Target Audience

Financial Statement Analysis & Valuation is intended for use in a financial statement analysis and/or valuation course in which profitability analysis and security valuation are emphasized. This book accommodates mini‑courses lasting only a few days as well as extended courses lasting a full semester.

Innovative Approach

Financial Statement Analysis & Valuation is applications oriented and focuses on the most salient aspects of accounting, analysis, and valuation. It teaches students how to read, analyze, and interpret financial statement data to make informed business decisions. This textbook makes financial statement analysis and valuation engaging, relevant, and contemporary. To that end, it consistently incorporates real company data, both in the body of each module and throughout the assignment material.

Flexible Structure

The curricula, instructor preferences, and course lengths vary across colleges. Accordingly and to the extent possible, the 15 modules that make up Financial Statement Analysis & Valuation were designed independently of one another. This modular presentation enables each college and instructor to “customize” the book to best fit their needs. Our introduction and discussion of financial statements constitute Modules 1 and 2. Module 3 presents the analysis of financial statements with an emphasis on analysis of operating profitability. Module 4 introduces credit risk analysis. Modules 5 through 10 offer an analysis of accounting numbers and disclosures. The aim of those modules is to help us better interpret financial statements and to adjust those statements as necessary to improve our financial statement analysis. Modules 11 through 15 describe forecasting, cost of capital estimation, and company valuation.

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. For instructors desiring greater emphasis on accounting analysis, additional time can be spent on Modules 1 through 10. For instructors desiring greater emphasis on analysis and valuation, additional time can be spent on Modules 11 through 15.

Module	15 Week Semester-Course	10 Week Quarter-Course	6 Week Mini-Course	1 Week Intensive-Course
1	Week 1	Weeks 1 (Modules 1 and 2)	Weeks 1 (Modules 1 and 2)	Day 1 (Modules 1 and 2)
2	Week 2
3	Week 3	Week 2	Week 2	Day 2
4	Week 4	Week 3	Optional	Optional
5	Week 5	Week 4	Week 3	Day 3 (Modules 5 and 6)
6	Week 7	Week 5	Skim
7	Week 7	Optional	Optional	Optional
8	Week 8	Optional	Optional	Optional
9	Week 9	Week 6	Optional	Optional
10	Week 10	Week 7	Skim	Optional
11	Week 11	Week 8	Week 4	Day 4 (Modules 11 and 12)
12	Week 12	Week 9	Week 5
13	Week 13	Weeks 9 and 10	Weeks 5 and 6	Day 5 (Modules 13 and 14)
14	Week 14	Week 10	Week 6
15	Week 15	Optional	Optional	Optional

INNOVATIVE PEDAGOGY

Financial Statement Analysis & Valuation includes special features specifically designed for the student with a keen interest in analysis and valuation.

Focus Companies for Each Module

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

Focus Company by Module

Module 1	Under Armour	Module 10	Southwest Airlines & FedEx
Module 2	Apple	Module 11	Procter & Gamble
Module 3	Intel	Module 12	NextEra Energy, Inc.
Module 4	Home Depot	Module 13	Procter & Gamble
Module 5	Pfizer	Module 14	Procter & Gamble
Module 6	Home Depot	Module 15	Dollar General
Module 7	Verizon	Appendix B	Starbucks
Module 8	Johnson & Johnson	Appendix C	Harley-Davidson
Module 9	Google

Real Company Data Throughout

Market research and reviewer feedback tell us that one of instructors' greatest frustrations with other financial statement analysis and valuation textbooks is their lack of real, contemporary company data. We have gone to great lengths to incorporate real company data throughout each module to reinforce important concepts and engage students. We engage nonaccounting students specializing in finance, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 3-18; 5-19; 6-22.

Analyst Adjustments

Analyst Adjustments are incorporated throughout most of the modules. These boxed elements explain and illustrate the types of adjustments analysts make to accounting information to make it more useful in their assessment of a firm.

Business Insights & Analyst Insights

Updated Business Insight boxes throughout each module showcase real-world business scenarios through the lens of financial statement analysis. For representative examples, SEE Pages 2-10; 6-6; 11-21. Analyst Insight boxes, in select modules, highlight the importance of analysts' professional judgment in financial analysis as well as with the reformulation of financial statements. For representative examples, SEE PAGES 4-28; 13-6.

Research Insights

Academic research plays an important role in the way business is conducted, accounting and analysis are performed, and students are taught. It is important for students to recognize how modern research and modern business practice interact. Therefore, we periodically incorporate relevant research to help students understand the important relation between research and modern business. For representative examples, SEE PAGES 3-25; 5-32.

Decision Orientation

One primary goal of a financial statement analysis and valuation 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, Analysis Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios.

Financial Statement Effects Template

As instructors, we recognize that the financial statement analysis and valuation course is not directed solely toward accounting majors. Financial Statement Analysis & Valuation embraces this reality. This book highlights financial reporting, analysis, valuation, interpretation, applications and decision making. We incorporate the following financial statement effects template to train students in understanding the economic ramifications of transactions and their impacts on financial statements. This analytical tool is a great resource for students in learning analysis 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. For those desiring a more traditional analysis, journal entries and T-accounts are shown in the margin.

