Cases in Financial Reporting, 8e
Rocky Mountain, Starbucks, Granite Bay
by Drake, Engel, Hirst, McAnally
ISBN: 978-1-61853-122-3 | Copyright 2015Tabs
This book is a collection of financial accounting cases designed to help you become a user of financial reports. Learning accounting is very much like learning a new language. The best way to learn any language is to immerse oneself in the language and to converse with many people. Conversations speed up language acquisition and teach the nuances of the language. Conversations strengthen language skills and build breadth. This collection of cases creates a set of conversational opportunities. You will learn accounting by reading financial statements and disclosures and by responding to topical questions about those financial reports. By reading and using many different companies’ financial statements, you will speed-up your acquisition of accounting concepts and skills. By observing the nuances of financial reporting, you will quickly learn to speak "accounting," the language of business.
These materials bridge a void in introductory financial statement materials at both the undergraduate and the graduate level. Typically, students are required to read a textbook chapter and do some exercises to ensure concept comprehension. Assigned end of chapter material, however, is often not sufficiently challenging to students with stronger analytical abilities or doesn’t fully capture the look and feel of actual financial statements and their footnote disclosures. Questions often focus on financial statement preparation rather than, as appropriate for many students, financial statement use. At the other extreme, unstructured discussion cases can leave students with a weak grasp of the mechanics and subtleties of financial accounting. These cases are designed to fill the void and help you become a sophisticated user of financial information.
Each case deals with a specific financial accounting topic within the context of one (or more) corporation’s financial statements. Each case contains financial statement information (a balance sheet, income statement, statement of cash flows, and footnotes) and a set of directed questions pertaining to one or two specific financial accounting and reporting issues. You will use the financial statement information to infer and interpret the economic events underlying the numbers. Some cases are accompanied by a corporate press release or a related business press article. In those instances, information from the press release or article is incorporated into the questions in the case. Some cases involve two companies within an industry and the case questions focus on intercompany comparisons of financial information. Some cases include industry-level information that you will use to assess the performance or position of the case company. Numerous cases are based on international companies or ask you to compare U.S. and international accounting standards.
New in the 8th Edition
In keeping with the contemporary flavor of the earlier editions, we have added many new companies to the book (including Starbucks, Deere & Company, Cisco, Wendy's, ZAGG, Golden Enterprises, Home Depot and Lowe's Companies). Roughly half of the cases in this addition are completely new or updated for the latest financial statements from fiscal 2012 and 2013.
We reviewed all of the continuing cases with an eye to improving their clarity. To that end, we reorganized the questions in several cases. We continue to include and emphasize financial ratios and questions about management’s incentives and motives in arriving at accounting choices in many cases. We have included a case (BP p.l.c.) with quarterly financials and disclosures to allow students to see and explore interim financial reports and observe how firms report current issues (like the impact of the Gulf of Mexico oil spill) in a timely manner. We ask students to interpret non-GAAP earnings measures disclosed in Google Inc. fourth quarter earnings press release and consider how the stock market reacts to information in the press release. We include the statements of comprehensive income in all new cases. While we included specific questions that probe the purpose of the comprehensive income disclosures in the Molson Coors Brewing Corporation case, these questions asking students to interpret comprehensive income can be used in any of the case that showcase the statement of comprehensive income.
A growing number of cases include industry-level information and include tables to guide the quantitative analysis especially when the questions require comparisons across years, to industry averages, or among firms. We have expanded the number of cases that directly probe differences between U.S. GAAP and International Financial Reporting Standards (IFRS). We continue to highlight these cases with IFRS in the table of contents. We also continue to include a significant number of non-U.S. companies, denoted in the table of contents.
WHAT MAKES THESE MATERIALS UNIQUE
These materials have a proven track record. The book was originally developed from the course materials used in the M.B.A. program since 1991 at the University of Texas at Austin. Since then, cases have been added, deleted, updated, and expanded. The resulting set of materials have been extremely well-received by students each semester it is taught. The course consistently receives among the highest student evaluations in the M.B.A. and honors undergrad programs at UT and Texas A&M. The authors have successfully used these cases internationally at ITESM in Mexico City, INSEAD in Fontainebleau, France, and IMADEC in Vienna, Austria.
