Financial Accounting for MBAs, 7e

by Easton, Wild, Halsey, McAnally

ISBN: 978-1-61853-231-2 | Copyright 2018

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Welcome to Financial Accounting for MBAs 7e!

Our main goal in writing this book was to satisfy the needs of today’s business manager by providing the most contemporary, relevant, 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 who used the First through Sixth Editions and whose feedback greatly benefited this Seventh Edition.

Target Audience

Financial Accounting for MBAs is intended for use in full‑time, part‑time, executive, and working professional MBA programs that include a financial accounting course as part of the curriculum, and one in which managerial decision making and analysis are emphasized. This book easily accommodates mini‑courses lasting several days as well as extended courses lasting a full semester.

Innovative Approach

Financial Accounting for MBAs is managerially oriented and focuses on the most salient aspects of accounting. It helps MBA students learn how to read, analyze, and interpret financial accounting data to make informed business decisions. This textbook makes financial accounting engaging, relevant, and contemporary. To that end, it consistently incorporates real company data, both in the body of each module and throughout assignment material.

Flexible Structure

The MBA curricula, instructor preferences, and course lengths vary across colleges. Accordingly and to the extent possible, the 13 modules that make up Financial Accounting for MBAs were designed independently of one another. This modular presentation enables each college and instructor to “customize” the book to best fit the needs of their students. Our introduction and discussion of financial statements constitute Modules 1, 2, and 3. Module 4 presents the analysis of financial statements with an emphasis on analysis of operating profitability. Modules 5 through 10 highlight major financial accounting topics including assets, liabilities, equity, and off‑balance‑sheet financing. Module 11 details the process for preparing and analyzing the statement of cash flow. Module 12
explains forecasting financial statements and Module 13 introduces simple valuation models. At the end of each module, we present an ongoing analysis project that can be used as a guide for an independent project. Like the rest of the book, the project is independent across the various modules.

At the end of the book, we include several useful resources. Appendix A contains compound interest tables and formulas. Appendix B is a chart of accounts used in the book. Appendix C is an illustrative case that applies the techniques described in Modules 1 through 13 to an actual company, Harley‑Davidson. Appendix C can be used as a guide, in conjunction with the module‑end project questions, by students required to prepare a company analysis.

Transaction Analysis and Statement Preparation

Instructors differ in their coverage of accounting mechanics. Some focus on the effects of transactions on financial statements using the balance sheet equation format. Others include coverage of journal entries and T‑accounts. We accommodate both teaching styles in this Seventh Edition. Specifically, Module 2 provides an expanded discussion of the effects of transactions using our innovative financial statement effects template. Emphasis is on the analysis of Apple’s summary transactions, which concludes with the preparation of its financial statements. Module 3, which is entirely optional, allows an instructor to drill down and focus on accounting mechanics: journal entries and T‑accounts. It illustrates accounting for numerous transactions, including those involving accounting adjustments. It concludes with the preparation of the financial statements. This detailed transaction analysis uses the same financial statement effects template, with journal entries and T‑accounts highlighted in the margin. These two modules accommodate the spectrum of teaching styles--instructors can elect to use either or both modules to suit their preferences, and their students are not deprived of any information as a result of that selection.

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. 

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Managerial Emphasis

Tomorrow’s MBA graduates must be skilled in using financial statements to make business decisions.

These skills often require application of ratio analyses, benchmarking, forecasting, valuation, and other aspects of financial statement analysis for decision making. Further, tomorrow’s MBA graduates must have the skills to go beyond basic financial statements and to interpret and apply nonfinancial statement disclosures, such as footnotes and supplementary reports. This book, therefore, emphasizes real company data, including detailed footnote and other management disclosures, and shows how to use this information to make managerial inferences and decisions. This approach makes financial accounting interesting and relevant for all MBA students.As MBA instructors, we recognize that the core MBA financial accounting course is not directed toward accounting majors. Financial Accounting for MBAs embraces this reality. This book highlights financial reporting, analysis, interpretation, and decision making. We incorporate the following financial statement effects template to train MBA students in understanding the economic ramifications of transactions and their impact on all key financial statements. This analytical tool is a great resource for MBA students in learning accounting and applying it to their future courses and careers. Each transaction is identified in the “Transaction” column. Then, the dollar amounts (positive or negative) of the financial statement effects are recorded in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow effects (via the cash column) and the statement of stockholders’ equity effects (via the contributed capital and earned capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each transaction. (denoted by the arrow line from net income to earned capital). This template is instructive as it reveals the financial impacts of transactions, and it provides insights into the effects of accounting choices.

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Innovative Pedagogy

Financial Accounting for MBAs includes special features specifically designed for the MBA student.

Focus Companies for Each Module

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

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Real Company Data Throughout

Market research and reviewer feedback tell us that one of instructors’ greatest frustrations with other MBA textbooks is their lack of real company data. We have gone to great lengths to incorporate real company data throughout each module to reinforce important concepts and engage MBA students. We engage nonaccounting MBA students specializing in finance, taxation, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 2 24, 4 23, 5 3, 5 19, 6 23, 7 16, 8 5, 9 20, 10 6, 11 25, and 12 17.

