Financial Accounting for MBAs, 6e

by Easton, Wild, Halsey, McAnally

ISBN: 978-1-61853-100-1 | Copyright 2015


The combined skills and expertise of Easton, Wild, Halsey, and McAnally create the ideal team to author the first new financial accounting textbook for MBAs in more than a generation. Their collective experience in award-winning teaching, consulting, and research in the area of financial accounting and analysis provides a powerful foundation for this innovative textbook.

Welcome to the Sixth Edition of Financial Accounting for MBAs. Our main goal in writing this book was to satisfy the needs of today’s business manager by providing the most contemporary, relevant, engaging, and user-oriented textbook available. This book is the product of extensive market research including focus groups, market surveys, class tests, manuscript reviews, and interviews with faculty from across the country. We are grateful to students and faculty who used the First through Fifth editions and whose feedback greatly benefited this Sixth edition.

Target Audience

Financial Accounting for MBAs is intended for use in full-time, part-time, executive, and evening MBA programs that include a financial accounting course as part of the curriculum, and one in which managerial decision making and analysis are emphasized. This book easily accommodates mini-courses lasting several days as well as extended courses lasting a full semester.

Innovative Approach

Financial Accounting for MBAs is managerially oriented and focuses on the most salient aspects of accounting. It helps MBA students learn how to read, analyze, and interpret financial accounting data to make informed business decisions. This textbook makes financial accounting engaging, relevant, and contemporary. To that end, it consistently incorporates real company data, both in the body of each module and throughout assignment material.

Flexible Structure

The MBA curricula, instructor preferences, and course lengths vary across colleges. Accordingly and to the extent possible, the 12 modules that make up Financial Accounting for MBAs were designed independently of one another. This modular presentation enables each college and instructor to "customize" the book to best fit the needs of their students. Our introduction and discussion of financial statements constitute Modules 1, 2, and 3. Module 4 presents the analysis of financial statements with an emphasis on analysis of operating profitability. Modules 5 through 10 highlight major financial accounting topics including assets, liabilities, equity, and off-balance-sheet financing. Module 11 explains forecasting financial statements and Module 12 introduces simple valuation models. At the end of each module, we present an ongoing analysis project that can be used as a guide for an independent project. Like the rest of the book, the project is independent across the various modules. At the end of the book, we include several useful resources. Appendix A contains compound interest tables and formulas. Appendix B details the process for preparing and analyzing the statement of cash flow. Appendix C is an illustrative case that applies the techniques described in Modules 1 through 12 to an actual company, Kimberly-Clark. Appendix C can be used, in conjunction with the module-end project questions, by students required to prepare a company analysis. Appendix D is a chart of accounts used in the book.

Transaction Analysis and Statement Preparation

Instructors differ in their coverage of accounting mechanics. Some focus on the effects of transactions on financial statements using the balance sheet equation format. Others include coverage of journal entries and T-accounts. We accommodate both teaching styles in this Sixth Edition. Specifically, Module 2 provides an expanded discussion of the effects of transactions using our innovative financial statement effects template. Emphasis is on the analysis of Apple's summary transactions, which concludes with the preparation of its financial statements. Module 3, which is entirely optional, allows an instructor to drill down and focus on accounting mechanics: journal entries and T-accounts. It illustrates accounting for numerous transactions, including those involving accounting adjustments. It concludes with the preparation of a trial balance and the financial statements. This detailed transaction analysis uses the same financial statement effects template, with journal entries and T-accounts highlighted in the margin. Thus, these two modules accommodate the spectrum of teaching styles—instructors can elect to use either or both modules to suit their preferences, and their students are not deprived of any information as a result of that selection.

Flexibility for Courses of Varying Lengths

Many instructors have approached us to ask about suggested class structures based on courses of varying length. To that end, we provide the following table of possible course designs:

Module 15 Week
Semester Course
10 Week
Quarter Course
6 Week
1 Week
Intensive Course
1 Week 1 Week 1 Week 1 Day 1
2 Week 2 Week 2 Week 2
3 Week 2
Week 2
Week 2
4 Week 3 & 4 Week 3 Week 3 Day 2
5 Week 5 Week 4 Skim Skim
6 Week 6 Week 5 Week 4 Day 3
7 Week 7 Week 6 Week 5 Day 4
8 Week 8 Week 7 Week 6 Day 5
9 Week 9 Optional Optional Optional
10 Week 10 & 11 Week 8 Optional Optional
11 Week 12 & 13 Week 9 Optional Optional
12 Week 13 & 14 Week 10 Optional Optional

Managerial Emphasis

Tomorrow's MBA graduates must be skilled in using financial statements to make business decisions. These skills often require application of ratio analyses, benchmarking, forecasting, valuation, and other aspects of financial statement analysis for decision making. Further, tomorrow's MBA graduates must have the skills to go beyond basic financial statements and to interpret and apply nonfinancial statement disclosures, such as footnotes and supplementary reports. This book, therefore, emphasizes real company data, including detailed footnote and other management disclosures, and shows how to use this information to make managerial inferences and decisions. This approach makes financial accounting interesting and relevant for all MBA students.

As MBA instructors, we recognize that the core MBA financial accounting course is not directed toward accounting majors. Financial Accounting for MBAs embraces this reality. This book highlights financial reporting, analysis, interpretation, and decision making. We incorporate the following financial statement effects template to train MBA students in understanding the economic ramifications of transactions and their impact on all key financial statements. This analytical tool is a great resource for MBA students in learning accounting and applying it to their future courses and careers. Each transaction is identified in the "Transaction" column. Then, the dollar amounts (positive or negative) of the financial statement effects are recorded in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow effects (via the cash column) and the statement of stockholders' equity effects (via the contributed capital and earned capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each transaction (denoted by the arrow line from net income to earned capital). This template is instructive as it reveals the financial impacts of transactions, and it provides insights into the effects of accounting choices.

managerial emphasis

Innovative Pedagogy

Financial Accounting for MBAs includes special features specifically designed for the MBA student.

