Financial Statement Analysis & Valuation, 7e

by Easton, McAnally, Crawford, Sommers

| ISBN: 978-1-61853-625-9 | Copyright 2025

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LO Learning Objective | Topics Page eLecture Guided Example Assignments
5-1

Apply revenue recognition principles and assess results.

Recognition Rules :: Complications :: Long-Term Contracts :: Reporting
5-3

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

5-2

Examine and evaluate sales allowances.

Accounting :: Reporting & Disclosure :: Analysis
5-11

3, 17, 25, 51

5-3

Analyze deferred revenue.

Accounting :: Illustrations :: Disclosure and Interpretation
5-14

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

5-4

Evaluate how foreign currency exchange rates affect revenue.

Economics :: Cash Flows :: Income :: Forecasting
5-15

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

5-5

Analyze accounts receivable and uncollectible amounts.

Aging :: Accounting :: Magnitude Analysis :: Quality Analysis
5-19

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

5-6

Evaluate operating expenses and discontinued operations.

Cost of Sales :: SG&A :: R&D :: Discontinued Operations
5-25

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

5-7

Interpret pro forma and non-GAAP disclosures.

Regulation G :: SEC Warnings :: Market Assessments
5-31

9, 16, 39, 50

DATA ANALYTICS and DATA VISUALIZATION

New technologies are changing the landscape of accounting and financial reporting. Companies are increasingly using data analytics and visualization (charts, pictures, and graphs) to more effectively convey financial information. To familiarize students with data visualization, each module opens with a data dashboard and it uses real-world data analytics and applications for student learning. Each module contains Data Analytics Insight boxes that describe how data analytics applies to the topics. Analytics and visualizations are reinforced with assignments in each module that present data graphically and require students to analyze and interpret the data visualizations.

Data analytics questions are exclusively available on myBusinessCourse. We provide students with online access to author-created PowerBI dashboards where they can interact with the data and learn how to create their own data visualizations. We have partnered with Calcbench, a leading provider of data extracted from SE filings. Calcbench data underlies each of the Data Analytics Insights and all of the end-of-chapter data analytics assignments. This allows readers to work with actual and interesting financial statement data. These discussions and assignments are identified by the data analytics icon in the margin. SEE PAGES 2-9, 6-38, 7-18, 8-24.





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Welcome to Financial Statement Analysis & Valuation!

Welcome to the Seventh Edition of Financial Statement Analysis & Valuation. Our main goal in writing this book was to address the needs of todays instructors and students interested in financial analysis and valuation by providing the most contemporary, 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 as well as conversations with credit and equity analysts at a wide range of firms. We are grateful to students and faculty whose insights, suggestions and feedback greatly benefited this edition.

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. The textbook takes a data‑driven approach to analysis and valuation; each module addresses applicable data analytic techniques.

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. The textbook takes a data‑driven approach to analysis and valuation; each module addresses applicable data analytic techniques.


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.


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 modules 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 Companies by Module



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 3-19, 4-27, 5-27.


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. For representative examples, SEE PAGES 5-11, 6-12, 7-7.


Data Analytics and Data Visualization

See the Data Analytics tab for a detailed description of this new feature.


Business Insights & Analysis 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 2-12, 3-26, 5-8. Analysis 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 3-37, 10-29, 14-9.


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 1-26, 3-26, 12-18.


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 3-17, 4-20, 11-7.


Experiential Learning

Students retain information longer if they can apply the lessons learned from the module content. To meet this need for experiential learning, this text includes an Ongoing Financial Statement and Analysis Project. This project uses Excel and includes financial statements for two companies Parker Hannifin (PH) and Illinois Tool Works (ITW). Quantitative and qualitative questions in each module require students to apply the lessons learned to complete a comprehensive financial statement analysis and valuation. The project helps students synthesize the material in the module and integrate material across modules. For representative examples, SEE PAGES 1-49, 3-61, 11-62.


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 ref lect 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, IFRS Applications, and Analysis Discussion Points.


