 485, 580–583 US GAAP on, 577 treating operating leases as, 476–480 Financial Accounting Foundation, 49 Financial Accounting Standards Advisory Council, 49 Financial Accounting Standards Board (FASB), 49–50 and convergence of global reporting standards, 56–57 development of standards, 45, 46 disclosure requirements of, 628 evolving standards, 78 revenue recognition standards, 99–100, 112 as standard-setting body, 47 financial analysis, 269–341 about, 270 for business/geographic segments, 327–329 reporting requirements, 327–328 segment ratios, 328–329 common ratios, 290–318 activity ratios, 292–298 categories, 291 integrated analysis with, 311–318 interpretation and context, 291–292 liquidity ratios, 298–303 profitability ratios, 307–311 solvency ratios, 303–307 computations vs., 272–274 credit analysis, 324–326 credit rating process, 324–326 research on ratios in, 326 disclosure of income tax information, 532–533 equity analysis, 318–323 industry-specific ratios, 321–323 research on ratios in, 323 valuation ratios, 319–321 and expense recognition on income statements, 125 framework for, 271–272 inventory management in, 377–388 model building and forecasting with, 330 objectives of, 271–272 practice problems, 333–338 process, 271–274 solutions to problems, 339–341 strategy and financial performance, 272–274 tools and techniques, 274–290 graphs, 288–290 regression analysis, 290 financial assets, on balance sheets, 186–189 financial condition, statements of, 162 see also balance sheets Financial Conduct Authority (FCA), 627, 628 financial flexibility, 20 Financial Instruments (IFRS 9), 146, 187 financial leverage, 303–304 financial leverage ratio, 304, 305, 587 I-8 Index financial performance evaluating, 673–681 accounting standards and ROE, 678–680 and changes in business strategy, 673–677 and war chests, 677 integrated analysis of, 312–313 projecting, 681–690 consistency of forecasts, 690 example, 687–689 forecasting operating profit, 683–684 issues with, 684–687 with market-based valuation, 682–687 for multiple periods, 687–690 financial position, statements of, 12, 162 see also balance sheets financial ratios financial analysis with, 278–282 and inventory write-downs, 370–375 financial reporting, for business segments, 327–328 Financial Reporting Council, 628 financial reporting quality, 607–670 about, 608–609 assessing, 625–632 conditions conducive to low-quality reports, 626 disciplining mechanism, 626–632 motivations for issuing low-quality reports, 625–626 conservative vs aggressive accounting, 620–625 bias in application of accounting standards, 624–625 in extractive industries, 621–622 detection of issues, 632–660 accounting choices and estimates, 638–655 areas of choice/estimate and analyst concerns, 652–655 presentation choices, 633–638 warning signs, 655–660 disciplining mechanisms, 626–632 auditors, 629–630 market regulatory authorities, 627–629 and motivation for manipulation, 631–632 private contracts, 630 and earnings quality, 609, 618 practice problems, 663–666 solutions to problems, 667–670 spectrum of quality for financial reports, 609–620 and aggressive presentation, 612, 615 and biased accounting choices, 612–618 departures from GAAP, 619–620 “GAAP, decision-useful, but sustainable?” level, 611–612 “GAAP, decision-useful, sustainable, and adequate returns” level, 610–611 presentation of non-GAAP financial measures, 614–618 “Within GAAP, but biased choices” level, 612–618 “Within GAAP, but ‘earnings management’” level, 618 financial reporting standards, 43–89 about, 44 Conceptual Framework for Financial Reporting 2010, 60–72 and barriers to single standards framework, 73–74 constraints on financial reports, 63–64 convergence of US GAAP and, 70–72 and effective standards frameworks, 72–73 elements of financial reports, 64–66 objective of financial reports, 61–62 qualitative characteristics of financial reports, 62–63 requirements for financial statements, 66–70 global, 56–59 of IFRS vs US GAAP, 74–77 monitoring developments in, 77–83 by CFA Institute, 78–79 with company disclosures, 79–83 for new products/types of transactions, 77–78 and objectives of financial reporting, 44–46 practice problems, 85–87 reports based on, 608 solutions to problems, 88–89 standard-setting bodies, 47–55 accounting standards boards, 48–50 for industry-specific regulation, 47–48 regulatory authorities, 50–55 financial reports constraints, 63–64 elements, 64–66 high-quality, 609–612 low-quality conditions conducive to, 626 and earnings quality, 609, 618 motivations for, 625–626 on spectrum of quality, 619–620 manipulation of motivation for, 631–632 prevalence of, 608 objectives, 61–62 qualitative characteristics, 62–63 spectrum of quality, 609–620 and aggressive presentation, 612, 615 and biased accounting choices, 612–620 departures from GAAP, 619–620 “GAAP, decision-useful, but sustainable?” level, 611–612 “GAAP, decision-useful, sustainable, and adequate returns” level, 610–611 presentation of non-GAAP financial measures, 614–618 “Within GAAP, but biased choices” level, 612–618 “Within GAAP, but ‘earnings management’” level, 618 Financial Services Agency, 47, 48, 57 financial statement analysis, 5–41 see also applications of financial statement analysis about, asset revaluations in, 445–446 framework, 30–34 conclusions and recommendations, 33–34 data analysis and interpretation, 33 data collection, 32 data processing, 33 follow-up, 34 purpose and context of analysis, 31–32 information sources, 11–30 auditor’s reports, 27–29 balance sheet, 12–16 cash flow statement, 20, 22–23 financial notes, 24–25 financial statements, 11–30 internal and external sources of information, 29–30 management commentary/MD&A, 26 statement of changes in equity, 20, 21 statement of comprehensive income, 16–20 supplementary information, 11–12 supplementary schedules, 24–25 practice problems, 37–39 scope of, 6–11 and earnings announcements, 8–11 and profit vs cash flow, 7–8 solutions to problems, 40–41 financial statements see also specific statements capitalisation vs expensing of costs on, 423–428 and direct financing leases, 480–485 finance vs operating leases on, 471–484 leases on, 580–583 LIFO liquidation on, 364–366 long-lived assets on, 454–455 notes to financial statements Alcatel-Lucent, 385–386 Caterpillar Inc., 360 disclosures, 70 financial statement analysis, 24–25 LIFO liquidation, 365 PACCAR, 613 Volvo Group, 372–373 relationships of, 287–288 requirements of IFRS framework, 66–70 for disclosures in notes, 70 from IAS No 1, 68–70 required statements, 67 statement features, 67–68 for structure and content, 68–70 and revenue recognition on income statements, 111–112 and sales-type leases, 485 financing activities cash flow from, 221 on cash flow statements, 219–220, 240 defined, 22 financing cash flow, 221 finished goods inventory, 346, 377 finite lives, intangible assets with, 450 Finland, 58 first-in, first-out (FIFO) method analyst adjustments related to, 699–702 Index I-9 and earnings/balance sheets, 639–640 of inventory valuation assigning costs in, 349 conversion from LIFO to FIFO, 358–363 and cost of goods sold, 172 defined, 118–119 inflation and LIFO vs., 354–356 other valuation methods vs., 349–352 in periodic vs perpetual inventory systems, 352 five-way decomposition of ROE, 316–318 fixed asset turnover ratio and average age of depreciable assets, 462–464 calculating, 293 interpreting, 297, 460 fixed charge coverage ratio, 305–306, 587 fixed costs, leverage and, 303–304 fixed production costs, 347n.7 