Financial & Managerial Accounting for MBAs, 6e

by Easton, Halsey, McAnally

ISBN: 978-1-61853-359-3 | Copyright 2021

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Welcome to Financial & Managerial Accounting for MBAs.

Our main goal in writing this book was to satisfy the needs of todays business manager by creating a contemporary, engaging, and user-oriented textbook. This book is the product of extensive market research including focus groups, market surveys, class tests, manuscript reviews, and interviews with faculty from around the world. We are grateful to the students and faculty who provided us with useful feedback during the preparation of this book.

Target Audience

Financial & Managerial Accounting for MBAs is intended for use in full-time, part-time, executive, and evening MBA programs that include a combined financial and managerial 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 & Managerial Accounting for MBAs is managerially oriented and focuses on the most salient aspects of accounting. It teaches MBA students how to read, analyze, and interpret accounting data to make informed business decisions. This textbook makes 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 25 modules that make up Financial & Managerial 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 profitability analysis. Modules 5 through 10 highlight major financial accounting topics including assets, liabilities, equity, and off-balance-sheet financing. Module 11 details the process for preparing and analyzing the statement of cash flow. Module 12 explains forecasting financial statements, and Module 13 introduces simple valuation models. At the end of each financial accounting module (Modules 1 through 13), 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. Module 14 introduces managerial accounting and is followed by a discussion of cost behavior and cost estimation in Module 15. Module 16 explains cost-volume-profit analysis while Module 17 focuses on using relevant costs to make business decisions. Job and process costing are covered in a single module, Module 18, followed by activity-based costing in Module 19 and the assignment of indirect costs in Module 20. The remaining modules, 21 through 25, highlight managerial accounting topics ranging from operational budgets and variance analysis to segment reporting, product pricing, and capital budgeting. At the end of the book, we include several useful resources. Appendix A contains compound interest tables and formulas. Appendix B is a chart of accounts used in the book. Appendix C is an illustrative case that applies the techniques described in Modules 1 through 13 to an actual company, Harley-Davidson. Appendix C can be used as a guide, in conjunction with the module-end project questions, by students required to prepare a company analysis.

Managerial Emphasis

As MBA instructors, we recognize that the core MBA accounting course is not directed toward accounting majors. Financial & Managerial Accounting for MBAs embraces this reality. This book highlights reporting, analysis, interpretation, and decision making. In the financial accounting modules, we incorporate the following financial statement effects template when relevant 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.

Innovative Pedagogy

Focus Companies for Each Module

In the financial accounting portion of the book, each modules content is explained through the accounting and 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 MBA students in real analysis and interpretation. Focus companies were selected based on the industries that MBA students typically enter upon graduation. We apply a similar approach to the managerial accounting modules, but limited access to internal accounting information prevents us from illustrating all managerial accounting topics using real company data. We do, however, incorporate real-world examples throughout each module. Each managerial accounting module is presented in context using real-world scenarios from a variety of service, retail, and manufacturing companies. The following table lists focus companies by module.

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, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 2-6, 4-16, 6-23, 7-3, 8-4, 9-10, 10-4, 11-6, and 12-17.

Decision Making Orientation
One primary goal of an MBA 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 4-26, 5-4, 8-11, 10-8, and 11-15. Each financial module also includes Analysis Insight boxes that provide insight into data analysis techniques and models that financial analysts typically use. For representative examples, SEE PAGES 2-11, 6-13, 7-15, 9-17, 10-9, 11-28, and 12-24.

Reviews for Each Learning Objective

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 reviews that require students to recall and apply the accounting techniques and concepts described in each module.

Excellent, Class-Tested Assignment Materials

Excellent assignment material is a must-have component of any successful textbook (and class). 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. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision.

New Edition Changes

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

Financial Accounting Modules (1-13)

  • Digital delivery enhanced    To serve the expanding delivery modes of MBA education, we updated our in-chapter Reviews and Guided Example videos for all chapters (each Learning Objective has a Review/Guided Example, as well as a corresponding eLecture).
  • Data visualization and analytics   Companies are increasingly using data visualization (charts, pictures, and graphs) to more effectively convey financial information. To support student learning, each module opens with a data dashboard and includes end-of-chapter assignments that present data graphically and require students to analyze and interpret the data visualizations. We provide students with online access (via MBC) to author-created PowerBI dashboards where they can interact with the data and learn how to create their own data visualizations.
  • Content reflects new standards    This edition covers new standards on Revenue Recognition, Leases, and Marketable Securities. It also includes in-depth discussion of the Tax Cuts and Jobs Act and how new tax law impacts financial analysis.
  • Revenue, Operating Expenses, and Receivables    We expanded the discussion of revenue recognition following the new standard and included an illustration and analysis of Microsofts revenue recognition. We also discuss sales returns and allowances and the effects of foreign currency exchange rates. Our operating expenses discussion introduces the effects of the Tax Cuts and Jobs Act, with a deeper discussion in Module 10.
  • Inventories    Our discussion of cash conversion cycle includes an illustration of management actions under- taken by Home Depot to streamline its supply chain to reduce days inventory outstanding.
  • Bond rating    A new section in Module 7 discusses Credit Analysis, including how bond ratings are determined. We provide an example of S&P Globals ratings for Verizon, following its purchase of Vodafones interest in Verizon Wireless. We also simplify our discussion of bond pricing.
  • Share-based compensation    Module 8 includes an expanded discussion of share-based compensation, and Teslas use of convertible debt.
  • Investments    We include a deeper discussion of the determination of fair value, including an expanded discussion of Level 3 inputs to value securities with limited markets and the accounting for those securities. Module 6 includes a new, expanded discussion of the new goodwill impairment standard.
  • Derivatives   We markedly revised our discussion of derivatives to simplify the exposition while maintaining the analysis coverage.
  • Equity Carve-Outs    The discussion of equity carve-outs is simplified and we provide examples of the ac- counting for Sell-offs, IPOs, Spin-offs, and Split-offs. We also discuss the deconsolidation of a subsidiary.
  • Leasing    Module 10 reflects the new lease standard including the analysis of right-of-use assets and differences between operating and financial leases. We discuss retrospective and prospective adoption, using Microsoft and Delta Airlines.
  • Pension disclosures    We markedly revised our discussion of pension accounting with a detailed illustration of the pension footnote disclosures. We include a section on fair valuation of pension obligations and the accounting for plan settlements.
  • Taxes    We provide an in-depth, completely revised, discussion of income tax expense, including the effects of the Tax Cuts and Jobs Act and the analysis implications during the transition period.
  • Updated Assignments    We updated all data and financial statements throughout the book to reflect each companys latest available financial statement filings and disclosures. Assignments include current financial statement excerpts and reflect new standards for Revenue Recognition, Leases, and Marketable Securities and the Tax Cuts and Jobs Act.

Managerial Accounting Modules (14-25)

  • Contemporary Topics and Examples    The authors have revised and added new Business Insight boxes throughout each module to bring the accounting to life for students using current, real-world examples. Several new Research Insight boxes have been incorporated throughout the text to emphasize the important relationship between research and modern business.
  • Real Company Examples    Dozens of new, real company examples have been integrated throughout the text.
  • Revised Assignments    Nearly two-thirds of the assignments in each module have been revised and updated.

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Example of the Road Map & video features available for each module.

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Road Map
LO Learning Objective | Topics Page eLecture Guided Example Assignments

Apply revenue recognition principles and assess results.

Recognition Rules :: Complications :: Long-Term Contracts :: Reporting

1, 8, 12, 13, 14, 15, 17, 29, 31, 32, 33, 34, 35, 40, 49, 51, 53, 54, 55, 56, 59, 61


Examine and evaluate sales allowances.

Accounting :: Reporting & Disclosure :: Analysis

3, 17, 25, 51


Analyze deferred revenue.

Accounting :: Illustrations :: Disclosure and Interpretation

10, 23, 24, 26, 29, 47, 55


Evaluate how foreign currency exchange rates affect revenue.

Economics :: Cash Flows :: Income :: Forecasting

5, 6, 22, 27, 36, 39, 60


Analyze accounts receivable and uncollectible amounts.

Aging :: Accounting :: Magnitude Analysis :: Quality Analysis

2, 7, 18, 19, 20, 21, 42, 43, 44, 45, 46, 49, 56, 58


Evaluate operating expenses and discontinued operations.

Cost of Sales :: SG&A :: R&D :: Discontinued Operations

4, 11, 28, 30, 37, 38, 41, 48, 52, 57, 59


Interpret pro forma and non-GAAP disclosures.