KEY CHANGES TO THIS EDITION

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

  • Digital delivery enhanced To serve the expanding delivery modes of higher education, we updated and expanded our in‑module Reviews and Guided Example videos for all modules (each Learning Objective has a Review/Guided Example, as well as a corresponding eLecture). In addition, all objective assignments are available in MBC.
  • Updated and expanded data visualizations and analytics: Data analytics questions have been updated and expanded in each module to show their usage in financial statement analysis. Author‑prepared videos demonstrate how to complete the data visualizations and analytics assignments.
  • New Data Analytics Insights: Each module includes new Data Analytics Insights that provide examples of how financial statement data can be analyzed and visualized to uncover trends and address important questions. Also, a new Appendix D entitled, “Data Analytics & Visualizations” provides an overview to create a baseline of knowledge.
  • New analysis project: Each module concludes with a hands‑on analysis project set in mBC. Readers are led through an analysis of two competitors: Parker Hannifin (ticker: PH) and ITW (ticker: ITW). Readers apply the tools they learn in each module to complete a comprehensive financial statement analysis and valuation project.
  • Integration of Calcbench data: We have partnered with Calcbench, a leading provider of data extracted from SEC filings. Calcbench data underlies each of the Data Analytics Insights and many of the end-of-chapter data analytics assignments. This allows readers to work with actual and interesting financial statement data.
  • ESG reporting: We include relevant discussions of ESG reporting and analysis whenever appropriate.
  • Enhancements to mBC: Assignments in mBC are updated to reflect new technology and reduce rounding issues. Downloadable Excel spreadsheets have been developed for many assignments. Solutions to algorithmic assignments have been added to this edition.
  • Credit analysis: There is a new overarching framework for credit analysis to provide students context for this important topic. The authors discuss common goals of credit analysis and the critical facets of this process. They adopt the term “capital structure analysis” instead of “solvency analysis” in light of its growing popularity to emphasize the importance of looking at all facets of a companys capital structure when conducting credit analysis.
  • EBITDA: EBITDA is a term commonly used in practice. This important measure is introduced in several places and explains how it relates to net income and other income statement measures. This includes discussion of the pros and cons of using EBITDA and its variations.
  • Analyzing intangible assets: New content in Module 6 discusses a wide variety of intangible assets including goodwill. The section discusses valuation methods, capitalization, and the subsequent accounting for intangibles. This includes explanation of the impairment of intangible assets and how to forecast intangibles.
  • Treasury Stock: In light of the marked increase in the frequency and size of stock repurchases and retirements, this edition includes an expanded discussion of this activity and demonstrates the financial statement impact of retiring stock and its interpretation.
  • Acquired Research and Development expense: The authors include a discussion of the origin and interpretation of acquired R&D expenses for financial statement analysis.
  • Earnings Quality: We expand discussion of earnings quality to include a detailed look at the relations among net income, accruals, and cash f lows, along with academic research on these subjects.
  • New Analyst Insights: Several new Analyst Insights examine comprehensive income, marketable securities, imputing lease expense from operating leases, and other trending topics.
  • Financial statement implications of current events: We discuss important market implications to financial statement analysis such as the collapse of Silicon Valley Bank and its connection to debt investments, the effect of unused office space in the wake of the shift to work‑from‑home on lease arrangements, and other current events.
  • Multiple choice questions: Each module contains a new set of multiple‑choice questions for readers to quickly check on their understanding of key concepts and tools for each module.
  • Solutions: Solutions are presented entirely in MS Excel. Spreadsheets include all data from the exercises and problems, which facilitates student work and allows instructors to easily show demonstrate solutions.


SUPPLEMENT PACKAGE

For Instructors

  • myBusinessCourse: A web-based learning and assessment program intended to complement your textbook and classroom instruction. This easy-to-use course management system grades homework automatically and provides students with additional help when you are not available. Further, detailed diagnostic tools assess class and individual performance. myBusinessCourse is ideal for online courses, hybrid courses, or traditional face-to-face courses for which you want to offer students more resources to succeed. Assignments with the MBC Homework logo in the margin are available in myBusinessCourse. eLecture videos are available for the module Learning Objectives, and Guided Examples for the in-module Reviews are available for you to assign students.
  • Solutions Manual: Created by the authors, the Excel-based Solutions Manual contains complete solutions to all the assignments.
  • PowerPoint: Created by the authors, the PowerPoint slides outline key elements of each module.
  • Test Bank: The Test Bank includes multiple-choice items, exercises, short essay questions, and problems.


Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. v)
Brief Contents (pg. xv)
Contents (pg. xvi)
Module 1: Framework for Analysis and Valuation (pg. 1-1)
Step 1 Business Environment and Accounting (pg. 1-5)
Review 1-1 (pg. 1-6)
Financial Statements: Demand and Supply (pg. 1-6)
Demand for Information (pg. 1-6)
Supply of Information (pg. 1-9)
International Accounting Standards (pg. 1-11)
Review of Financial Statements (pg. 1-12)
Balance Sheet (pg. 1-12)
Income Statement (pg. 1-15)
Statement of Stockholders’ Equity (pg. 1-17)
Statement of Cash Flows (pg. 1-18)
Information Beyond Financial Statements (pg. 1-19)
Review 1-3 (pg. 1-19)
Analyzing the Business Environment (pg. 1-20)
Analyzing the Value-Chain (pg. 1-20)
Five-Forces Analysis of Business Environment (pg. 1-20)
SWOT Analysis of Business Environment (pg. 1-22)
Analyzing Competitive Advantage (pg. 1-23)
Review 1-4 (pg. 1-25)
Step 2 Adjusting and Analyzing Financial Data (pg. 1-25)
Managerial Choices in Financial Reporting (pg. 1-25)
Analysis of Return on Assets (pg. 1-27)
Components of Return on Assets (pg. 1-27)
Analysis of Return on Equity (pg. 1-28)
Review 1-5 (pg. 1-29)
Step 3 Forecasting Financial Numbers (pg. 1-29)
Review 1-6 (pg. 1-30)
Step 4 Business Valuation (pg. 1-30)
Valuation Models (pg. 1-31)
Are Financial Data Relevant? (pg. 1-31)
Financial Statement Analysis in an Efficient Capital Market (pg. 1-32)
Analyzing Global Reports (pg. 1-33)
Review 1-7 (pg. 1-33)
Appendix 1A: Financial Statement Data and Analytics (pg. 1-34)
SEC Filings (pg. 1-34)
Data Analytics (pg. 1-36)
Guidance Answer (pg. 1-37)
Questions (pg. 1-39)
Mini Exercises (pg. 1-40)
Exercises (pg. 1-42)
Problems (pg. 1-44)
Analysis Decision Points (pg. 1-49)
Ongoing Analysis Project (pg. 1-49)
Solutions to Reviews (pg. 1-50)
Module 2: Review of Business Activities and Financial Statements (pg. 2-1)
Interpreting a Balance Sheet (pg. 2-3)
Assets (pg. 2-3)
Liabilities and Equity (pg. 2-5)
Analyst Adjustments 2.1 (pg. 2-10)
Review 2-1 (pg. 2-12)
Interpreting an Income Statement (pg. 2-13)
Recognizing Revenues and Expenses (pg. 2-14)
Reporting Discontinued Operations (pg. 2-15)
Analyst Adjustments 2.2 (pg. 2-16)
Analyzing the Income Statement (pg. 2-16)
Analyst Adjustments 2.3 (pg. 2-17)
Review 2-2 (pg. 2-17)
Interpreting a Statement of Stockholders’ Equity (pg. 2-18)
Review 2-3 (pg. 2-18)
Interpreting a Statement of Cash Flows (pg. 2-19)
Statement Format and Data Sources (pg. 2-19)
Review 2-4 (pg. 2-20)
Articulation of Financial Statements (pg. 2-20)
Retained Earnings Reconciliation (pg. 2-20)
Financial Statement Linkages (pg. 2-21)
Review 2-5 (pg. 2-22)
Analyzing Transactions and Adjustments (pg. 2-22)
Four-Step Accounting Cycle (pg. 2-23)
Financial Statement Effects Template (pg. 2-23)
Step 1-Analyze Transactions and Prepare Entries (pg. 2-24)
Step 2-Prepare Accounting Adjustments (pg. 2-27)
Step 3-Prepare Financial Statements (pg. 2-31)
Step 4-Close the Books (pg. 2-32)
Additional Information Sources (pg. 2-33)
Form 10-K (pg. 2-33)
Form 20-F and Form 40-F (pg. 2-34)
Form 8-K (pg. 2-35)
Analyst Reports (pg. 2-35)
Credit Services (pg. 2-35)
Data Services (pg. 2-36)
Review 2-10 (pg. 2-36)
Analyzing Global Reports (pg. 2-36)
Guidance Answers (pg. 2-37)