Focus Companies for Each Module

Each module’s content is explained through the accounting and reporting activities of real companies. Each module incorporates a "focus company" for special emphasis and demonstration. The enhanced instructional value of focus companies comes from the way they engage MBA students in real analysis and interpretation. Focus companies were selected based on the industries that MBA students typically enter upon graduation.

Module 1 Berkshire Hathaway Module 8 IBM
Module 2 Apple Module 9 Google
Module 3 Apple Module 10 Southwest Airlines
Module 4 Walmart Module 11 Procter & Gamble
Module 5 Pfizer Module 12 Nike
Module 6 Cisco Appendix B Starbucks
Module 7 Verizon Appendix C Kimberly-Clark

Real Company Data Throughout

Market research and reviewer feedback tell us that one of instructors' greatest frustrations with other MBA textbooks is their lack of real company data. We have gone to great lengths to incorporate real company data throughout each module to reinforce important concepts and engage MBA students. We engage nonaccounting MBA students specializing in finance, taxation, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 2-34, 4-7, 5-8, 5-15, 6-10, 7-16, 8-5, 9-26, 10-20, and 11-9.

Footnotes and Other Management Disclosures

Analyzed on their own, financial statements reveal only part of a corporation’s economic story. Information essential for a complete analysis of a company’s financial position must be gleaned from the footnotes and other disclosures provided by the company. Consequently, we incorporate footnotes and other disclosures generously throughout the text and assignments. For representative examples, SEE PAGES 7-7, 7-9, 8-12, 8-27, and 10-6.

Industry-Level Data

We repeatedly emphasize that financial analysis cannot be performed in a vacuum—appropriate benchmarks are critical to a complete understanding of a company’s financial performance and position. To this point, we provide graphics that capture industry-level data including many of the ratios we discuss and compute in the modules. For representative examples, SEE PAGES 4-15, 4-19, 6-12, and 7-25.

Decision Making Orientation

One primary goal of a MBA financial accounting course is to teach students the skills needed to apply their accounting knowledge to solving real business problems and making informed business decisions. With that goal in mind, Managerial Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios. For representative examples, SEE PAGES 2-35, 4-14, 7-23, 8-9, 9-16, and 10-7.

Mid-Module and Module-End Reviews

Financial Accounting can be challenging—especially for MBA students lacking business experience or previous exposure to business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include mid-module and module-end reviews that require students to recall and apply the financial accounting techniques and concepts described in each module. For representative examples, SEE PAGES 4-8, 7-11, 8-14, 9-16, and 10-11.

Experiential Learning

Students retain information longer if they can apply the lessons learned from the module content. To meet this need for experiential learning, we conclude each module with a hands-on analysis project. A series of questions guides students’ inquiry and helps students synthesize the material in the module and integrate material across modules. For representative examples, SEE PAGES 1-42, 4-58, and 9-55.

Excellent, Class-Tested Assignment Materials

Excellent assignment material is a must-have component of any successful textbook (and class). We went to great lengths to create the best assignments possible from contemporary financial statements. In keeping with the rest of the book, we used real company data extensively. We also ensured that assignments reflect our belief that MBA students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical bookkeeping tasks. There are six categories of assignments: Discussion Questions, Mini Exercises, Exercises, Problems, IFRS Applications, and Management Applications. For representative examples, SEE PAGES 4-37, 6-45, and 9-41.

Sixth Edition Changes

Based on classroom use and reviewer feedback, a number of substantive changes have been made in the sixth edition to further enhance the MBA students’ experiences:

  • Updated Financial Data: We have updated all Focus Company financial statements and disclosures to reflect each company’s latest available filings. We also explain the SEC’s EDGAR financial statement retrieval software and how to download excel spreadsheets of financial statements from 10-K filings.
  • Updated Assignments: We have updated all assignments using real data to reflect each company's latest available filings and have added many new assignments that also utilize real financial data and footnotes. We have expanded the IFRS Applications to include more companies from Canada and Australia.
  • Ongoing Analysis Project: We have added a project component to each module. See the description above in experiential learning.
  • Analyzing Cash Flows: To help students better understand cash flows, we have included new sections on the analysis of cash flows in Appendix B, including a discussion of the cash flow cycle and interpretation of cash flow patterns.
  • International Financial Reporting Standards (IFRS): We have updated the IFRS insight boxes and IFRS Alert boxes on the similarities and differences between U.S. GAAP and IFRS. Each module concludes with a Global Accounting section and an expanded IFRS assignments section, which brings in reports and disclosures from around the globe.
  • New Focus Companies: We have changed a number of the focus companies: Module 4 now uses Walmart, Module 7 focuses on IBM, Module 10 uses Southwest Airlines, and Module 12 highlights Nike.
  • Accounting Quality: We augmented the section on accounting quality in Module 5. It describes measures of accounting quality and factors that mitigate accounting quality. We also provide a check list of items in financial statements that should be reviewed when analyzing financial statements.
  • Intercorporate Investments: Consistent with recent changes in accounting standards, we have revised Module 9 (formerly Module 7) to emphasize investors’ control of securities and deemphasize the percentage of ownership as the determining factor in selecting the method used for financial reporting.
  • Credit Ratings: This edition expands discussion of credit ratings. This includes trends in credit ratings, current credit rating statistics, and rating procedures implemented by companies such as Moody’s and Standard and Poor's.
  • Noncontrolling Interest: We added expanded discussion of noncontrolling interest, how it is reported in financial statements, and the interpretation of its disclosure. The book distinguishes the ROE disaggregation with and without controlling interest and explains how to handle noncontrolling interest for analysis, forecasting, and equity valuation. In Module 9, we also expand our discussion of consolidation to illustrate the allocation of consolidated net income to the noncontrolling interest and to the controlling (parent) interest.
  • Revised Forecasting Module: We have expanded our discussion of the forecasting of revenues and expenses to distinguish between forecasting using publicly-available databases and forecasting with proprietary databases. For the latter, we continue to utilize analyst reports and spreadsheets provided to us by Morgan Stanley.
  • Enhanced R&D Analysis: We have developed a new discussion of R&D costs in Module 5 focusing on the analysis and interpretation of R&D.
  • Expanded Analysis of Allowance Accounts: We have developed a new appendix to Module 6 to illustrate the accounting for sales returns and analysis. We also present a discussion of the analysis of the allowance accounts in Schedule II (Valuation and Qualifying Accounts) of the 10-K or similar disclosures in other types of annual reports.
  • Pension Accounting: We have expanded our discussion of analysis of pension disclosures, including the change that many companies now immediately recognize actuarial gains and losses in operating results.
  • New Regulations: We highlight pending and proposed accounting standards and their likely effects, if passed. These include the proposed standard on revenue recognition. This edition also reflects all accounting standards in effect since our last edition, including the new business combination and consolidation standard and goodwill impairment testing.

Companion Casebook

Cases in Financial Reporting, 8th edition by Michael Drake (Brigham Young University), Ellen Engel (University of Chicago), D. Eric Hirst (University of Texas – Austin), and Mary Lea McAnally (Texas A&M University). This book comprises 27 cases and is a perfect companion book for faculty interested in exposing students to a wide range of real financial statements. The cases are current and 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 to major multinationals. Each case deals with a specific financial accounting topic within the context of one (or more) company's financial statements. Each case contains financial statement information and a set of directed questions pertaining to one or two specific financial accounting issues. This is a separate, saleable casebook (ISBN 978-1-61853-122-3). Contact your sales representative to receive a desk copy or email