Regulation G :: SEC Warnings :: Market Assessments

9, 16, 39, 50

Expand/Collapse All
Preface (pg. iii)
Brief Contents (pg. ix)
Contents (pg. x)
Module 1 Financial Accounting for MBAs (pg. 1-1)
Preview (pg. 1-1)
Reporting on Business Activities (pg. 1-3)
Business Activities (pg. 1-3)
Business Strategy (pg. 1-3)
Review 1-1 (pg. 1-4)
Financial Statements: Demand and Supply (pg. 1-4)
Demand for Information (pg. 1-4)
Supply of Information (pg. 1-7)
International Accounting Standards (pg. 1-8)
Review 1-2 (pg. 1-9)
Structure of Financial Statements (pg. 1-9)
Balance Sheet (pg. 1-10)
Income Statement (pg. 1-13)
Statement of Stockholders’ Equity (pg. 1-14)
Statement of Cash Flows (pg. 1-15)
Information Beyond Financial Statements (pg. 1-16)
Managerial Choices in Financial Accounting (pg. 1-17)
Review 1-3 (pg. 1-18)
Analysis of Financial Statements (pg. 1-18)
Return on Assets (pg. 1-18)
Components of Return on Assets (pg. 1-18)
Return on Equity (pg. 1-20)
Are Financial Statements Relevant? (pg. 1-20)
Review 1-4 (pg. 1-21)
Financial Statements and Business Analysis (pg. 1-22)
Analyzing the Competitive Environment (pg. 1-22)
SWOT Analysis of the Business Environment (pg. 1-23)
Analyzing Competitive Advantage (pg. 1-24)
Review 1-5 (pg. 1-25)
Book Road Map (pg. 1-25)
Global Accounting (pg. 1-26)
Appendix 1A: Financial Statement Data and Analytics (pg. 1-26)
SEC Filings (pg. 1-26)
Data Analytics (pg. 1-29)
Appendix 1B: Accounting Principles and Governance (pg. 1-30)
Financial Accounting Environment (pg. 1-30)
Audit Report (pg. 1-31)
Guidance Answers (pg. 1-34)
Questions (pg. 1-34)
Mini Exercises (pg. 1-35)
Exercises (pg. 1-38)
Problems (pg. 1-40)
IFRS Applications (pg. 1-46)
Management Applications (pg. 1-47)
Ongoing Project (pg. 1-48)
Solutions to Review Problems (pg. 1-48)
Review 1-1-Solution (pg. 1-48)
Review 1-2-Solution (pg. 1-49)
Review 1-3-Solution (pg. 1-49)
Review 1-4-Solution (pg. 1-50)
Review 1-5-Solution (pg. 1-50)
Module 2 Introducing Financial Statements (pg. 2-1)
Preview (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)
Review 2-1 (pg. 2-13)
Income Statement (pg. 2-13)
Recognizing Revenues and Expenses (pg. 2-14)
Reporting of Transitory Items (pg. 2-15)
Analyzing the Income Statement (pg. 2-16)
Review 2-2 (pg. 2-17)
Statement of Stockholders’ Equity (pg. 2-17)
Review 2-3 (pg. 2-18)
Statement of Cash Flows (pg. 2-18)
Statement Format and Data Sources (pg. 2-18)
Review 2-4 (pg. 2-20)
Articulation of Financial Statements (pg. 2-20)
Retained Earnings Reconciliation (pg. 2-20)
Financial Statement Linkages (pg. 2-20)
Review 2-5 (pg. 2-22)
Additional Information Sources (pg. 2-22)
Form 10-K (pg. 2-22)
Form 20-F and Form 40-F (pg. 2-24)
Form 8-K (pg. 2-25)
Analyst Reports (pg. 2-25)
Credit Services (pg. 2-26)
Data Services (pg. 2-26)
Review 2-6 (pg. 2-26)
Global Accounting (pg. 2-26)
Balance Sheet (pg. 2-26)
Income Statement (pg. 2-26)
Guidance Answers (pg. 2-27)
Questions (pg. 2-27)
Mini Exercises (pg. 2-28)
Exercises (pg. 2-29)
Problems (pg. 2-34)
IFRS Applications (pg. 2-38)
Management Applications (pg. 2-38)
Ongoing Project (pg. 2-39)
Solutions to Review Problems (pg. 2-40)
Review 2-1-Solution (pg. 2-40)
Review 2-2-Solution (pg. 2-40)
Review 2-3-Solution (pg. 2-40)
Review 2-4-Solution (pg. 2-41)
Review 2-5-Solution (pg. 2-41)
Review 2-6-Solution (pg. 2-42)
Module 3 Transactions, Adjustments, and Financial Statements (pg. 3-1)
Preview (pg. 3-1)
Basics of Accounting (pg. 3-3)
Four-Step Accounting Cycle (pg. 3-3)
Financial Statement Effects Template (pg. 3-3)
Review 3-1 (pg. 3-5)
Accounting Cycle Step 1-Analyze Transactions and Prepare Entries (pg. 3-6)
Apple’s Transactions (pg. 3-6)
Applying the Financial Statement Effects Template (pg. 3-6)
Applying the Journal Entry and T-Account (pg. 3-6)
 Review 3-2 (pg. 3-8)
Accounting Cycle Step 2-Prepare Accounting Adjustments (pg. 3-9)
Four Types of Accounting Adjustments (pg. 3-9)
Prepaid Expenses (pg. 3-10)
Unearned Revenues (pg. 3-10)
Accrued Expenses (pg. 3-11)
Accrued Revenues (pg. 3-12)
Accounting Adjustments for Apple (pg. 3-12)
Review 3-3 (pg. 3-13)
Accounting Cycle Step 3-Prepare Financial Statements (pg. 3-13)
Income Statement (pg. 3-13)
Balance Sheet (pg. 3-14)
Statement of Stockholders’ Equity (pg. 3-15)
Review 3-4 (pg. 3-16)
Accounting Cycle Step 4-Close the Books (pg. 3-16)
Closing with the Template (pg. 3-16)
Closing with Journal Entries (pg. 3-16)
1. Close Revenue and Gain Accounts. (pg. 3-16)
2. Close Expense and Loss Accounts. (pg. 3-17)
3. Close Dividend Account. (pg. 3-17)
Accounting Cycle Summarized (pg. 3-17)
Review 3-5 (pg. 3-18)
Global Accounting (pg. 3-18)
Appendix 3A: FASB’s Financial Statement Presentation Project (pg. 3-19)
Guidance Answers (pg. 3-19)
Questions (pg. 3-20)
Mini Exercises (pg. 3-20)
Exercises (pg. 3-23)
Problems (pg. 3-27)
IFRS Applications (pg. 3-32)
Management Applications (pg. 3-33)
Solutions to Review Problems (pg. 3-35)
Review 3-1-Solution (pg. 3-35)
Review 3-2-Solution (pg. 3-36)
Review 3-3-Solution (pg. 3-36)
Review 3-4-Solution (pg. 3-37)
Review 3-5-Solution (pg. 3-37)
Module 4 Analyzing and Interpreting Financial Statements (pg. 4-1)
Preview (pg. 4-1)
Return on Equity (ROE) (pg. 4-3)
Review 4-1 (pg. 4-3)
ROE Disaggregation: DuPont Analysis (pg. 4-4)
Return on Assets (pg. 4-4)
Financial Leverage (pg. 4-5)
Review 4-2 (pg. 4-5)
Return on Assets and Its Disaggregation (pg. 4-6)
Analysis of Profitability and Productivity (pg. 4-7)
Analysis of Profitability (pg. 4-8)
Analysis of Productivity (pg. 4-9)
Analysis of Financial Leverage (pg. 4-12)
Review 4-3 (pg. 4-14)
Balance Sheet Analysis with an Operating Focus (pg. 4-14)
Operating and Nonoperating Returns (pg. 4-14)
Operating and Nonoperating Liabilities (pg. 4-15)
Return on Net Operating Assets (RNOA) (pg. 4-15)
Net Operating Assets (NOA) (pg. 4-15)
Net Nonoperating Obligations (NNO) (pg. 4-17)
Review 4-4 (pg. 4-18)
Income Statement Analysis with an Operating Focus (pg. 4-19)
Operating Line Items on the Income Statement (pg. 4-19)
Nonoperating Line Items on the Income Statement (pg. 4-19)
Net Nonoperating Expense (NNE) (pg. 4-22)
Review 4-5 (pg. 4-22)
Return on Net Operating Assets (RNOA) (pg. 4-23)
RNOA vs ROA (pg. 4-23)
Financial leverage (pg. 4-24)
Review 4-6 (pg. 4-25)