Footnotes and Other Management Disclosures

Analyzed on their own, financial statements reveal only part of a corporation’s economic story. Information essential for a complete analysis of a company’s performance and financial position must be gleaned from the footnotes and other disclosures provided by the company. Consequently, we incorporate footnotes and other disclosures generously throughout the text and assignments. For representative examples, SEE PAGES 7 6, 8 15, 9 7, 9 33, and 10 5.

Industry Level Data

We repeatedly emphasize that financial analysis cannot be performed in a vacuum—appropriate benchmarks are critical to a complete understanding of a company’s financial performance and position. To this point, we provide graphics that capture industry level data including many of the ratios we discuss and compute in the modules. For representative examples, SEE PAGES 4 28, 4 38, 5 23, 6 26, and 7 25.

Decision Making Orientation

One primary goal of a MBA financial accounting course is to teach students the skills needed to apply their accounting knowledge to solving real business problems and making informed business decisions. With that goal in mind, Managerial Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios. For representative examples, SEE PAGES 2 14, 4 28, 7 25, 8 11, 9 14, and 10 6.

Reviews for Each Learning Objective

Financial accounting can be challenging—especially for MBA students lacking business experience or previous exposure to business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include reviews that require students to recall and apply the financial accounting techniques and concepts described in each section. Review questions usually include real financial statement data from a company in the same industry as the module’s focus company. For representative examples, SEE PAGES 4 14, 7 7, 8 12, 9 9, and 10 23.

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 45, 4 63, and 9 53.

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 MBA students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical bookkeeping tasks. There are six categories of assignments: Questions, Mini Exercises, Exercises, Problems, IFRS Applications, and Management Applications. For representative examples, SEE PAGES 4 43, 5 36, 7 41, 7 45, and 9 52.                                            

Fundamentals of Financial Accounting Tutorial

This interactive tutorial is intended for use in programs that either require or would like to offer a pre‑term tutorial that creates a baseline of accounting knowledge for students with little to no prior exposure to financial accounting. Initially developed as a pre‑term tutorial for first year MBA students, this product can be used as a warm‑up for any introductory level financial accounting course. It is designed as an asynchronous, interactive, self‑paced experience for students.
Available Learning Modules (You Select)
1. Introducing Financial Accounting (approximate completion time 2 hours)
2. Constructing Financial Statements (approximate completion time 4 hours)
3. Adjusting Entries and Completing the Accounting Cycle (approximate completion time 4 hours)
4. Reporting and Analyzing Cash Flows (approximate completion time 3.5 hours)
5. Analyzing and Interpreting Financial Statements (approximate completion time 3.5 hours)
This is a separate, saleable item. Contact your sales representative to receive more information or email customerservice@cambridgepub.com.   

Companion Casebook

Cases in Financial Reporting, 8th edition by Michael Drake (Brigham Young University), Ellen Engel (University of Illinois—Chicago), D. Eric Hirst (University of Texas – Austin), and Mary Lea McAnally (Texas A&M University). This book comprises 27 cases and is a perfect companion book for faculty interested in exposing students to a wide range of real financial statements. The cases are current and cover companies from Japan, Sweden, Austria, the Netherlands, the UK, India, as well as from the U.S. Many of the U.S. companies are major multinationals. Each case deals with a specific financial accounting topic within the context of one (or more) company’s financial statements. Each case contains financial statement information and a set of directed questions pertaining to one or two specific financial accounting issues. This is a separate, saleable casebook (ISBN 978‑1‑61853‑122‑3). Contact your sales representative to receive a desk copy or email customerservice@cambridgepub.com.                                           

                                                


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

  • Table of Contents is reorganized to facilitate eLearning, with additional in‑module Reviews and Guided Example videos for all modules (each Learning Objective has a Review/Guided Example, as well as a corresponding eLecture). Content is also revised to be more streamlined and pointed.
  • New regulations: This edition covers new standards on Revenue Recognition, Leases, Discontinued Operations, and Marketable Securities.
  • DuPont Model:
    • Module 4 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.
    • Analysis of financial performance in later modules relies on the DuPont model. However, text boxes include deeper discussion of analyses that gleaned from the operating / nonoperating distinction.
  • Cash flows: Measures of cash flow are incorporated into the body of the book as new Module 11 (formerly Appendix B). Cash flow computations are simplified, and there is detailed explanation of how to use and analyze cash flow statements, including cash‑based ratios and life cycle notions.
  • IFRS: Global Accounting sections are updated to include new developments.
  • 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.
  • R&D Costs: Module 6 now includes R&D facilities along with restructuring as they are part of operations.
  • Module 8 includes a complete rewrite of share‑based compensation with an initial overview of accounting for such compensation that simplifies this complex topic. There is a greater emphasis on restricted stock-type plans that are now more prevalent.
  • Equity Carve‑Outs: Moved to Module 9 because carve‑outs can be viewed as a divestiture of a subsidiary investment, and set as a new appendix (to reflect their reduced occurrence).
  • Revised forecasting module: Module 12 is shortened and rewritten for clarity. It begins with a concrete example of forecasting mechanics (as the opening section for those wishing to cover just the mechanics). Module 12 uses a new Procter & Gamble analyst report from Morgan Stanley and set as an appendix.
  • Updated financial data and assignments: Data and financial statements are updated throughout the book to reflect each company’s latest available financial statement filings and disclosures.
  • Bond rating: Explanation of the determination of bond ratings is enhanced with inclusion 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).
  • Updated Comprehensive Case: Appendix C (available on the book’s website) shows a case analysis using Harley‑Davidson financial statements and notes.
  • Foreign currency: New section on foreign currency effects for revenues, profit, and cash flow.
  • Mechanics: Transaction analysis revised, streamlined, and covered entirely in Module 3.
  • Derivatives: Revised derivatives discussion for simpler exposition with new illustrative examples. Added new section on analysis of derivatives to provide MBAs with a tangible take‑away.