Multiple Choice (pg. 2-37)
Questions (pg. 2-38)
Mini Exercises (pg. 2-39)
Exercises (pg. 2-41)
Problems (pg. 2-47)
Analysis Discussion Points (pg. 2-51)
Data Analytics (pg. 2-51)
Ongoing Analysis Project (pg. 2-51)
Solutions to Reviews (pg. 2-52)
Module 3: Profitability Analysis and Interpretation (pg. 3-1)
Return on Equity (ROE) (pg. 3-3)
Review 3-1 (pg. 3-5)
ROE Disaggregation: DuPont Analysis (pg. 3-5)
Return on Assets (ROA) (pg. 3-5)
Financial Leverage (FL) (pg. 3-6)
Noncontrolling Interest Ratio (NCIR) (pg. 3-6)
Review 3-2 (pg. 3-7)
Return on Assets and Its Disaggregation (pg. 3-8)
Analyst Adjustments 3.1 (pg. 3-8)
Analysis of Profitability and Productivity (pg. 3-9)
Analysis of Profitability (pg. 3-10)
Analysis of Productivity (pg. 3-11)
Analysis of Financial Leverage (pg. 3-15)
Analyst Adjustments 3.2 (pg. 3-16)
Review 3-3 (pg. 3-17)
Balance Sheet Analysis with an Operating Focus (pg. 3-17)
Return on Net Operating Assets (RNOA) (pg. 3-18)
Net Operating Assets (NOA) (pg. 3-18)
Net Nonoperating Obligations (NNO) (pg. 3-20)
Review 3-4 (pg. 3-23)
Income Statement Analysis with an Operating Focus (pg. 3-23)
Operating Line Items on the Income Statement (pg. 3-24)
Nonoperating Line Items on the Income Statement (pg. 3-24)
Net Nonoperating Expense (NNE) (pg. 3-26)
Review 3-5 (pg. 3-27)
Return on Net Operating Assets (RNOA) (pg. 3-27)
Review 3-6 (pg. 3-29)
RNOA Disaggregation into Margin and Turnover (pg. 3-30)
Net Operating Profit Margin (pg. 3-30)
Net Operating Asset Turnover (pg. 3-30)
Trade-Off between Margin and Turnover (pg. 3-31)
Analyst Adjustments 3.4 (pg. 3-32)
Review 3-7 (pg. 3-33)
Analyzing Global Reports (pg. 3-34)
Appendix 3A: Operating versus Nonoperating Classification (pg. 3-34)
Appendix 3B: Nonoperating Return Component of ROE (pg. 3-35)
Nonoperating Return-With Net Nonoperating Assets (pg. 3-37)
Review 3-8 (pg. 3-39)
Appendix 3C: Vertical and Horizontal Analysis (pg. 3-39)
Limitations of Ratio Analysis (pg. 3-41)
Review 3-9 (pg. 3-42)
Guidance Answer (pg. 3-42)
Multiple Choice (pg. 3-42)
Questions (pg. 3-44)
Mini Exercises (pg. 3-45)
Exercises (pg. 3-47)
Problems (pg. 3-53)
Analysis Discussion Points (pg. 3-61)
Data Analytics (pg. 3-61)
Ongoing Analysis Project (pg. 3-61)
Solutions to Reviews (pg. 3-62)
Module 4 Credit Risk Analysis and Interpretation (pg. 4-1)
Market for Credit (pg. 4-3)
Demand for Credit (pg. 4-3)
Supply of Credit (pg. 4-4)
Review 4-1 (pg. 4-6)
Credit Risk Analysis Process (pg. 4-6)
Information for Credit Risk Analysis (pg. 4-6)
Chance of Default (pg. 4-7)
Loss Given Default (pg. 4-8)
Review 4-2 (pg. 4-11)
Measuring Credit Risk (pg. 4-11)
Adjusting Financial Information (pg. 4-11)
Analyst Adjustments 4.1 (pg. 4-12)
Overarching Approach to Credit Analysis (pg. 4-12)
Capital Structure (Solvency) Analysis (pg. 4-13)
Coverage Analysis (pg. 4-15)
Liquidity Analysis (pg. 4-19)
Review 4-3 (pg. 4-20)
Credit Ratings (pg. 4-22)
Importance of Credit Ratings (pg. 4-23)
How Credit Ratings Are Determined (pg. 4-24)
Review 4-4 (pg. 4-33)
Predicting Bankruptcy Risk (pg. 4-33)
Review 4-5 lo4-5 (pg. 4-34)
Appendix 4A: Verizon Financial Statements and Debt and Lease Notes (pg. 4-35)
Appendix 4B: Approaches of Other Credit Raters (pg. 4-39)
Moody’s Investors Service (pg. 4-39)