FOB shipping see free on board shipping follow-up, financial statement analysis, 34 Ford Motor Company, 102–103 forecasts consistency of, 690 and financial analysis, 330 of financial performance, 681–690 of operating profit, 683–684 and quality of financial reports, 625 ForgeHouse, Inc., 127 Form (SEC), 54–55 Form (SEC), 54–55 Form (SEC), 54–55 Form 6-K (SEC), 53 Form 8-K (SEC), 54 Form 10-K (SEC), 53, 364–365 Form 10-Q (SEC), 53 Form 11-K (SEC), 55 Form 20-F (SEC), 53 Form 40-F (SEC), 53 Form 144 (SEC), 54 format of balance sheets, 165–167 of cash flow statements, 219–232 cash flows and non-cash activities, 219–221 cash flows from operating activities, 222–232 and IFRS vs US GAAP, 221–222 of income statements, 95–99 Form DEF-14A (SEC), 53 fourth-quarter surprises, 658 Framework for the Preparation and Presentation of Financial Statements (IASB), 45, 116 FRC see UK Financial Reporting Council free cash flow to equity (FCFE), 254–255 free cash flow to the firm (FCFF), 254–255 free on board (FOB) shipping, 638 free operating cash flow to debt, 325 function of expense method, 454–455 funds from operations (FFO) interest coverage, 325 funds from operations (FFO) to debt, 325 G GAAP see generally accepted accounting principles “GAAP, decision-useful, but sustainable?” financial reports, 611–612 “GAAP, decision-useful, sustainable, and adequate returns” financial reports, 610–611 gains on debt forgiveness, 127 extraordinary, 127 on income statement, 97 on marketable securities, 188–189 GDP see gross domestic product General Electric, 82, 659 generally accepted accounting principles (GAAP) see also entries for specific countries and regions, e.g.: US GAAP convergence of IFRS and, 57–59 financial reports with departures from, 619–620 “GAAP, decision-useful, but sustainable?” financial reports, 611–612 “GAAP, decision-useful, sustainable, and adequate returns” financial reports, 610–611 non-GAAP measures in financial reports, 614–618, 633–638 “Within GAAP, but biased choices” financial reports, 612–618 “Within GAAP, but ‘earnings management’” financial reports, 618 geographic segments, financial analysis for, 327–329 Georgia, 58 Germany bank regulation, 47 conservatism in, 624 IFRS adoption, 58 management reporting requirements, 26 Ghana, 59 GICS see S&P/MSCI Global Industrial Classification System GlaxoSmithKline plc, 629 global financial crisis (2008-2009), 56 global financial reporting standards, 56–59 see also International Financial Reporting Standards (IFRS) Goldman Sachs, 555 goodwill accounting, 184 analyst adjustments for, 704–706 on balance sheets, 183–186 from business combinations, 422–423 defined, 420 economic, 184 and financial reporting issues, 648 financial reporting issues with, 654 on income statements, 124 ratio comparisons for, 705–706 valuation of, 181–182 goodwill impairment, 185–186 Google, 54 graphs, for financial analysis, 288–290 gross domestic product (GDP), 682 gross margin, financial reporting quality and, 658 gross profit, 98 and inflation, 355–356 and inventory valuation method, 350–352 and LIFO liquidation, 364, 366–367 in periodic vs perpetual inventory systems, 352–354 gross profit margin, 307, 308 calculating, 356 and conversion from LIFO to FIFO, 362–363 defined, 308 and income statement ratios, 144 on income statements, 98 inventory management with, 376, 377 and inventory write-downs, 375 in ratio analysis, 277 gross reporting of revenue, 109–110 Groupe Danone cash flow statement, 248–249 income statement, 95–98, 131 segment ratio evaluation, 328–329 grouping by function (term), 98 grouping by nature (term), 98 Groupon, 635–638 growth investors, 696 Guatemala, 58 H held-for-sale assets, impairment of, 451 held for trading (term), 187 held-to-maturity (term), 186 HERE, 615, 616 Hewlett-Packard cash flow analysis of comparables, 256–257 cross-sectional common-size analysis, 200, 203–204 evaluation of liquidity measures, 301 high-quality financial reports and earnings quality, 609 on spectrum of quality, 610–612 historical cost, 66 Honduras, 58 Hong Kong SAR, 59 horizontal common-size analysis, 141n.50, 282, 285–287 I IAS see International Accounting Standards IASB see International Accounting Standards Board IBM see International Business Machines identifiable intangible assets, 182–183 if-converted method for diluted earnings per share, 134–136 I-10 Index IFRS see International Financial Reporting Standards IFRS Foundation, 48–49 impairment(s) expected loss method of, 187 financial reporting quality and, 660 of goodwill, 185–186 of intangible assets, 181, 450–451 of long-lived assets, 448–451, 623 of PPE, 180, 449 Impairment of Assets (IAS 36), 448 implicit interest rate, 478–479 InBev USA LLC, 423, 685, 686 incentives, for low-quality financial reports, 625–626 income adjusted CSOI, 635–638 comprehensive defined, 193n.20 IFRS on, 145, 148 on income statements, 145–148 on statement of comprehensive income, 19–20 US GAAP on, 145, 148 Conceptual Framework on, 65 deferred, 176 on income statements, 100 net, 242–245 and asset revaluations, 445–446 coefficient of variation of, 322 defined, 98 and direct method for overall statement of cash flows, 241–242 on income statement, 98 and indirect method for overall statement of cash flows, 242–245 per employee, 322 relationship of cash flow and, 657 operating, 322 other comprehensive accumulated, 193 defined, 145 on income statements, 147–148 on statement of comprehensive income, 19–20 taxable, 508–513 total comprehensive, 145 income statement method of tax recognition, 518n.3 income statement ratios, 143–145 income statements, 93–159 analysis of, 16–19, 141–145 common-size, 141–143, 283–285 income statement ratios, 143–145 and cash flow statements, 232–233 common-size analysis of, 141–143, 283–285 components and format, 95–99 for CRA International Inc., 99 for Groupe Danone, 95–98 for Kraft Foods, 96–97 comprehensive income on, 145–148 consolidated of Alcatel-Lucent, 383–384 of Volvo Group, 371 disclosures about long-lived assets in, 454–455 earnings per share, 95n.5, 131–141 basic, 132–134 changes in, 140–141 diluted, 134–140 and simple vs complex capital structure, 132 expense recognition, 116–125 and amortisation, 124 applications, 120–124 and depreciation/amortisation, 121–124 for doubtful accounts, 120 and financial analysis, 125 general principles, 117–120 for warranties, 120–121 function, 94–95 interest costs on, 428 leases on, 471 LIFO liquidation on, 365 non-operating items, 130–131 non-recurring items, 125–131 and changes in accounting policies, 128–130 discontinued operations, 126 extraordinary items, 126–127 unusual and infrequent items, 127–128 practice problems, 151–155 revenue recognition, 99–116 accounting standards issued May 2014, 112–116 for barter transactions, 109 and financial statements, 111–112 general principles, 100–103 and gross vs net reporting of revenues, 109–110 for installment sales, 108–109 for long-term contracts, 104–107 in special cases, 103–110 solutions to problems, 156–159 vertical common-size, 283–285 income taxes, 507–544 and accounting profit vs taxable income, 508–513 cash for, 239 current and deferred tax, 524–527 disclosure of tax information, 528–533 IFRS vs US GAAP, 508, 533–536 and inventory method changes, 368 practice problems, 538–542 presentation, 528–533 solutions to problems, 543–544 and taxable vs accounting profit, 518–523 tax bases, 513–518 of assets, 513–515 and changes in tax rates, 517–518 of liabilities, 515–517 unused tax losses and credits, 523–524 Income