Mid-Module and Module-End Reviews

Financial statement analysis and valuation can be challenging—especially for students lacking business experience or previous exposure to finance, management, and other business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include multiple mid‑module and module‑end reviews that require students to recall and apply the financial statement analysis and valuation techniques and concepts described in each module. To aid students in developing their comparative analysis skills, most of those review problems center on a company or companies that compete with the focus company of that module. For representative examples, SEE PAGES 3-4; 8-12; 11-20.

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 1-43; 3-62; 11-68.

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 students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical tasks. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision or in a valuation context. There are six categories of assignments: Questions, Mini Exercises, Exercises, Problems, International Applications, and Analysis Discussion Points.

Fifth Edition Changes

• The Table of Contents is reorganized to facilitate eLearning, with additional in‑module Reviews and Guided Example videos for all modules.
• Expanded and updated Analyst Adjustments and New Assignments supporting the adjustments: The authors have included additional Analyst Adjustment boxes and updated the existing ones throughout the book. Also, this edition includes assignments that require students to use the adjustment techniques, which often includes the reformulation of financial statement numbers.
• New regulations: This edition reflects the release of new standards on Revenue Recognition, Leases, Marketable Securities, and all other important accounting disclosures.
• DuPont Model: Module 3 now opens with DuPont Analysis (moved from an appendix) as a simple, yet powerful, analysis framework. For those instructors interested, a disaggregation of ROE that separates operating and nonoperating items is shown later in the module as a natural extension of DuPont analysis. Evidence of its usefulness is provided as the authors apply the model and its extension to real companies.
• Revenue, Operating Expenses, and Receivables: Module 5 is reorganized and streamlined to reduce its length and focus its discussion on revenue, operating expenses, and receivables.
• Receivables and Payables: Module 5 now includes accounts receivable which are naturally paired with revenues. Accounts payable is moved to Module 6 and presented with inventories. A new section on days to collect receivables, days sales in inventory, days to pay accounts payable, and the cash conversion cycle is added to Module 6. These new metrics are applied to actual companies for demonstration.
• R&D Costs: Module 6 now includes R&D facilities along with restructuring activities asmany analysts view them as a natural extension of operating assets.
• Share-Based Compensation: Module 8 includes a complete rewrite of share‑based compensation with greater emphasis on restricted stock.
• Taxes: Coverage of analysis of income taxes is moved from Module 5 to Module 10 based on instructor feedback.
• Equity Carve-Outs: Coverage is moved to Module 9 because many view carve‑outs as a divestiture of a special type of investment and this coverage is set as a new appendix (to reflect their reduced occurrence in practice).
• Streamlined Forecasting Module: Module 11 is markedly shortened and rewritten for clarity. It now begins with a concrete example of forecasting mechanics (as the opening section for those faculty wishing to cover just the mechanics and not the refinements). Module 11 uses a new Procter & Gamble analyst report provided by Morgan Stanley, which is set as an appendix.
• Updated financial data and assignments: All data and financial statements are updated throughout the book to reflect each company’s latest available financial statement filings and disclosures.
• Bond Ratings: Greatly enhanced the discussion of the determination of bond ratings with an example of Moody’s ratings for Verizon.
• Expanded Analysis of Allowances Accounts: Added section in Module 6 on accounting for sales allowances, including accounting and analysis of Schedule II allowance disclosures (including effects on sales and adequacy of the allowance account).
• Pension accounting: Revised discussion of pension accounting, including a new section on fair valuation of pension obligations, the treatment of pension plans in bankruptcy, and an analysis of pension plans disclosures such as what is operating versus nonoperating (Module 10).
• Global Analysis: The sections on global analysis are updated to include new developments.
• Updated Comprehensive Case: Appendix C shows a case analysis using Harley-Davidson financial statements and notes.

Example of the Analyst Playbook & video features available for each module.

Click on a Module 4 eLecture or Guided Example to preview the related video.

Analyst Playbook

LO	Learning Objective | Topics	Page	eLecture	Guided Example	Assignments
LO4-1	Describe the demand for and supply of credit. Demand for Credit :: Supply of Credit	4-3	E4-1	Review 4-1	1, 2, 3, 4, 5
LO4-2	Explain the credit risk analysis process. Information Sources :: Chance of Default :: Loss Given Default	4-7	E4-2	Review 4-2	6, 7, 8, 9, 10, 11, 12, 16, 31, 36
LO4-3	Compute and interpret credit risk measures. Adjusted Financial Statements :: Profitability Analysis :: Coverage Analysis :: Liquidity :: Solvency	4-14	E4-3	Review 4-3	16, 17, 18, 19, 22, 23, 24, 25, 26, 29, 30, 31, 34, 36
LO4-4	Explain credit ratings and describe the credit rating process. Credit Rating Agencies :: Importance of Credit Ratings :: How Credit Rating are Determined	4-25	E4-4	Review 4-4	13, 16, 22, 30
LO4-5	Apply bankruptcy prediction models to evaluate bankruptcy risk. Altman Z-score :: Application of Altman Z-score :: Bankruptcy Prediction Errors	4-31	E4-5	Review 4-5	14, 15, 20, 21, 27, 28, 32, 33, 35