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The Analysis and use of financial statements

Author: White, Gerald I. ; Sondhi, Ashwinpaul C. ; Fried, DovPublisher: Wiley, 2003.Edition: 3rd ed.Language: EnglishDescription: 367 p. ; 25 cm. includes CD-ROM / DVDISBN: 047142918XType of document: BookNote: CD available inside back coverBibliography/Index: Includes bibliographical references and index
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Item type Current location Collection Call number Status Notes Date due Barcode Item holds
Book Europe Campus
Main Collection
Print HG60 .W467 2003
(Browse shelf)
001174220
Available CD available inside back cover 001174220
Total holds: 0

CD available inside back cover

Includes bibliographical references and index

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The Analysis and Use of Financial Statements Contents Appendices and Cases are located in the Wiley web site (wiley.com) and on the CD. 1. FRAMEWORK FOR FINANCIAL STATEMENT ANALYSIS 1 Introduction 2 Need for Financial Statement Analysis 2 Focus on Investment Decisions 3 Classes of Users, 4 Financial Information and Capital Markets, 4 The Financial Reporting System 5 General Principles and Measurement Rules, 5 The U.S. Financial Reporting System 6 Securities and Exchange Commission, 6 Financial Accounting Standards Board, 7 International Accounting Standards 11 International Organization of Securities Commissions, 12 Inte r n ational Accounting Standards Board, 12 European Financial Reporting Standards, 13 SEC Reporting Requirements for Foreign Registrants 13 Principal Financial Statements 14 The Balance Sheet, 14 The Income Statement, 15 Statement of Comprehensive Income, 16 Statement of Cash Flows, 17 Statement of Stockholders' Equity, 17 Footnotes, 18 Contingencies, 18 Supplementary Schedules, 20 Other Sources of Financial Information 20 Management Discussion and Analysis, 20 Other Data Sources, 21 Role of the Auditor 22 Reporting on Uncertainties, 23 Other Auditor Services, 25 Changing Auditors, 25 Auditing Outside of the United States, 25 Summary 26 2. ACCOUNTING INCOME AND ASSETS: THE ACCRUAL CONCEPT 28 Introduction 29 Income, Cash Flows, and Assets: Definitions and Relationships 29 The Accrual Concept of Income 31 Income Statement, 34 Accounting Income: Revenue and Expense Recognition, 39 Issues in Revenue and Expense Recognition, 45 Summary of Review Recognition Methods, 52 Nonrecurring Items 52 Types of Nonrecurring Items, 53 IAS Standards for Nonrecurring Items, 56 Analysis of Nonrecurring Items, 56 Quality of Earnings, 61 The Balance Sheet 61 Format and Classification, 61 Measurement of Assets and Liabilities, 63 Uses of the Balance Sheet, 64 Statement of Stockholders' Equity 65 Format, Classification, and Use, 65 Summary 68 3. ANALYSIS OF CASH FLOWS 74 Statement of Cash Flows 75 Direct and Indirect Method Cash Flow Statements, 75 Preparation of a Statement of Cash Flows, 78 Transactional Analysis, 78 Preparation of a Direct Method Statement of Cash Flows, 79 Indirect Method, 82 Reported versus Operating Changes in Assets and Liabilities, 83 Effect of Exchange Rate Changes on Cash, 85 Analysis of Cash Flow Information 87 Free Cash Flows and Valuation, 87 Relationship of Income and Cash Flows, 88 Analysis of Cash Flow Trends, 92 Cash Flow Classification Issues, 94 Cash Flow Statements: An International Perspective 98 Summary 99 4. FOUNDATIONS OF RATIO AND FINANCIAL ANALYSIS 110 Introduction 111 Purpose and Use of Ratio Analysis, 111 Ratio Analysis: Cautionary Notes, 112 VIII CONTENTS Common-Size Statements 114 Discussion of Ratios by Category 119 Activity Analysis, 119 Liquidity Analysis, 124 Long-term Debt and Solvency Analysis, 130 Profitability Analysis, 133 Operating and Financial Leverage, 135 Ratios: An