Financial Statement Analysis & Valuation, 5e

by Easton, McAnally, Sommers, Zhang

ISBN: 978-1-61853-233-6 | Copyright 2018

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Welcome to the Fifth 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. We are grateful to students and faculty whose insights, suggestions and feedback greatly benefited this Fifth 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.

Flexible Structure

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

Flexibility for Courses of Varying Lengths

Many instructors have approached us to ask about suggested class structures based on courses of varying length. To that end, we provide the following table of possible course designs. For instructors desiring greater emphasis on accounting analysis, additional time can be spent on Modules 1 through 10. For instructors desiring greater emphasis on analysis and valuation, additional time can be spent on Modules 11 through 15.

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

INNOVATIVE PEDAGOGY

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

Focus Companies for Each Module

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

Focus Company by Module

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

Real Company Data Throughout

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

Analyst Adjustments

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

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Business Insights & Analyst Insights

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

Research Insights

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


Decision Orientation

One primary goal of a financial statement analysis and valuation course is to teach students the skills needed to apply their accounting knowledge to solving real business problems and making informed business decisions. With that goal in mind, Analysis Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios.


Financial Statement Effects Template

As instructors, we recognize that the financial statement analysis and valuation course is not directed solely toward accounting majors. Financial Statement Analysis & Valuation embraces this reality. This book highlights financial reporting, analysis, valuation, interpretation, applications and decision making. We incorporate the following financial statement effects template to train students in understanding the economic ramifications of transactions and their impacts on financial statements. This analytical tool is a great resource for students in learning analysis and applying it to their future courses and careers. Each transaction is identified in the “Transaction” column. Then, the dollar amounts (positive or negative) of the financial statement effects are recorded in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow effects (via the cash column) and the statement of stockholders’ equity effects (via the contributed capital and earned capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each transaction (denoted by the arrow line from net income to earned capital). This template is instructive as it reveals the financial impacts of transactions, and it provides insights into the effects of accounting choices. For those desiring a more traditional analysis, journal entries and T-accounts are shown in the margin.

Mid-Module and Module-End Reviews

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

Experiential Learning

Students retain information longer if they can apply the lessons learned from the module content. To meet this need for experiential learning, we conclude each module with a hands-on analysis project. A series of questions guides students’ inquiry and helps students synthesize the material in the module and integrate material across modules. For representative examples, SEE PAGES 1-43; 3-62; 11-68.

Excellent, Class-Tested Assignment Materials

Excellent assignment material is a must-have component of any successful textbook (and class). We went to great lengths to create the best assignments possible from contemporary financial statements. In keeping with the rest of the book, we used real company data extensively. We also ensured that assignments reflect our belief that students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical tasks. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision or in a valuation context. There are six categories of assignments: Questions, Mini Exercises, Exercises, Problems, International Applications, and Analysis Discussion Points.

Fifth Edition Changes

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

Introducing myBusinessCourse

myBusinessCourse is a complete, secure, web-based training and e-Learning solution. There is nothing to download or install; it is accessible through any modern web browser and most mobile devices.


eLecture Videos

eLecture Videos

  • Created by the authors of the textbook
  • Consistent with the textbook's explanations and approach
  • Cover learning objectives and concepts from each chapter
  • Ideal for remediation
  • Ideal for online and hybrid classrooms

Narrated demonstration videos

Guided Example Videos

  • Created by the authors of the textbook
  • Provide problem solving strategies as well as solutions
  • Offer clear, step-by-step demonstrations of how to solve select problems from the textbook

Auto-graded assignments

Auto-graded Assignments

  • Provides immediate feedback
  • Create assignments using problems from the textbook
  • Additional randomized versions of assignments provide extra practice
  • Ideal for remediation
  • Include select questions from test banks

Detailed Reporting Tools

Detailed Reporting Tools

  • Quickly review the performance of individual students
  • Quickly review the performance of entire class
  • Use reports on student performance to customize your lectures to fit student needs