Taxes (ASC 740), 508 Income Taxes (IAS 12), 508, 515, 518n.3, 520, 522, 523 income tax paid, 509 income tax payable, 174, 177, 509 incremental costs, 115 indefinite lives, intangible assets with, 451 India, 59, 627 indirect-format statements, 223–226 indirect method for cash flow from operating activities, 648–649 indirect method for overall statement of cash flows, 242–245 adjustments to net income, 242–245 converting direct method and, 245–246 defined, 23, 222–223 Indonesia, 59 industry-specific ratios, for equity analysis, 321–323 industry-specific regulation, of financial statements, 47–48 inflation, LIFO vs FIFO and, 354–356 information comparative growth, 288 decision-useful, 610–612 for financial statement analysis, 11–30 auditor’s reports, 27–29 balance sheet, 12–16 cash flow statement, 20, 22–23 financial notes, 24–25 internal and external sources of information, 29–30 management commentary/MD&A, 26 statement of changes in equity, 20, 21 statement of comprehensive income, 16–20 supplementary information, 11–12 supplementary schedules, 24–25 income tax, 528–533 from SEC forms, 52–55 supplementary, 11–12 infrequent items, 127–128 initial recognition, taxable and accounting profit at, 522 installment method of revenue recognition, 108–109 installment sales, revenue recognition for, 108–109 Insurance Medical Group, Ltd., 127 insurance recoverables, 623 intangible assets acquisition of, 420–423 on balance sheets, 181–186 from business combinations, 422–423 capitalization of, 647–648, 653 depreciation/amortisation of, 121, 181 identifiable, 182–183 impairment of, 181, 450–451 on income statements, 124 internally-developed, 420–422 long-lived, 416 not from business combinations, 420 and research, 182, 421 Intangible Assets (IAS 38), 444 integrated analysis with ratios, 311–318 DuPont analysis, 313–318 liquidity of company, 311–312 performance of company, 312–313 ROE decomposition, 313–318 interest and amortisation of bonds, 550–554 capitalization of, 419, 428–431, 650–651 cash for, 238–239 Interest (ASC 835), 428n.11 interest coverage ratio, 305, 325, 587 Index I-11 interest expenses, 471n.32, 550–554 interest payments, 550–554 interest rate effective, 547, 551 implicit, 478–479 market, 547 interest received in advance, 516–517, 521, 522 interests (in businesses) as investments, 523 minority/noncontrolling, 17, 193 interim period disclosures, 115n.26 internal control systems, 29 internal development costs, 431–435 internally-developed intangible assets, 420–422 internal sources of information, for financial statement analysis, 29–30 International Accounting Standards (IAS), 66–70 Borrowing Costs (IAS 23), 428n.11 Employee Benefits (IAS 19), 584n.17 Impairment of Assets (IAS 36), 448 Income Taxes (IAS 12), 508, 515, 518n.3, 520, 522, 523 Intangible Assets (IAS 38), 444 Inventories, 369 Leases (IAS 17), 467n.29 Presentation of Financial Statements (IAS 1), 68–70, 94n.1 Statement of Cash Flows (IAS 7), 471n.32 International Accounting Standards Board (IASB), 48–49 disclosure requirements, 628 development of standards, 45, 46, 78 Framework for the Preparation and Presentation of Financial Statements, 45, 116 and GAAP, 70–72 and global reporting standards, 56–57 on income, 100 income statement standards, 94n.1 management reporting framework of, 26 on objective of financial reporting, 44 revenue recognition standards, 99–100, 112 as standard-setting body, 47 International Business Machines (IBM), 633 International Federation of Accountants, 27 International Financial Reporting Standards (IFRS) see also Conceptual Framework for Financial Reporting 2010 adoption of, 58–59 on amortisation, 121, 550, 551 on available-for-sale classification, 146–147 for balance sheets, 14–15 on barter transactions, 109 on bond cost reporting, 555 on borrowed funds, 419 on capitalisation of interest costs, 428n.11, 430 for cash flow statements, 22, 220 on comprehensive income, 145, 148 on debt issuance costs, 557 on decision-useful information, 610n.2 on deferred tax assets/liabilities, 510, 511, 525 on depreciation, 121, 441 on diluted earnings per share, 139 on direct-format statements, 226–228 disclosure requirements, 79–81, 453–454 for EU capital markets, 55 fair value definition, 417n.2 on financial statement ratios, 677–678 and global reporting standards, 56–59 on impairments, 180, 181, 448–451, 454 income definition, 100 for income statements, 94, 98 on income taxes, 508 for indirect-format statements, 223–226 for intangible assets, 420–422 on interest, 238, 419, 471n.32, 554 on inventory valuation, 346–348, 367–369, 377 on investment property, 464 and IOSCO, 51 on leases, 468, 476, 480, 484n.36, 565, 566, 570, 572, 577–578, 582–583 non-IFRS measures in financial reports, 634 on pension plans, 584 on percentage-of-completion method, 104 on residual value, 121 on revaluation, 435, 444, 445, 447–448 on revenue recognition, 101, 112, 113, 622 SEC’s adoption of, 357 on segment reporting, 327 and Swiss financial statements, 50 on taxable profit vs accounting profit, 518–520 on tax issues, 515 and US GAAP conservatism in, 622–624 on financial reporting standards, 74–77 frameworks of, 70–72 on income taxes, 508, 533–536 International Organization of Securities Commissions (IOSCO), 26, 48, 51, 627–628 International Paper Company, 462–464 international standards for auditing (ISAs), 27 introductory paragraph, audit report, 27 Inventories (IAS 2), 369 inventory(-ies), 345–414 adjustments to, 368–375 declines and recoveries of inventory value, 369–370 inventory write-downs and financial ratios, 370–375 with LIFO reserve, 357 analyst adjustments for, 699–702 on balance sheets, 171–173 commodity, 623 cost of, 347–348 days of inventory on hand and activity ratios, 292–294 and conversion from LIFO to FIFO, 362 inventory management with, 376–377 and inventory turnover, 294–295 and inventory write-downs, 374–375 ending, 346, 350–356 and financial reporting issues, 656–657 finished goods, 346, 377 growth in, 656–657 inventory management, 375–388 comparisons of companies, 378–381 in financial analysis, 377–388 inventory ratios, 376–377 in MD&A of annual report, 381–382 presentation and disclosure of inventories, 376 for single company, 383–388 of manufacturing and merchandising companies, 346 practice problems, 391–406 presentation and disclosure of, 376 raw materials, 346, 377 solutions to problems, 407–414 valuation, 118–120, 172, 348–368 changes in, 367–368 comparison of, 354–356 cost of sales, gross profit, and ending inventory, 350–352 first-in, first-out, 118–119, 172, 349–352 last-in, first-out, 119, 172, 349–352, 357–367 LIFO liquidation, 363–367 LIFO reserve, 357–363 periodic vs perpetual inventory systems, 352–354 retail method, 171 specific identification, 118, 349–352 specific identification methods, 172 weighted average cost, 172, 349–352 weighted average cost method, 119 work-in-progress, 346, 377 inventory costing, alternative methods, 118–120, 654 inventory costs, 117–118, 346–348 inventory management, 375–388 comparisons of companies, 378–381 in financial analysis, 377–388 inventory ratios, 376–377 in MD&A of annual report, 381–382 presentation and disclosure of inventories, 376 for single company, 383–388 inventory ratios, 376–377 inventory revenues, 117–118 inventory turnover ratio, 293–295 and activity ratio, 293–294 activity ratio definition, 292 calculating, 356 and conversion from LIFO to FIFO, 362 and DOH, 294–295 inventory management with, 376–377 inventory ratios, 657 and inventory write-downs, 374 