Several unique features distinguish this casebook:
Financial Statement Diversity
This book comprises 27 cases using companies that span a large variety of industries and operating activities. We believe that you will appreciate the exposure to many different companies and quickly learn that, while financial statements do not all look the same, you can understand and use them all.
Current Financial Statements
The cases are very current; primarily dated between 2009 and 2013. This affords you the opportunity to read and use pertinent and timely financial information. Some older cases have been included because they explicate a concept particularly well or because they demonstrate an uncommon trend.
International Financial Statements
Cases cover companies from Japan, Sweden, Austria, the Netherlands, the UK, as well as from the U.S. The U.S. companies range from small-cap firms to major multinationals. The globalization of business necessitates your facility with financial statements other than those prepared in accordance with U.S. GAAP. The international cases will help you understand some of the recent harmonization efforts between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board. A number of cases require you to compare U.S. GAAP financials to International Financial Reporting Standards (IFRS).
Current and Anticipated Accounting Developments
Where relevant, cases and teaching notes address anticipated new accounting standards so that instructors can make students aware of potential accounting or disclosures changes that they may see in financial statements after they finish the course. For example, the Build-A-Bear Workshop case probes the recent proposals by the Financial Accounting Standards Board and the International Accounting Standards Board that would largely eliminate the option to use operating lease accounting and asks students to conduct analyses of the financial statements under the proposed rules. Other cases address the pending new revenue recognition standard from the FASB and IASB (Apple teaching notes) and new impairment tests for goodwill (Cisco Systems).
Cases are prefaced with a set of learning objectives. These become your learning goals as you work through the cases. The focus of each case is made clear through these objectives.
Each case focuses on one or two sets of financial statements. A brief description of the companies in the case is designed to remind you that accounting information is used in specific business contexts. Reported financial accounting numbers are the result of a series of complex, professional estimates and judgments; many of which are influenced by industry practice. Correctly reading and interpreting financial information is predicated on your awareness of a company’s business and industry.
THE ‘CPA’ APPROACH—CONCEPTS, PROCESS, AND ANALYSIS
As in prior editions, the questions are organized in "C.P.A." order.
- The typical case begins with a set of conceptual questions. As we introduce each topic area, we want to ensure that you are familiar with the vocabulary and the broader concepts before moving into the specific application to the case-corporation. These general questions focus each case on its topic area. For example, the State Street Corporation case on marketable securities begins with the conceptual questions, “What are trading securities?” and “What are available-for-sale securities?” Several cases make explicit reference to the Concept Statements of the Financial Accounting Standards Board (available at www.fasb.org) or to International Financial Reporting (available at www.iasb.org).
- Before you become a sophisticated consumer of accounting information you need an understanding of the accounting process and the basics of financial statement preparation. Thus, the second set of questions in each case focuses on the process, the nuts and bolts of the accounting topic at hand. Process questions require you to retrieve specific information from the financial statements and to manipulate the information via calculations, journal entries, and T-accounts. It is at this point that many textbook exercises end. However, we believe that the accounting process is not the end but the means by which you will build a firm understanding of how financial accounting works the way it does.
- With a strong understanding of the concepts and a solid knowledge of the accounting cycle, you are ready for higher level analytical questions. These questions have you synthesize, analyze, interpret information and formulate and defend your opinion on accounting policies, standards, and corporate behavior. Thus, analysis questions sharpen your higher-order thinking skills. In the 7th edition, there is emphasis on the use of the DuPont model of ROE analysis across cases. A number of cases encourage you to delve deeper by accessing original reports or finding current data on the internet.