Enhanced eBook

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Third Party Integrations

Third Party Integrations

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Support and Training

Support and Training

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  • Faculty training conducted daily
Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. v)
Brief Contents (pg. xiii)
Contents (pg. xiv)
MODULE 1: Framework for Analysis and Valuation (pg. 1-1)
Under Armour (pg. 1-2)
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. 1-7)
Supply of Information (pg. 1-10)
International Accounting Standards (pg. 1-11)
REVIEW 1-2 (pg. 1-12)
REVIEW OF FINANCIAL STATEMENTS (pg. 1-12)
Balance Sheet (pg. 1-13)
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. 1-20)
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. 1-21)
Analyzing Competitive Advantage (pg. 1-22)
REVIEW 1-4 (pg. 1-23)
STEP 2 ADJUSTING AND ANALYZING FINANCIAL DATA (pg. 1-24)
Managerial Choices in Financial Reporting (pg. 1-24)
Analysis of Return on Assets (pg. 1-25)
Analysis of Return on Equity (pg. 1-26)
Are Financial Data Relevant? (pg. 1-26)
REVIEW 1-5 (pg. 1-28)
STEP 3 FORECASTING FINANCIAL NUMBERS (pg. 1-28)
STEP 4 BUSINESS VALUATION (pg. 1-29)
Financial Statement Analysis in an Efficient Capital Market (pg. 1-30)
ANALYZING GLOBAL REPORTS (pg. 1-30)
APPENDIX 1A: ACCESSING SEC FILINGS (pg. 1-30)
GUIDANCE ANSWERS (pg. 1-33)
QUESTIONS (pg. 1-33)
MINI EXERCISES (pg. 1-34)
EXERCISES (pg. 1-36)
PROBLEMS (pg. 1-37)
IFRS APPLICATIONS (pg. 1-41)
ANALYSIS DISCUSSION POINTS (pg. 1-41)
ONGOING ANALYSIS PROJECT (pg. 1-42)
SOLUTIONS TO REVIEW PROBLEMS (pg. 1-43)
MODULE 2: Review of Business Activities and Financial Statements (pg. 2-1)
Apple (pg. 2-2)
INTERPRETING A BALANCE SHEET (pg. 2-3)
Assets (pg. 2-3)
REVIEW 2-1 (pg. 2-11)
INTERPRETING AN INCOME STATEMENT (pg. 2-11)
Recognizing Revenues and Expenses (pg. 2-13)
Reporting of Transitory Items (pg. 2-14)
Analyzing the Income Statement (pg. 2-15)
REVIEW 2-2 (pg. 2-16)
INTERPRETING A STATEMENT OF STOCKHOLDERS’ EQUITY (pg. 2-16)
REVIEW 2-3 (pg. 2-17)
INTERPRETING A STATEMENT OF CASH FLOWS (pg. 2-17)
Statement Format and Data Sources (pg. 2-17)
REVIEW 2-4 (pg. 2-18)
ARTICULATION OF FINANCIAL STATEMENTS (pg. 2-19)
Retained Earnings Reconciliation (pg. 2-19)
Financial Statement Linkages (pg. 2-19)
REVIEW 2-5 (pg. 2-21)
ANALYZING TRANSACTIONS AND ADJUSTMENTS (pg. 2-21)
Four-Step Accounting Cycle (pg. 2-21)
Financial Statement Effects Template (pg. 2-21)
Accounting Cycle Step 1—Analyze Transactions and Prepare Entries (pg. 2-23)
Applying the Financial Statement Effects Template (pg. 2-23)
Applying the Journal Entry and T-Account (pg. 2-24)
REVIEW 2-6 (pg. 2-26)
ACCOUNTING CYCLE STEP 2—PREPAREACCOUNTING ADJUSTMENTS (pg. 2-27)
Prepaid Expenses (pg. 2-28)
Unearned Revenues (pg. 2-28)
Accrued Expenses (pg. 2-29)
Accrued Revenues (pg. 2-29)
Accounting Adjustments for Apple (pg. 2-30)
REVIEW 2-7 (pg. 2-30)
ACCOUNTING CYCLE STEP 3—PREPAREFINANCIAL STATEMENTS (pg. 2-30)
REVIEW 2-8 (pg. 2-31)
ACCOUNTING CYCLE STEP 4—CLOSE THE BOOKS (pg. 2-31)
REVIEW 2-9 (pg. 2-32)
ADDITIONAL INFORMATION SOURCES (pg. 2-32)
Form 10-K (pg. 2-32)
REVIEW 2-10 (pg. 2-36)
Form 20-F and Form 40-F (pg. 2-34)
Form 8-K (pg. 2-34)
Analyst Reports (pg. 2-35)
Credit Services (pg. 2-35)
Data Services (pg. 2-35)
ANALYZING GLOBAL REPORTS (pg. 2-36)
APPENDIX 2A: FASB’S FINANCIAL STATEMENT PRESENTATION PROJECT (pg. 2-37)
GUIDANCE ANSWERS (pg. 2-37)
QUESTIONS (pg. 2-38)
MINI EXERCISES (pg. 2-38)
EXERCISES (pg. 2-40)
PROBLEMS (pg. 2-46)
IFRS APPLICATIONS (pg. 2-51)
ANALYSIS DISCUSSION POINTS (pg. 2-51)
ONGOING ANALYSIS PROJECT (pg. 2-52)
SOLUTIONS TO REVIEW PROBLEMS (pg. 2-52)
MODULE 3: Profitability Analysis and Interpretation (pg. 3-1)
Intel (pg. 3-2)
RETURN ON EQUITY (ROE) (pg. 3-3)
REVIEW 3-1 (pg. 3-4)
ROE DISAGGREGATION: DUPONT ANALYSIS (pg. 3-4)
REVIEW 3-2 (pg. 3-6)
RETURN ON ASSETS AND ITS DISAGGREGATION (pg. 3-6)
