by Easton, Lea McAnally, Sommers, Zhang
ISBN: 978-1-61853-104-9 | Copyright 2015Tabs
Welcome to the Fourth Edition of Financial Statement Analysis & Valuation.
Our main goal in writing this book was to address the needs of today’s 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.
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.
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 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.
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.
|1||Week 1||Weeks 1
(Modules 1 and 2)
(Modules 1 and 2)
(Modules 1 and 2)
|2||Weeks 1 and 2|
|3||Week 3||Week 2||Day 3|
|4||Week 4||Week 3||Optional||Optional|
|5||Week 5||Week 4||Skim||Day 3
(Modules 5 and 6)
|6||Week 7||Week 5||Skim|
|9||Week 9||Week 6||Optional||Optional|
|10||Week 10||Week 7||Skim||Optional|
|11||Week 11||Week 8||Week 4||Day 4
(Modules 11 and 12)
|12||Week 12||Week 9||Week 5|
|13||Week 13||Weeks 9 and 10||Weeks 5 and 6||Day 5
(Modules 13 and 14)
|14||Week 14||Week 10||Week 6|
Financial Statement Analysis & Valuation includes special features specifically designed for the student with a keen interest in analysis and valuation.
Each module’s content is explained through the reporting activities of real companies. To that end, each module incorporates a "focus company" for special emphasis and demonstration. The enhanced instructional value of focus companies comes from the way they engage students in real analysis and interpretation. Focus companies were selected based on the industries that business students typically enter upon graduation.
|Module 1||Berkshire Hathaway||Module 10||Southwest Airlines|
|Module 2||Apple||Module 11||Procter & Gamble|
|Module 3||Walmart||Module 12||Southern Company|
|Module 4||Home Depot||Module 13||Nike|
|Module 5||Pfizer||Module 14||Nike|
|Module 6||Cisco||Module 15||Nike|
|Module 7||Verizon||Appendix B||Starbucks|
|Module 8||IBM||Appendix C||Kimberly-Clark|
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 3-11; 5-5; 6-12.
New to the fourth edition, 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.
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.
Academic research plays an important role in the way business is conducted, accounting and analysis are performed, and students are taught. It is important for students to recognize how modern research and modern business practice interact. Therefore, we periodically incorporate relevant research to help students understand the important relation between research and modern business. For representative examples, SEE PAGES 3-19; 5-37.
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.
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 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 company or companies that compete with the focus company of that module. For representative examples, SEE PAGES 3-8; 8-15; 11-39.
Students retain information longer if they can apply the lessons learned from the module content. To meet this need for experiential learning, we conclude each module with a hands-on analysis project. A series of questions guides students’ inquiry and helps students synthesize the material in the module and integrate material across modules. For representative examples, SEE PAGES 1-37; 3-52; 13-28.
Excellent assignment material is a must-have component of any successful textbook (and class). We went to great lengths to create the best assignments possible from contemporary financial statements. In keeping with the rest of the book, we used real company data extensively. We also ensured that assignments reflect our belief that students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical tasks. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision or in a valuation context. There are six categories of assignments: Questions, Mini Exercises, Exercises, Problems, International Applications, and Discussion Points.
FOURTH EDITION CHANGES
Based on classroom use and reviewer feedback, a number of substantive changes have been made in the fourth edition to further enhance the students’ experiences:
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|Module 01: Framework for Analysis and Valuation (pg. 1-1)|
|Module 02: Review of Business Activities and Financial Statements (pg. 2-1)|
|Module 03: Profitability Analysis and Interpretation (pg. 3-1)|
|Module 04: Credit Risk Analysis and Interpretation (pg. 4-1)|
|Module 05: Revenue Recognition and Operating Income (pg. 5-1)|
|Module 06: Asset Recognition and Operating Assets (pg. 6-1)|
|Module 07: Liability Recognition and Nonowner Financing (pg. 7-1)|
|Module 08: Equity Recognition and Owner Financing (pg. 8-1)|
|Module 09: Intercorporate Entities (pg. 9-1)|
|Module 10: Off-Balance-Sheet Financing (pg. 10-1)|
|Module 11: Forecasting Financial Statements (pg. 11-1)|
|Module 12: Cost of Capital and Valuation Basics (pg. 12-1)|
|Module 13: Cash-Flow-Based Valuation (pg. 13-1)|
|Module 14: Operating-Income-Based Valuation (pg. 14-1)|
|Module 15: Market-Based Valuation (pg. 15-1)|
|Appendix A: Compound Interest Tables (pg. A-1)|
|Appendix B: Constructing and Analyzing the Statement of Cash Flows (pg. B-1)|
|Appendix C: Comprehensive Case (pg. C-1)|
|Appendix D: Chart of Accounts with Acronyms (pg. D-1)|
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Practice Quiz Solutions
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Guided Example Excel Template - Mid-Module Review Chapter 4
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Guided Example Excel Template - Mid-Module Review Chapter 12
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