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Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. v)
Brief Contents (pg. xi)
Contents (pg. xii)
Module 01: Financial Accounting for MBAs (pg. 1-1)
Focus Company: Berkshire Hathaway (pg. 1-1)
Reporting on Business Activities (pg. 1-4)
Financial Statements: Demand and Supply (pg. 1-5)
Demand for Information (pg. 1-5)
Supply of Information (pg. 1-7)
International Accounting Standards and Convergence (pg. 1-8)
Financial Statements (pg. 1-9)
Balance Sheet (pg. 1-10)
Income Statement (pg. 1-12)
Statement of Stockholders’ Equity (pg. 1-14)
Statement of Cash Flows (pg. 1-15)
Financial Statement Linkages (pg. 1-16)
Information Beyond Financial Statements (pg. 1-16)
Choices in Financial Accounting (pg. 1-17)
Mid-Module Review (pg. 1-18)
Analysis of Financial Statements (pg. 1-19)
Return on Assets (pg. 1-19)
Components of Return on Assets (pg. 1-19)
Return on Equity (pg. 1-20)
Financial Statements and Business Analysis (pg. 1-20)
Analyzing the Competitive Environment (pg. 1-20)
Analyzing the Broader Business Environment (pg. 1-22)
Analyzing Competitive Advantage (pg. 1-23)
Global Accounting (pg. 1-24)
Module-End Review (pg. 1-24)
Appendix 1A: Accessing SEC Filings (pg. 1-25)
Appendix 1B: Accounting Principles and Governance (pg. 1-26)
Financial Accounting Environment (pg. 1-26)
Audits and Corporate Governance (pg. 1-27)
Regulatory and Legal Environment (pg. 1-30)
Guidance Answers (pg. 1-32)
Discussion Questions (pg. 1-32)
Mini Exercises (pg. 1-33)
Exercises (pg. 1-34)
Problems (pg. 1-35)
IFRS Applications (pg. 1-41)
Management Applications (pg. 1-42)
Ongoing Project (pg. 1-42)
Solutions to Review Problems (pg. 1-43)
Module 02: Introducing Financial Statements and Transaction Analysis (pg. 2-1)
Focus Company: Apple (pg. 2-1)
Balance Sheet (pg. 2-3)
Balance Sheet and the Flow of Costs (pg. 2-3)
Assets (pg. 2-4)
Liabilities and Equity (pg. 2-6)
Income Statement (pg. 2-12)
Recognition of Revenues and Expenses (pg. 2-13)
Reporting of Transitory Items (pg. 2-14)
Statement of Stockholders’ Equity (pg. 2-15)
Statement of Cash Flows (pg. 2-16)
Statement Format and Data Sources (pg. 2-16)
Cash Flow Computations (pg. 2-17)
Mid-Module Review 1 (pg. 2-20)
Articulation of Financial Statements (pg. 2-20)
Retained Earnings Reconciliation (pg. 2-20)
Financial Statement Linkages (pg. 2-21)
Mid-Module Review 2 (pg. 2-21)
Transaction Analysis and Accounting (pg. 2-22)
Analyzing and Recording Transactions (pg. 2-23)
Adjusting Accounts (pg. 2-23)
Constructing Financial Statements (pg. 2-26)
Global Accounting (pg. 2-31)
Module-End Review (pg. 2-31)
Appendix 2A: Additional Information Sources (pg. 2-32)
Form 10-K (pg. 2-32)
Form 20-F and Form 40-F (pg. 2-33)
Form 8-K (pg. 2-33)
Analyst Reports (pg. 2-34)
Credit Services (pg. 2-34)
Data Services (pg. 2-35)
Guidance Answers (pg. 2-35)
Discussion Questions (pg. 2-35)
Mini Exercises (pg. 2-36)
Exercises (pg. 2-37)
Problems (pg. 2-40)
IFRS Applications (pg. 2-46)
Management Applications (pg. 2-47)
Ongoing Project (pg. 2-48)
Solutions to Review Problems (pg. 2-49)
Module 03: Accounting Adjustments and Constructing Financial Statements (pg. 3-1)
Focus Company: Apple (pg. 3-1)
Accounting for Transactions (pg. 3-4)
Financial Statement Effects Template (pg. 3-4)
Transaction Analysis (pg. 3-5)
Mid-Module Review 1 (pg. 3-8)
Accounting Adjustments (Accruals) (pg. 3-8)
Prepaid Expenses (Assets) (pg. 3-9)
Unearned Revenues (Liabilities) (pg. 3-9)
Accrued Expenses (Liabilities) (pg. 3-10)
Accrued Revenues (Assets) (pg. 3-11)
Trial Balance Preparation and Use (pg. 3-12)
Mid-Module Review 2 (pg. 3-15)
Financial Statement Preparation (pg. 3-15)
Income Statement (pg. 3-15)
Balance Sheet (pg. 3-16)
Statement of Stockholders’ Equity (pg. 3-17)
Statement of Cash Flows (pg. 3-17)
Closing Process (pg. 3-20)
Global Accounting (pg. 3-21)
Module-End Review (pg. 3-21)
Appendix 3A: Closing Process Using Journal Entries (pg. 3-22)
Guidance Answers (pg. 3-23)
Discussion Questions (pg. 3-24)
Mini Exercises (pg. 3-24)
Exercises (pg. 3-27)
Problems (pg. 3-30)
IFRS Applications (pg. 3-33)
Management Applications (pg. 3-34)
Solutions to Review Problems (pg. 3-36)
Module 04: Analyzing and Interpreting Financial Statements (pg. 4-1)
Focus Company: Walmart (pg. 4-1)
Return on Equity (ROE) (pg. 4-4)
Operating Return (RNOA) (pg. 4-5)
Operating Items in the Income Statement—NOPAT (pg. 4-5)
Mid-Module Review 1 (pg. 4-8)
Operating Items in the Balance Sheet—NOA (pg. 4-8)
Computing Return on Net Operating Assets (RNOA) (pg. 4-11)
RNOA Disaggregation into Margin and Turnover (pg. 4-13)
Net Operating Profit Margin (pg. 4-13)
Net Operating Asset Turnover (pg. 4-13)
Trade-Off between Margin and Turnover (pg. 4-14)
Mid-Module Review 2 (pg. 4-16)