Analysis of Profitability and Productivity (pg. 3-7)
Analysis of Profitability (pg. 3-8)
Analysis of Productivity (pg. 3-9)
Analysis of Financial Leverage (pg. 3-12)
REVIEW 3-3 (pg. 3-14)
OPERATING FOCUS ON FINANCIAL CONDITION (pg. 3-14)
Net Operating Assets (NOA) (pg. 3-15)
REVIEW 3-4 (pg. 3-19)
OPERATING FOCUS ON FINANCIAL PERFORMANCE (pg. 3-20)
Net Operating Profit After Tax (NOPAT) (pg. 3-22)
REVIEW 3-5 (pg. 3-24)
RETURN ON NET OPERATING ASSETS (RNOA) (pg. 3-24)
REVIEW 3-6 (pg. 3-26)
RNOA DISAGGREGATION INTO MARGIN ANDTURNOVER (pg. 3-26)
Net Operating Profit Margin (pg. 3-26)
Net Operating Asset Turnover (pg. 3-26)
Trade-Off between Margin and Turnover (pg. 3-27)
REVIEW 3-7 (pg. 3-29)
ANALYZING GLOBAL REPORTS (pg. 3-29)
APPENDIX 3A: NONOPERATING COMPONENT OF ROE (pg. 3-31)
Nonoperating Return (pg. 3-31)
Nonoperating Return—with Debt Financing (pg. 3-31)
Nonoperating Return—With Debt Financing and Nonoperating Assets (pg. 3-32)
Nonoperating Return— Without Debt Financing, but with Nonoperating Assets (pg. 3-33)
Nonoperating Return— With Debt Financing, Nonoperating Assets,and Noncontrolling Interest (pg. 3-34)
REVIEW 3-8 (pg. 3-35)
APPENDIX 3B: LIQUIDITY AND SOLVENCY ANALYSIS (pg. 3-36)
Liquidity Analysis (pg. 3-36)
Solvency Analysis (pg. 3-37)
Vertical and Horizontal Analysis (pg. 3-39)
REVIEW 3-9 (pg. 3-42)
GUIDANCE ANSWERS (pg. 3-42)
QUESTIONS (pg. 3-42)
MINI EXERCISES (pg. 3-43)
EXERCISES (pg. 3-48)
PROBLEMS (pg. 3-52)
IFRS APPLICATIONS (pg. 3-61)
ANALYSIS DISCUSSION POINTS (pg. 3-64)
ONGOING ANALYSIS PROJECT (pg. 3-65)
SOLUTIONS TO REVIEW PROBLEMS (pg. 3-66)
MODULE 4: Credit Risk Analysis and Interpretation (pg. 4-1)
HomeDepot (pg. 4-2)
MARKET FOR CREDIT (pg. 4-3)
Demand for Credit (pg. 4-3)
Supply of Credit (pg. 4-4)
CREDIT RISK ANALYSIS PROCESS (pg. 4-8)
Information for Credit Risk Analysis (pg. 4-8)
Chance of Default (pg. 4-9)
Loss Given Default (pg. 4-11)
REVIEW 4-2 (pg. 4-13)
MEASURING CREDIT RISK (pg. 4-14)
Adjusting Financial Information (pg. 4-14)
Profitability Analysis (pg. 4-14)
Coverage Analysis (pg. 4-16)
Liquidity Analysis (pg. 4-20)
Solvency Analysis (pg. 4-21)
REVIEW 4-3 (pg. 4-23)
CREDIT RATINGS (pg. 4-25)
Importance of Credit Rating (pg. 4-26)
How Credit Ratings Are Determined (pg. 4-27)
REVIEW 4-4 (pg. 4-31)
PREDICTING BANKRUPTCY RISK (pg. 4-31)
Altman Z-Score (pg. 4-31)
Application of Z-Score (pg. 4-32)
Bankruptcy Prediction Errors (pg. 4-32)
REVIEW 4-5 (pg. 4-33)
APPENDIX 4A: CREDIT RISK ANALYSIS AT TWO MAJOR NRSROs (pg. 4-34)
GUIDANCE ANSWERS (pg. 4-37)
QUESTIONS (pg. 4-38)
MINI EXERCISES (pg. 4-38)
EXERCISES (pg. 4-40)
PROBLEMS (pg. 4-43)
IFRS APPLICATIONS (pg. 4-48)
ANALYSIS DISCUSSION POINTS (pg. 4-51)
ONGOING ANALYSIS PROJECT (pg. 4-51)
SOLUTIONS TO REVIEW PROBLEMS (pg. 4-52)
MODULE 5: Revenue Recognition and Operating Income (pg. 5-1)
Pfizer (pg. 5-2)
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)
REVIEW 5-1 (pg. 5-9)
ANALYZING SALES ALLOWANCES (pg. 5-9)
Accounting for Sales Allowances (pg. 5-10)
Reporting Sales Allowances (pg. 5-11)
Analysis of Sales Allowances (pg. 5-11)
REVIEW 5-2 (pg. 5-12)
ANALYZING UNEARNED (DEFERRED) REVENUE (pg. 5-13)
REVIEW 5-3 (pg. 5-14)
FOREIGN CURRENCY EFFECTS ON REVENUE (pg. 5-14)
Foreign Currency and Cash Flows (pg. 5-15)
Foreign Currency and Income (pg. 5-16)
Foreign Currency and Future Results (pg. 5-16)
REVIEW 5-4 (pg. 5-17)
ANALYZING ACCOUNTS RECEIVABLE (pg. 5-17)
Aging Analysis of Receivables (pg. 5-18)
Accounting for Accounts Receivable (pg. 5-18)
Analysis of Accounts Receivable—Magnitude (pg. 5-19)
Analysis of Accounts Receivable—Quality (pg. 5-21)
REVIEW 5-5 (pg. 5-23)
ANALYZING EXPENSES AND LOSSES (pg. 5-24)
Analyze Deductions from Income (pg. 5-24)
Analyze Research and Development Expense (pg. 5-25)
Analyze Discontinued Operations (pg. 5-27)
REVIEW 5-6 (pg. 5-29)
PRO FORMA INCOME REPORTING (pg. 5-30)
Regulation G Reconciliation (pg. 5-30)
SEC Warnings about Pro Forma Numbers (pg. 5-31)
Disclosures and Market Assessments (pg. 5-31)