Integrated Analysis 139 Analysis of Firm Performance, 140 Economic Characteristics and Strategies, 145 Classification and Selection of Ratios, 148 Earnings per Share and Other Ratios Used in Valuation 149 Earnings per Share, 149 Cash Flow per Share, 151 EBITDA per Share, 152 Book Value per Share, 153 Price-to-Earnings and Price-to-Book-Value Ratios, 153 Dividend Payout Ratio, 153 Patterns of Ratio Disclosure and Use 153 Perceived Importance and Classification, 153 Disclosure of Ratios and Motivation, 154 Summary 154 5. EMPIRICAL RESEARCH: IMPLICATIONS FOR FINANCIAL STATEMENT ANALYSIS 163 Introduction 164 Classical Approach 165 Market-Based Research 166 Efficient Market Theory, 166 Modern Portfolio Theory, 167 Tests of the EMH versus the Mechanistic Hypothesis, 168 Ball and Brown Study, 169 Information Content Studies, 169 Relationship Between Earnings and Stock Returns, 170 Positive Accounting Research 173 Disclosure and Regulatory Requirements, 173 Agency Theory, 173 Summary of the Research, 175 Empirical Research: A Mid-Course Evaluation, 176 Direction of Current Research: Back to the Future? 181 Ball and Brown Revisited, 181 Contextual Approaches and Fundamental Analysis, 183 Coming Full Circle: From Edwards and Bell to Ohlson, 184 Implications of Empirical Research for Financial Statement Analysis 185 6. ANALYSIS OF INVENTORIES 192 Introduction 193 Inventory and Cost of Goods Sold: Basic Relationships 193 Scenario 1: Stable Prices, 194 Scenario 2: Rising Prices, 194 Comparison of Information Provided by Alternative Methods 195 Balance Sheet Information: Inventory Account, 195 Income Statement Information: Cost of Goods Sold, 196 LIFO Versus FIFO: Income, Cash Flow, and Working Capital Effects 198 Adjustment from LIFO to FIFO 200 Adjustment of Inventory Balances, 200 Adjustment of Cost of Goods Sold, 201 Adjustment of Income to Current Cost Income 202 Financial Ratios: LIFO Versus FIFO 206 Profitability: Gross Profit Margin, 207 Liquidity: Working Capital, 208 Activity: Inventory Turnover, 209 Solvency: Debt-to-Equity Ratio, 211 Declines in LIFO Reserve 211 LIFO Liquidations, 212 Declining Prices, 214 Initial Adoption of LIFO and Changes to and from LIFO 215 Initial Adoption of LIFO, 215 Change from LIFO Method, 216 LIFO: A Historical and Empirical Perspective 217 Overview of FIFO/LIFO Choice, 217 Summary of FIFO/LIFO Choice, 217 International Accounting and Reporting Practices 219 IASB Standard 2, 220 Summary and Concluding Comments 220 7. ANALYSIS OF LONG-LIVED ASSETS: PART I--THE CAPITALIZATION DECISION 227 Introduction 228 Acquiring the Asset: The Capitalization Decision 228 Capitalization Versus Expensing: Conceptual Issues 229 Financial Statement Effects of Capitalization, 229 Capitalization Versus Expensing: General Issues 233 Capitalization of Interest Costs, 233 Intangible Assets, 235 Asset Revaluation, 240 Capitalization Versus Expensing: Industry Issues 241 Regulated Utilities, 241 Computer Software Development Costs, 242 Accounting for Oil and Gas Exploration, 244 CONTENTS ix Liability or Equity?, 304 Analysis of Deferred Tax Assets and the Valuation Allowance, 306 Effective Tax Rates, 307 Accounting for Taxes: Specialized Issues 308 Temporary versus Permanent Differences, 308 Indefinite Reversals, 308 Accounting for Acquisitions, 309 Analysis of Income Tax Disclosures: Pfizer 309 Analysis of the Effective Tax Rate, 310 Analysis of Deferred Income Tax Expense, 311 Using Deferred Taxes to Estimate Taxable Income, 312 Analysis of Deferred Tax Assets and Liabilities, 313 Other Issues in Income Tax Analysis, 314 Financial Reporting Outside the United States 314 IASB Standards, 314 Other National Standards, 315 Summary 316 10. ANALYSIS OF FINANCING LIABILITIES 322 Introduction 323 Balance Sheet Debt 323 Current Liabilities, 