Further RNOA Disaggregation (pg. 4-17)
Nonoperating Return (pg. 4-17)
Financial Leverage Across Industries (pg. 4-19)
Limitations of Ratio Analysis (pg. 4-20)
Global Accounting (pg. 4-22)
Module-End Review (pg. 4-23)
Appendix 4A: Nonoperating Return Component of ROE (pg. 4-23)
Nonoperating Return Framework (pg. 4-23)
Nonoperating Return—With Debt Financing, but Without Nonoperating Assets (pg. 4-23)
Nonoperating Return—With Debt Financing and Nonoperating Assets (pg. 4-24)
Nonoperating Return—Without Debt Financing, but With Nonoperating Assets (pg. 4-26)
Nonoperating Return—With Debt Financing, Nonoperating Assets, and Noncontrolling Interest (pg. 4-26)
Derivation of Nonoperating Return Formula (pg. 4-27)
Special Topics (pg. 4-28)
Appendix 4B: Tools of Liquidity and Solvency Analysis (pg. 4-29)
Liquidity Analysis (pg. 4-29)
Solvency Analysis (pg. 4-30)
Vertical and Horizontal Analysis (pg. 4-31)
Appendix 4C: DuPont Disaggregation Analysis (pg. 4-33)
Basic DuPont Model (pg. 4-34)
Return on Assets (pg. 4-34)
Productivity (pg. 4-35)
Financial Leverage (pg. 4-35)
ROA Adjustment in the Basic DuPont Model (pg. 4-35)
Illustration of DuPont Disaggregation (pg. 4-36)
Guidance Answers (pg. 4-36)
Discussion Questions (pg. 4-37)
Mini Exercises (pg. 4-37)
Exercises (pg. 4-41)
Problems (pg. 4-45)
IFRS Applications (pg. 4-54)
Management Applications (pg. 4-57)
Ongoing Project (pg. 4-58)
Solutions to Review Problems (pg. 4-58)
Module 05: Reporting and Analyzing Operating Income (pg. 5-1)
Focus Company: Pfizer (pg. 5-1)
Operating Income Components (pg. 5-5)
Revenue and its Recognition (pg. 5-5)
Research and Development (R&D) Expenses (pg. 5-12)
Restructuring Expenses and Incentives (pg. 5-15)
Mid-Module Review 1 (pg. 5-19)
Income Tax Expenses and Allowances (pg. 5-19)
Mid-Module Review 2 (pg. 5-27)
Foreign Currency Translation Effects (pg. 5-27)
Operating Components Below-The-Line (pg. 5-29)
Discontinued Operations (pg. 5-29)
Extraordinary Items (pg. 5-30)
Earnings Per Share (pg. 5-31)
Accounting Quality (pg. 5-33)
Assessing and Remediating Accounting Quality (pg. 5-35)
Global Accounting (pg. 5-36)
Module-End Review (pg. 5-38)
Appendix 5A: Proposed Revenue Recognition Standard (pg. 5-38)
Appendix 5B: Expanded Explanation of Deferred Taxes (pg. 5-40)
Guidance Answers (pg. 5-42)
Discussion Questions (pg. 5-42)
Mini Exercises (pg. 5-43)
Exercises (pg. 5-45)
Problems (pg. 5-51)
IFRS Applications (pg. 5-62)
Management Applications (pg. 5-67)
Ongoing Project (pg. 5-67)
Solutions to Review Problems (pg. 5-68)
Module 06: Reporting and Analyzing Operating Assets (pg. 6-1)
Focus Company: Cisco Systems (pg. 6-1)
Accounts Receivable (pg. 6-3)
Allowance for Uncollectible Accounts (pg. 6-5)
Footnote and MD&A Disclosures (pg. 6-7)
Analysis Implications (pg. 6-9)
Mid-Module Review 1 (pg. 6-13)
Inventory (pg. 6-13)
Capitalization of Inventory Cost (pg. 6-14)
Inventory Costing Methods (pg. 6-15)
Lower of Cost or Market (pg. 6-17)
Footnote Disclosures (pg. 6-18)
Financial Statement Effects of Inventory Costing (pg. 6-19)
Tools of Inventory Analysis (pg. 6-21)
LIFO Liquidations (pg. 6-25)
Mid-Module Review 2 (pg. 6-26)
Property, Plant and Equipment (PPE) (pg. 6-26)
Capitalization of Asset Costs (pg. 6-27)
Depreciation (pg. 6-27)
Asset Sales and Impairments (pg. 6-31)
Footnote Disclosures (pg. 6-34)
Analysis Implications (pg. 6-35)
Global Accounting (pg. 6-38)
Module-End Review (pg. 6-39)
Appendix 6A: Sales Returns and Allowances (pg. 6-39)
Analysis of Allowance Accounts (pg. 6-40)
Guidance Answers (pg. 6-41)
Discussion Questions (pg. 6-42)
Mini Exercises (pg. 6-42)
Exercises (pg. 6-45)
Problems (pg. 6-50)
IFRS Applications (pg. 6-54)
Management Applications (pg. 6-58)
Ongoing Project (pg. 6-58)
Solutions to Review Problems (pg. 6-59)
Module 07: Reporting and Analyzing Nonowner Financing (pg. 7-1)
Focus Company: Verizon Communications (pg. 7-1)
Current Liabilities (pg. 7-4)
Accounts Payable (pg. 7-4)
Accounts Payable Turnover (APT) (pg. 7-5)
Mid-Module Review 1 (pg. 7-6)
Accrued Liabilities (pg. 7-6)
Mid-Module Review 2 (pg. 7-10)
Current Nonoperating Liabilities (pg. 7-10)
Mid-Module Review 3 (pg. 7-11)
Long-Term Nonoperating Liabilities (pg. 7-12)
Pricing of Debt (pg. 7-12)
Effective Cost of Debt (pg. 7-14)
Reporting of Debt Financing (pg. 7-15)
Financial Statement Effects of Debt Issuance (pg. 7-15)
Effects of Discount and Premium Amortization (pg. 7-17)
Financial Statement Effects of Bond Repurchase (pg. 7-19)
Financial Statement Footnotes (pg. 7-20)
Credit Ratings and the Cost of Debt (pg. 7-21)
What Are Credit Ratings? (pg. 7-22)
What Determines Credit Ratings? (pg. 7-23)
Any Trends with Credit Ratings? (pg. 7-24)
Financial Ratios across Industries (pg. 7-25)
Global Accounting (pg. 7-26)
Module-End Review (pg. 7-27)