I-12 Index inventory value, 369–370 inventory write-downs in financial analysis, 378 and financial ratios, 370–375 US GAAP vs IFRS on, 368–369 investing activities on cash flow statement, 219, 239–240 defined, 20, 22 net cash flow from, 220 investment property, 180–181, 464–467 investments analyst adjustments for, 698 in business subsidiaries, branches, associates, or interests, 523 IOSCO see International Organization of Securities Commissions iPad, 674–676 iPhone, 9, 129–130, 274, 674–676 iPod, 9, 674–676 Ireland, 58 Irving, Bryan, 127 ISAs see international standards for auditing Israel, 59 issuance, bond, 546–550 iTunes, 273–274, 674 Izumiya, Naoki, 677 J Japan benefits of conservatism in, 624 discipline for financial reporting quality in, 627 regulatory body of, 47 use of IFRS vs GAAP in, 59 Japanese Business Accounting Council, 57 Japanese GAAP, 57, 59 Jobs, Steve, Johnson & Johnson, 561–563, 683, 684 K Kazakhstan, 59 Kenya, 59 Khaitan, Aditya, 677 Kidder Peabody, 659 Kingdom of Saudi Arabia Capital Market Authority, 51n.10 Kohlberg Kravis Roberts & Co L.P., 685 Koninklijke KPN N.V., 447–448 Korea, 59 KPMG SA, 630 KPS Capital Partners, L.P., 685 Kraft Foods derecognition of long-lived assets, 453 income statement, 97–98 income statement ratios, 143–145 statement of earnings, 96 Kyrgyz Republic, 59 L last-in, first-out (LIFO) method analyst adjustments related to, 699–702 financial reporting issues with, 654, 657 of inventory valuation, 349–367 assigning costs in, 350 conversion from LIFO to FIFO, 358–363 and cost of goods sold, 172 defined, 119, 350 inflation and FIFO vs., 354–356 and inventory write-downs, 370 LIFO liquidations, 363–367 LIFO reserve, 357–363 other valuation methods vs., 349–352 in periodic vs perpetual inventory systems, 352–354 leases, 564–583 advantages of, 564–565 analyst adjustments for, 707–713 direct financing, 480–485, 577–580, 582–583 finance accounting/reporting by lessee, 566–577 accounting/reporting by lessor, 577–583 defined, 468 direct financing leases, 480–485, 577–580, 582–583 financial statement impact of, 580–583 operating leases vs., 467–485, 565–583 operating vs., 565–583 recognition and measurement of, 567–569, 578–580 sales-type, 577, 578, 580–583 sales-type leases, 484, 485, 577, 578, 580–583 treating operating leases as, 476–480 for long-lived assets, 467–485 finance vs operating leases, 467–485 lease versus buy decision, 467–470 operating accounting/reporting by lessee, 566–567, 570–577 accounting/reporting by lessor, 577, 582–583 analyst adjustments related to, 707–713 and analyst adjustments to debt, 710–712 coverage ratio for analyst adjustment, 712–713 defined, 468 finance vs., 467–485, 565–583 financial statement impact of, 582–583 sales-type, 484, 485, 577, 578, 580–583 synthetic, 467, 565 Leases (ASC 840), 467n.29, 577n.14 Leases (ASC 842), 468 Leases (IAS 17), 467n.29 Leases (IFRS 16), 78, 220, 468, 566 lease versus buy decision, 467–470 Lebanon, 59 Lenovo Group Limited activity ratios, 294–296 liquidity measures, 301 ratio analysis, 275–277 lessees defined, 467, 564 finance vs operating leases for financial statement impact of leases, 471–480 leases on long-lived assets, 471–480 leases on non-current liabilities, 566–577 treating operating leases as finance leases, 476–480 lessors defined, 467, 564 finance vs operating leases for direct financing leases, 480–485 financial statement impact of leases, 480–485 leases on long-term assets, 480–485 leases on non-current liabilities, 577–583 sales-type leases, 485 leverage, 303–304, 445 leverage ratios, 305, 587–589 Levitt, Arthur, 624–625 liabilities see also non-current liabilities on balance sheets, 162, 165–166, 174–178, 191 Conceptual Framework on, 64 current of Apple Inc., 175 on balance sheets, 165–166, 174–178 deferred revenue analysis, 176–178 of SAP Group, 175 current tax, 509–510 deferred tax accounting profit vs taxable income for, 510–513 on balance sheets, 191–192 changes in tax rates, 517–518 defined, 509 defined, 162 and financial position, income tax bases of, 515–517 long-term, 191 total liabilities-to-equity ratio, 363 LIFO conformity rule, 357 LIFO liquidations, 363–367 disclosure of, 364–366 example, 366–367 on financial statements, 364–366 and LIFO reserve, 363–364 LIFO method see last-in, first-out method LIFO reserve, 357–363 converting LIFO to FIFO inventory with, 358–363 defined, 357 and LIFO liquidations, 363–364 Lindsay, Don, 10–11 line costs, 648 line graphs, 290 liquid asset requirement, 322 liquidations, LIFO, 363–367 disclosure of, 364–366 example, 366–367 on financial statements, 364–366 and LIFO reserve, 363–364 liquidity on balance sheet, 15, 165–167 defined, 8, 164–165, 196 evaluation of measures, 301 integrated analysis of, 311–312 Index I-13 liquidity ratios, 298–303 bounds and context of, 302–303 calculations, 299 defined, 204, 291, 299 evaluation, 301 interpretation, 300–301 cash conversion cycle, 301 cash ratio, 300 current ratio, 300 defensive internal ratio, 300 quick ratio, 300 Lithuania, 58 litigation losses, 623 LM Ericsson Telephone Company, 588–589 loan covenants, 634 loan loss reserves, allowances for, 653 loans and taxable/deductible temporary differences, 521, 522 and tax bases of liabilities, 516, 517 long-lived assets, 415–506 see also noncurrent assets acquisition of, 417–435 accounting for, 417 capitalisation of costs, 423–435 and financial reporting issues, 648 intangible assets, 420–423 property, plant, and equipment, 417–420 amortisation of, 443–444 defined, 121, 416 depreciation of, 435–443, 643–647, 653 derecognition of, 451–453 disclosures for, 453–466 Daejan Holdings PLC, 465–466 fixed asset turnover and average age of depreciable assets, 462–464 Vodafone Group Plc, 455–460 impairment of, 448–451, 623 investment property as, 464–467 leases on, 467–485 finance vs operating leases, 467–485 lease versus buy decision, 467–470 practice problems, 489–500 presentation of, 453–466 comparing fixed asset turnover and average age of depreciable assets, 462–464 Daejan Holdings PLC, 465–466 Vodafone Group Plc, 455–460 revaluation model for, 444–448 solutions to problems, 501–506 long-term contracts, revenue recognition for, 104–107 long-term debt on cash flow statement, 241 disclosure of, 561–564 and lease disclosure, 572–577 presentation of, 561–564 long-term financial liabilities, 191 look-ahead bias, 696 losses in conservative accounting choices, 620–621 expected, as impairment method, 187 impairment, 449 on income statement, 98 litigation, 623 on marketable securities, 188–189 tax loss carry forward, 509 unused tax, 523–524 Lotte Group, 677 low-quality financial reports conditions conducive to, 626 and earnings quality, 609, 618 motivations for, 625–626 on spectrum of quality, 619–620 M Macedonia, 58 Macintosh® computers, McLeod Russel India Ltd., 677 Malawi, 59 Malaysia, 59 Malaysian GAAP, 59 management commentary, 26, 628 “Management Commentary” (IFRS Practice Statement), 615 management discussion and analysis (MD&A), 12 “Critical Accounting Estimates,” 625 on derecognition, 557 in financial statement analysis, 26 information in, 564 inventory management in, 381–382 LIFO liquidation in, 364 of Microsoft, 431 of PACCAR, 613–614 policy disclosure requirements, 79 as SEC requirement, 557n.5 of Volvo Group, 381–382 managers financial reporting quality and disclosure by, 659 fixation on earnings reports by, 659 merger and acquisition orientation of, 660 motivations for issuing low-quality reports by, 625–626 manipulation, of financial reports, 