Fitch Ratings (pg. 4-40)
Guidance Answers (pg. 4-40)
Multiple Choice (pg. 4-41)
Questions (pg. 4-42)
Mini Exercises (pg. 4-42)
Exercises (pg. 4-44)
Problems (pg. 4-49)
Analysis Discussion Point (pg. 4-56)
Data Analytics (pg. 4-56)
Ongoing Analysis Project (pg. 4-56)
Solutions to Reviews (pg. 4-56)
Module 5: Revenue Recognition and Operating Income (pg. 5-1)
Analyzing Revenue (pg. 5-3)
Revenue Recognition Rules (pg. 5-4)
Complications of Revenue Recognition (pg. 5-5)
Performance Obligations Satisfied Over Time (pg. 5-6)
Performance Obligations Satisfied Over Time (pg. 5-6)
Review 5-1 lo5-1 (pg. 5-8)
Analyzing Sales Allowances (pg. 5-9)
Accounting for Sales Allowances (pg. 5-9)
Reporting Sales Allowances (pg. 5-10)
Analysis of Sales Allowances (pg. 5-10)
Analyst Adjustments 5.1 (pg. 5-11)
Review 5-2 lo5-2 (pg. 5-12)
Analyzing Unearned (Deferred) Revenue (pg. 5-13)
Review 5-3 lo5-3 (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. 5-16)
Foreign Currency and Future Results (pg. 5-17)
Review 5-4 lo5-4 (pg. 5-17)
Analyzing Accounts Receivable (pg. 5-18)
Aging Analysis of Receivables (pg. 5-18)
Accounting for Accounts Receivable (pg. 5-19)
Analysis of Accounts Receivable-Magnitude (pg. 5-20)
Analysis of Accounts Receivable-Quality (pg. 5-22)
Analyst Adjustments 5.2 (pg. 5-23)
Review 5-5 lo5-5 (pg. 5-24)
Analyzing Expenses and Losses (pg. 5-25)
Analyze Deductions from Income (pg. 5-25)
Analyze Research and Development Expense (pg. 5-26)
Provision (Benefit) for Taxes on Income (pg. 5-30)
Analyze Discontinued Operations (pg. 5-31)
Analyst Adjustments 5.3 (pg. 5-33)
Review 5-6 lo5-6 (pg. 5-33)
Pro Forma and Non-GAAP Disclosures (pg. 5-34)
Regulation G Reconciliation (pg. 5-34)
SEC Warnings about Pro Forma Numbers (pg. 5-35)
Disclosures and Market Assessments (pg. 5-36)
Review 5-7 (pg. 5-37)
Analyzing Global Reports (pg. 5-38)
Guidance Answer (pg. 5-39)
Multiple Choice (pg. 5-39)
Questions (pg. 5-40)
Mini Exercises (pg. 5-40)
Exercises (pg. 5-45)
Problems (pg. 5-53)
Analysis Discussion Points (pg. 5-61)
Data Analytics (pg. 5-61)
Ongoing Analysis Project (pg. 5-61)
Solutions to Reviews (pg. 5-61)
Module 6: Asset Recognition and Operating Assets (pg. 6-1)
Analyzing 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)
Analyzing Inventory-Reporting (pg. 6-9)
Lower of Cost or Market (LCM) (pg. 6-9)
LIFO Reserve Adjustments to Financial Statements (pg. 6-10)
LIFO Liquidations (pg. 6-11)
Analyst Adjustments 6.1 (pg. 6-12)
Review 6-2 (pg. 6-13)
Analyzing Inventory-Tools (pg. 6-13)
Gross Profit Analysis (pg. 6-13)
Days Inventory Outstanding and Inventory Turnover (pg. 6-15)
Days Payable Outstanding (pg. 6-17)
Cash Conversion Cycle (pg. 6-18)
Review 6-3 (pg. 6-19)
Analyzing PP&E Assets-Capitalization and Depreciation (pg. 6-20)
Plant and Equipment (pg. 6-20)
Research and Development Facilities and Equipment (pg. 6-22)
Review 6-4 (pg. 6-22)
Analyzing PP&E Assets-Sales, Impairments, and Restructuring (pg. 6-23)
Asset Sales (pg. 6-23)
Analyst Adjustments 6.2 (pg. 6-23)
Asset Impairments (pg. 6-24)
Restructuring Costs (pg. 6-25)
Analyst Adjustments 6.3 (pg. 6-28)
Review 6-5 (pg. 6-29)
Analyzing PP&E Assets-Tools (pg. 6-30)
PP&E Turnover (pg. 6-30)
Analyst Adjustments 6.4 (pg. 6-31)
PP&E Useful Life (pg. 6-32)