Appendix 7A: Compound Interest (pg. 7-27)
Present Value Concepts (pg. 7-27)
Future Value Concepts (pg. 7-32)
Appendix 7B: Economics of Gains and Losses on Bond Repurchases (pg. 7-32)
Guidance Answers (pg. 7-34)
Discussion Questions (pg. 7-34)
Mini Exercises (pg. 7-34)
Exercises (pg. 7-37)
Problems (pg. 7-41)
IFRS Applications (pg. 7-45)
Management Applications (pg. 7-52)
Ongoing Project (pg. 7-52)
Solutions to Review Problems (pg. 7-53)
Module 08: Reporting and Analyzing Owner Financing (pg. 8-1)
Focus Company: IBM Corporation (pg. 8-1)
Contributed Capital (pg. 8-4)
Classes of Stock (pg. 8-4)
Accounting for Stock Transactions (pg. 8-7)
Stock-Based Compensation (pg. 8-9)
Mid-Module Review 1 (pg. 8-14)
Earned Capital (pg. 8-15)
Cash Dividends (pg. 8-15)
Mid-Module Review 2 (pg. 8-17)
Stock Dividends and Splits (pg. 8-17)
Mid-Module Review 3 (pg. 8-19)
Accumulated Other Comprehensive Income (pg. 8-19)
Noncontrolling Interest (pg. 8-21)
Analysis and Interpretation of Noncontrolling Interest (pg. 8-23)
Summary of Stockholders’ Equity (pg. 8-23)
Equity Carve-Outs and Convertibles (pg. 8-24)
Sell-Offs (pg. 8-24)
Spin-Offs (pg. 8-25)
Split-Offs (pg. 8-26)
Analysis of Equity Carve-Outs (pg. 8-27)
Mid-Module Review 4 (pg. 8-27)
Convertible Securities (pg. 8-27)
Global Accounting (pg. 8-29)
Module-End Review (pg. 8-30)
Guidance Answers (pg. 8-30)
Discussion Questions (pg. 8-30)
Mini Exercises (pg. 8-31)
Exercises (pg. 8-34)
Problems (pg. 8-39)
IFRS Applications (pg. 8-46)
Management Applications (pg. 8-51)
Ongoing Project (pg. 8-51)
Solutions to Review Problems (pg. 8-52)
Module 09: Reporting and Analyzing Intercorporate Investments (pg. 9-1)
Focus Company: Google (pg. 9-1)
Passive Investments (pg. 9-4)
Acquisition and Sale (pg. 9-5)
Fair Value versus Cost (pg. 9-5)
Investments Marked to Market (pg. 9-6)
Financial Statement Disclosures (pg. 9-7)
Investments Reported at Cost (pg. 9-9)
Mid-Module Review 1 (pg. 9-10)
Investments with Significant Influence (pg. 9-11)
Accounting for Investments with Significant Influence (pg. 9-11)
Equity Method Accounting and ROE Effects (pg. 9-13)
Mid-Module Review 2 (pg. 9-16)
Investments with Control (pg. 9-17)
Accounting for Investments with Control (pg. 9-17)
Global Accounting (pg. 9-29)
Module-End Review (pg. 9-30)
Appendix 9A: Accounting for Derivatives (pg. 9-30)
Disclosures for Derivatives (pg. 9-31)
Analysis of Derivatives (pg. 9-34)
Guidance Answers (pg. 9-35)
Discussion Questions (pg. 9-35)
Mini Exercises (pg. 9-36)
Exercises (pg. 9-37)
Problems (pg. 9-46)
IFRS Applications (pg. 9-50)
Management Applications (pg. 9-54)
Ongoing Project (pg. 9-55)
Solutions to Review Problems (pg. 9-56)
Module 10: Reporting and Analyzing Off-Balance-Sheet Financing (pg. 10-1)
Focus Company: Southwest Airlines (pg. 10-1)
Leases (pg. 10-4)
Lessee Reporting of Leases (pg. 10-4)
Footnote Disclosure of Leases (pg. 10-6)
Capitalization of Operating Leases (pg. 10-7)
Mid-Module Review (pg. 10-11)
Pensions (pg. 10-12)
Reporting of Defined Benefit Pension Plans (pg. 10-12)
Balance Sheet Effects (pg. 10-12)
Income Statement Effects (pg. 10-14)
Footnote Disclosures—Components of Plan Assets and PBO (pg. 10-16)
Footnote Disclosures and Future Cash Flows (pg. 10-17)
Footnote Disclosures and Profit Implications (pg. 10-18)
Analysis Implications (pg. 10-19)
Other Post-Employment Benefits (pg. 10-22)
Global Accounting (pg. 10-22)
Module-End Review (pg. 10-23)
Appendix 10A: Amortization Component of Pension Expense (pg. 10-24)
Appendix 10B: Special Purpose Entities (SPEs) (pg. 10-25)
Applying SPEs as Financing Tools (pg. 10-26)
Reporting of SPEs Designated as VIEs (pg. 10-27)
Analysis Implications of SPEs (pg. 10-27)
Appendix 10C: Lease Capitalization Using a Calculator and Present Value Tables (pg. 10-28)
Lease Capitalization Using Present Value Tables (pg. 10-30)
Guidance Answers (pg. 10-31)
Discussion Questions (pg. 10-31)
Mini Exercises (pg. 10-31)
Exercises (pg. 10-35)
Problems (pg. 10-41)
IFRS Applications (pg. 10-46)
Ongoing Project (pg. 10-52)
Solutions to Review Problems (pg. 10-53)
Module 11: Forecasting Financial Statements (pg. 11-1)
Focus Company: Procter & Gamble (P&G) (pg. 11-1)
Forecasting Process (pg. 11-3)
Overview of Forecasting Process (pg. 11-3)
All-Important Revenues Forecast (pg. 11-5)
Identifying the Forecasting Steps (pg. 11-7)
Forecasting Process: Procter & Gamble (pg. 11-7)
Step 1: Forecasting Revenues (pg. 11-7)
Factors Impacting Revenue Growth (pg. 11-8)
Forecasting Revenue Growth (pg. 11-13)
Step 2: Forecasting Expenses (pg. 11-20)
Forecasting Operating Expenses (pg. 11-20)
Forecasting Nonoperating Expenses (pg. 11-20)
Forecasting Expenses for P&G Using Public Information (pg. 11-20)
Forecasting Expenses for P&G Using Proprietary Databases (pg. 11-23)