REVIEW 5-7 (pg. 5-33)
ANALYZING GLOBAL REPORTS (pg. 5-34)
GUIDANCE ANSWERS (pg. 5-34)
QUESTIONS (pg. 5-34)
MINI EXERCISES (pg. 5-35)
EXERCISES (pg. 5-38)
PROBLEMS (pg. 5-44)
IFRS APPLICATIONS (pg. 5-50)
ANALYSIS DISCUSSION POINTS (pg. 5-52)
ONGOING ANALYSIS PROJECT (pg. 5-52)
SOLUTIONS TO REVIEW PROBLEMS (pg. 5-53)
MODULE 6: Asset Recognition and Operating Assets (pg. 6-1)
HomeDepot (pg. 6-2)
ANALYZING INVENTORY—COSTING METHODS (pg. 6-3)
Capitalization of Inventory Cost (pg. 6-3)
Inventory Cost Flows (pg. 6-4)
First-In, First-Out (FIFO) (pg. 6-5)
Last-In, First-Out (LIFO) (pg. 6-5)
Average Cost (AC) (pg. 6-6)
Financial Statement Effects of Inventory Costing (pg. 6-7)
REVIEW 6-1 (pg. 6-8)
ANALYZING 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. 6-10)
REVIEW 6-2 (pg. 6-12)
ANALYZING INVENTORY—ANALYSIS TOOLS (pg. 6-12)
Gross Profit Analysis (pg. 6-12)
Days Inventory Outstanding and Inventory Turnover (pg. 6-14)
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. 6-17)
Research and Development Facilities and Equipment (pg. 6-20)
REVIEW 6-4 (pg. 6-21)
PPE ASSETS—SALES, IMPAIRMENTS, ANDRESTRUCTURING (pg. 6-21)
Asset Sales (pg. 6-21)
Asset Impairments (pg. 6-23)
Restructuring Costs (pg. 6-24)
REVIEW 6-5 (pg. 6-28)
PPE ASSETS—ANALYSIS TOOLS (pg. 6-29)
PPE Turnover (pg. 6-30)
PPE Useful Life (pg. 6-31)
PPE Percent Used Up (pg. 6-31)
REVIEW 6-6 (pg. 6-32)
ANALYZING GLOBAL REPORTS (pg. 6-32)
GUIDANCE ANSWERS (pg. 6-33)
QUESTIONS (pg. 6-34)
MINI EXERCISES (pg. 6-34)
EXERCISES (pg. 6-37)
PROBLEMS (pg. 6-41)
IFRS APPLICATIONS (pg. 6-46)
ANALYSIS DISCUSSION POINTS (pg. 6-47)
ONGOING ANALYSIS PROJECT (pg. 6-47)
SOLUTIONS TO REVIEW PROBLEMS (pg. 6-48)
MODULE 7: Liability Recognition and Nonowner Financing (pg. 7-1)
Verizon (pg. 7-2)
ANALYZING ACCRUED LIABILITIES (pg. 7-3)
Accrued Liabilities Defined (pg. 7-4)
Accruals for Contractual Liabilities—Wages Payable Example (pg. 7-4)
Accruals for Contractual Liabilities—Deferred Revenue Example (pg. 7-5)
Accruals for Contingent Liabilities Defined (pg. 7-5)
Accruals for Contingent Liabilities—Warranties Example (pg. 7-5)
REVIEW 7-1 (pg. 7-8)
ANALYZING SHORT-TERM DEBT (pg. 7-8)
Reporting of Short-Term Debt (pg. 7-9)
Current Maturities of Long-Term Debt (pg. 7-10)
REVIEW 7-2 (pg. 7-11)
ANALYZING LONG-TERM DEBT—PRICING (pg. 7-11)
Pricing of Bonds Issued at Par (pg. 7-12)
Pricing of Bonds Issued at a Discount (pg. 7-12)
Pricing of Bonds Issued at a Premium (pg. 7-13)
Effective Cost of Debt (pg. 7-13)
REVIEW 7-3 (pg. 7-15)
ANALYZING LONG-TERM DEBT—REPORTING (pg. 7-15)
Financial Statement Disclosure of Debt Issuance (pg. 7-15)
Balance Sheet Reporting (pg. 7-16)
Income Statement Reporting (pg. 7-17)
Amortization of Discount (pg. 7-18)
Amortization of Premium (pg. 7-18)
Financial Statement Effects of Bond Repurchase (pg. 7-19)
Fair Value Disclosures (pg. 7-20)
REVIEW 7-4 (pg. 7-21)
ANALYZING THE QUALITY OF DEBT (pg. 7-21)
What Are Credit Ratings? (pg. 7-22)
MODULE 8: Equity Recognition and Owner Financing (pg. 8-1)
Johnson & Johnson (pg. 8-2)
STOCKHOLDERS’ EQUITY TERMS (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. 8-9)
STOCK TRANSACTIONS (pg. 8-9)
Stock Issuance (pg. 8-9)
Stock Repurchase (Treasury Stock) (pg. 8-10)
REVIEW 8-2 (pg. 8-13)
STOCK-BASED COMPENSATION (pg. 8-13)
Accounting for Stock-Based Compensation (pg. 8-15)
Footnote Disclosures for Stock-Based Compensation (pg. 8-16)
REVIEW 8-3 (pg. 8-17)
CASH DIVIDENDS (pg. 8-18)
Cash Dividend Disclosures (pg. 8-18)
Dividend Payout and Yield (pg. 8-18)
Cash Dividends Financial Effects (pg. 8-18)
REVIEW 8-4 (pg. 8-19)
STOCK SPLITS AND STOCK DIVIDENDS (pg. 8-20)
Stock Split (pg. 8-20)
Stock Dividend (pg. 8-20)
REVIEW 8-5 (pg. 8-21)
ACCUMULATED OTHER COMPREHENSIVE INCOME (pg. 8-22)
AOCI Components (pg. 8-22)
AOCI Disclosures and Interpretation (pg. 8-22)
REVIEW 8-6 (pg. 8-24)
CONVERTIBLE SECURITIES (pg. 8-24)
REVIEW 8-7 (pg. 8-25)
EARNINGS PER SHARE (EPS) (pg. 8-25)
REVIEW 8-8 (pg. 8-27)
ANALYZING GLOBAL REPORTS (pg. 8-27)