PP&E Percent Used Up (pg. 6-32)
Review 6-6 (pg. 6-33)
Analyzing Intangible Assets (pg. 6-33)
Types and Valuation of Intangible Assets (pg. 6-35)
Valuation Models for Intangible Assets (pg. 6-37)
Accounting for Goodwill (pg. 6-37)
Analysis of Intangible Asset Impairment Charges (pg. 6-38)
Analyst Adjustments 6.5 (pg. 6-39)
Review 6-7 (pg. 6-40)
Analyzing Global Reports (pg. 6-41)
Guidance Answers (pg. 6-42)
Multiple Choice (pg. 6-43)
Questions (pg. 6-45)
Mini Exercises (pg. 6-46)
Exercises (pg. 6-49)
Problems (pg. 6-55)
Analysis Discussion Points (pg. 6-61)
Data Analytics (pg. 6-61)
Ongoing Analysis Project (pg. 6-61)
Solutions to Reviews (pg. 6-61)
Module 7: Liability Recognition and Nonowner Financing (pg. 7-1)
Analyzing Accrued Liabilities (pg. 7-3)
Accrued Liabilities Defined (pg. 7-3)
Accruals for Contingent Liabilities Defined (pg. 7-5)
Analyst Adjustments 7.1 (pg. 7-7)
Review 7-1 (pg. 7-8)
Analyzing Short-Term Debt (pg. 7-8)
Reporting for Short-Term Debt (pg. 7-9)
Current Maturities of Long-Term Debt (pg. 7-9)
Analyzing Long-Term Debt-Pricing (pg. 7-10)
Pricing of Bonds Issued at Par (pg. 7-11)
Pricing of Bonds Issued at a Discount (pg. 7-12)
Pricing of Bonds Issued at a Premium (pg. 7-12)
Effective Cost of Debt (pg. 7-13)
Review 7-3 (pg. 7-15)
Analyzing Long-Term Debt-Reporting (pg. 7-15)
Balance Sheet Reporting (pg. 7-15)
Income Statement Reporting (pg. 7-17)
Financial Statement Effects of Bond Repurchase (pg. 7-18)
Fair Value Disclosures (pg. 7-19)
Review 7-4 (pg. 7-20)
Analyzing Global Reports (pg. 7-20)
Appendix 7A: Time Value of Money (pg. 7-21)
Present Value Concepts (pg. 7-21)
Future Value Concepts (pg. 7-25)
Appendix 7B: Amortization of Debt (pg. 7-26)
Amortization of Discount (pg. 7-26)
Amortization of Premium (pg. 7-27)
Multiple Choice (pg. 7-28)
Questions (pg. 7-29)
Mini Exercises (pg. 7-29)
Exercises (pg. 7-32)
Problems (pg. 7-36)
Analysis Discussion Points (pg. 7-39)
Data Analytics (pg. 7-39)
Ongoing Analysis Project (pg. 7-40)
Solutions to Reviews (pg. 7-40)
Module 8: Equity Recognition and Owner Financing (pg. 8-1)
Analyzing Stockholders’ Equity and Classes of Stock (pg. 8-3)
Stockholders’ Equity Accounts (pg. 8-3)
Statement of Stockholders’ Equity (pg. 8-6)
Preferred Stock (pg. 8-7)
Common Stock (pg. 8-8)
Analyst Adjustments 8.1 (pg. 8-9)
Review 8-1 (pg. 8-10)
Analyzing Stock Transactions (pg. 8-10)
Stock Issuance (pg. 8-10)
Stock Repurchase (pg. 8-11)
Review 8-2 (pg. 8-15)
Analyzing Stock-Based Compensation (pg. 8-16)
Characteristics of Stock-Based Compensation Plans (pg. 8-16)
Analysis of Stock-Based Compensation Plans (pg. 8-16)
Accounting for Stock-Based Compensation (pg. 8-17)
Note Disclosures for Stock-Based Compensation (pg. 8-18)
Review 8-3 (pg. 8-19)
Analyzing Dividends and Stock Splits (pg. 8-19)
Cash Dividend Disclosures (pg. 8-20)
Dividend Payout and Yield (pg. 8-20)
Cash Dividends Financial Effects (pg. 8-20)
Stock Split (pg. 8-21)
Review 8-4 (pg. 8-21)
Analyzing Accumulated Other Comprehensive Income (AOCI) (pg. 8-22)
AOCI Components (pg. 8-22)
AOCI Disclosures and Interpretation (pg. 8-22)
Analyst Adjustments 8.3 (pg. 8-25)
Review 8-5 (pg. 8-26)
Analyzing Earnings per Share (EPS) (pg. 8-26)
Review 8-6 (pg. 8-28)
Analyzing Global Reports (pg. 8-28)