RNOA Disaggregation into Margin and Turnover (pg. 4-25)
Net Operating Profit Margin (pg. 4-25)
Net Operating Asset Turnover (pg. 4-26)
Trade-Off between Margin and Turnover (pg. 4-27)
Review 4-7 (pg. 4-29)
Global Accounting (pg. 4-29)
Appendix 4A: Operating versus Nonoperating Classification (pg. 4-30)
Appendix 4B: Nonoperating Return Component of ROE (pg. 4-31)
Nonoperating Return (pg. 4-31)
Nonoperating Return- With Substantial Net Nonoperating Assets: Amazon (pg. 4-33)
Nonoperating Return- With Noncontrolling Interest: AT&T (pg. 4-34)
Appendix 4C: Liquidity and Solvency Analysis (pg. 4-35)
Liquidity Analysis (pg. 4-36)
Current Ratio (pg. 4-36)
Quick Ratio (pg. 4-36)
Solvency Analysis (pg. 4-37)
Liabilities-to-Equity (pg. 4-37)
Times Interest Earned (pg. 4-38)
Vertical and Horizontal Analysis (pg. 4-38)
Limitations of Ratio Analysis (pg. 4-40)
Review 4-9 (pg. 4-41)
Guidance Answers (pg. 4-41)
Questions (pg. 4-42)
Mini Exercises (pg. 4-42)
Exercises (pg. 4-46)
Problems (pg. 4-50)
IFRS Applications (pg. 4-57)
Management Applications (pg. 4-57)
Ongoing Project (pg. 4-58)
Solutions to Review Problems (pg. 4-59)
Review 4-1-Solution (pg. 4-59)
Review 4-2-Solution (pg. 4-59)
Review 4-3-Solution (pg. 4-59)
Review 4-4-Solution (pg. 4-60)
Review 4-5-Solution (pg. 4-60)
Review 4-6-Solution (pg. 4-60)
Review 4-7-Solution (pg. 4-60)
Review 4-8-Solution (pg. 4-60)
Review 4-9-Solution (pg. 4-61)
Module 5 Revenues, Receivables, and Operating Expenses (pg. 5-1)
Preview (pg. 5-1)
Revenue (pg. 5-3)
Revenue Recognition Rules (pg. 5-4)
Complications of Revenue Recognition (pg. 5-5)
Performance Obligations Satisfied Over Time (pg. 5-7)
Review 5-1 (pg. 5-11)
Sales Allowances (pg. 5-11)
Accounting for Sales Allowances (pg. 5-11)
Reporting Sales Allowances (pg. 5-12)
Analysis of Sales Allowances (pg. 5-13)
Review 5-2 (pg. 5-13)
Unearned (Deferred) Revenue (pg. 5-14)
Review 5-3 (pg. 5-15)
Foreign Currency Effects on Revenue, Expenses, and Cash Flow (pg. 5-15)
Foreign Currency and Cash Flows (pg. 5-16)
Foreign Currency and Income (pg. 5-17)
Foreign Currency and Future Results (pg. 5-17)
Review 5-4 (pg. 5-18)
Accounts Receivable (pg. 5-19)
Aging Analysis of Receivables (pg. 5-19)
Accounting for Accounts Receivable (pg. 5-20)
Analysis of Accounts Receivable-Magnitude (pg. 5-21)
Analysis of Accounts Receivable-Quality (pg. 5-22)
Review 5-5 (pg. 5-24)
Expenses and Losses (pg. 5-25)
Deductions from Income (pg. 5-25)
Research and Development Expense (pg. 5-26)
Provision (Benefit) for Taxes on Income (pg. 5-28)
Discontinued Operations (pg. 5-28)
Review 5-6 (pg. 5-30)
Pro Forma Income Reporting (pg. 5-31)
Regulation G Reconciliation (pg. 5-31)
SEC Warnings about Pro Forma Numbers (pg. 5-32)
Disclosures and Market Assessments (pg. 5-32)
Review 5-7 (pg. 5-34)
Global Accounting (pg. 5-35)
Revenue Recognition (pg. 5-35)
Accounts Receivable (pg. 5-35)
Research and Development (pg. 5-35)
Guidance Answers (pg. 5-35)
Questions (pg. 5-35)
Mini Exercises (pg. 5-36)
Exercises (pg. 5-40)
Problems (pg. 5-47)
IFRS Applications (pg. 5-53)
Management Applications (pg. 5-54)
Ongoing Project (pg. 5-54)
Solutions to Review Problems (pg. 5-55)
Review 5-1-Solution (pg. 5-55)
Review 5-2-Solution (pg. 5-55)
Review 5-3-Solution (pg. 5-56)
Review 5-4-Solution (pg. 5-56)
Review 5-5-Solution (pg. 5-57)
Review 5-6-Solution (pg. 5-57)
Review 5-7-Solution (pg. 5-58)
Module 6 Inventories, Accounts Payable, and Long-Term Assets (pg. 6-1)
Preview (pg. 6-1)
Inventory-Costing Methods (pg. 6-3)
First-In, First-Out (FIFO) (pg. 6-4)
Last-In, First-Out (LIFO) (pg. 6-5)
Average Cost (AC) (pg. 6-5)
Financial Statement Effects of Inventory Costing (pg. 6-7)
Review 6-1 (pg. 6-8)
Inventory-Reporting (pg. 6-8)
Lower of Cost or Market (LCM) (pg. 6-8)
LIFO Reserve Adjustments to Financial Statements (pg. 6-9)
LIFO Liquidations (pg. 6-11)
Review 6-2 (pg. 6-11)
Inventory-Analysis Tools (pg. 6-12)
Gross Profit Analysis (pg. 6-12)
Days Inventory Outstanding and Inventory Turnover (pg. 6-13)
Days Payable Outstanding (pg. 6-15)
Cash Conversion Cycle (pg. 6-16)
Review 6-3 (pg. 6-17)
PPE Assets-Capitalization and Depreciation (pg. 6-17)
Plant and Equipment (pg. 6-18)
Research and Development Facilities and Equipment (pg. 6-19)
Review 6-4 (pg. 6-20)
PPE Assets-Sales, Impairments, and Restructuring (pg. 6-20)
Asset Sales (pg. 6-20)
Asset Impairments (pg. 6-21)
Restructuring Costs (pg. 6-22)
Review 6-5 (pg. 6-24)
PPE Assets-Analysis Tools (pg. 6-25)
PPE Turnover (pg. 6-25)
PPE Useful Life (pg. 6-26)
PPE Percent Used Up (pg. 6-27)
Review 6-6 (pg. 6-27)
Global Accounting (pg. 6-27)
Inventory (pg. 6-27)
Property, plant, and equipment (pg. 6-28)
Research and Development (pg. 6-28)
Restructuring (pg. 6-28)
Guidance Answers (pg. 6-28)
Questions (pg. 6-29)
Mini Exercises (pg. 6-30)
Exercises (pg. 6-32)
Problems (pg. 6-38)
IFRS Applications (pg. 6-40)
Management Applications (pg. 6-42)
Ongoing Project (pg. 6-42)
Solutions to Review Problems (pg. 6-43)
Review 6-1-Solution (pg. 6-43)
Review 6-2-Solution (pg. 6-43)
Review 6-3-Solution (pg. 6-44)
Review 6-4-Solution (pg. 6-44)
Review 6-5-Solution (pg. 6-44)
Review 6-6-Solution (pg. 6-44)
Module 7 Current and Long-Term Liabilities (pg. 7-1)
Preview (pg. 7-1)
Accrued Liabilities (pg. 7-3)
Accrued Liabilities Defined (pg. 7-3)
Accruals for Contractual Liabilities-Wages Payable Example (pg. 7-4)
Accruals for Contractual Liabilities-Deferred Revenue Example (pg. 7-4)
Accruals for Contingent Liabilities (pg. 7-5)
Accruals for Contingent Liabilities-Warranties Example (pg. 7-5)
Review 7-1 (pg. 7-7)
Short-Term Debt (pg. 7-7)
Accounting for Short-Term Debt (pg. 7-7)
Current Maturities of Long-Term Debt (pg. 7-8)
Review 7-2 (pg. 7-9)
Long-Term Debt-Pricing (pg. 7-9)
Pricing of Bonds Issued at Par (pg. 7-10)
Pricing of Bonds Issued at a Discount (pg. 7-10)
Pricing of Bonds Issued at a Premium (pg. 7-11)
Effective Cost of Debt (pg. 7-11)
Review 7-3 (pg. 7-13)
Long-Term Debt-Reporting (pg. 7-13)
Balance Sheet Reporting (pg. 7-13)
Income Statement Reporting (pg. 7-14)
Financial Statement Effects of Bond Repurchase (pg. 7-14)
Review 7-4 (pg. 7-16)
Quality of Debt (pg. 7-16)
Credit Analysis (pg. 7-16)
What Are Credit Ratings? (pg. 7-18)
What Determines Credit Ratings? (pg. 7-18)
Verizon Credit Rating Example (pg. 7-21)