608, 631–632 manufacturing companies, inventories of, 346 margin stability, 691 marketable securities, 169, 187–189 market-based valuation, 682–687 market-oriented investors, 696 market rate(s) for bonds payable, 554–555 of interest, 547 market value to book value (MV/BV) ratio, 705–706 mark-to-market, 187 Mason, Andrew, 635 matching principle, 117 Mauritius, 59 MD&A see management discussion and analysis merchandising companies, inventories of, 346 merger and acquisition orientation, 660 MetaCarta, 617 Mexico, 58, 678–680 Micron Technology, Inc., 528–533 consolidated balance sheet, 529–530 consolidated statement of operations, 528–529 notes to consolidated financial statement, 530–531 Microsoft, 431 Middle East, 59 see also specific countries minimalist disclosure approach, 659 minority interests, 17, 193 model building, financial analysis for, 330 Moldova, 58 monetary reserve requirement, 322 monitoring, of financial reporting standards, 77–83 by CFA Institute, 78–79 with company disclosures, 79–83 for new products/types of transactions, 77–78 Monte Carlo simulation, for risk assessment, 690 Moody’s Investor Service, 692–693 Morl, Ian, 127 Morocco, 59 Motally, 617 motivation for manipulating financial reports, 631–632 for producing low-quality financial reports, 618, 625–626 Motorola Solutions, 616 Mozambique, 59 MTR Gaming Group, Inc., 429–430 multiple-delivery arrangements, 656 multiple-period financial performance, projecting, 687–690 multi-step format, income statement, 98 MV/BV ratio see market value to book value ratio N Namibia, 59 National Datacomputer Inc., 302–303 nature of expense method, 454–455 NAVTEQ, 617 negative covenants, 559 Nestlé Group, 630, 685–687 net book value, 123 net cash flow, 220, 325 Netherlands, 58 net income and asset revaluations, 445–446 cash flow and, 657 coefficient of variation for, 322 defined, 98 and direct method for overall statement of cash flows, 241–242 and financial reporting issues, 657 on income statement, 98 and indirect method for overall statement of cash flows, 242–245 per employee, 322 net interest margin, 322 net profit margin, 307, 308 calculation of, 278 and conversion from LIFO to FIFO, 363 defined, 308 and income statement ratios, 143 and inventory write-downs, 375 in ratio analysis, 277 I-14 Index net realisable value (NRV), 171–172, 368 net reporting of revenues, 109–110 neutrality, in financial reporting, 621 New Century Financial, 619 new products, financial reporting standards for, 77–78 New Zealand, 59 Nicaragua, 58 Nigeria, 59 Nigerian Federal Executive Council, 59 Nokia Corporation, 588–589, 615–618 Nokia Siemens Networks, 615, 616 non-cash activities, on cash flow statements, 219–221 noncontrolling interest, 17, 193 non-current assets see also long-lived assets on balance sheets, 165, 178–189 Apple Inc., 179 financial assets, 186–189 goodwill, 183–186 intangible assets, 181–186 investment property, 180–181 property, plant, and equipment, 179–180 SAP Group, 178–179 non-current liabilities, 545–604 balance sheets, 190–192 of Apple Inc., 190–191 deferred tax liabilities, 191–192 long-term financial liabilities, 191 of SAP Group, 190 on balance sheets, 166 bonds payable, 546–564 amortisation of bonds, 550–554 debt covenants, 559–561 derecognition of debt, 557–559 disclosure of long-term debt, 561–564 fair value reporting, 554–557 interest expense, 550–554 interest payment, 550–554 issuance of bonds, 546–550 presentation of long-term debt, 561–564 defined, 546 leases, 564–583 advantages of, 564–565 finance vs operating, 565–583 pension plans, 583–586 practice problems, 592–597 solutions to problems, 598–604 solvency of, 586–589 non-operating items financial reporting quality issues with, 658 on income statements, 130–131 non-public companies, related-party transactions with, 655 non-recurring items financial reporting quality issues with, 658 on income statements, 125–131 and changes in accounting policies, 128–130 discontinued operations, 126 extraordinary items, 126–127 unusual and infrequent items, 127–128 non-recurring restructuring events, 624 no par shares, 192 Norse Energy Corp., 651 North America, 58 see also specific countries and regions Norwalk Agreement, 56 Norway, 58 notes payable, 176 notes to financial statements by Alcatel-Lucent, 385–386 by Caterpillar Inc., 360 disclosures in, 70 in financial statement analysis, 24–25 LIFO liquidation in, 365 by PACCAR, 613 by Volvo Group, 372–373 Novarra, 617 Novartis Group, 629–630, 685 Novo Nordisk, 585–586 NRV see net realisable value number of days of payables, 292, 296 O objectives of financial analysis, 271–272 of financial reporting, 44–46 of financial reports, 61–62 Objectives and Principles of Securities Regulation (IOSCO), 51 obligations in contracts, 113 performance, 114 occupancy rate, 323 OCI see other comprehensive income off-balance-sheet financing, 706–713 Office of the Comptroller of the Currency, 47 oil and gas industry, 621–622 one-time sales, 658 ongoing purchases, 427 operating activities on cash flow statement, 219, 235–239 cash for income taxes, 239 cash for interest, 238–239 cash for other operating expenses, 238 cash from customers, 235–236 and cash generation activities, 649–650 cash to employees, 237–238 cash to suppliers, 236–237 direct vs indirect reporting method, 648–649 defined, 20 operating cash flows (cash flows from operating activities), 221–232 and capitalising vs expensing of costs, 427–428 direct-format statement under IFRS, 226–228 direct method for calculating, 648 financing vs., 221 free operating cash flow to debt, 325 indirect-format statement under IFRS, 223–226 indirect method for calculating, 648–649 and leases, 471 under US GAAP, 228–232 operating efficiency ratios, 292 see also activity ratios operating income adjusted consolidated segment, 635–638 coefficient of variation for, 322 operating leases accounting/reporting by lessee, 566–567, 570–577 accounting/reporting by lessor, 577, 582–583 and adjustments to debt, 710–712 analyst adjustments for, 707–713 coverage ratio for, 712–713 defined, 468 finance leases vs for lessees, 471–480, 566–577, 582–583 for lessors, 480–485, 577–583 on long-lived assets, 467–485 on non-current liabilities, 565–583 financial statement impact of, 582–583 treating, as finance leases, 476–480 operating leverage, 303 operating margins, 658 operating profit defined, 18 and depreciation method, 645–646 EBIT vs., 99 forecasts of, 683–684 on income statement, 99 operating profit margin, 307, 308 defined, 308 and depreciation method, 645–646 and income statement ratios, 144 operating ROA, 308 operational efficiency, 691 operations, statement of, 17, 528–529 see also income statements opinion paragraph, audit report, 27 opinions, audit, 27–28 Oppenheimer, Peter, ordinary shares, 132 Organization for the Harmonization of Business Law, 59 Oriental Brewery, 685 other comprehensive income (OCI) accumulated, 193 defined, 145 on income statements, 147–148 on statement of comprehensive income, 19–20 other current assets, on balance sheets, 173–174 other operating expenses, 238 overall statement of cash flows, 241–246 direct method, 241–242 adjustments to net income, 241–242 converting indirect and, 245–246 defined, 23, 222 indirect method, 242–245 adjustments to net income, 242–245 converting direct and, 245–246 defined, 23, 222–223 owners’ equity, 12, 162 see also equity P PACCAR, 612–614 Pakistan, 59 Index I-15 Panama, 58 Paraguay, 58 parent companies, on income statements, 17 Parmalat, 619 par value, 192 