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

  • 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

  • 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

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  • Quickly review the performance of entire class
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Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. v)
Contents (pg. xiii)
Module 1: Financial Accounting (pg. 1-1)
Under Armour (UA) (pg. 1-1)
Reporting on Business Activities (pg. 1-3)
International Accounting Standards (pg. 1-9)
Review 1-1 (pg. 1-5)
Financial Statements: Demand and Supply (pg. 1-5)
Demand for Information (pg. 1-5)
Supply of Information (pg. 1-8)
Review 1-2 (pg. 1-10)
Structure of Financial Statements (pg. 1-10)
Balance Sheet (pg. 1-11)
Income Statement (pg. 1-13)
Statement of Cash Flows (pg. 1-16)
Statement of Stockholders’ Equity (pg. 1-15)
Information Beyond Financial Statements (pg. 1-17)
Managerial Choices in Financial Accounting (pg. 1-18)
Review 1-3 (pg. 1-19)
Analysis of Financial Statements (pg. 1-19)
Return on Assets (pg. 1-19)
Components of Return on Assets (pg. 1-19)
Return on Equity (pg. 1-21)
Are Financial Statements Relevant? (pg. 1-21)
Financial Statements and Business Analysis (pg. 1-22)
Analyzing the Competitive Environment (pg. 1-22)
SWOT Analysis of the Business Environment (pg. 1-23)
Analyzing Competitive Advantage (pg. 1-24)
Review 1-5 (pg. 1-25)
Book Road Map (pg. 1-26)
Global Accounting (pg. 1-26)
 Appendix 1A: Accessing SEC Filings  (pg. 1-27)
 Appendix 1B: Accounting Principles and Governance (pg. 1-29)
Financial Accounting Environment (pg. 1-29)
Audit Report (pg. 1-30)
Guidance Answers  (pg. 1-34)
Questions  (pg. 1-34)
Mini Exercises (pg. 1-35)
Exercises (pg. 1-37)
Problems (pg. 1-38)
IFRS Applications  (pg. 1-44)
 Management Applications (pg. 1-45)
 Ongoing Project (pg. 1-45)
Solutions to Review Problems (pg. 1-46)
Module 2: Introducing Financial Statements (pg. 2-1)
Apple (APPL) (pg. 2-1)
Balance Sheet (pg. 2-3)
Balance Sheet and the Flow of Costs (pg. 2-3)
Assets (pg. 2-4)
Liabilities and Equity (pg. 2-6)
Review 2-1 (pg. 2-12)
Income Statement (pg. 2-12)
Recognizing Revenues and Expenses (pg. 2-14)
Reporting of Transitory Items (pg. 2-14)
Analyzing the Income Statement (pg. 2-15)
Review 2-2 (pg. 2-16)
Statement of Stockholders’ Equity (pg. 2-16)
Review 2-3 (pg. 2-17)
Statement of Cash Flows (pg. 2-17)
Statement Format and Data Sources (pg. 2-17)
Review 2-4 (pg. 2-19)
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)
Additional Information Sources (pg. 2-21)
Form 10-K (pg. 2-21)
Form 20-F and Form 40-F (pg. 2-23)
Form 8-K (pg. 2-24)
Analyst Reports (pg. 2-24)
Credit Services (pg. 2-25)
Data Services (pg. 2-25)
Review 2-6 (pg. 2-25)
Global Accounting (pg. 2-25)
Guidance Answers  (pg. 2-26)
 Questions  (pg. 2-26)
Mini Exercises (pg. 2-27)
Exercises (pg. 2-28)
Problems (pg. 2-33)
 IFRS Applications (pg. 2-35)
Management Applications  (pg. 2-36)
 Ongoing Project (pg. 2-37)
Solutions to Review Problems (pg. 2-37)
Module 3: Transactions, Adjustments, and Financial Statements (pg. 3-1)
Apple (AAPL) (pg. 3-1)
Basics of Accounting (pg. 3-3)
Financial Statement Effects Template (pg. 3-4)
Review 3-1 (pg. 3-5)
Accounting Cycle Step 1—Analyze Transactions and Prepare Entries (pg. 3-6)
Apple’s Transactions (pg. 3-6)
Applying the Financial Statement Effects Template (pg. 3-6)
Applying the Journal Entry and T-Account (pg. 3-6)
Accounting Cycle Step 2—Prepare Accounting Adjustments (pg. 3-9)
Prepaid Expenses (pg. 3-10)
Unearned Revenues (pg. 3-11)
Accrued Expenses (pg. 3-11)
Accrued Revenues (pg. 3-12)
Accounting Adjustments for Apple (pg. 3-12)
Review 3-3 (pg. 3-13)