Why Credit Ratings Matter (pg. 7-23)
Review 7-5 (pg. 7-24)
Global Accounting (pg. 7-24)
Appendix 7A: Time Value of Money (pg. 7-25)
Present Value Concepts (pg. 7-25)
Present Value of a Single Amount (pg. 7-25)
Time Value of Money Tables (pg. 7-25)
Present Value of an Annuity (pg. 7-26)
Bond Valuation (pg. 7-27)
Time Value of Money Computations Using a Calculator (pg. 7-28)
Time Value of Money Computations Using Excel (pg. 7-28)
Future Value Concepts Future Value of a Single Amount (pg. 7-30)
Future Value of an Annuity (pg. 7-30)
Review 7-6 (pg. 7-30)
Appendix 7B: Amortization of Debt (pg. 7-31)
Amortization of Discount (pg. 7-31)
Amortization of Premium (pg. 7-32)
Guidance Answers (pg. 7-32)
Questions (pg. 7-32)
Mini Exercises (pg. 7-33)
Exercises (pg. 7-36)
Problems (pg. 7-41)
IFRS Applications (pg. 7-46)
Management Applications (pg. 7-48)
Solutions to Review Problems (pg. 7-48)
Review 7-1-Solution (pg. 7-48)
Review 7-2-Solution (pg. 7-49)
Review 7-3-Solution (pg. 7-49)
Review 7-4-Solution (pg. 7-49)
Review 7-5-Solution (pg. 7-51)
Review 7-6-Solution (pg. 7-51)
Module 8 Stock Transactions, Dividends, and EPS (pg. 8-1)
Preview (pg. 8-1)
Stockholders’ Equity and Classes of Stock (pg. 8-3)
Stockholders’ Equity Accounts (pg. 8-3)
Statement of Stockholders’ Equity (pg. 8-5)
Preferred Stock (pg. 8-6)
Common Stock (pg. 8-7)
Review 8-1 (pg. 8-8)
Stock Transactions (pg. 8-9)
Stock Issuance (pg. 8-9)
Stock Repurchase (Treasury Stock) (pg. 8-10)
Review 8-2 (pg. 8-12)
Stock-Based Compensation (pg. 8-13)
Characteristics of Stock-Based Compensation Plans (pg. 8-13)
Analysis of Stock-Based Compensation Plans (pg. 8-13)
Accounting for Stock-Based Compensation (pg. 8-14)
Footnote Disclosures for Stock-Based Compensation (pg. 8-15)
Review 8-3 (pg. 8-16)
Dividends and Stock Splits (pg. 8-16)
Cash Dividend Disclosures (pg. 8-17)
Dividend Payout and Yield (pg. 8-17)
Cash Dividends Financial Effects (pg. 8-17)
Stock Split (pg. 8-18)
Review 8-4 (pg. 8-19)
Accumulated Other Comprehensive Income (pg. 8-19)
AOCI Components (pg. 8-19)
AOCI Disclosures and Interpretation (pg. 8-20)
Review 8-5 (pg. 8-21)
Convertible Securities (pg. 8-22)
Convertible Securities Disclosures and Interpretation (pg. 8-22)
Convertible Securities Financial Effects (pg. 8-23)
Review 8-6 (pg. 8-23)
Earnings per Share (EPS) (pg. 8-23)
EPS Disclosures (pg. 8-24)
Review 8-7 (pg. 8-25)
Global Accounting (pg. 8-25)
Appendix 8A: Stock-Based Compensation: Reporting and Analyzing (pg. 8-26)
Employee Stock Purchase Plans (ESPP) (pg. 8-26)
Stock Awards (pg. 8-27)
Stock Options (pg. 8-27)
Stock Appreciation Rights (SAR) (pg. 8-28)
Summary of Share-Based Compensation (pg. 8-28)
Analysis Implications (pg. 8-28)
Guidance Answers (pg. 8-29)
Questions (pg. 8-30)
Mini Exercises (pg. 8-31)
Exercises (pg. 8-34)
Problems (pg. 8-39)
IFRS Applications (pg. 8-48)
Ongoing Project (pg. 8-50)
Solutions to Review Problems (pg. 8-51)
Review 8-1-Solution (pg. 8-51)
Review 8-2-Solution (pg. 8-51)
Review 8-3-Solution (pg. 8-52)
Review 8-4-Solution (pg. 8-52)
Review 8-5-Solution (pg. 8-52)
Review 8-6-Solution (pg. 8-53)
Review 8-7-Solution (pg. 8-53)
Module 9 Intercorporate Investments (pg. 9-1)
Preview (pg. 9-1)
Intercorporate Investments (pg. 9-3)
Passive Investments in Equity Securities (pg. 9-4)
Investments in Debt Securities (pg. 9-8)
Review 9-1 (pg. 9-11)
Equity Investments with Significant Influence (pg. 9-12)
Accounting for Investments with Significant Influence (pg. 9-12)
Equity Method Accounting and ROE Effects (pg. 9-14)
Review 9-2 (pg. 9-17)
Equity Investments with Control (pg. 9-17)
Accounting for Investments with Control (pg. 9-18)
Review 9-3 (pg. 9-27)
Global Accounting (pg. 9-28)
Passive Investments (pg. 9-28)
Equity Method Investment (pg. 9-28)
Consolidation (pg. 9-28)
Appendix 9A: Accounting for Derivatives (pg. 9-29)
Analysis of Derivatives (pg. 9-30)
Review 9-4 (pg. 9-31)
Appendix 9B: Equity Carve-Outs (pg. 9-32)
Analysis of Equity Carve-Outs (pg. 9-36)
Guidance Answers (pg. 9-36)
Questions (pg. 9-36)
Mini Exercises (pg. 9-37)
Exercises (pg. 9-41)
Problems (pg. 9-50)
IFRS Applications (pg. 9-52)
Ongoing Project (pg. 9-54)
Solutions to Review Problems (pg. 9-55)
Review 9-1-Solution (pg. 9-55)
Review 9-2-Solution (pg. 9-55)
Review 9-3-Solution (pg. 9-56)
Review 9-4-Solution (pg. 9-56)
Module 10 Leases, Pensions, and Income Taxes (pg. 10-1)
Preview (pg. 10-1)
Leases (pg. 10-3)
New Lease Reporting Standard (pg. 10-3)
Lessee Reporting Example-Microsoft Corporation (pg. 10-4)
Lease Accounting (pg. 10-5)
Summary of Lease Accounting and Reporting (pg. 10-9)
Analysis Issues Relating to Leases (pg. 10-10)
Review 10-1 (pg. 10-11)
Pensions (pg. 10-11)
Defined Benefit Pension Plans on the Balance Sheet (pg. 10-12)
Analysis Issue-Sufficiency of Plan Assets to Pay Pension Obligations (pg. 10-13)
Defined Benefit Pension Plans on the Income Statement (pg. 10-15)
Pension Expense Smoothing (pg. 10-16)
Fair Value Accounting for Pensions (pg. 10-19)
Footnote Disclosure-Key Assumptions (pg. 10-21)
Analysis Implications (pg. 10-22)
Other Post-Employment Benefits (OPEB) (pg. 10-23)
Review 10-2 (pg. 10-23)
Income Taxes (pg. 10-24)
Timing Differences Create Deferred Tax Assets and Liabilities (pg. 10-24)
Disclosures for Income Taxes (pg. 10-29)
Analysis of Income Tax Disclosures (pg. 10-30)
Expanded Explanation of Deferred Taxes (pg. 10-31)
Review 10-3 (pg. 10-33)
Global Accounting (pg. 10-35)
Leases (pg. 10-35)
Pensions (pg. 10-35)
Income Taxes (pg. 10-35)
Appendix 10A: Lease Accounting Example- Finance and Operating Leases (pg. 10-35)
Questions (pg. 10-36)
Mini Exercises (pg. 10-37)
Exercises (pg. 10-42)
Problems (pg. 10-50)
IFRS Applications (pg. 10-59)
Ongoing Project (pg. 10-61)
Solutions to Review Problems (pg. 10-61)
Review 10-1-Solution (pg. 10-61)
Review 10-2-Solution (pg. 10-62)
Review 10-3-Solution (pg. 10-62)
Module 11 Cash Flows (pg. 11-1)
Preview (pg. 11-2)
Framework for Statement of Cash Flows (pg. 11-3)
Relation Among Financial Statements (pg. 11-3)
Statement of Cash Flows Structure (pg. 11-4)
Operating Activities Preview (pg. 11-5)
Investing Activities Preview (pg. 11-8)
Financing Activities Preview (pg. 11-8)
Review 11-1 (pg. 11-8)
Cash Flow from Operating Activities (pg. 11-9)