APPENDIX 8A: STOCK-BASED COMPENSATION: REPORTING AND ANALYZING (pg. 8-29)
GUIDANCE ANSWERS (pg. 8-32)
QUESTIONS (pg. 8-32)
MINI EXERCISES (pg. 8-33)
EXERCISES (pg. 8-36)
PROBLEMS (pg. 8-42)
IFRS APPLICATIONS (pg. 8-49)
ONGOING ANALYSIS PROJECT (pg. 8-53)
SOLUTIONS TO REVIEW PROBLEMS (pg. 8-53)
MODULE 9: Intercorporate Entities (pg. 9-1)
Google (pg. 9-2)
ANALYZING INTERCORPORATE INVESTMENTS (pg. 9-3)
Passive Investments in Marketable Securities (pg. 9-4)
Investments in Debt Securities (pg. 9-8)
REVIEW 9-1 (pg. 9-9)
ANALYZING EQUITY INVESTMENTS WITH SIGNIFICANT INFLUENCE (pg. 9-10)
Accounting for Investments with Significant Influence (pg. 9-10)
Equity Method Accounting and ROE Effects (pg. 9-12)
REVIEW 9-2 (pg. 9-16)
ANALYZING EQUITY INVESTMENTS WITH CONTROL (pg. 9-16)
Accounting for Investments with Control (pg. 9-17)
REVIEW 9-3 (pg. 9-30)
ANALYZING GLOBAL REPORTS (pg. 9-30)
APPENDIX 9A: ANALYZING DERIVATIVES (pg. 9-31)
Fair Value Hedge Example (pg. 9-32)
Cash Flow Hedge Example (pg. 9-33)
Analysis of Derivatives (pg. 9-35)
REVIEW 9-4 (pg. 9-36)
APPENDIX 9B: ANALYZING EQUITY CARVE-O (pg. 9-36)
Sell-Offs (pg. 9-36)
Spin-Offs (pg. 9-37)
Split-Offs (pg. 9-38)
Analysis of Equity Carve-Outs (pg. 9-39)
REVIEW 9-5 (pg. 9-39)
GUIDANCE ANSWERS (pg. 9-39)
QUESTIONS (pg. 9-40)
MINI EXERCISES (pg. 9-40)
EXERCISES (pg. 9-43)
PROBLEMS (pg. 9-51)
IFRS APPLICATIONS (pg. 9-55)
ANALYSIS DISCUSSION POINTS (pg. 9-57)
ONGOING ANALYSIS PROJECT (pg. 9-58)
SOLUTIONS TO REVIEW PROBLEMS (pg. 9-59)
MODULE 10: Analyzing Leases, Pensions, and Taxes (pg. 10-1)
Southwest & FedEx (pg. 10-2)
ANALYZING LEASES (pg. 10-3)
Lessee Reporting of Leases (pg. 10-3)
New Lease Accounting Rules (pg. 10-5)
Footnote Disclosure of Leases (pg. 10-6)
Capitalization of Operating Leases (pg. 10-6)
REVIEW 10-1 (pg. 10-10)
ANALYZING PENSIONS (pg. 10-11)
Reporting of Defined Benefit Pension Plans (pg. 10-12)
Balance Sheet Effects (pg. 10-12)
Income Statement Effects (pg. 10-14)
Fair Value Accounting for Pensions (pg. 10-16)
Footnote Disclosure—Pension Plan Assets and PBO (pg. 10-17)
Footnote Disclosure—Future Cash Flows (pg. 10-19)
Footnote Disclosure—Key Assumptions (pg. 10-20)
Analysis Implications (pg. 10-21)
Other Post-Employment Benefits (OPEB) (pg. 10-23)
REVIEW 10-2 (pg. 10-24)
ANALYZING INCOME TAXES (pg. 10-24)
Timing Differences Create Deferred Tax Assets andLiabilities (pg. 10-25)
Disclosures for Income Taxes (pg. 10-28)
Analysis of Income Tax Disclosures (pg. 10-30)
REVIEW 10-3 (pg. 10-32)
ANALYZING GLOBAL REPORTS (pg. 10-33)
APPENDIX 10A: LEASE CAPITALIZATION USING A CALCULATOR AND PRESENT VALUE TABLES (pg. 10-34)
Lease Capitalization Using Present Value Tables (pg. 10-35)
APPENDIX 10B: AMORTIZATION COMPONENT OF PENSION EXPENSE (pg. 10-36)
APPENDIX 10C: EXPANDED EXPLANATION OF DEFERRED TAXES (pg. 10-37)
GUIDANCE ANSWERS (pg. 10-39)
QUESTIONS (pg. 10-39)
MINI EXERCISES (pg. 10-40)
EXERCISES (pg. 10-45)
PROBLEMS (pg. 10-52)
IFRS APPLICATIONS (pg. 10-61)
ONGOING ANALYSIS PROJECT (pg. 10-64)
SOLUTIONS TO REVIEW PROBLEMS (pg. 10-65)
MODULE 11: Forecasting Financial Statements (pg. 11-1)
Procter & Gamble (pg. 11-2)
FORECASTING PROCESS (pg. 11-3)
REVIEW 11-1 (pg. 11-5)
FORECASTING THE INCOME STATEMENT (pg. 11-6)
REVIEW 11-2 (pg. 11-8)
FORECASTING THE BALANCE SHEET (pg. 11-9)
REVIEW 11-3 (pg. 11-12)
THE FORECASTED CASH BALANCE (pg. 11-12)
REVIEW 11-4 (pg. 11-13)
FORECASTING MULTIPLE YEARS AHEAD (pg. 11-13)
REVIEW 11-5 (pg. 11-15)
REFINING FINANCIAL STATEMENT FORECASTS (pg. 11-15)
Company Guidance (pg. 11-15)
Segment Data (pg. 11-17)
Impact of Acquisitions (pg. 11-18)
Impact of Divestitures (pg. 11-19)
Reassessing Financial Statement Forecasts (pg. 11-19)
REVIEW 11-6 (pg. 11-20)
APPENDIX 11A: FORECASTING THE STATEMENT OFCASH FLOWS (pg. 11-20)
REVIEW 11-7 (pg. 11-22)
APPENDIX 11B: PARSIMONIOUS METHOD FORFORECASTING NOPAT AND NOA (pg. 11-22)
Multiyear Forecasting with Parsimonious Method (pg. 11-22)
REVIEW 11-8 (pg. 11-23)