323 Long-Term Debt, 325 Debt with Equity Features, 337 Effects of Changes in Interest Rates, 342 Debt of Firms in Distress, 347 Retirement of Debt Prior to Maturity, 348 Bond Covenants 350 Nature of Covenants, 351 Summary 354 11. LEASES AND OFF-BALANCE-SHEET DEBT 363 Introduction 364 Leases 364 Incentives for Leasing, 365 Lease Classification: Lessees, 365 Financial Reporting by Lessees: Capital versus Operating Leases, 368 Analysis of Lease Disclosures, 371 Other Lease-Related Issues, 375 Off-Balance-Sheet Financing Activities 376 Take-or-Pay and Throughput Arrangements, 376 Sale of Receivables, 378 Other Securitizations, 381 Joint Ventures, Finance Subsidiaries, and Investment in Affiliates, 382 Analytical Adjustments for Capitalization and Expensing 246 Need for Analytical Adjustments, 246 Valuation Implications, 248 Other Economic Consequences, 248 Additional Analysis of Fixed Asset Data, 250 Summary 252 8. ANALYSIS OF LONG-LIVED ASSETS: PART II--ANALYSIS OF DEPRECIATION AND IMPAIRMENT 257 Introduction 258 The Depreciation Concept 258 Depreciation Methods, 259 Depletion, 264 Amortization, 264 Depreciation Method Disclosures, 265 Impact of Depreciation Methods on Financial Statements, 265 Accelerated Depreciation and Taxes, 266 Impact of Inflation on Depreciation, 266 Changes in Depreciation Method, 268 Analysis of Fixed Asset Disclosures 272 Estimating Relative Age and Useful Lives, 273 Estimating the Age of Assets, 273 Impairment of Long-Lived Assets 275 Financial Reporting of Impaired Assets, 275 Impair ment of Asset s Held f or Sale, 275 Impairment of Assets Remaining in Use, 276 Financial Statement Impact of Impairments, 277 Effect of SFAS 121 on Analysis of Impairment, 277 Empirical Findings, 278 Liabilities for Asset Retirement Obligations 280 Provisions of SFAS 143, 280 Effects of SFAS 143, 281 Summary 282 9. ANALYSIS OF INCOME TAXES 290 Introduction 291 Basic Income Tax Accounting Issues 291 The Liability Method: SFAS 109 and IAS 12 291 Deferred Tax Liabilities, 299 Treatment of Operating Losses, 299 Deferred Tax Assets and the Valuation Allowance, 299 Financial Statement Presentation and Disclosure Requirements, 300 Deferred Taxes: Analytical Issues 301 Factors Influencing the Level and Trend of Deferred Taxes, 301 X CONTENTS Analysis of OBS Activities: Texaco 383 Adjustments to 1999 Debt, 383 Financial Reporting by Lessors 386 Lease Classification: Lessors, 387 Sales-Type Leases, 387 Direct Financing Leases, 390 IAS Standards for Lessors, 391 Summary 393 11. PENSIONS AND OTHER EMPLOYEE BENEFITS 400 Introduction 401 Pension Plans 401 Defined Contribution Plans, 404 Defined Benefit Plans, 404 Defined Benefit Pension Plans 405 Estimating Benefit Obligations, 405 Factors Affecting Benefit Obligations, 407 Factors Affecting Plan Assets, 410 Funded Status of Pension Plan, 411 Financial Reporting for Pensions: SFAS 87 and SFAS 132 412 Pension Cost: Components and Measurement, 413 Balance Sheet Carrying Amounts and Reconciliation to Funded Status, 415 Analysis of Pension Plan Disclosures 418 Importance of Assumptions, 418 Analysis of Pension Plan: Status, Costs, and Cash Flows, 421 Analysis of Texaco Pension Plan Disclosures, 425 Other Pension Fund Issues 429 Acquisitions and Divestitures, 429 Curtailments and Settlements, 429 Cash Balance Plans, 430 IASB and Non-U.S. Reporting Requirements 431 Other Postemployment Benefits 432 Estimating Health Care Benefits, 433 Computing Postretirement Benefit Cost, 433 Disclosure of Plan Status, 434 Importance of Assumptions, 434 Analysis of Westvaco's Postretirement Health Care Costs, 437 Using SFAS 106 and SFAS 132 Disclosures, 437 Postretirement Benefits Outside the United States, 438 Preretirement Benefits 438 Stock Compensation Plans 438 Using SFAS 123 Disclosures, 441 Effect on