Steps to Compute Net Cash Flow from Operating Activities (pg. 11-10)
Java House Case Illustration (pg. 11-11)
Review 11-2 (pg. 11-15)
Computing Cash Flows from Investing Activities (pg. 11-16)
Analyze Remaining Noncash Assets (pg. 11-16)
Java House Case Illustration (pg. 11-16)
Review 11-3 (pg. 11-18)
Cash Flows from Financing Activities (pg. 11-18)
Analyze Remaining Liabilities and Equity (pg. 11-18)
Java House Case Illustration (pg. 11-18)
Review 11-4A (pg. 11-19)
Computing Cash Flows from Balance Sheet Accounts (pg. 11-19)
Supplemental Disclosures for the Indirect Method (pg. 11-20)
Review 11-4B (pg. 11-21)
Analysis of Cash Flow Information (pg. 11-21)
Cash Flow Components (pg. 11-21)
Cash Flow Patterns (pg. 11-23)
Usefulness of the Statement of Cash Flows (pg. 11-25)
Review 11-5 (pg. 11-27)
Ratio Analyses of Cash Flows (pg. 11-27)
Free Cash Flow (pg. 11-28)
Review 11-6 (pg. 11-29)
Appendix 11A: Direct Method Reporting for Statement of Cash Flows (pg. 11-29)
Cash Flows from Operating Activities (pg. 11-29)
Converting Revenues and Expenses to Cash Flows (pg. 11-29)
Java House Case Illustration (pg. 11-29)
Convert Sales to Cash Received from Customers (pg. 11-30)
Convert Cost of Goods Sold to Cash Paid for Merchandise Purchased (pg. 11-30)
Convert Wages Expense to Cash Paid to Employees (pg. 11-31)
Convert Insurance Expense to Cash Paid for Insurance (pg. 11-31)
Eliminate Depreciation Expense and Other Noncash Operating Expenses (pg. 11-31)
Convert Income Tax Expense to Cash Paid for Income Taxes (pg. 11-31)
Omit Gains and Losses Related to Investing and Financing Activities (pg. 11-31)
Cash Flows from Investing and Financing (pg. 11-32)
Supplemental Disclosures (pg. 11-32)
Review 11-7 (pg. 11-32)
Guidance Answers (pg. 11-32)
Questions (pg. 11-33)
Mini Exercises (pg. 11-34)
Exercises (pg. 11-37)
Problems (pg. 11-43)
IFRS Applications (pg. 11-55)
Solutions to Review Problems (pg. 11-56)
Review 11-1-Solution (pg. 11-56)
Review 11-2-Solution (pg. 11-56)
Review 11-3-Solution (pg. 11-57)
Review 11-4A-Solution (pg. 11-57)
Review 11-4B-Solution (pg. 11-57)
Review 11-5-Solution (pg. 11-57)
Review 11-6-Solution (pg. 11-58)
Review 11-7-Solution (pg. 11-58)
Module 12 Financial Statement Forecasting (pg. 12-1)
Preview (pg. 12-1)
Forecasting Process (pg. 12-3)
Adjusted Financial Statements (pg. 12-3)
Forecasting Order of Financial Statements (pg. 12-3)
Morgan Stanley Forecasting Process (pg. 12-4)
Forecasting Mechanics (pg. 12-4)
Forecasting Consistency and Precision (pg. 12-4)
Company Guidance (pg. 12-5)
Review 12-1 (pg. 12-6)
Forecasting the Income Statement (pg. 12-8)
Overview (pg. 12-8)
Sales as the Income Statement Forecast Driver (pg. 12-9)
Cost of Goods Sold (COGS) (pg. 12-9)
SGA Expense (pg. 12-9)
Interest Expense (pg. 12-9)
Income Tax Expense (pg. 12-10)
Review 12-2 (pg. 12-11)
Forecasting the Balance Sheet (pg. 12-12)
Overview Here is a high-level overview of balance sheet forecasting-details follow. Working (pg. 12-12)
Working Capital Accounts (pg. 12-12)
PPE (Property, Plant and Equipment) Assets (pg. 12-12)
Intangible Assets (pg. 12-14)
Long-Term Debt (LTD) (pg. 12-14)
Retained Earnings (pg. 12-14)
Dividends (pg. 12-15)
Treasury Stock (pg. 12-15)
Cash Plug (the plug) (pg. 12-15)
Estimating the Normal Cash Level (pg. 12-15)
When Cash Plug Deviates from Norm (pg. 12-15)
Maintaining the Capital Structure (pg. 12-16)
Review 12-3 (pg. 12-16)
Building Forecasts from the Bottom Up (pg. 12-16)
Segment Data (pg. 12-16)
Review 12-4 (pg. 12-18)
Appendix 12A: Forecasting the Statement of Cash Flows (pg. 12-19)
Review 12-5 (pg. 12-20)
Appendix 12B: Multiyear Forecasting with Target Cash and New Debt Financing (pg. 12-20)
Forecasting Sensitivity Analysis (pg. 12-21)
Review 12-6 (pg. 12-22)
Appendix 12C: Parsimonious Method for Forecasting NOPAT and NOA (pg. 12-22)
Multiyear Forecasting with Parsimonious Method (pg. 12-22)
Review 12-7 (pg. 12-23)
Appendix 12D: Morgan Stanley’s Forecast Report on Procter & Gamble (pg. 12-23)
Questions (pg. 12-31)
Mini Exercises (pg. 12-31)
Exercises (pg. 12-37)
Problems (pg. 12-45)
Ongoing Project (pg. 12-51)
Solutions to Review Problems (pg. 12-51)
Review 12-1-Solution (pg. 12-51)
Review 12-2-Solution (pg. 12-52)
Review 12-3-Solution (pg. 12-52)
Review 12-4-Solution (pg. 12-53)
Review 12-5-Solution (pg. 12-54)
Review 12-6-Solution (pg. 12-54)
Review 12-7-Solution (pg. 12-55)
Module 13 Using Financial Statements for Valuation (pg. 13-1)
Preview (pg. 13-2)
Equity Valuation Models (pg. 13-3)
Dividend Discount Model (pg. 13-3)
Discounted Cash Flow Model (pg. 13-3)
Residual Operating Income Model (pg. 13-3)
Valuation Model Inputs (pg. 13-4)
Review 13-1 (pg. 13-5)
Discounted Cash Flow (DCF) Model (pg. 13-5)
DCF Model Structure (pg. 13-5)
Steps in Applying the DCF Model (pg. 13-6)
Illustrating the DCF Model (pg. 13-6)
Review 13-2 (pg. 13-8)
Residual Operating Income (ROPI) Model (pg. 13-9)
ROPI Model Structure (pg. 13-9)
Steps in Applying the ROPI Model (pg. 13-9)
Illustrating the ROPI Model (pg. 13-10)
Review 13-3 (pg. 13-11)
Further Considerations Involving Valuation Models (pg. 13-11)
Managerial Insights from the ROPI Model (pg. 13-11)
Assessment of Valuation Models (pg. 13-12)
Review 13-4 (pg. 13-13)
Global Accounting (pg. 13-14)
Appendix 13A: Derivation of Free Cash Flow Formula (pg. 13-14)
Appendix 13B: Deutsche Bank Valuation of Procter & Gamble (pg. 13-14)
Qualitative and Quantitative Summary (pg. 13-14)
Concluding Observations of Analyst Report (pg. 13-25)
Guidance Answers (pg. 13-25)
Mini Exercises (pg. 13-26)
Exercises (pg. 13-27)
Problems (pg. 13-31)
Management Applications (pg. 13-36)
Ongoing Project (pg. 13-37)
Solutions to Review Problems (pg. 13-38)
Review 13-1-Solution (pg. 13-38)
Review 13-2-Solution (pg. 13-38)
Review 13-3-Solution (pg. 13-39)
Review 13-4-Solution (pg. 13-39)
Module 14 Managerial Accounting for MBAs (pg. 14-1)
Preview (pg. 14-1)
Uses of Accounting Information (pg. 14-3)
Financial Accounting (pg. 14-3)
Managerial Accounting (pg. 14-4)
Review 14-1 (pg. 14-5)
Strategic Cost Management (pg. 14-5)
Review 14-2 (pg. 14-6)
Missions, Goals, and Strategies (pg. 14-6)
An Organization’s Mission and Goals (pg. 14-6)
Strategic Position Analysis (pg. 14-7)
Managerial Accounting and Goal Attainment (pg. 14-9)
Planning, Organizing, and Controlling (pg. 14-10)