APPENDIX 11C: MORGAN STANLEY’S FORECAST REPORT ON PROCTER & GAMBLE (pg. 11-23)
QUESTIONS (pg. 11-44)
MINI EXERCISES (pg. 11-45)
EXERCISES (pg. 11-51)
PROBLEMS (pg. 11-60)
IFRS APPLICATIONS (pg. 11-67)
ONGOING ANALYSIS PROJECT (pg. 11-68)
SOLUTIONS TO REVIEW PROBLEMS (pg. 11-68)
MODULE 12: Cost of Capital and Valuation Basics (pg. 12-1)
NextEra Energy (pg. 12-2)
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)
Review of Time Value of Money (pg. 12-6)
Valuation of a Debt Instrument (pg. 12-9)
Valuation of an Equity Instrument (pg. 12-9)
ESTIMATING COST OF CAPITAL (pg. 12-10)
Diversifiable and Non-Diversifiable Risk (pg. 12-11)
REVIEW 12-1 (pg. 12-11)
Cost of Equity Capital Using the Capital Asset Pricing Model (pg. 12-12)
Cost of Equity Capital Using a Multi-Factor Model (pg. 12-13)
REVIEW 12-2 (pg. 12-14)
Cost of Debt Capital (pg. 12-14)
REVIEW 12-3 (pg. 12-16)
Weighted Average Cost of Capital (pg. 12-16)
REVIEW 12-4 (pg. 12-17)
DIVIDEND DISCOUNT MODEL (pg. 12-17)
Recursive Process of Valuation (pg. 12-18)
Framework of the Dividend Discount Model (pg. 12-19)
Dividend Discount Model with Constant Perpetuity (pg. 12-19)
REVIEW 12-5 (pg. 12-20)
Dividend Discount Model with Increasing Perpetuity (pg. 12-20)
Issues in Applying the Dividend Discount Model (pg. 12-21)
REVIEW 12-6 (pg. 12-23)
APPENDIX 12A: ESTIMATING COST OF EQUITY CAPITAL (pg. 12-23)
GUIDANCE ANSWERS (pg. 12-28)
QUESTIONS (pg. 12-28)
MINI EXERCISES (pg. 12-28)
EXERCISES (pg. 12-29)
PROBLEMS (pg. 12-31)
ANALYSIS DISCUSSION POINTS (pg. 12-34)
SOLUTIONS TO REVIEW PROBLEMS (pg. 12-36)
MODULE 13: Cash-Flow-Based Valuation (pg. 13-1)
Procter & Gamble (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. 13-4)
Model Equivalency (pg. 13-4)
Valuation Model Inputs (pg. 13-4)
REVIEW 13-1 (pg. 13-5)
DISCOUNTED CASH FLOW (DCF) MODEL (pg. 13-5)
DCF Model Structure (pg. 13-6)
Steps in Applying the DCF Model (pg. 13-7)
Illustrating the DCF Model (pg. 13-7)
Extending the DCF Model (pg. 13-9)
ANALYZING GLOBAL REPORTS (pg. 13-14)
REVIEW 13-2 (pg. 13-15)
APPENDIX 13A: P&G FINANCIAL STATEMENTS (pg. 13-15)
APPENDIX 13B: DERIVATION OF FREE CASH FLOW FORMULA (pg. 13-18)
APPENDIX 13C: DEUTSCHE BANK VALUATION OF P&G (pg. 13-18)
Qualitative and Quantitative Summary (pg. 13-18)
Financial Statement Forecasts (pg. 13-26)
Valuation of Equity (pg. 13-29)
Observations on the Analyst Report (pg. 13-30)
GUIDANCE ANSWERS (pg. 13-30)
QUESTIONS (pg. 13-30)
MINI EXERCISES (pg. 13-31)
EXERCISES (pg. 13-31)
PROBLEMS (pg. 13-35)
ANALYSIS DISCUSSION POINTS (pg. 13-39)
ONGOING ANALYSIS PROJECT (pg. 13-39)
SOLUTIONS TO REVIEW PROBLEMS (pg. 13-40)
MODULE 14: Operating-Income-Based Valuation (pg. 14-1)
Procter & Gamble (pg. 14-2)
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)
Model Equivalency (pg. 14-4)
Valuation Model Inputs (pg. 14-4)
REVIEW 14-1 (pg. 14-5)
RESIDUAL OPERATING INCOME (ROPI) MODEL (pg. 14-6)
ROPI Model Structure (pg. 14-6)
Steps in Applying the ROPI Model (pg. 14-7)
Illustrating the ROPI Model (pg. 14-8)
Extending the ROPI Model (pg. 14-9)
REVIEW 14-2 (pg. 14-10)
STEADY STATE IN VALUATION (pg. 14-11)
Multi-Year Forecast Precision (pg. 14-11)
Achieving Steady State (pg. 14-12)
Forecasting Steady State—An Illustration (pg. 14-12)
REVIEW 14-3 (pg. 14-14)
MANAGERIAL INSIGHTS FROM THE ROPI MODEL (pg. 14-14)
ASSESSMENT OF VALUATION MODELS (pg. 14-16)
ANALYZING GLOBAL REPORTS (pg. 14-17)
REVIEW 14-4 (pg. 14-17)
APPENDIX 14A: P&G FINANCIAL STATEMENTS (pg. 14-18)
GUIDANCE ANSWERS (pg. 14-21)
QUESTIONS (pg. 14-21)
MINI EXERCISES (pg. 14-21)
EXERCISES (pg. 14-23)
PROBLEMS (pg. 14-27)
ANALYSIS DISCUSSION POINTS (pg. 14-31)
ONGOING ANALYSIS PROJECT (pg. 14-32)
SOLUTIONS TO REVIEW PROBLEMS (pg. 14-33)
MODULE 15: Market-Based Valuation (pg. 15-1)
Dollar General (pg. 15-2)
Valuation Model using Market Multiples (pg. 15-3)
Application of the Model Using Market Multiples (pg. 15-4)
VALUATION USING BALANCE SHEET MULTIPLES (pg. 15-5)
Valuation Using a Net Operating Asset (NOA) Multiple (pg. 15-6)