the Statement of Cash Flows, 441 Stock Repurchase Programs and Sales of Put Warrants, 442 Summary 442 13. ANALYSIS OF INTERCORPORATE INVESTMENTS 454 Introduction 455 Investments in Securities 456 Cost Method, 456 Market Method, 457 Lower of Cost or Market Method, 457 U.S. Accounting Standards for Investments in Securities, 457 Analysis of Marketable Securities 461 Separation of Operating from Investment Results, 461 Effects of Classification of Marketable Securities Under SFAS 115, 462 Analysis of Investment Performance, 462 Summary of Analytical Procedures, 466 Equity Method of Accounting 466 Conditions for Use, 466 Illustration of the Equity Method, 467 Comparison of the Equity Method and SFAS 115, 468 Equity Method of Accounting and Analysis, 469 Consolidation 471 Conditions for Use, 473 Illustration of Consolidation, 473 Comparison of Consolidation with the Equity Method 473 Consolidation versus the Equity Method: Analytical Considerations, 475 Proportionate Consolidation, 478 Significance of Consolidation: Summary, 481 Analysis of Minority Interest 482 Consolidation Practices Outside the United States 483 Analysis of Segment Data 484 Disclosure Requirements of SFAS 131 and IAS 14, 484 Illustration of Industry Segments: Lucent and Roche, 486 Illustration of Geographical Segments: Honda, 488 Management Discussion and Analysis, 489 Uses and Limitations of Segment Data, 490 Using Segment Data to Estimate Consolidàted Earnings and Risk, 490 Summary 492 14. ANALYSIS OF BUSINESS COMBINATIONS 503 Introduction 504 Accounting for Acquisitions 504 Conditions Necessary for Use of the Pooling of Interests Method, 505 Illustration of the Purchase and Pooling Methods 506 The Purchase Method, 506 The Pooling of Interests Method, 509 CONTENTS Effects of Accounting Methods 509 Comparison of Balance Sheets, 509 Comparison of Income Statements, 510 Ratio Effects, 514 Cash Flow Statement Effects, 515 Complicating Factors in Purchase Method Acquisitions 520 Contingent Payments, 520 Allocation of Purchase Price, 520 Restructuring Provisions, 521 Income Tax Effects of Business Combinations 521 International Differences in Accounting for Business Combinations 524 Differences in Historical Treatment of Goodwill, 524 Analysis of Goodwill 525 Goodwill Amortization, 526 Goodwill Impairment, 5 2 6 Goodwill Impairment Under SFAS 142, 527 Choosing the Acquisition Method 528 Income Maximization as Motivation for the Pooling/Purchase Choice, 529 Market Reaction and the Pooling/Purchase Choice, 529 Interpreting the Research Results, 530 Push-Down Accounting 532 Example: Genentech, 532 Impact on the Balance Sheet, 533 Impact on the Income Statement, 534 Effect on Cash Flows, 535 Effect on Financial Ratios, 535 Push-Down Summed Up, 535 Spinoffs 535 Analysis of Spinoffs, 536 Example: Lucent, 536 Reasons for Investment in Spinoffs, 537 Summary 538 Illustration of Translation and Remeasurement 555 Translation: The All-Current Method, 556 Cumulative Translation Adjustment, 559 Remeasurement: The Temporal Method, 561 Comparison of Translation and Remeasurement 562 Income Statement Effects, 562 Balance Sheet Effects, 563 Impact on Financial Ratios, 564 Impact on Reported Cash Flows, 566 Analysis of Foreign Currency Disclosures 568 Exchange Rate Changes: Exposure and Effects, 568 Hyperinflationary Economies 573 Alternative Accounting Methods for Hyperinflationary Subsidiaries, 574 Effects of Debt Denominated in Hyperinflationary Currencies, 574 Changes in Functional Currency 574 Analytical Difficulties Related to Foreign Operations 575 Relationships Among Interest Rates, Inflation, and Exchange Rates, 575 Consistency in Reporting, 576 Economic Interpretation of Results, 577 Impact of SFAS 8 and SFAS 52 on Management and Investor Behavior, 579 Financial Reporting Outside