Review 14-3 (pg. 14-11)
Changing Environment of Business (pg. 14-12)
Global Competition and Its Key Dimensions (pg. 14-12)
Big Data and Analysis (pg. 14-12)
Robotics and Cognitive Technologies (pg. 14-12)
Enterprise Risk Management (ERM) (pg. 14-13)
Review 14-4 (pg. 14-13)
Ethics in Managerial Accounting (pg. 14-13)
Codes of Ethics (pg. 14-15)
Corporate Governance (pg. 14-15)
Sustainability Accounting and Corporate Social Responsibility (pg. 14-16)
Review 14-5 (pg. 14-17)
Cost Drivers (pg. 14-17)
Structural Cost Drivers (pg. 14-18)
Organizational Cost Drivers (pg. 14-19)
Activity Cost Drivers (pg. 14-19)
Review 14-6 (pg. 14-20)
Guidance Answers (pg. 14-20)
Questions (pg. 14-21)
Mini Exercises (pg. 14-21)
Exercises (pg. 14-23)
Management Applications (pg. 14-24)
Solutions to Review Problems (pg. 14-26)
Review 14-1-Solution (pg. 14-26)
Review 14-2-Solution (pg. 14-27)
Review 14-3-Solution (pg. 14-27)
Review 14-4-Solution (pg. 14-27)
Review 14-5-Solution (pg. 14-27)
Review 14-6-Solution (pg. 14-28)
Module 15 Cost Behavior, Activity Analysis, and Cost Estimation (pg. 15-1)
Preview (pg. 15-1)
Cost Behavior Analysis (pg. 15-3)
Four Basic Cost Behavior Patterns (pg. 15-3)
Factors Affecting Cost Behavior Patterns (pg. 15-5)
Review 15-1 (pg. 15-5)
Total Cost Function for an Organization or Segment (pg. 15-6)
Relevant Range (pg. 15-7)
Additional Cost Behavior Patterns (pg. 15-8)
Committed and Discretionary Fixed Costs (pg. 15-10)
Review 15-2 (pg. 15-11)
Cost Estimation (pg. 15-11)
High-Low Cost Estimation (pg. 15-11)
Scatter Diagrams (pg. 15-13)
Least-Squares Regression (pg. 15-14)
Review 15-3 (pg. 15-16)
Additional Issues in Cost Estimation (pg. 15-17)
Changes in Technology and Prices (pg. 15-17)
Matching Activity and Costs (pg. 15-17)
Identifying Activity Cost Drivers (pg. 15-18)
Alternative Cost Driver Classifications (pg. 15-18)
Manufacturing Cost Hierarchy (pg. 15-19)
Customer Cost Hierarchy (pg. 15-20)
Review 15-5 (pg. 15-21)
Guidance Answers (pg. 15-21)
Questions (pg. 15-22)
Mini Exercises (pg. 15-22)
Exercises (pg. 15-24)
Problems (pg. 15-27)
Management Applications (pg. 15-29)
Solutions to Review Problems (pg. 15-32)
Review 15-1-Solution (pg. 15-32)
Review 15-2-Solution (pg. 15-32)
Review 15-3-Solution (pg. 15-33)
Review 15-4-Solution (pg. 15-33)
Review 15-5-Solution (pg. 15-33)
Module 16 Cost-Volume-Profit Analysis and Planning (pg. 16-1)
Preview (pg. 16-1)
Cost-Volume-Profit Analysis (pg. 16-3)
Key Assumptions (pg. 16-3)
Profit Formula (pg. 16-5)
Review 16-1 (pg. 16-6)
Contribution and Functional Income Statements (pg. 16-7)
Contribution Income Statement (pg. 16-7)
Functional Income Statement (pg. 16-7)
Analysis Using Contribution Margin Ratio (pg. 16-8)
Review 16-2 (pg. 16-8)
Break-Even Point and Profit Planning (pg. 16-9)
Determining Break-Even Point in Units (pg. 16-9)
Profit Planning (pg. 16-10)
Cost-Volume-Profit Graph (pg. 16-11)
Profit-Volume Graph (pg. 16-11)
Impact of Income Taxes (pg. 16-13)
Review 16-3 (pg. 16-14)
Multiple-Product Cost-Volume-Profit Analysis (pg. 16-15)
Determining Break-Even and Target Profit Sales Dollars (pg. 16-15)
Sales Mix Analysis (pg. 16-15)
Review 16-4 (pg. 16-18)
Analysis of Operating Leverage (pg. 16-18)
Review 16-5 (pg. 16-20)
Appendix 16A: Profitability Analysis with Unit and Nonunit Cost Drivers (pg. 16-21)
Multi-Level Contribution Income Statement (pg. 16-21)
Variations in Multi-Level Contribution Income Statement (pg. 16-23)
Review 16-6 (pg. 16-24)
Guidance Answers (pg. 16-24)
Questions (pg. 16-24)
Mini Exercises (pg. 16-24)
Exercises (pg. 16-26)
Problems (pg. 16-30)
Management Applications (pg. 16-35)
Solutions to Review Problems (pg. 16-36)
Review 16-1-Solution (pg. 16-36)
Review 16-2-Solution (pg. 16-36)
Review 16-3-Solution (pg. 16-37)
Review 16-4-Solution (pg. 16-37)
Review 16-5-Solution (pg. 16-38)
Review 16-6-Solution (pg. 16-38)
Module 17 Relevant Costs and Benefits for Decision Making (pg. 17-1)
Preview (pg. 17-1)
Identifying Relevant Costs (pg. 17-3)
Relevance of Future Revenues (pg. 17-4)
Relevance of Outlay Costs (pg. 17-4)
Irrelevance of Sunk Costs (pg. 17-4)
Sunk Costs Can Cause Ethical Dilemmas (pg. 17-5)
Relevance of Disposal and Salvage Values (pg. 17-5)
Relevance of Opportunity Costs (pg. 17-5)
Review 17-1 (pg. 17-6)
Differential Analysis of Relevant Costs (pg. 17-7)
Review 17-2 (pg. 17-8)
Applying Differential Analysis (pg. 17-8)
Multiple Changes in Profit Plans (pg. 17-8)
Review 17-3 (pg. 17-9)
Special Orders (pg. 17-10)
Review 17-4 (pg. 17-12)
Outsourcing Decisions (Make or Buy) (pg. 17-13)
Review 17-5 (pg. 17-16)
Sell or Process Further (pg. 17-16)
Review 17-6 (pg. 17-18)
Use of Limited Resources (pg. 17-18)
Single Constraint (pg. 17-19)
Multiple Constraints (pg. 17-19)
Theory of Constraints (pg. 17-20)
Limitations of Decision Analysis Models (pg. 17-21)
Review 17-7 (pg. 17-21)
Guidance Answers (pg. 17-21)
Questions (pg. 17-22)
Mini Exercises (pg. 17-22)
Exercises (pg. 17-25)
Problems (pg. 17-29)
Management Applications (pg. 17-33)
Solutions to Review Problems (pg. 17-36)
Review 17-1-Solution (pg. 17-36)
Review 17-2-Solution (pg. 17-36)
Review 17-3-Solution (pg. 17-37)
Review 17-4-Solution (pg. 17-37)
Review 17-5-Solution (pg. 17-38)
Review 17-6-Solution (pg. 17-38)
Review 17-7-Solution (pg. 17-38)
Module 18 Product Costing: Job and Process Operations (pg. 18-1)
Preview (pg. 18-1)
Inventory Costs in Various Organizations (pg. 18-3)
Review 18-1 (pg. 18-3)
Inventory Costs for Financial Reporting (pg. 18-4)
Product Costs and Period Costs (pg. 18-4)
Three Components of Product Costs (pg. 18-5)
A Closer Look at Manufacturing Overhead (pg. 18-6)
Review 18-2 (pg. 18-8)
The Production Environment (pg. 18-9)
Production Files and Records (pg. 18-10)
Review 18-3 (pg. 18-10)
Job Costing for Products and Services (pg. 18-11)
Job Costing Illustrated (pg. 18-12)
Statement of Cost of Goods Manufactured (pg. 18-16)
Overapplied and Underapplied Overhead (pg. 18-17)
Job Costing in Service Organizations (pg. 18-18)
Review 18-4 (pg. 18-19)
Process Costing (pg. 18-20)
Cost of Production Report (pg. 18-21)
Weighted Average and First-In, First-Out Process Costing (pg. 18-24)
Process Costing in Service Organizations (pg. 18-25)
Review 18-5 (pg. 18-25)