Accounting Cycle Step 3—Prepare Financial Statements (pg. 3-13)
Income Statement (pg. 3-13)
Balance Sheet (pg. 3-14)
Statement of Stockholders’ Equity (pg. 3-15)
Review 3-4 (pg. 3-16)
Accounting Cycle Step 4—Close the Books (pg. 3-16)
Review 3-5 (pg. 3-18)
Global Accounting (pg. 3-18)
Appendix 3A: FASB’s Financial Statement Presentation Project (pg. 3-18)
 Guidance Answers (pg. 3-19)
 Questions (pg. 3-19)
Mini Exercises (pg. 3-20)
Exercises (pg. 3-23)
Problems (pg. 3-27)
IFRS Applications  (pg. 3-32)
Management Applications (pg. 3-33)
Solutions to Review Problems (pg. 3-35)
Module 4: Analyzing and Interpreting Financial Statements (pg. 4-1)
Intel (INTC) (pg. 4-1)
Return on Equity (ROE) (pg. 4-3)
Review 4-1 (pg. 4-4)
ROE Disaggregation: DuPont Analysis (pg. 4-4)
Review 4-2 (pg. 4-6)
Return on Assets and its Disaggregation (pg. 4-6)
Analysis of Profitability and Productivity (pg. 4-7)
Analysis of Profitability (pg. 4-8)
Analysis of Productivity (pg. 4-9)
Analysis of Financial Leverage (pg. 4-12)
Review 4-3 (pg. 4-14)
Operating Focus on Financial Condition (pg. 4-14)
Net Operating Assets (NOA) (pg. 4-15)
Review 4-4 (pg. 4-19)
Operating Focus on Financial Performance (pg. 4-20)
Net Operating Assets (NOA) (pg. 4-15)
Review 4-5 (pg. 4-24)
Return on Net Operating Assets (RNOA) (pg. 4-24)
Review 4-6 (pg. 4-26)
RNOA Disaggregation into Margin and Turnover (pg. 4-26)
Net Operating Profit Margin (pg. 4-27)
Net Operating Asset Turnover (pg. 4-27)
Trade-Off between Margin and Turnover (pg. 4-28)
Review 4-7 (pg. 4-30)
Global Accounting (pg. 4-30)
 Appendix 4A: Nonoperating Return Component of ROE   (pg. 4-31)
Nonoperating Return (pg. 4-31)
Nonoperating Return—with Debt Financing (pg. 4-31)
Nonoperating Return—With Debt Financing and Nonoperating Assets (pg. 4-32)
Nonoperating Return—Without Debt Financing, but with Nonoperating Assets (pg. 4-33)
Nonoperating Return—With Debt Financing, NonoperatingAssets, and Noncontrolling Interest (pg. 4-34)
Review 4-8 (pg. 4-35)
 Appendix 4B: Liquidity and Solvency Analysis  (pg. 4-36)
Liquidity Analysis (pg. 4-36)
Solvency Analysis (pg. 4-37)
Vertical and Horizontal Analysis (pg. 4-39)
Limitations of Ratio Analysis (pg. 4-41)
Review 4-9 (pg. 4-42)
Guidance Answers  (pg. 4-42)
Questions  (pg. 4-42)
Mini Exercises (pg. 4-43)
Exercises (pg. 4-46)
Problems (pg. 4-50)
IFRS Applications (pg. 4-59)
Management Applications  (pg. 4-62)
Ongoing Project (pg. 4-63)
Solutions to Review Problems (pg. 4-64)
Module 5: Revenues, Receivables, and Operating Expenses (pg. 5-1)
Pfizer (PFE) (pg. 5-1)
Revenue (pg. 5-3)
Revenue Recognition Rules (pg. 5-4)
Complications of Revenue Recognition (pg. 5-5)
Performance Obligations Satisfied Over Time (pg. 5-6)
Review 5-1 (pg. 5-9)
Sales Allowances (pg. 5-9)
Accounting for Sales Allowances (pg. 5-9)
Reporting Sales Allowances (pg. 5-10)
Analysis of Sales Allowances (pg. 5-11)
Review 5-2 (pg. 5-11)
Unearned (Deferred) Revenue (pg. 5-12)
Review 5-3 (pg. 5-13)
Foreign Currency Effects on Revenue (pg. 5-13)
Foreign Currency and Cash Flows (pg. 5-14)
Foreign Currency and Income (pg. 5-14)
Foreign Currency and Future Results (pg. 5-15)
Review 5-4 (pg. 5-15)
Accounts Receivable (pg. 5-16)
Aging Analysis of Receivables (pg. 5-16)
Accounting for Accounts Receivable (pg. 5-17)
Analysis of Accounts Receivable–Magnitude (pg. 5-18)
Analysis of Accounts Receivable—Quality (pg. 5-20)
Review 5-5 (pg. 5-21)
Expenses and Losses (pg. 5-22)
Deductions from Income (pg. 5-22)
Research and Development Expense (pg. 5-23)
Discontinued Operations (pg. 5-25)
Review 5-6 (pg. 5-26)
Pro Forma Income Reporting (pg. 5-27)
Regulation G Reconciliation (pg. 5-28)
SEC Warnings about Pro Forma Numbers (pg. 5-28)