Valuation Using a Book Value (BV) Multiple (pg. 15-7)
REVIEW 15-1 (pg. 15-8)
VALUATION USING INCOME STATEMENT MULTIPLES (pg. 15-8)
Valuation Using a Net Operating Profit After Tax (NOPAT) Multiple (pg. 15-9)
Valuation Using a Net Income (NI) Multiple (pg. 15-10)
Valuation Using Industry-Based Multiples (pg. 15-11)
Combining Estimates from Differing Multiples (pg. 15-12)
REVIEW 15-2 (pg. 15-12)
SELECTING COMPARABLES FOR MARKET MULTIPLES (pg. 15-12)
Deriving Price-to-Book from Residual Operating Income Model (pg. 15-13)
PB Ratios in Relation to Profitability, Growth, and Risk (pg. 15-14)
Deriving Price-to-Earnings from Residual Operating Income Model (pg. 15-17)
PE Ratios in Relation to Profitability, Growth, and Risk (pg. 15-18)
REVIEW 15-3 (pg. 15-19)
INTERPRETING AND REVERSE ENGINEERING MARKET MULTIPLES (pg. 15-19)
Interpreting and Reverse Engineering the PB Ratio (pg. 15-19)
Interpreting and Reverse Engineering the PE Ratio (pg. 15-21)
Perspective on Valuation Multiples and Fundamental Analysis (pg. 15-22)
REVIEW 15-4 (pg. 15-23)
GUIDANCE ANSWERS (pg. 15-23)
QUESTIONS (pg. 15-24)
MINI EXERCISES (pg. 15-24)
EXERCISES (pg. 15-26)
PROBLEMS (pg. 15-30)
ANALYSIS DISCUSSION POINTS (pg. 15-34)
SOLUTIONS TO REVIEW PROBLEMS (pg. 15-38)
APPENDIX A: Compound Interest Tables (pg. A-1)
APPENDIX B: Computing and Analyzing Cash Flows (pg. B-1)
Starbucks (pg. B-2)
FRAMEWORK FOR STATEMENT OF CASH FLOWS (pg. B-3)
Relation Among Financial Statements (pg. B-3)
Statement of Cash Flows Structure (pg. B-4)
Operating Activities Preview (pg. B-7)
Investing Activities Preview (pg. B-8)
Financing Activities Preview (pg. B-9)
REVIEW B-1 (pg. B-9)
CASH FLOW FROM OPERATING ACTIVITIES (pg. B-9)
Steps to Compute Net Cash Flow from Operating Activities (pg. B-10)
Java House Case Illustration (pg. B-12)
REVIEW B-2 (pg. B-16)
COMPUTING CASH FLOWS FROM INVESTING ACTIVITIES (pg. B-17)
Analyze Remaining Noncash Assets (pg. B-17)
Java House Case Illustration (pg. B-17)
REVIEW B-3 (pg. B-18)
CASH FLOWS FROM FINANCING ACTIVITIES (pg. B-18)
Analyze Remaining Liabilities and Equity (pg. B-18)
Java House Case Illustration (pg. B-18)
REVIEW B-4A (pg. B-19)
Computing Cash Flows from Balance Sheet Accounts (pg. B-19)
Supplemental Disclosures for the Indirect Method (pg. B-20)
REVIEW B-4B (pg. B-21)
ANALYSIS OF CASH FLOW INFORMATION (pg. B-21)
Cash Flow Components (pg. B-21)
Cash Flow Patterns (pg. B-23)
Usefulness of the Statement of Cash Flows (pg. B-26)
REVIEW B-5 (pg. B-27)
Ratio Analyses of Cash Flows (pg. B-28)
Free Cash Flow (pg. B-29)
REVIEW B-6 (pg. B-30)
APPENDIX B1: DIRECT METHOD REPORTING FOR THE STATEMENT OF CASH FLOWS (pg. B-30)
Cash Flows from Operating Activities (pg. B-30)
Cash Flows from Investing and Financing (pg. B-33)
REVIEW B-7 (pg. B-33)
GUIDANCE ANSWERS (pg. B-33)
QUESTIONS (pg. B-34)
MINI EXERCISES (pg. B-35)
EXERCISES (pg. B-38)
PROBLEMS (pg. B-43)
IFRS APPLICATIONS (pg. B-55)
SOLUTIONS TO REVIEW PROBLEMS (pg. B-56)
APPENDIX C: Comprehensive Case (pg. C-1)
Harley-Davidson (pg. C-2)
REVIEWING FINANCIAL STATEMENTS (pg. C-3)
Business Environment for Financial Reporting (pg. C-3)
Income Statement Reporting and Analysis (pg. C-4)
Balance Sheet Reporting and Analysis (pg. C-9)
Statement of Cash Flows Reporting and Analysis (pg. C-22)
Independent Audit Opinion (pg. C-23)
ASSESSING PROFITABILITY AND CREDITWORTHINESS (pg. C-24)
ROE Disaggregation—DuPont Analysis (pg. C-24)
ROE Disaggregation—Operating Focus (pg. C-25)
Disaggregation of RNOA—Margin and Turnover (pg. C-26)
Credit Analysis (pg. C-26)
Summarizing Profitability and Creditworthiness (pg. C-27)
FORECASTING FINANCIAL STATEMENTS (pg. C-28)
VALUING EQUITY SECURITIES (pg. C-31)
Discounted Cash Flow Valuation (pg. C-32)
Residual Operating Income Valuation (pg. C-32)
Assessment of the Valuation Estimate (pg. C-32)
Summary Observations (pg. C-33)
APPENDIX D: Chart of Accounts (with Acronyms) (pg. D-1)
Glossary (pg. G-1)
Index (pg. I-1)
Peter D. Easton