Step 3: Forecasting Assets, Liabilities and Equity (pg. 11-24)
Process of Forecasting Balance Sheet Items (pg. 11-25)
Forecasting Balance Sheet Items (pg. 11-27)
Step 4: Adjust Forecasted Statements (pg. 11-32)
Adjust Forecasted Balance Sheet (pg. 11-32)
Forecasting Statement of Cash Flows (pg. 11-34)
Additional Forecasting Issues (pg. 11-34)
Reassessing Financial Statement Forecasts (pg. 11-34)
Multiyear Forecasting of Financial Statements (pg. 11-35)
Mid-Module Review (pg. 11-38)
Parsimonious Multiyear Forecasting (pg. 11-39)
Parsimonious Method for Forecasting (pg. 11-40)
Multiyear Forecasting with Parsimonious Method (pg. 11-40)
Global Accounting (pg. 11-41)
Module-End Review (pg. 11-41)
Appendix 11A: Morgan Stanley’s Forecast Report on Procter & Gamble (pg. 11-41)
Discussion Questions (pg. 11-57)
Mini Exercises (pg. 11-57)
Exercises (pg. 11-60)
Problems (pg. 11-68)
IFRS Applications (pg. 11-75)
Management Applications (pg. 11-77)
Ongoing Project (pg. 11-79)
Solutions to Review Problems (pg. 11-80)
Module 12: Analyzing and Valuing Equity Securities (pg. 12-1)
Focus Company: Nike (pg. 12-1)
Equity Valuation Models (pg. 12-3)
Dividend Discount Model (pg. 12-3)
Discounted Cash Flow Model (pg. 12-3)
Residual Operating Income Model (pg. 12-4)
Discounted Cash Flow (DCF) Model (pg. 12-4)
DCF Model Structure (pg. 12-4)
Steps in Applying the DCF Model (pg. 12-5)
Illustrating the DCF Model (pg. 12-5)
Mid-Module Review (pg. 12-7)
Residual Operating Income (ROPI) Model (pg. 12-7)
ROPI Model Structure (pg. 12-8)
Steps in Applying the ROPI Model (pg. 12-8)
Illustrating the ROPI Model (pg. 12-9)
Managerial Insights from the ROPI Model (pg. 12-10)
Assessment of Valuation Models (pg. 12-11)
Global Accounting (pg. 12-12)
Module-End Review (pg. 12-13)
Appendix 12A: Nike Financial Statements (pg. 12-13)
Appendix 12B: RBC Capital Markets Valuation of Procter & Gamble (pg. 12-15)
Appendix 12C: Derivation of Free Cash Flow Formula (pg. 12-17)
Guidance Answers (pg. 12-18)
Discussion Questions (pg. 12-18)
Mini Exercises (pg. 12-18)
Exercises (pg. 12-19)
Problems (pg. 12-22)
IFRS Applications (pg. 12-30)
Management Applications (pg. 12-32)
Ongoing Project (pg. 12-32)
Solutions to Review Problems (pg. 12-33)
Appendix A: Compound Interest Tables (pg. A-1)
Appendix B: Constructing the Statement of Cash Flows (pg. B-1)
Focus Company: Starbucks (pg. B-1)
Framework for Statement of Cash Flows (pg. B-5)
Operating Activities (pg. B-6)
Investing Activities (pg. B-7)
Financing Activities (pg. B-7)
Cash Flow From Operating Activities (pg. B-8)
Steps to Compute Net Cash Flow from Operating Activities (pg. B-9)
Java House Case Illustration (pg. B-10)
Cash Flows from Investing Activities (pg. B-13)
Analyze Remaining Noncash Assets (pg. B-13)
Java House Case Illustration (pg. B-13)
Cash Flows from Financing Activities (pg. B-14)
Analyze Remaining Liabilities and Equity (pg. B-14)
Java House Case Illustration (pg. B-15)
Summary of Net Cash Flow Reporting (pg. B-15)
Supplemental Disclosures for Indirect Method (pg. B-16)
Java House Case Illustration (pg. B-16)
Analysis of Cash Flow Information (pg. B-17)
Cash Flow Patterns (pg. B-17)
Usefulness of the Statement of Cash Flows (pg. B-22)
Ratio Analyses of Cash Flows (pg. B-22)
Appendix-End Review 1 (pg. B-24)
Appendix B1: Direct Method Reporting for the Statement of Cash Flows (pg. B-25)
Cash Flows from Operating Activities (pg. B-26)
Cash Flows from Investing and Financing (pg. B-28)
Appendix-End Review 2 (pg. B-28)
Guidance Answers (pg. B-29)
Discussion Questions (pg. B-30)
Mini Exercises (pg. B-31)
Exercises (pg. B-33)
Problems (pg. B-36)
IFRS Applications (pg. B-47)
Solutions to Review Problems (pg. B-48)
Appendix C: Comprehensive Case (pg. C-1)
Focus Company: Kimberly-Clark (pg. C-1)
Introduction (pg. C-3)
Reviewing The Financial Statements (pg. C-4)
Income Statement Reporting and Analysis (pg. C-4)
Balance Sheet Reporting and Analysis (pg. C-11)
Off-Balance-Sheet Reporting and Analysis (pg. C-21)
Statement of Cash Flows Reporting and Analysis (pg. C-25)
Independent Audit Opinion (pg. C-26)
Assessing Profitability and Creditworthiness (pg. C-27)
ROE Disaggregation (pg. C-27)
Disaggregation of RNOA—Margin and Turnover (pg. C-28)
Disaggregation of Margin and Turnover (pg. C-28)
Credit Analysis (pg. C-29)
Summarizing Profitability and Creditworthiness (pg. C-29)
Forecasting Financial Statement Numbers (pg. C-29)
Valuing Equity Securities (pg. C-32)
Parsimonious Forecast (pg. C-32)
Discounted Cash Flow Valuation (pg. C-33)
Residual Operating Income Valuation (pg. C-33)
Sensitivity Analysis of Valuation Parameters (pg. C-34)
Assessment of the Valuation Estimate (pg. C-34)
Summary Observations (pg. C-35)
Appendix D: Chart of Accounts with Acronyms (pg. D-1)
Glossary (pg. G-1)
Index (pg. I-1)
Peter D. Easton