Disclosures and Market Assessments (pg. 5-29)
Review 5-7 (pg. 5-31)
Global Accounting (pg. 5-31)
Guidance Answers  (pg. 5-32)
Questions  (pg. 5-32)
Mini Exercises (pg. 5-33)
Exercises (pg. 5-36)
Problems (pg. 5-42)
IFRS Applications (pg. 5-47)
 Management Applications (pg. 5-49)
Ongoing Project  (pg. 5-50)
Solutions to Review Problems (pg. 5-51)
Module 6: Inventories, Accounts Payable, and Long-Term Assets (pg. 6-1)
Home Depot (HD) (pg. 6-1)
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)
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. 6-11)
Inventory—Analysis Tools (pg. 6-11)
Gross Profit Analysis (pg. 6-11)
Days Inventory Outstanding and Inventory Turnover (pg. 6-12)
Days Payable Outstanding (pg. 6-14)
Cash Conversion Cycle (pg. 6-14)
Review 6-3 (pg. 6-15)
PPE Assets—Capitalization And Depreciation (pg. 6-16)
Plant and Equipment (pg. 6-16)
Research and Development Facilities and Equipment (pg. 6-19)
PPE Assets—Sales, Impairments, and Restructuring (pg. 6-20)
Asset Sales (pg. 6-20)
Asset Impairments (pg. 6-21)
Restructuring Costs (pg. 6-22)
Review 6-5 (pg. 6-24)
PPE Assets—Analysis Tools (pg. 6-25)
PPE Turnover (pg. 6-25)
PPE Useful Life (pg. 6-26)
PPE Percent Used Up (pg. 6-27)
Review 6-6 (pg. 6-27)
Global Accounting (pg. 6-28)
 Guidance Answers (pg. 6-29)
 Questions (pg. 6-29)
Mini Exercises (pg. 6-30)
Exercises (pg. 6-32)
Problems (pg. 6-36)
IFRS Applications (pg. 6-39)
Management Applications (pg. 6-41)
Ongoing Project (pg. 6-41)
Solutions to Review Problems (pg. 6-42)
Module 7: Current and Long-Term Liabilities (pg. 7-1)
Verizon Communications (VZ) (pg. 7-1)
Accrued Liabilities (pg. 7-3)
Accrued Liabilities Defined (pg. 7-3)
Accruals for Contractual Liabilities—Wages Payable Example (pg. 7-4)
Accruals for Contractual Liabilities—Deferred Revenue Example (pg. 7-5)
Accruals for Contingent Liabilities Defined (pg. 7-5)
Accruals for Contingent Liabilities—Warranties Example (pg. 7-5)
Review 7-1 (pg. 7-7)
Short-Term Debt (pg. 7-7)
Accounting for Short-Term Debt (pg. 7-7)
Current Maturities of Long-Term Debt (pg. 7-8)
Review 7-2 (pg. 7-9)
Long-Term Debt—Pricing (pg. 7-10)
Pricing of Bonds Issued at Par (pg. 7-11)
Pricing of Bonds Issued at a Discount (pg. 7-11)
Pricing of Bonds Issued at a Premium (pg. 7-12)
Effective Cost of Debt (pg. 7-12)
Review 7-3 (pg. 7-14)
Long-Term Debt—Reporting (pg. 7-14)
Financial Statement Disclosure of Debt Issuance (pg. 7-14)
Balance Sheet Reporting (pg. 7-15)
Income Statement Reporting (pg. 7-16)
Amortization of Discount (pg. 7-17)
Amortization of Premium (pg. 7-17)
Financial Statement Effects of Bond Repurchase (pg. 7-18)
Fair Value Disclosures (pg. 7-19)
Review 7-4 (pg. 7-20)
Quality of Debt (pg. 7-20)
What Are Credit Ratings? (pg. 7-21)
What Determines Credit Ratings? (pg. 7-22)
Verizon Credit Rating Example (pg. 7-23)
Why Credit Ratings Matter (pg. 7-25)
Review 7-5 (pg. 7-26)
Global Accounting (pg. 7-26)
Appendix 7A: Time Value of Money  (pg. 7-26)
Present Value Concepts (pg. 7-26)
Future Value Concepts (pg. 7-31)
 Guidance Answers  (pg. 7-32)
Questions  (pg. 7-32)
Mini Exercises (pg. 7-33)
Exercises (pg. 7-37)
Problems (pg. 7-41)
IFRS Applications (pg. 7-45)
Management Applications  (pg. 7-48)
Ongoing Project  (pg. 7-48)
Solutions to Review Problems (pg. 7-49)
Module 8: Stock Transactions, Dividends, and EPS (pg. 8-1)
Johnson & Johnson (JNJ) (pg. 8-1)
Stockholders’ Equity and Classes of Stock (pg. 8-3)
Stockholders’ Equity Accounts (pg. 8-3)
Statement of Stockholders’ Equity (pg. 8-5)
Preferred Stock (pg. 8-6)
Common Stock (pg. 8-7)
Review 8-1 (pg. 8-8)
Stock Transactions (pg. 8-8)
Stock Issuance (pg. 8-8)
Stock Repurchase (Treasury Stock) (pg. 8-10)
Review 8-2 (pg. 8-12)
Stock-Based Compensation (pg. 8-12)