payables accounts payable, as current liability, 176 bonds payable, 546–564 and amortisation of bonds, 550–554 debt covenants, 559–561 derecognition of debt, 557–559 disclosure of long-term debt, 561–564 fair value reporting, 554–557 and interest expense, 550–554 and interest payments, 550–554 and issuance of bonds, 546–550 presentation of long-term debt, 561–564 income tax payable, 174, 177, 509 notes payable, 176 number of days of payables, 292, 296 payables turnover, 292, 296 payments, interest, 550–554 P/B ratio see price to book value ratio PCAOB see Public Company Accounting Oversight Board P/CF ratio see price to cash flow ratio peer comparison ratios, 694 pension plans defined-benefit, 583–584 defined-contribution, 583 disclosure of, 585–586 as non-current liabilities, 583–586 pension trust fund, 584 P/E ratio see price to earnings ratio percentage-of-completion method of revenue recognition, 104–106, 114 performance obligation, 114 period costs, 117 periodic inventory systems, 352–354 permanent differences, in taxable and accounting profit, 518–519 perpetual inventory systems, 352–354 Peru, 58 Philippines, 59 P&L statements see profit and loss statements Poland, 58 Polly Peck International (PPI), 619 PowerLinx, Inc., 643 PPE see property, plant, and equipment PPI see Polly Peck International preferred stock, 134–136, 192–193 premiums, bond, 553–554 prepaid expenses, 173–174 presentation aggressive, 612, 615 of deferred tax, 535–536 and detection of financial reporting issues, 633–638 of income tax information, 528–533 of inventory information, 376 of long-lived assets, 453–466 Daejan Holdings PLC, 465–466 fixed asset turnover and average age of depreciable assets, 462–464 Vodafone Group Plc, 455–460 of long-term debt, 561–564 of non-GAAP financial measures, 614–618 Presentation of Financial Statements (IAS 1), 68–70, 94n.1 present value, 66 pretax margin, 144, 307, 308 price, transaction, 113, 115 price to book value (P/B) ratio, 319, 320 price to cash flow (P/CF) ratio, 319, 320 price to earnings (P/E) ratio, 319–320 price to sales (P/S) ratio, 319, 320 PricewaterhouseCoopers, 28, 629 private contracts, 630 production costs, 347n.7 productive capacity, 461 products, new, 77–78 profit accounting defined, 508 taxable income vs., 508–513 taxable profit vs., 518–523 cash flow vs., 7–8 gross, 98 and inflation, 355–356 and inventory valuation method, 350–352 and LIFO liquidation, 364, 366–367 in periodic vs perpetual inventory systems, 352–354 operating defined, 18 and depreciation method, 645–646 EBIT vs., 99 forecasts of, 683–684 on income statement, 99 taxable, 518–523 profitability and capitalising vs expensing of costs, 426, 428 cost flow assumptions and, 639–640 profitability ratios, 307–311 calculation, 307–308 defined, 291 evaluation, 309–311 and income statement ratios, 145 interpretation, 308–311 profit and loss (P&L) statements, 17 see also income statements profit margin gross, 307, 308 calculating, 356 and conversion from LIFO to FIFO, 362–363 defined, 308 and income statement ratios, 144 on income statements, 98 inventory management with, 376, 377 and inventory write-downs, 375 in ratio analysis, 277 and income statement ratios, 143 net, 307, 308 calculation of, 278 and conversion from LIFO to FIFO, 363 defined, 308 and income statement ratios, 143 and inventory write-downs, 375 in ratio analysis, 277 operating, 307, 308 defined, 308 and depreciation method, 645–646 and income statement ratios, 144 pretax, 144, 307, 308 pro forma reporting, 633 property, plant, and equipment (PPE), 416 see also long-lived assets acquisition of, 417–420 analyst adjustments for, 703–704 on balance sheets, 179–180 on cash flow statements, 239–240 depreciation of, 703–704 impairment of, 448–450 investment property, 180–181 sale of, 240 prorated revenue recognition, 104, 105 proxy statements, 53 P/S ratio see price to sales ratio Public Company Accounting Oversight Board (PCAOB), 27, 52 Q Qatar, 59 qualified audit opinion, 28 quality of earnings, 608, 609, 618 of financial reporting (see financial reporting quality) of reported results, 608 quick ratio, 299, 300 R ratio analysis, 275–288 for Acer Inc., 275–277 classes of ratios, 278–279 common-size, 282–288 of balance sheet, 282–283, 285–287 of income statement, 283–285 vertical, 141n.50, 197, 282–285 cross-sectional, 284–285, 292 for equity investments, 697 for goodwill, 705–706 interpreting financial ratios, 279 for Lenovo Group Limited, 275–277 and relationships of financial statements, 287–288 and sources of ratios, 281–282 for Toshiba Corporation, 275–277 trend, 285–287 value, purpose, and limitations, 280–281 raw materials inventory, 346, 377 RCF see retained cash flow realizable value, 66 rebate programs, 656 receivables dividends, 514, 521 trade, 169–171 receivables turnover, 292, 295–296 recognition see also revenue recognition Conceptual Framework on, 65 and derecognition, 451–453, 557–559 expense, 16, 96–97, 116–125 of finance leases, 567–569, 578–580 of financial report elements, 65 tax, 518n.3 taxable and accounting profit at, 522 I-16 Index recommendations, from financial statement analysis, 33–34 recoverable amount, 449, 623 registration requirements, of market regulators, 628 regression analysis, 290 Regulation FD (SEC), 54n.14 regulatory authorities, 50–55 see also US Securities and Exchange Commission (SEC) for capital markets in Europe, 55 discipline for financial reporting quality from, 627–629 International Organization of Securities Commissions, 51 S-1 registration statements for, 54 related-party transactions, 655, 658 remaining useful life, 461–464 remeasurements, pension plan, 584 rent received in advance and taxable/deductible temporary differences, 521, 522 and tax bases of liabilities, 516, 517 research and development, 182, 184, 421 research costs, 514, 515, 521, 623 reserve, LIFO, 357–363 converting LIFO to FIFO inventory with, 358–363 defined, 357 and LIFO liquidations, 363–364 residual value, 121–124 responsibility statements, 628 restructuring events, 624, 660 results, quality of, 608 retail method for inventory valuation, 171 retained cash flow (RCF), 691 retained earnings, 193 retention rate, 319, 321 retrospective application, of accounting policies, 128 return on assets (ROA), 280, 308–309 and conversion from LIFO to FIFO, 363 operating, 308 segment, 328–329 return on capital, 308, 309, 325 return on common equity, 308 return on equity (ROE), 309 and accounting standards, 678–680 decomposition of, 313–318 defined, 308 and ratio analysis, 280 return on investment, 308 return on sales see net profit margin return on total capital, 308, 309 revaluation model for long-lived assets, 435, 444–448 revenue(s) and accounts receivable, 656 coefficient of variation for, 322 and credit sales, 640–641 deferred/unearned analysis of, 176–178 as current liability, 176 on income statements, 100 gross vs net reporting of, 109–110 on income statements, 16, 95 inventory, 117–118 outsized growth of, 656 Revenue from Contracts with Customers (ASC 606), 112n.25, 114 Revenue from Contracts with Customers (ASU 2014-09), 114 Revenue from Contracts with Customers (IFRS 15), 112n.25, 114 revenue per employee, 322 revenue recognition completed contract method, 104–105, 107 and financial reporting issues, 640– 641, 652–653, 655–656 on income statements, 99–116 accounting standards issued May 2014, 112–116 for barter transactions, 109 and financial statements, 111–112 general principles, 100–103 and gross vs net reporting of revenues, 109–110 