- By grouping the case questions into the C.P.A. categories, the text has broad audience. Taken alone, the Concept and Process questions are perfectly aimed at undergraduate introductory financial accounting classes. Because many M.B.A. students have taken some accounting and most have had some business experience, they are better prepared to handle the Analysis questions even at the introductory level. Several topics (e.g. pensions, leases, marketable securities, deferred taxes) included in this casebook are not typically covered in an introductory course. These can be used at the intermediate level for undergraduate and M.B.A. classes. For intermediate and financial statement analysis courses, the Concept questions can be used by your instructor to start class discussion. Taking up these questions first ensures that you are on firm ground before you tackle the more challenging Analysis questions. The set of financial statements included with each case affords you and your class instructor the opportunity to explore issues the Analysis questions do not touch upon.
How To Use These Materials
We’ve designed these cases to be used in conjunction with an introductory, intermediate, or financial statement analysis textbook. The order in which material is presented by your instructor does not affect the relevance of the cases. Each case stands alone and while some cases naturally precede others, there is no prescribed order.
As you use these materials, notice two main themes—earnings persistence and the quality of earnings. The first third of the cases in the book relate to the framework of financial reporting. In these cases you are acquiring skills in basic financial statement preparation, and in understanding how financial statements aid in the investment decision process. In achieving the latter, we emphasize how financial statements classify items and how such classifications are important in the prediction of the nature, uncertainty, and timing of future cash flows. Thus, we introduce the notion of earnings persistence and how it affects firm valuation. The remainder of the cases explores the accounting issues for the major financial statement line items. We place particular emphasis on the latitude and judgment managementhas in arriving at the reported numbers and the economic consequences of their choices. This introduces the notion of the quality of earnings. The cases are designed to help you acquire the skills necessary to identify quality of earnings issues and learn how to deal with them (for example, by restating the financials under different assumptions or accounting methods such as U.S. GAAP and IFRS).
|Cases in Financial Reporting (pg. i)|
|Starbucks Corporation—Understanding Financial Statements (pg. 1)|
|Rocky Mountain Chocolate Factory, Inc.—Preparing Financial Statements (pg. 19)|
|Golden Enterprises, Inc.—Statement of Cash Flows (pg. 26)|
|Apple Inc.—Revenue Recognition (pg. 37)|
|Google Inc.—Earnings Announcements and Information Environment (pg. 46)|
|Molson Coors Brewing Company Profitability and Earnings Persistence (pg. 62)|
|Mitsubishi Electric Corporation—Time Value of Money (pg. 76)|
|Weis Markets, Inc.—Measurement Concepts & Valuation (pg. 85)|
|Pearson plc—Accounts Receivable (pg. 102)|
|Callaway Golf Company—Manufacturing Inventory (pg. 111)|
|Deere & Company and CNH Global N.V.—Inventory (pg. 118)|
|Palfinger AG—Property, Plant, & Equipment (pg. 132)|
|Cisco Systems, Inc.—Goodwill and Other Intangible Assets (pg. 139)|
|The Wendy’s Company—Equity Method Investments (pg. 155)|
|Volvo Group—Research & Development Costs (pg. 163)|
|WorldCom, Inc.—Capitalized Costs and Earnings Quality (pg. 175)|
|State Street Corporation—Marketable Securities (pg. 185)|
|BP p.l.c.—Contingencies (pg. 196)|
|Johnson & Johnson—Retirement Obligations (pg. 210)|
|ZAGG Inc.—Deferred Income Taxes (pg. 221)|
|Rite Aid Corporation—Long-Term Debt (pg. 229)|
|Build-A-Bear Workshop, Inc.—Leases (pg. 243)|
|Xilinx, Inc.—Stock-Based Compensation (pg. 251)|
|Merck & Co., Inc. and GlaxoSmithKline plc—Shareholders’ Equity (pg. 268)|
|The Home Depot, Inc. and Lowe’s Companies, Inc.—Financial Statement Analysis (pg. 281)|
|Nordstrom, Inc.—Analyzing Financial Performance Return on Operating Assets Additive DuPont Model (pg. 316)|
|Nordstrom, Inc.—Analyzing Financial Performance Traditional Multiplicative DuPont Model (pg. 324)|
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