Accounting for Stock-Based Compensation (pg. 8-14)
Footnote Disclosures for Stock-Based Compensation (pg. 8-15)
Review 8-3 (pg. 8-16)
Cash Dividends (pg. 8-16)
Cash Dividend Disclosures (pg. 8-17)
Dividend Payout and Yield (pg. 8-17)
Cash Dividends Financial Effects (pg. 8-17)
Review 8-4 (pg. 8-18)
Stock Splits and Dividends (pg. 8-19)
Stock Split (pg. 8-19)
Stock Dividend (pg. 8-19)
Review 8-5 (pg. 8-20)
Accumulated Other Comprehensive Income (pg. 8-20)
AOCI Components (pg. 8-21)
AOCI Disclosures and Interpretation (pg. 8-21)
Review 8-6 (pg. 8-22)
Convertible Securities (pg. 8-23)
Review 8-7 (pg. 8-24)
Earnings per Share (EPS) (pg. 8-24)
Review 8-8 (pg. 8-26)
Global Accounting (pg. 8-26)
 Appendix 8A: Stock-Based Compensation: Reporting and Analyzing  (pg. 8-27)
Guidance Answers  (pg. 8-30)
 Questions (pg. 8-31)
Mini Exercises (pg. 8-32)
Exercises (pg. 8-35)
Problems (pg. 8-40)
IFRS Applications  (pg. 8-48)
Ongoing Project  (pg. 8-52)
Solutions to Review Problems (pg. 8-52)
Module 9: Intercorporate Investments (pg. 9-1)
Google (GOOG) (pg. 9-1)
Intercorporate Equity 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)
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. 9-14)
Equity Investments with Control (pg. 9-15)
Accounting for Investments with Control (pg. 9-15)
Review 9-3 (pg. 9-25)
Global Accounting (pg. 9-26)
 Appendix 9A: Accounting for Derivatives  (pg. 9-27)
Fair Value Hedge Example (pg. 9-28)
Cash Flow Hedge Example (pg. 9-28)
Analysis of Derivatives (pg. 9-30)
Review 9-4 (pg. 9-31)
Appendix 9B: Equity Carve-Outs  (pg. 9-32)
Sell-Offs (pg. 9-32)
Spin-Offs (pg. 9-32)
Split-Offs (pg. 9-33)
Analysis of Equity Carve-Outs (pg. 9-34)
Review 9-5 (pg. 9-34)
 Guidance Answers (pg. 9-35)
 Questions (pg. 9-35)
Mini Exercises (pg. 9-35)
Exercises (pg. 9-38)
Problems (pg. 9-47)
 IFRS Applications (pg. 9-49)
 Management Applications  (pg. 9-52)
 Ongoing Project (pg. 9-53)
Solutions to Review Problems (pg. 9-54)
Module 10: Leases, Pensions, and Income Taxes (pg. 10-1)
Southwest Airlines (LUV) and FedEx (FDX) (pg. 10-1)
Leases (pg. 10-3)
Lessee Reporting of Leases (pg. 10-3)
New Lease Accounting Rules (pg. 10-4)
Footnote Disclosure of Leases (pg. 10-5)
Capitalization of Operating Leases (pg. 10-6)
Review 10-1 (pg. 10-11)
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. 10-22)
Review 10-2 (pg. 10-23)
Income Taxes (pg. 10-24)
Timing Differences Create Deferred Tax Assets and Liabilities (pg. 10-24)
Disclosures for Income Taxes (pg. 10-27)
Analysis of Income Tax Disclosures (pg. 10-29)
Review 10-3 (pg. 10-30)
Global Accounting (pg. 10-31)
Appendix 10A: Lease Capitalization Using a Calculator and Present Value Tables (pg. 10-31)
 Appendix 10B: Amortization Component of Pension Expense (pg. 10-33)
 Appendix 10C: Expanded Explanation of Deferred Taxes (pg. 10-35)
 Guidance Answers (pg. 10-37)
 Questions (pg. 10-37)
Mini Exercises (pg. 10-38)
Exercises (pg. 10-43)
Problems (pg. 10-51)
IFRS Applications (pg. 10-59)
Ongoing Project (pg. 10-63)
Solutions to Review Problems (pg. 10-64)
Module 11: Cash Flows (pg. 11-1)
Starbucks Corporation (SBUX) (pg. 11-1)
Framework for the Statement of Cash Flows (pg. 11-3)
Relation Among Financial Statements (pg. 11-3)
Statement of Cash Flows Structure (pg. 11-4)
Operating Activities Preview (pg. 11-7)
Investing Activities Preview (pg. 11-8)
Financing Activities Preview (pg. 11-8)
Review 11-1 (pg. 11-9)
Cash Flow from Operating Activities (pg. 11-9)
Steps to Compute Net Cash Flow from Operating Activities (pg. 11-10)
Java House Case Illustration (pg. 11-12)
Review 11-2 (pg. 11-15)
Computing Cash Flows from Investing Activities (pg. 11-16)
Analyze Remaining Noncash Assets (pg. 11-16)