Appendix 18A: Absorption and Variable Costing (pg. 18-26)
Basic Concepts (pg. 18-26)
Inventory Valuations (pg. 18-26)
Income Under Absorption and Variable Costing (pg. 18-27)
Production Equals Sales (pg. 18-27)
Production Exceeds Sales (pg. 18-28)
Sales Exceed Production (pg. 18-29)
Evaluating Alternatives to Inventory Valuation (pg. 18-30)
Review 18-6 (pg. 18-31)
Guidance Answers (pg. 18-31)
Questions (pg. 18-32)
Mini Exercises (pg. 18-32)
Exercises (pg. 18-34)
Problems (pg. 18-38)
Management Applications (pg. 18-44)
Solutions to Review Problems (pg. 18-46)
Review 18-1-Solution (pg. 18-46)
Review 18-2-Solution (pg. 18-47)
Review 18-3-Solution (pg. 18-47)
Review 18-4-Solution (pg. 18-47)
Review 18-5-Solution (pg. 18-49)
Review 18-6-Solution (pg. 18-49)
Module 19 Activity-Based Costing, Customer Profitability, and Activity-Based Management (pg. 19-1)
Preview (pg. 19-1)
Activity-Based Costing (ABC) (pg. 19-3)
Changing Cost Environment (pg. 19-3)
Activity-Based Costing Concepts (pg. 19-4)
ABC Product Costing Model (pg. 19-5)
Review 19-2 (pg. 19-6)
Traditional Product Costing and ABC Compared (pg. 19-6)
Applying Overhead with a Plantwide Rate (pg. 19-7)
Applying Overhead with Department Rates (pg. 19-7)
Applying Overhead with Activity-Based Costing (pg. 19-9)
Review 19-3 (pg. 19-12)
Implementation of ABC (pg. 19-13)
Limitations of ABC Illustration (pg. 19-13)
Comparing Traditional and Activity-Based Costing (pg. 19-13)
ABC Implementation Issues (pg. 19-14)
Review 19-4 (pg. 19-15)
ABC and Customer Profitability Analysis (pg. 19-16)
Customer Profitability Profile (pg. 19-16)
ABC Customer Profitability Analysis Illustrated (pg. 19-16)
Review 19-5 (pg. 19-19)
Activity-Based Management (pg. 19-19)
The Difference Between ABC and Activity-Based Managemen (pg. 19-19)
Review 19-6 (pg. 19-20)
Guidance Answers (pg. 19-20)
Questions (pg. 19-21)
Mini Exercises (pg. 19-21)
Exercises (pg. 19-24)
Problems (pg. 19-28)
Management Applications (pg. 19-33)
Solutions to Review Problems (pg. 19-37)
Review 19-1-Solution (pg. 19-37)
Review 19-2-Solution (pg. 19-37)
Review 19-3-Solution (pg. 19-37)
Review 19-4-Solution (pg. 19-39)
Review 19-5-Solution (pg. 19-39)
Review 19-6-Solution (pg. 19-39)
Module 20 Additional Topics in Product Costing (pg. 20-1)
Preview (pg. 20-1)
Production and Service Department Costs (pg. 20-3)
Review 20-1 (pg. 20-3)
Service Department Cost Allocation (pg. 20-4)
Direct Method (pg. 20-5)
Step Method (pg. 20-6)
Linear Algebra (Reciprocal) Method (pg. 20-7)
Dual Rates (pg. 20-9)
Review 20-2 (pg. 20-9)
Lean Production and Just-in-Time Inventory Management (pg. 20-10)
Reducing Incoming Materials Inventory (pg. 20-10)
Reducing Work-in-Process Inventory (pg. 20-11)
Reducing Finished Goods Inventory (pg. 20-12)
Review 20-3 (pg. 20-12)
Performance Evaluation and Recordkeeping with Lean Production and JIT (pg. 20-13)
Performance Evaluation (pg. 20-13)
Simplified Recordkeeping (pg. 20-14)
Review 20-4 (pg. 20-15)
Increased Focus on Data-Driven Decision Making (pg. 20-15)
Review 20-5 (pg. 20-16)
Guidance Answers (pg. 20-17)
Questions (pg. 20-17)
Mini Exercises (pg. 20-17)
Exercises (pg. 20-20)
Problems (pg. 20-21)
Management Applications (pg. 20-26)
Solutions to Review Problems (pg. 20-27)
Review 20-1-Solution (pg. 20-27)
Review 20-2-Solution (pg. 20-27)
Review 20-3-Solution (pg. 20-29)
Review 20-4-Solution (pg. 20-29)
Review 20-5-Solution (pg. 20-29)
Module 21 Pricing and Other Product Management Decisions (pg. 21-1)
Preview (pg. 21-2)
Understanding the Value Chain (pg. 21-3)
Usefulness of a Value Chain Perspective (pg. 21-5)
Value-Added and Value Chain Perspectives (pg. 21-6)
Review 21-1 (pg. 21-7)
The Pricing Decision (pg. 21-7)
Economic Approaches to Pricing (pg. 21-7)
Cost-Based Approaches to Pricing (pg. 21-8)
Review 21-2 (pg. 21-11)
Target Costing (pg. 21-12)
Target Costing Is Proactive for Cost Management (pg. 21-12)
Target Costing Encourages Design for Production (pg. 21-13)
Target Costing Reduces Time to Introduce Products (pg. 21-14)
Target Costing Requires Cost Information (pg. 21-14)
Target Costing Requires Coordination (pg. 21-14)
Target Costing Is Key for Products with Short Life Cycles (pg. 21-15)
Target Costing Helps Manage Life-Cycle Costs (pg. 21-16)
Review 21-3 (pg. 21-17)
Continuous Improvement Costing (pg. 21-17)
Review 21-4 (pg. 21-18)
Benchmarking (pg. 21-18)
Review 21-5 (pg. 21-20)
Guidance Answers (pg. 21-20)
Questions (pg. 21-20)
Mini Exercises (pg. 21-20)
Exercises (pg. 21-22)
Problems (pg. 21-23)
Management Applications (pg. 21-26)
Solutions to Review Problems (pg. 21-27)
Review 21-1-Solution (pg. 21-27)
Review 21-2-Solution (pg. 21-27)
Review 21-3-Solution (pg. 21-28)
Review 21-4-Solution (pg. 21-28)
Review 21-5-Solution (pg. 21-29)
Module 22 Operational Budgeting and Profit Planning (pg. 22-1)
Preview (pg. 22-1)
Reasons for Budgeting (pg. 22-3)
Compel Planning (pg. 22-3)
Promote Communication and Coordination (pg. 22-3)
Provide a Guide to Action and Basis of Evaluation (pg. 22-3)
Aid in Risk Management (pg. 22-3)
Review 22-1 (pg. 22-4)
General Approaches to Budgeting (pg. 22-4)
Output/Input Approach (pg. 22-5)
Activity-Based Approach (pg. 22-5)
Incremental Approach (pg. 22-5)
Minimum Level Approach (pg. 22-5)
Review 22-2 (pg. 22-6)
Master Budget (pg. 22-7)
Sales Budget (pg. 22-9)
Purchases Budget (pg. 22-10)
Selling Expense Budget (pg. 22-10)
General and Administrative Expense Budget (pg. 22-11)
Cash Budget (pg. 22-11)
Budgeted Financial Statements (pg. 22-13)
Finalizing the Budget (pg. 22-14)
Review 22-3 (pg. 22-15)
Budget Development in Manufacturing Organizations (pg. 22-16)
Production Budget (pg. 22-16)
Manufacturing Cost Budget (pg. 22-16)
Review 22-4 (pg. 22-19)
Budget Development and Manager Behavior (pg. 22-20)
Employee Participation (pg. 22-20)
Budgeting Periods (pg. 22-21)
Forecasts (pg. 22-21)
Ethics (pg. 22-22)
Open Book Management (pg. 22-22)
Bookmark 34 (pg. 22-23)
Guidance Answers (pg. 22-23)
Questions (pg. 22-23)
Mini Exercises (pg. 22-24)
Exercises (pg. 22-26)
Problems (pg. 22-30)
Management Applications (pg. 22-35)
Solutions to Review Problems (pg. 22-37)
Review 22-1-Solution (pg. 22-37)
Review 22-2-Solution (pg. 22-38)
Review 22-3-Solution (pg. 22-38)
Review 22-4-Solution (pg. 22-40)
Review 22-5-Solution (pg. 22-42)