for installment sales, 108–109 for long-term contracts, 104–107 in special cases, 103–110 installment method, 108–109 in oil and gas industry, 622 percentage-of-completion method, 104–106 prorated, 104, 105 reversal, impairment, 451 reviews, by market regulators, 628 rights, in contracts, 113 risk credit, 324, 691–694 Monte Carlo simulation for assessing, 690 Risk Management Association, 282 ROA see return on assets “A Roadmap for Convergence between IFRSs and US GAAP” (IASB/ FASB), 56 Roche Group, 128 ROE see return on equity Royal Dutch Shell PLC, 317–318, 572–577 Royal Numico N V., 328 Rule 144 (SEC), 54 S S-1 registration statements, 54 Safeway, Inc., 185–186 sale(s) available-for-sale securities, 146, 187–189 cost of adjusting, with LIFO reserve, 357–358 and inflation, 355–356 and inventory valuation method, 346, 350–352 in perpetual vs periodic inventory systems, 352–354 credit, 640–641 days of sales outstanding, 292, 295–296, 656 and finished goods inventory, 377–378 on income statements, 95n.4 installment, 108–109 of long-lived assets cash from, 240 and derecognition of assets, 451–452 impairment of assets held for sale, 451 one-time, 658 price to sales ratio, 319, 320 return on (see net profit margin) sales per square meter (sales per square foot) ratio, 322 sales-type leases defined, 484, 578 financial statement impact of, 485, 580–583 US GAAP on, 577 salvage value, 122 same store sales ratio, 321–322 SAP Group accounts receivable, 169, 170 balance sheet components, 163–164 common-size analysis, 199 current assets, 167–168 current liabilities, 175 deferred revenue, 176–178 deferred tax assets, 174 deferred tax liabilities, 192 equity, 193–194 financial assets, 189 goodwill, 186 inventories, 171 marketable securities, 169 non-current assets, 178–179 non-current liabilities, 190 Sarbanes-Oxley Act (2002) auditing standards, 27 internal control systems requirements, 29 and SEC authority, 52 Saudi Arabia, 59 Saudi Arabian Monetary Agency, 59 scale, as credit analysis factor, 691 Scania AB, 18 scenario analysis, 330 scope paragraph, of audit report, 27 screening, of equity investments, 694–697 Sears, 633 SEC see US Securities and Exchange Commission securities antidilutive, 139–140 available-for-sale, 146, 187–189 dealing, 219 marketable, 169, 187–189 trading, 146, 219 Securities Act (1933), 52 Securities and Exchange Board of India, 51n.10 Securities and Exchange Commission (Brazil), 47 Securities Exchange Act (1934), 52 Securities Offerings Registration Statement, 52 segment debt ratio, 328 segment margin, 328–329 segment ratios, 328–329 segment ROA, 328–329 segment turnover, 328–329 Self-Regulatory Organizations (SROs), 51 sensitivity analysis, 330 Index I-17 Serbia, 58 settlement value, 66 SFAS see Statement of Financial Accounting Standards shareholders’ equity, 162, 427 see also equity shares see also earnings per share (EPS) cash flow per share, 319 common, 132, 192, 241 diluted, 18 dividends per share, 319 no par, 192 ordinary, 132 treasury, 193 shipping, financial reporting quality and, 638 simple capital structures, 132 simulations, 330, 690 Singapore, 59, 628 single-step format, for income statements, 98 Small, Medium, and Micro Enterprises (SMME), 522 software development costs, 422, 431–434 solvency defined, 8, 196, 303, 586 of non-current liabilities, 586–589 solvency ratios, 303–307 calculation, 304–305 defined, 204, 291, 304–305, 587 evaluation, 306–307, 588–589 interpretation, 305–307 leverage/coverage ratios, 587–589 Sony Corporation, 555–557, 659 South Africa, 59, 95n.4 South America, 58, 627–628 see also specific countries and regions S&P 500, common-size analysis of, 142–143, 201–202 specific identification method of inventory valuation, 118, 172, 349–352 spin-offs, 452–453 S&P/MSCI Global Industrial Classification System (GICS), 142–143, 200 SROs see Self-Regulatory Organizations stacked column graphs, 289 standard costs, 171 Standard & Poor’s Corporation coverage ratios for capitalized interest, 430 credit rating process, 325 Standards Advice Review Group, 55 Standards and Financial Marketing Integrity Division, 78 Standards of Practice Handbook (CFA Institute), 34 “Statement in Support of Convergence and Global Accounting Standards” (SEC), 57 statement of cash flows see cash flow statements Statement of Cash Flows (ASC 230), 471n.32 Statement of Cash Flows (IAS 7), 471n.32, 651 statement of changes in equity of Apple Inc., 195–196 and balance sheet, 195–196 defined, 12 in financial statement analysis, 20, 21 statement of comprehensive income, 12, 16–20 Statement of Financial Accounting Standards (SFAS) Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed (SFAS 86), 431 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), 679 statement of operations, 17, 528–529 see also income statement statements of financial condition, 162 see also balance sheets statements of financial position, 12, 162 see also balance sheets stock see also equity investments common, 132, 192, 241 preferred, 134–136, 192–193 treasury stock method for diluted EPS, 137–139 stock options, diluted earnings per share for, 139 Straight from the Gut (Welsh), 659 straight-line depreciation method and balance sheet, 644–647 bond premium/discount amortisation, 551 calculation, 436 defined, 435 depreciation/amortisation, 121–122 double-declining and units-ofproduction methods vs., 436–440 Strum Ruger & Co., Inc Form 10-K, 364–365 LIFO liquidation for, 364–366 subscription accounting, 129–130 subsidiaries, 17, 523 Sunbeam, 288, 619, 626, 658 supplementary information, for financial statement analysis, 11–12 supplementary schedules, 24–25 suppliers, cash to, 236–237 survivorship bias, 696 sustainability, of earnings, 610–612 sustainable growth rate, 319, 321 Swaziland, 59 Swiss Exchange, 50, 58 Swiss GAAP, 50, 58 Switzerland, 50, 58 Syngenta, 75 synthetic leases, 467, 565 T Tanzania, 59 taxable income, 508–513 taxable profit, accounting profit vs., 518–523 taxable temporary differences, in taxable/accounting profit, 519–522 tax asset valuation accounts, 654 tax bases, 513–518 of assets, 513–515 and changes in tax rates, 517–518 defined, 509 of liabilities, 515–517 taxes current, 524–527 deferred, 524–527, 533–536 income, 507–544 and accounting profit vs taxable income, 508–513 cash for, 239 disclosure of tax information, 528–533 IFRS vs US GAAP, 508, 533–536 practice problems, 538–542 presentation, 528–533 solutions to problems, 543–544 and taxable vs accounting profit, 518–523 tax bases for, 513–518 unused tax losses and credits, 523–524 and inventory method changes, 368 in lease versus buy decision, 467 and LIFO method, 357 reporting of depreciation methods, 441 tax expense, 368, 509 tax loss carry forward, 509 tax rates, changes in, 517–518 tax recognition, 518n.3 TD Ameritrade Holding Corporation, 705–706 Tech Data Corporation, 228–230 Teck Resources Ltd., 10–11 Telefónica Group, 226–228 Teléfonos de México, S.A.B DE C.V., 678–680 Tele Norte Leste Participaỗừes S.A., 678680 temporary differences, in accounting/ taxable profit, 508, 519–522 deductible differences, 519–522 examples, 520–522 at initial recognition, 522 taxable differences, 519–522 10-K, Form see Form 10-K Thailand, 59 Thomson Reuters, 281 Tokyo Agreement, 57 tolerance for leverage, 691 top-down analysis, 694 TORM A/S, 560–561 Toshiba Corporation, 275–277 total asset turnover, 293, 297 total comprehensive income, 145 total debt to total debt plus equity ratio, 326 total invested capital, 681n.4 total liabilities-to-equity ratio, 