Java House Case Illustration (pg. 11-16)
Review 11-3 (pg. 11-17)
Cash Flows from Financing Activities (pg. 11-18)
Analyze Remaining Liabilities and Equity (pg. 11-18)
Java House Case Illustration (pg. 11-18)
Review 11-4A (pg. 11-19)
Computing Cash Flows from Balance Sheet Accounts (pg. 11-19)
Supplemental Disclosures for the Indirect Method (pg. 11-20)
Review 11-4B (pg. 11-21)
Analysis of Cash Flow Information (pg. 11-21)
Cash Flow Components (pg. 11-21)
Cash Flow Patterns (pg. 11-22)
Usefulness of the Statement of Cash Flows (pg. 11-25)
Review 11-5 (pg. 11-27)
Ratio Analyses of Cash Flows (pg. 11-27)
Free Cash Flow (pg. 11-28)
Review 11-6 (pg. 11-29)
Appendix 11A: Direct Method Reporting for the Statement of Cash Flows (pg. 11-29)
Cash Flows from Operating Activities (pg. 11-29)
Guidance Answers  (pg. 11-32)
Questions  (pg. 11-32)
Mini Exercises (pg. 11-34)
Exercises (pg. 11-36)
Problems (pg. 11-42)
IFRS Applications  (pg. 11-54)
Solutions to Review Problems (pg. 11-56)
Module 12: Financial Statement Forecasting (pg. 12-1)
Procter & Gamble (P&G) (pg. 12-1)
Forecasting Process (pg. 12-3)
Review 12-1 (pg. 12-5)
Forecasting the Income Statement (pg. 12-6)
Review 12-2 (pg. 12-8)
Forecasting the Balance Sheet (pg. 12-9)
Review 12-3 (pg. 12-12)
The Forecasted Cash Balance (pg. 12-12)
Review 12-4 (pg. 12-13)
Forecasting Multiple Years Ahead (pg. 12-13)
Review 12-5 (pg. 12-15)
Refining Financial Statement Forecasts (pg. 12-15)
Company Guidance (pg. 12-15)
Segment Data (pg. 12-17)
Impact of Acquisitions (pg. 12-18)
Impact of Divestitures (pg. 12-19)
Reassessing Financial Statement Forecasts (pg. 12-19)
Review 12-6 (pg. 12-20)
Appendix 12A: Forecasting the Statement of Cash Flows (pg. 12-20)
Review 12-7 (pg. 12-22)
Appendix 12B: Parsimonious Method for Forecasting NOPAT and NOA  (pg. 12-22)
Multiyear Forecasting with Parsimonious Method (pg. 12-22)
Review 12-8 (pg. 12-23)
 Appendix 12C: Morgan Stanley’s Forecast Report on Procter & Gamble (pg. 12-23)
 Questions (pg. 12-45)
Mini Exercises (pg. 12-45)
Exercises (pg. 12-51)
Problems (pg. 12-60)
 IFRS Applications (pg. 12-67)
Ongoing Project  (pg. 12-68)
Solutions to Review Problems (pg. 12-68)
Module 13: Using Financial Statements for Valuation (pg. 13-1)
Procter & Gamble (PG) (pg. 13-1)
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)
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. 13-6)
Illustrating the DCF Model (pg. 13-7)
Review 13-2 (pg. 13-8)
Residual Operating Income (ROPI) Model (pg. 13-9)
ROPI Model Structure (pg. 13-9)
Steps in Applying the ROPI Model (pg. 13-10)
Illustrating the ROPI Model (pg. 13-10)
Review 13-3 (pg. 13-11)
Further Considerations Involving Valuation Models (pg. 13-11)
Managerial Insights from the ROPI Model (pg. 13-11)
Assessment of Valuation Models (pg. 13-13)
Review 13-4 (pg. 13-14)
Global Accounting (pg. 13-14)
 Appendix 13A: Derivation of Free Cash Flow Formula (pg. 13-15)
 Appendix 13B:  Deutsche Bank Valuation of Procter & Gamble (pg. 13-15)
Qualitative and Quantitative Summary (pg. 13-15)
Financial Statement Forecasts (pg. 13-23)
Valuation Model (pg. 13-26)
Concluding Observations of Analyst Report (pg. 13-27)
Guidance Answers  (pg. 13-27)
 Questions (pg. 13-28)
Mini Exercises (pg. 13-28)
Exercises (pg. 13-29)
Problems (pg. 13-34)
Management Applications  (pg. 13-39)
Ongoing Project  (pg. 13-39)
Solutions to Review Problems (pg. 13-40)
Appendix A: Compound Interest Tables1 (pg. A-1)
Appendix B: Chart of Accounts (with Acronyms) (pg. B-1)
Appendix C: Comprehensive Case (pg. C-1)
Harley-Davidson (HOG) (pg. C-1)
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-33)
Summary Observations (pg. C-33)
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.