Peter D. Easton

Peter D. Easton is an expert in accounting and valuation and holds the Notre Dame Alumni Chair in Accountancy in the Mendoza College of Business.

Professor Easton’s expertise is widely recognized by the academic research community and by the legal community. Professor Easton frequently serves as a consultant on accounting and valuation issues in federal and state courts.

Professor Easton holds undergraduate degrees from the University of Adelaide and the University of South Australia. He holds a graduate degree from the University of New England and a PhD in Business Administration (majoring in accounting and finance) from the University of California, Berkeley.

Professor Easton’s research on corporate valuation has been published in the Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Review of Accounting Studies, and Journal of Business Finance and Accounting.

Professor Easton has served as an associate editor for 11 leading accounting journals and he is currently an associate editor for the Journal of Accounting Research, Journal of Business Finance and Accounting, and Journal of Accounting, Auditing, and Finance. He is an editor of the Review of Accounting Studies.

Professor Easton has held appointments at the University of Chicago, the University of California at Berkeley, Ohio State University, Macquarie University, the Australian Graduate School of Management, the University of Melbourne, Tilburg University, National University of Singapore, Seoul National University, and Nyenrode University. He is the recipient of numerous awards for excellence in teaching and in research. Professor Easton regularly teaches accounting analysis and security valuation to MBAs. In addition, Professor Easton has taught managerial accounting at the graduate level.

John J. Wild

John J. Wild

John J. Wild is a distinguished professor of accounting and business at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England.

He received his BBA, MS, and PhD from the University of Wisconsin. Professor Wild teaches courses in accounting and analysis at both the undergraduate and graduate levels. He has received the Mabel W. Chipman Excellence-in-Teaching Award, the departmental Excellence-in-Teaching Award, and the MBA Teaching Excellence Award (twice) from the EMBA graduation classes at the University of Wisconsin. He also received the Beta Alpha Psi and Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild is a past KPMG Peat Marwick National Fellow and is a prior recipient of fellowships from the American Accounting Association and the Ernst & Young Foundation.

Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of several best-selling books. His research articles on financial accounting and analysis appear in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Journal of Accounting, Auditing & Finance, Journal of Accounting and Public Policy, Journal of Business Finance and Accounting, Auditing: A Journal of Theory and Practice, and other accounting and business journals. He is past associate editor of Contemporary Accounting Research and has served on editorial boards of several respected journals, including The Accounting Review and the Journal of Accounting and Public Policy.

Robert F. Halsey

Robert F. Halsey

Robert F. Halsey is Professor of Accounting and Associate Dean of the Undergraduate School at Babson College. He received his MBA and PhD from the University of Wisconsin.

Prior to obtaining his PhD he worked as the chief financial officer (CFO) of a privately held retailing and manufacturing company and as the vice president and manager of the commercial lending division of a large bank.

Professor Halsey teaches courses in financial and managerial accounting at both the graduate and undergraduate levels, including a popular course in financial statement analysis for second year MBA students. He has also taught numerous executive education courses for large multinational companies through Babson’s school of Executive Education as well as for a number of stock brokerage firms in the Boston area. He is regarded as an innovative teacher and has been recognized for outstanding teaching at both the University of Wisconsin and Babson College.

Professor Halsey co-authors Advanced Accounting published by Cambridge Business Publishers. Professor Halsey’s research interests are in the area of financial reporting, including firm valuation, financial statement analysis, and disclosure issues. He has publications in Advances in Quantitative Analysis of Finance and Accounting, The Journal of the American Taxation Association, Issues in Accounting Education, The Portable MBA in Finance and Accounting, the CPA Journal, AICPA Professor/Practitioner Case Development Program, and in other accounting and analysis journals.

Professor Halsey is an active member of the American Accounting Association and other accounting, analysis, and business organizations. He is widely recognized as an expert in the areas of financial reporting, financial analysis, and business valuation.

Mary Lea McAnally

Mary Lea McAnally

Mary Lea McAnally is the Philip Ljundahl Professor of Accounting at the Mays Business School at Texas A&M. She obtained her Ph.D. from Stanford University and B. Comm. from the University of Alberta.

She worked as a Chartered Accountant (in Canada) and is a Certified Internal Auditor. Prior to arriving at Texas A&M in 2002, Professor McAnally held positions at University of Texas at Austin, Canadian National Railways, and Dunwoody and Company.

Her research interests include accounting and disclosure in regulated environments, executive compensation, and accounting for risk. She has published articles in the leading academic journals including Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research. Professor McAnally received the Mays Business School Research Achievement Award in 2005. She was Associate Editor at Accounting Horizons, served on the editorial board of Contemporary Accounting Research, and was Guest Editor for the MBA-teaching volume of Issues in Accounting Education. She is active in the American Accounting Association and its FARS section.

At Texas A&M, Professor McAnally teaches financial reporting, analysis, and valuation in the full-time, Professional, and Executive MBA programs. Through the Mays Center for Executive Development, she works with corporate clients. She has also taught at University of Alberta, University of Calgary, IMADEC (in Austria) and at the Indian School of Business at the Hyderabad and Mohali campuses. She has received numerous faculty-determined and student-initiated teaching awards at the MBA and executive levels. Those awards include the Beazley Award, the Trammell Foundation Award, the MBA Teaching Award (multiple times), the MBA Association Distinguished Faculty Award (three times), the Award for Outstanding and Memorable Faculty Member, and the Distinguished Achievement Award.

Last Updated: Feb 10 2017
Appendix C PDF
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Practice Quizzes
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Practice Quiz Solutions
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