of the United States 580 International Accounting Standards, 580 Summary 580 16. DERIVATIVES AND HEDGING ACTIVITIES 589 Introduction 590 Defining Risk 590 Foreign Currency Risk, 592 Interest Rate Risk, 592 Commodity Risk, 592 Risk of Changes in Market Value, 593 Event Risk, 593 Hedging Techniques 593 Forward Contracts, 593 Options, 595 Economic Hedges, 595 Accounting Standards for Derivative Instruments and Hedging Activities 596 Recognition of Derivatives and Measurement of Derivatives and Hedged Items, 597 Hedge Qualification Criteria, 600 Types of Hedges, 600 Embedded Derivatives, 603 15. ANALYSIS OF MULTINATIONAL OPERATIONS 546 Introduction 547 Effects of Exchange Rate Changes 547 Basic Accounting Issues 549 Foreign Currency Translation Under SFAS 52 550 Role of the Functional Currency, 550 Remeasurement: The Temporal Method, 551 Translation: The All-Current Method, 552 Treatment of Exchange Rate Gains and Losses, 552 Remeasurement versus Translation, 553 xii CONTENTS Hedge Effectiveness, 604 Hedge Termination, 605 Effect of Hedging on Impairment, 605 Disclosure Requirements, 606 Related Financial Reporting Requirements, 606 Analysis of Hedging Disclosures 608 Analysis of IBM's Risk Management Disclosures, 608 Analysis of AMR's Risk Management Disclosures, 610 Risk Factors in Derivatives and Hedging Activities, 612 Summary 613 17. ANALYSIS OF FINANCIAL STATEMENTS: A SYNTHESIS 619 Introduction 620 Analysis of and Adjustments to the Balance Sheet 620 Analysis of Book Value, 620 Adjustments to Assets, 621 Adjustments to Liabilities, 622 Balance Sheet Adjustments for Westvaco, 622 Adjustments to Stockholders' Equity, 628 Adjusted Book Value per Common Share, 628 Analysis of Capital Structure, 629 Balance Sheet Adjustments for Non-U.S. Companies, 630 Adjustments to Reported Income 631 Normalization of Reported Income, 631 Analytical Treatment of Nonrecurring Items, 634 Income Normalization for Non-U.S. Firms, 636 Normalization Over the Economic Cycle, 636 Acquisitions Effects, 636 Exchange Rate Effects, 637 Effect of Accounting Changes, 637 Quality of Earnings, 637 Comprehensive Income, 639 Analysis of Cash Flow 640 Analysis of Cash Flow Components, 641 Free Cash Flow, 643 International Cash Flow Comparisons, 643 Adjusted Financial Ratios 644 International Ratio Comparisons, 645 Summary 645 18. ACCOUNTING- AND FINANCE-BASED MEASURES OF RISK 646 Introduction 647 Earnings Variability and Its Components, 647 Credit Risk 648 Bankruptcy Prediction, 648 Research Results, 649 The Prediction of Bond Ratings, 658 Usefulness of Bond Ratings Predictions, 662 The Significance of Ratings: Another Look, 665 Equity Risk: Measurement and Prediction 666 Risk and Return: Theoretical Models, 666 Import ance and Usefulness of Beta (ß), 668 Review of Theoretical and Empirical Findings, 668 The Attack on the CAPM and ß, 673 Summary 677 19. VALUATION AND FORECASTING 682 Introduction 683 VALUATION MODELS 683 Overview of Models 683 Asset-Based Valuation Models 685 Market Price and Book Value: Theoretical Considerations, 685 Book Value: Measurement Issues, 686 Tobin's Q Ratio, 687 Stability and Growth of Book Value, 687 Discounted Cash Flow Valuation Models 689 Dividend-based Models, 689 Earnings-based Models, 690 Free Cash Flow Approach to Valuation, 702 The Abnormal Earnings or EBO Model 705 EBO versus DCF Models, 707 The EBO Model: Concluding Comments, 714 FORECASTING MODELS AND TIME SERIES PROPERTIES OF EARNINGS 714 Forecasting Models, 714 Extrapolative Models, 714 Forecasting with Disaggregated Data, 717 Comparison with Financial Analyst Forecasts 720 Analyst Forecasts; Some Caveats, 721 FINANCIAL STATEMENT FORECASTS 724 Alpha Growth, 725 Summary 731 PRESENT VALUE TABLES 739 BIBLIOGRAPHY 743 INDEX 755

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