John J. Wild

John J. Wild

John J. Wild is a distinguished professor of accounting and business at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England.

He received his BBA, MS, and PhD from the University of Wisconsin. Professor Wild teaches courses in accounting and analysis at both the undergraduate and graduate levels. He has received the Mabel W. Chipman Excellence-in-Teaching Award, the departmental Excellence-in-Teaching Award, and the MBA Teaching Excellence Award (twice) from the EMBA graduation classes at the University of Wisconsin. He also received the Beta Alpha Psi and Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild is a past KPMG Peat Marwick National Fellow and is a prior recipient of fellowships from the American Accounting Association and the Ernst & Young Foundation.

Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of several best-selling books. His research articles on financial accounting and analysis appear in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Journal of Accounting, Auditing & Finance, Journal of Accounting and Public Policy, Journal of Business Finance and Accounting, Auditing: A Journal of Theory and Practice, and other accounting and business journals. He is past associate editor of Contemporary Accounting Research and has served on editorial boards of several respected journals, including The Accounting Review and the Journal of Accounting and Public Policy.


Robert F. Halsey

Robert F. Halsey

Robert F. Halsey is Professor of Accounting and Associate Dean of the Undergraduate School at Babson College. He received his MBA and PhD from the University of Wisconsin.

Prior to obtaining his PhD he worked as the chief financial officer (CFO) of a privately held retailing and manufacturing company and as the vice president and manager of the commercial lending division of a large bank.

Professor Halsey teaches courses in financial and managerial accounting at both the graduate and undergraduate levels, including a popular course in financial statement analysis for second year MBA students. He has also taught numerous executive education courses for large multinational companies through Babson’s school of Executive Education as well as for a number of stock brokerage firms in the Boston area. He is regarded as an innovative teacher and has been recognized for outstanding teaching at both the University of Wisconsin and Babson College.

Professor Halsey co-authors Advanced Accounting published by Cambridge Business Publishers. Professor Halsey’s research interests are in the area of financial reporting, including firm valuation, financial statement analysis, and disclosure issues. He has publications in Advances in Quantitative Analysis of Finance and Accounting, The Journal of the American Taxation Association, Issues in Accounting Education, The Portable MBA in Finance and Accounting, the CPA Journal, AICPA Professor/Practitioner Case Development Program, and in other accounting and analysis journals.

Professor Halsey is an active member of the American Accounting Association and other accounting, analysis, and business organizations. He is widely recognized as an expert in the areas of financial reporting, financial analysis, and business valuation.


Mary Lea McAnally

Mary Lea McAnally

Mary Lea McAnally is the Philip Ljundahl Professor of Accounting at the Mays Business School at Texas A&M. She obtained her Ph.D. from Stanford University and B. Comm. from the University of Alberta.

She worked as a Chartered Accountant (in Canada) and is a Certified Internal Auditor. Prior to arriving at Texas A&M in 2002, Professor McAnally held positions at University of Texas at Austin, Canadian National Railways, and Dunwoody and Company.

Her research interests include accounting and disclosure in regulated environments, executive compensation, and accounting for risk. She has published articles in the leading academic journals including Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research. Professor McAnally received the Mays Business School Research Achievement Award in 2005. She was Associate Editor at Accounting Horizons, served on the editorial board of Contemporary Accounting Research, and was Guest Editor for the MBA-teaching volume of Issues in Accounting Education. She is active in the American Accounting Association and its FARS section.

At Texas A&M, Professor McAnally teaches financial reporting, analysis, and valuation in the full-time, Professional, and Executive MBA programs. Through the Mays Center for Executive Development, she works with corporate clients. She has also taught at University of Alberta, University of Calgary, IMADEC (in Austria) and at the Indian School of Business at the Hyderabad and Mohali campuses. She has received numerous faculty-determined and student-initiated teaching awards at the MBA and executive levels. Those awards include the Beazley Award, the Trammell Foundation Award, the MBA Teaching Award (multiple times), the MBA Association Distinguished Faculty Award (three times), the Award for Outstanding and Memorable Faculty Member, and the Distinguished Achievement Award.


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