Module 23 Standard Costs and Performance Reports (pg. 23-1)
Preview (pg. 23-1)
Responsibility Accounting (pg. 23-3)
Performance Reporting and Organization Structures (pg. 23-4)
Types of Responsibility Centers (pg. 23-4)
Financial and Nonfinancial Performance Measures (pg. 23-5)
Review 23-1 (pg. 23-6)
Performance Reporting for Cost Centers (pg. 23-6)
Development of Flexible Budgets (pg. 23-6)
Flexible Budgets Emphasize Performance (pg. 23-7)
Standard Costs and Performance Reports (pg. 23-8)
Review 23-2 (pg. 23-8)
Variance Analysis for Costs (pg. 23-9)
Components of Standard Cost Analysis (pg. 23-9)
Establishing and Using Standards for Direct Materials (pg. 23-10)
Review 23-3 (pg. 23-13)
Establishing and Using Standards for Direct Labor (pg. 23-13)
Review 23-4 (pg. 23-15)
Establishing and Using Standards for Variable Overhead (pg. 23-15)
Fixed Overhead Variances (pg. 23-17)
Review 23-5 (pg. 23-18)
Performance Reports for Revenue Centers (pg. 23-18)
Inclusion of Controllable Costs (pg. 23-19)
Revenue Centers as Profit Centers (pg. 23-20)
Review 23-6 (pg. 23-21)
Appendix 23A: Fixed Overhead Variances (pg. 23-21)
Review 23-7 (pg. 23-23)
Appendix 23B: Reconciling Budgeted and Actual Income (pg. 23-23)
Review 23-8 (pg. 23-24)
Guidance Answers (pg. 23-25)
Questions (pg. 23-25)
Mini Exercises (pg. 23-25)
Exercises (pg. 23-27)
Problems (pg. 23-29)
Management Applications (pg. 23-35)
Solutions to Review Problems (pg. 23-38)
Review 23-1-Solution (pg. 23-38)
Review 23-2-Solution (pg. 23-38)
Review 23-3-Solution (pg. 23-39)
Review 23-4-Solution (pg. 23-39)
Review 23-5-Solution (pg. 23-39)
Review 23-6-Solution (pg. 23-40)
Review 23-7-Solution (pg. 23-40)
Review 23-8-Solution (pg. 23-40)
Module 24 Segment Reporting, Transfer Pricing, and Balanced Scorecard (pg. 24-1)
Preview (pg. 24-1)
Strategic Business Segments and Segment Reporting (pg. 24-3)
Multilevel Segment Income Statements (pg. 24-5)
Interpreting Segment Reports (pg. 24-5)
Review 24-1 (pg. 24-7)
Transfer Pricing (pg. 24-7)
Management Considerations (pg. 24-8)
Determining Transfer Prices (pg. 24-10)
Review 24-2 (pg. 24-13)
Investment Center Evaluation Measures (pg. 24-13)
Return on Investment (pg. 24-13)
Investment Center Income (pg. 24-15)
Investment Center Asset Base (pg. 24-16)
Other Valuation Issues (pg. 24-16)
Residual Income (pg. 24-17)
Economic Value Added (pg. 24-17)
Which Measure Is Best? (pg. 24-18)
Review 24-3 (pg. 24-20)
Balanced Scorecard (pg. 24-20)
Balanced Scorecard Framework (pg. 24-20)
Balanced Scorecard and Strategy (pg. 24-22)
Guidance Answers (pg. 24-24)
Questions (pg. 24-24)
Mini Exercises (pg. 24-25)
Exercises (pg. 24-28)
Problems (pg. 24-31)
Management Applications (pg. 24-36)
Solutions to Review Problems (pg. 24-38)
Review 24-1-Solution (pg. 24-38)
Review 24-2-Solution (pg. 24-38)
Review 24-3-Solution (pg. 24-39)
Review 24-4-Solution (pg. 24-40)
Module 25 Capital Budgeting Decisions (pg. 25-1)
Preview (pg. 25-1)
Long-Range Planning and Capital Budgeting (pg. 25-3)
Review 25-1 (pg. 25-6)
Capital Budgeting Models That Consider Time Value of Money (pg. 25-6)
Expected Cash Flows (pg. 25-6)
Manager Behavior and Expected Cash Flows (pg. 25-8)
Net Present Value (pg. 25-8)
Internal Rate of Return (pg. 25-9)
Cost of Capital (pg. 25-10)
Review 25-2 (pg. 25-11)
Capital Budgeting Models That Do Not Consider Time Value of Money (pg. 25-11)
Payback Period (pg. 25-12)
Accounting Rate of Return (pg. 25-13)
Review 25-3 (pg. 25-13)
Evaluation of Capital Budgeting Models (pg. 25-14)
Review 25-4 (pg. 25-16)
Additional Aspects of Capital Budgeting (pg. 25-16)
Using Multiple Investment Criteria (pg. 25-16)
Evaluating Risk (pg. 25-17)
Differential Analysis of Project Cash Flows (pg. 25-17)
Predicting Differential Costs and Revenues for High-Tech Investments (pg. 25-19)
Review 25-5 (pg. 25-20)
Taxes in Capital Budgeting Decisions (pg. 25-20)
Depreciation Tax Shield (pg. 25-21)
Investment Tax Credit (pg. 25-22)
Review 25-6 (pg. 25-23)
Appendix 25A: Time Value of Money (pg. 25-23)
Future Value (pg. 25-24)
Present Value (pg. 25-24)
Annuities (pg. 25-25)
Unequal Cash Flows (pg. 25-26)
Deferred Returns (pg. 25-28)
Review 25-7 (pg. 25-28)
Appendix 25B: Table Approach to Determining Internal Rate of Return (pg. 25-29)
Equal Cash Inflows (pg. 25-29)
Unequal Cash Inflows (pg. 25-29)
Review 25-8 (pg. 25-30)
Guidance Answers (pg. 25-30)
Questions (pg. 25-31)
Mini Exercises (pg. 25-31)
Exercises (pg. 25-33)
Problems (pg. 25-35)
Management Applications (pg. 25-37)
Solutions to Review Problems (pg. 25-42)
Review 25-1-Solution (pg. 25-42)
Review 25-2-Solution (pg. 25-42)
Review 25-3-Solution (pg. 25-43)
Review 25-4-Solution (pg. 25-44)
Review 25-5-Solution (pg. 25-45)
Review 25-6-Solution (pg. 25-45)
Review 25-7-Solution (pg. 25-46)
Review 25-8-Solution (pg. 25-46)
Appendix A Compound Interest Tables (pg. A-1)
Appendix B Chart of Accounts with Acronyms (pg. B-1)
Appendix C Comprehensive Case (pg. C-1)
Preview (pg. C-1)
Reviewing Financial Statements (pg. C-3)
Business Environment for Financial Reporting (pg. C-3)
Income Statement Reporting and Analysis (pg. C-3)
Balance Sheet Reporting and Analysis (pg. C-9)
Statement of Cash Flows Reporting and Analysis (pg. C-21)
Independent Audit Opinion (pg. C-22)
Assessing Profitability and Creditworthiness (pg. C-23)
ROE Disaggregation-DuPont Analysis (pg. C-23)
ROE Disaggregation-Operating Focus (pg. C-24)
Disaggregation of RNOA-Margin and Turnover (pg. C-25)
Credit Analysis (pg. C-26)
Summarizing Profitability and Creditworthiness (pg. C-26)
Forecasting Financial Statements (pg. C-27)
Valuing Equity Securities (pg. C-30)
Discounted Cash Flow Valuation (pg. C-31)
Residual Operating Income Valuation (pg. C-32)
Assessment of the Valuation Estimate (pg. C-32)
Summary Observations (pg. C-33)
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.

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: Oct 30 2023

Corrections to identified errors in the first printing of the text.

Appendix C
Last Updated: Sep 16 2020

Appendix C:  Comprehensive Case / Harley-Davidson

Excel Templates - Students
Last Updated: Nov 14 2022

Excel templates for use with the Module Reviews associated with the financial modules of the text. 

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