Appendix 8A: Stock-Based Compensation: Reporting and Analyzing (pg. 8-29)
Employee Stock Purchase Plans (ESPP) (pg. 8-29)
Stock Awards (pg. 8-29)
Stock Options (pg. 8-29)
Stock Appreciation Rights (SAR) (pg. 8-30)
Summary of Share-Based Compensation (pg. 8-30)
Analysis Implications (pg. 8-30)
Guidance Answer (pg. 8-31)
Multiple Choice (pg. 8-31)
Questions (pg. 8-33)
Mini Exercises (pg. 8-33)
Exercises (pg. 8-37)
Problems (pg. 8-41)
Data Analytics (pg. 8-46)
Ongoing Analysis Project (pg. 8-46)
Solutions to Reviews (pg. 8-46)
Module 9: Intercorporate Investments (pg. 9-1)
Analyzing 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)
Analyzing Equity Investments with Significant Influence (pg. 9-12)
Investments with Significant Influence (pg. 9-12)
Equity Method Accounting and ROE Effects (pg. 9-14)
Review 9-2 (pg. 9-17)
Analyzing Equity Investments with Control (pg. 9-17)
Investments with Control (pg. 9-18)
Analyst Adjustments 9.1 (pg. 9-26)
Review 9-3 (pg. 9-27)
Analyzing Global Reports (pg. 9-28)
Appendix 9A: Analyzing Derivatives (pg. 9-29)
Analysis of Derivatives (pg. 9-30)
Review 9-4 (pg. 9-31)
Appendix 9B: Analyzing Equity Carve-Outs (pg. 9-32)
Analysis of Equity Carve-Outs (pg. 9-35)
Review 9-5 (pg. 9-36)
Guidance Answer (pg. 9-36)
Multiple Choice (pg. 9-37)
Questions (pg. 9-37)
Mini Exercises (pg. 9-38)
Exercises (pg. 9-41)
Problems (pg. 9-46)
Analysis Discussion Point (pg. 9-49)
Data Analytics (pg. 9-49)
Ongoing Analysis Project (pg. 9-49)
Solutions to Reviews (pg. 9-50)
Module 10: Analyzing Leases, Pensions, and Taxes (pg. 10-1)
Analyzing Leases (pg. 10-3)
Lessee Reporting Example-Microsoft (pg. 10-3)
Lease Accounting (pg. 10-5)
Summary of Lease Accounting and Reporting (pg. 10-8)
Analyst Adjustments 10.1 (pg. 10-9)
Review 10-1 (pg. 10-9)
Analyzing Pensions (pg. 10-10)
Defined Benefit Plans on the Balance Sheet (pg. 10-11)
Analysis Issue-Sufficiency of Plan Assets (pg. 10-12)
Fair Value Accounting for Pensions (pg. 10-18)
Note Disclosure-Key Assumptions (pg. 10-20)
Analysis Implications (pg. 10-20)
Analyst Adjustments 10.2 (pg. 10-21)
Other Post-Employment Benefits (OPEB) (pg. 10-23)
Review 10-2 (pg. 10-24)
Analyzing Income Taxes (pg. 10-25)
Timing Differences Create Deferred Tax Assets and Deferred Tax Liabilities (pg. 10-25)
Disclosures for Income Taxes (pg. 10-30)
Analysis of Income Tax Disclosures (pg. 10-31)
Expanded Explanation of Deferred Taxes (pg. 10-32)
Analyst Adjustments 10.3 (pg. 10-35)
Review 10-3 (pg. 10-35)
Analyzing Global Reports (pg. 10-37)
Appendix 10A: Lease Accounting Example- Finance and Operating Leases (pg. 10-37)
Multiple Choice (pg. 10-38)
Questions (pg. 10-40)
Mini Exercises (pg. 10-40)
Exercises (pg. 10-46)
Problems (pg. 10-49)
Data Analytics (pg. 10-56)
Ongoing Analysis Project (pg. 10-56)
Solutions to Reviews (pg. 10-56)
Module 11: Financial Statement Forecasting (pg. 11-1)
Forecasting Process (pg. 11-4)
Company Guidance (pg. 11-6)
Review 11-1 (pg. 11-7)
Forecasting the Income Statement (pg. 11-8)
Review 11-2 (pg. 11-13)
Forecasting the Balance Sheet (pg. 11-14)
Review 11-3 (pg. 11-18)
Building Forecasts from Segment Disclosures (pg. 11-19)
Segment Data (pg. 11-19)
Quarterly Data (pg. 11-24)
Review 11-4 (pg. 11-24)
Appendix 11A: Forecasting the Statement of Cash Flows (pg. 11-25)