363 Toyota Motor Corporation, 611–612 trade payables see accounts payable trade receivables, 169–171 trading securities, 146, 219 trailing twelve months (TTM) ratio, 281 transaction price, 113, 115 transactions, new, 77–78 treasury shares, 193 treasury stock method, 137–139 trend analysis, 285–287 I-18 Index Tsingtao Brewery, 677 TTM ratio see trailing twelve months ratio Turkey, 59 turnover asset, 293, 297, 462–464, 656 fixed asset turnover ratio and average age of depreciable assets, 462–464 calculating, 293 interpreting, 297, 460 on income statements, 95n.4 inventory turnover ratio, 294–295 and activity ratio, 293–294 activity ratio definition, 292 calculation, 356 and conversion from LIFO to FIFO, 362 and DOH, 294–295 inventory management with, 376–377 inventory ratios, 657 and inventory write-downs, 374 payables, 292, 296 receivables, 292, 295–296 segment, 328–329 total asset, 297 working capital, 292, 297 Tyco International Ltd., 660 U Uganda, 59 uncollectible accounts, 641–642 unearned revenue analysis of, 176–178 as current liability, 176 on income statements, 100 Unilever Group, 223–226 United Agri-Products (UPI), 641–642 United Kingdom, disclosure requirements, 628 UK Financial Reporting Council (FRC), 26 United States auditing standards, 27 bank regulation, 47 depreciation methods in, 428 LIFO method and taxes, 357 liquidity representations on balance sheets, 15 manipulation of financial reporting, 608 OCI statement format, 19 tax and financial regulations, 467 US GAAP for barter transactions, 109 for bonds, 550, 551, 554, 555 for borrowed funds, 419 for capitalisation of interest costs, 428n.11, 430 for cash flows, 22, 220, 223, 228–232 and completed contract method, 104–105 for comprehensive income, 145, 148 for debt issuance costs, 557 on decision-useful information, 610n.2 for deferred tax assets/liabilities, 510, 511, 525 for depreciation, 441 fair value definition, 417n.2 and FASB, 50 for financial statement ratios, 677–678 and global reporting standards, 57, 70–72, 74–75 for gross vs net reporting, 110 and IFRS conservatism in, 622–624 on financial reporting standards, 74–77 frameworks of, 70–72 on income taxes, 508, 533–536 for impairments, 448–451, 454 income statement standards, 94 income taxes, 508 for intangible assets, 420n.4, 421, 422 for interest, 238, 419, 471n.32, 554 for inventory valuation, 346–350, 368–370, 377 for investment property, 467 for leases, 468, 476, 480, 484, 566, 570, 577, 578, 582–583 for LIFO reserve, 357 for long-lived assets, 454 manipulation of financial reporting under, 608 for pension plans, 584–585 policy disclosure requirements, 79 for revaluation, 435, 444, 447–448 for revenue recognition, 101–102, 112, 113, 622 and ROE comparisons, 678–680 SEC on reconciliations with, 447n.17 for segment reporting, 327 and Syngenta, 75 and taxable profit v accounting profit, 518–520 on tax-related issues, 515, 523 US Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Release, 641–643 adoption of IFRS, 357 and convergence of global reporting standards, 57, 58 on “cookie jar” reserve accounting, 625 discipline for financial reporting by, 627, 628 financial reporting standards of, 51–55 Form 3, 54–55 Form 4, 54–55 Form 5, 54–55 Form 6-K, 53 Form 8-K, 54 Form 10-K, 53, 364–365 Form 10-Q, 53 Form 11-K, 55 Form 20-F, 53 Form 40-F, 53 Form 144, 54 Form DEF-14A, 53 and GAAP, 50, 72, 74–75 and Groupon, 635 and IASB, 48 on management reporting, 26 MD&A requirements, 26, 557n.5 on non-GAAP measures in financial reports, 615, 635 on non-recurring restructuring events, 624 and PACCAR, 612–613 on reconciliations with US GAAP, 447n.17 Regulation FD, 54n.14 as regulatory body, 47 reporting requirements, 629 revenue recognition standards, 101–102 Rule 144, 54 units-of-production depreciation method, 435–440, 644–647 unqualified audit opinion, 27–28 unused tax credits, 523–524 unused tax losses, 523–524 unusual items, on income statements, 127–128 UPI see United Agri-Products UPM-Kymmene Corporation, 462–464 Uruguay, 58 useful life, 121–124 Uzbekistan, 59 V valuation inventory, 348–368 changes in, 367–368 comparison of, 354–356 cost of sales, gross profit, and ending inventory, 350–352 first-in, first-out, 118–119, 172, 349–352 last-in, first-out, 119, 172, 349–352, 357–367 LIFO liquidation, 363–367 LIFO reserve, 357–363 periodic vs perpetual inventory systems, 352–354 retail method, 171 specific identification, 118, 349–352 weighted average cost, 349–352 weighted average cost method, 119 market-based, 682–687 valuation allowance, 509, 525, 642 valuation ratios, 319–321 calculation, 319–320 defined, 291, 319–320 dividend-related quantities, 321 interpretation of EPS, 320–321 value face, 546–549 fair of bonds payable, 554–557 Conceptual Framework on, 66 defined, 162n.1, 169, 417n.2 financial assets at, 187–188 of financial liabilities, 554–555 and long-term asset acquisition, 417 inventory, 369–370 market value to book value ratio, 705–706 net book, 123 net realisable, 171–172, 368 par, 192 present, 66 price to book value ratio, 319, 320 realizable, 66 residual, 121–124 Index I-19 salvage, 122 settlement, 66 value investors, 696 variable consideration, 114–115 variable costs, 303, 347n.7 variable production costs, 347n.7 variation, coefficient of, 322 Venezuela, 58 verification, conservatism and, 621 Verizon Communications Inc., 678–680 vertical common-size balance sheet, 282–283 vertical common-size income statement, 283–285 vertical common-size ratio analysis, 141n.50, 197, 282–285 Vietnam, 59 Vodafone Group Plc, 455–460 Volkswagen Group auditor’s reports, 28–29 balance sheets, 13–15 cash flow statements, 22–23 disclosures, 80–81 financial notes, 25 income statements, 17–18 MD&A, 26 statement of changes in equity, 20, 21 statement of comprehensive income, 19–20 Volvic, 329 Volvo Group consolidated balance sheet, 371–372 consolidated income statement, 371 inventories of Caterpillar Inc and, 378–381 inventory write-downs, 370–375 MD&A, 381–382 notes to consolidated financial statements, 372–373 W Wal-Mart Stores balance sheets, 15–16 cash flows from operating activities, 231–233 war chests, 677 warranties, expense recognition for, 120–121 warrants, bonds with, 563–564 warranty reserves, 655 weighted average cost, 172 weighted average cost method, 119, 349–352 Welsh, Jack, 659 “Within GAAP, but biased choices” financial reports, 612–618 “Within GAAP, but ‘earnings management’” financial reports, 618 working capital, 166, 297, 689n.6 working capital turnover, 292, 297 work-in-progress inventory, 346, 377 WorldCom capitalization policies, 648 financial reporting quality, 619 write-downs, inventory in financial analysis, 378 and financial ratios, 370–375 US GAAP vs IFRS on, 368–369 X XBRL see eXtensible Business Reporting Language Z Zambia, 59 Zimbabwe, 59 Z-score, 326 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 298 30 3 30 7 31 1 31 8 31 9 32 1 32 3 32 4 32 4 32 6 32 7 32 7 32 8 33 0 33 0 33 3 33 9 Study Session Financial Reporting and Analysis (3)    34 3 Reading 27 Inventories   Introduction   Cost of Inventories   Inventory... Evaluation of Inventory Management   Presentation and Disclosure   Inventory Ratios   Financial Analysis Illustrations   34 5 34 6 34 7 34 8 34 9 34 9 34 9 35 0 35 0 35 2 35 4 35 7 35 7 36 3 36 7 36 8 37 5 37 6 37 6 37 7... 35 ,281 35 ,011 Minority interests 2,149 2 ,37 7 37 , 430 37 ,38 8 36 ,9 93 33, 257 Noncurrent liabilities Noncurrent financial liabilities 25 Other noncurrent liabilities 26 3, 028 3, 235 Deferred tax liabilities