Peter D. Easton

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

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

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

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

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

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


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.


Gregory A. Sommers

Gregory A. Sommers

Gregory A. Sommers is Director of the Master of Science in Accounting program and Professor of Practice in Accounting in the Edwin L. Cox School of Business at Southern Methodist University.

He holds an undergraduate degree in accounting from Fresno Pacific University and a PhD in Accounting and Management Information Systems from The Ohio State University. Professor Sommers is a Certified Public Accountant who practiced in and continues to be licensed in California.

Professor Sommers’ research focuses on market-based empirical studies of the relations between currently available accounting data, expectations of future accounting data, expected cost of capital and valuation. His research has been published in Journal of Accounting Research and Journal of Business, Finance, and Accounting. Professor Sommers serves on the editorial board of Review of Accounting Studies.

Professor Sommers teaches financial accounting, including international accounting, in the undergraduate and graduate programs as well as in executive education at Southern Methodist University. He has taught financial statement analysis and valuation for over ten years at the graduate level and his teaching materials were previously utilized as resources for another textbook in this area. Professor Sommers’ teaching has earned him numerous awards including Outstanding MBA Teaching as well as recognition from student organizations.

Professor Sommers is an active member of the American Accounting Association and its Financial Accounting and Reporting Section. He has served as chairman of the Trueblood Seminar for Professors sponsored by Deloitte. Professor Sommers is recognized as an expert in the areas of financial reporting, financial analysis, estimation of cost of capital, and business valuation.


Xiao-Jun Zhang

Xiao-Jun Zhang

Xiao-Jun Zhang is the E. R. Niemela Associate Professor of Accounting at the Haas School of Business, University of California, Berkeley. He has served as Chair of the accounting group and the Director of the Center for Financial Reporting and Management at the University of California, Berkeley.

Professor Zhang holds an undergraduate degree from Renmin University, and masters degrees from the University of Maryland and Columbia University. Professor Zhang received his PhD from Columbia University.

Professor Zhang's research focuses on financial statement analysis and security valuation. His work has been published in highly respected research journals including The Accounting Review, Journal of Accounting and Economics, Journal of Accounting Research, and Review of Accounting Studies. Professor Zhang has served on the editorial board of several journals, and has been a reviewer for many others top journals in the fields of finance and accounting.

Professor Zhang teaches undergraduate, MBA, and PhD courses in accounting and analysis. He is consistently ranked among the best instructors by students at the University of California, Berkeley. Professor Zhang is a respected consultant having performed consulting services for several hedge funds. He has also served as an advisor to the Investment Club at the University of California, Berkeley.


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