Review 11-5 (pg. 11-26)
Appendix 11B: Multiyear Forecasting with Target Cash and Debt Financing (pg. 11-27)
Income Statement (pg. 11-28)
Balance Sheet (pg. 11-28)
Forecasting Sensitivity Analysis (pg. 11-30)
Review 11-6 (pg. 11-31)
Appendix 11C: Parsimonious Method for Forecasting NOPAT and NOA (pg. 11-31)
Review 11-7 (pg. 11-32)
Appendix 11D: Morgan Stanley’s Forecast Report on Procter & Gamble (pg. 11-32)
Multiple Choice (pg. 11-40)
Questions (pg. 11-41)
Mini Exercises (pg. 11-41)
Exercises (pg. 11-47)
Problems (pg. 11-54)
Data Analytics (pg. 11-62)
Ongoing Analysis Project (pg. 11-62)
Solutions to Reviews (pg. 11-62)
Module 12: Cost of Capital and Valuation Basics (pg. 12-1)
Basics of Valuation (pg. 12-3)
Payoffs from Equity and Debt Instruments (pg. 12-4)
Steps in Stock Valuation (pg. 12-4)
Intrinsic Value (pg. 12-5)
Valuation of a Debt Instrument (pg. 12-6)
Valuation of an Equity Instrument (pg. 12-6)
Estimating Cost of Capital (pg. 12-7)
Diversifiable and Non-Diversifiable Risk (pg. 12-8)
Review 12-1 (pg. 12-8)
Cost of Equity Capital Using CAPM (pg. 12-9)
Cost of Equity Capital Using a Multi-Factor Model (pg. 12-10)
Review 12-2 (pg. 12-11)
Cost of Debt Capital (pg. 12-11)
Review 12-3 (pg. 12-13)
Weighted Average Cost of Capital (pg. 12-13)
Review 12-4 (pg. 12-15)
Dividend Discount Model (pg. 12-15)
Recursive Process of Valuation (pg. 12-15)
Framework of Dividend Discount Model (pg. 12-16)
DDM with Constant Perpetuity (pg. 12-16)
Review 12-5 (pg. 12-17)
DDM with Increasing Perpetuity (pg. 12-17)
Applying the Dividend Discount Model (pg. 12-18)
Review 12-6 (pg. 12-20)
Appendix 12A: Estimating Cost of Equity Capital (pg. 12-20)
Guidance Answer (pg. 12-25)
Multiple Choice (pg. 12-25)
Questions (pg. 12-25)
Mini Exercises (pg. 12-26)
Exercises (pg. 12-27)
Problems (pg. 12-28)
Analysis Discussion Points (pg. 12-32)
Data Analytics (pg. 12-32)
Ongoing Analysis Project (pg. 12-32)
Solutions to Reviews (pg. 12-32)
Module 13: Cash-Flow-Based Valuation (pg. 13-1)
Equity Valuation Models (pg. 13-3)
Dividend Discount Model (pg. 13-3)
Discounted Cash Flow Model (pg. 13-4)
Residual Operating Income Model (pg. 13-4)
Model Equivalency (pg. 13-4)
Valuation Model Inputs (pg. 13-4)
Review 13-1 (pg. 13-6)
Discounted Cash Flow (DCF) Model (pg. 13-6)
DCF Model Structure (pg. 13-6)
Steps in Applying the DCF Model (pg. 13-8)
Illustrating the DCF Model (pg. 13-8)
Review 13-2 (pg. 13-10)
Sensitivity Analysis of the Model (pg. 13-11)
Reverse Engineering of the Model (pg. 13-13)
REVIEW 13-3 (pg. 13-15)
Analyzing Global Reports (pg. 13-15)
Appendix 13A: P&G Financial Statements (pg. 13-16)
Appendix 13B: Derivation of Free Cash Flow Formula (pg. 13-18)
Appendix 13C: Deutsche Bank Valuation of P&G (pg. 13-18)
Guidance Answer (pg. 13-30)
Multiple Choice (pg. 13-30)
Questions (pg. 13-31)
Mini Exercises (pg. 13-31)
Exercises (pg. 13-34)
Problems (pg. 13-36)
Analysis Discussion Point (pg. 13-40)
Data Analytics (pg. 13-41)
Ongoing Analysis Project (pg. 13-41)
Solutions to Reviews (pg. 13-41)
Module 14: Operating-Income-Based Valuation (pg. 14-1)
Equity Valuation Models (pg. 14-3)
Dividend Discount Model (pg. 14-3)
Discounted Cash Flow Model (pg. 14-3)
Residual Operating Income Model (pg. 14-4)