Financial Reporting, Financial Statement Analysis, and Valuation A Strategic Perspective (with Thomson One Access Code),9780324302950

Financial Reporting, Financial Statement Analysis, and Valuation A Strategic Perspective (with Thomson One Access Code)

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Edition: 6th
ISBN13: 9780324302950
ISBN10: 0324302959
Format: Hardcover
Pub. Date: 2006-04-04
Publisher(s): South-Western College Pub
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Summary

Stickney/Brown/Wahlen is a balanced, flexible, and complete Financial Statement Analysis book that is written with the premise that students learn financial statement analysis most effectively by performing the analysis on actual companies. Students learn to integrate the concepts from economics, business strategy, accounting, and other business disciplines through the integration of a unique six-step process.

Table of Contents

Preface iv
About the Authors xiii
Overview of Financial Reporting, Financial Statement Analysis, and Valuation
1(84)
Overview of Financial Statement Analysis
2(2)
Step 1: Identify the Industry Economic Characteristics
4(2)
Tools for Studying Industry Economics
6(5)
Value Chain Analysis
6(2)
Porter's Five Forces Classification Framework
8(2)
Economic Attributes Framework
10(1)
Step 2: Identify the Company Strategies
11(3)
Framework for Strategy Analysis
12(1)
Application of Strategy Framework to PepsiCo's Beverage Segment
12(2)
Step 3: Assess the Quality of the Financial Statements
14(17)
Balance Sheet---Measuring Financial Position
14(6)
Income Statement---Measuring Operating Performance
20(6)
Statement of Cash Flows
26(3)
Independent Auditor's Opinion and the Sarbanes-Oxley Act of 2002
29(1)
Summary of Financial Statements, Notes, and Accountant's Opinion
30(1)
Step 4: Analyze Profitability and Risk
31(5)
Tools of Profitability and Risk Analysis
32(4)
Step 5: Prepare Forecasted Financial Statements
36(1)
Step 6: Value the Firm
36(1)
The Association between Earnings and Share Prices
37(2)
Role of Financial Statement Analysis in an Efficient Capital Market
39(1)
Sources of Financial Statement Information
40(1)
Summary
41(1)
Appendix 1.1 Preparing a Term Project
42(5)
Questions and Exercises
47(2)
Problems and Cases
49(18)
Integrative Case 1.1 Starbucks
67(8)
Case 1.2 Nike: Somewhere between a Swoosh and a Slam Dunk
75(10)
Asset and Liability Valuation and Income Measurement
85(39)
Asset and Liability Valuation
86(6)
Historical Value: Acquisition Cost
86(1)
Historical Value: Adjusted Acquisition Cost
87(1)
Historical Value: Present Value of Cash Flows Using Historical Interest Rates
88(1)
Current Values: Current Replacement Cost
89(1)
Current Values: Net Realizable Value
90(1)
Current Values: Present Values of Cash Flows Using Current Interest Rates
90(1)
GAAP Valuations
91(1)
Income Recognition
92(5)
Treatment 1: Value Changes Recognized on the Balance Sheet and Income Statement When Realized
93(1)
Treatment 2: Value Changes Recognized on the Balance Sheet When They Occur but Recognized in Net Income When Realized
94(1)
Treatment 3: Value Changes Recognized on the Balance Sheet and the Income Statement When They Occur
95(1)
Summary of Asset and Liability Valuation and Income Recognition
96(1)
Accounting for Income Taxes
97(8)
Overview of Income Tax Accounting
97(4)
Measuring Income Tax Expense: A Bit More to the Story
101(3)
Reporting Income Taxes in the Financial Statements
104(1)
PepsiCo's Reporting of Income Taxes
104(1)
Framework for Analyzing the Effects of Transactions on the Financial Statements
105(5)
Overview of the Analytical Framework
107(3)
Summary of Analytical Framework
110(1)
Summary
110(1)
Questions and Exercises
111(1)
Problems and Cases
112(9)
Integrative Case 2.1 Starbucks
121(3)
Income Flows versus Cash Flows: Key Relationships in the Dynamics of a Business
124(74)
Net Income, Cash Flows, and Life Cycle Relations
126(18)
Net Income and Cash Flow from Operations
126(9)
Relation between Cash Flows from Operating, Investing, and Financing Activities
135(2)
Illustrations of Cash Flow Relations
137(7)
Preparing the Statement of Cash Flows
144(8)
Algebraic Formulation
144(1)
Classifying Changes in Balance Sheet Accounts
145(6)
Illustration of the Preparation Procedure
151(1)
Summary
152(1)
Questions and Exercises
153(4)
Problems and Cases
157(15)
Integrative Case 3.1 Starbucks
172(2)
Case 3.2 Prime Contractors
174(2)
Case 3.3 W. T. Grant Company
176(22)
Profitability Analysis
198(86)
Profitability Analysis
200(1)
Rate of Return on Assets
200(29)
Disaggregating ROA
205(1)
Economic and Strategic Factors in the Interpretation of ROA
205(9)
Analyzing the Profit Margin for ROA
214(8)
Analyzing Total Assets Turnover
222(3)
Supplementing ROA in Profitability Analysis
225(4)
Rate of Return on Common Shareholders' Equity
229(5)
Earnings per Common Share
234(4)
Calculating EPS
235(2)
Criticisms of EPS
237(1)
Interpreting Financial Statement Ratios
238(1)
Comparisons with Corresponding Ratios of Earlier Periods
238(1)
Comparisons with Corresponding Ratios of Other Firms
239(1)
Summary
239(1)
Questions and Exercises
240(2)
Problems and Cases
242(24)
Integrative Case 4.1 Starbucks
266(6)
Case 4.2 Profitability and Risk Analysis of Wal-Mart Stores
272(12)
Risk Analysis
284(78)
Disclosures Regarding Risk and Risk Management
285(3)
Financial Statement Analysis of Risk
288(1)
Analyzing Short-Term Liquidity Risk
289(7)
Analyzing Long-Term Solvency Risk
296(4)
Analyzing Credit Risk
300(5)
Analyzing Bankruptcy Risk
305(11)
The Bankruptcy Process
305(1)
Models of Bankruptcy Prediction
306(7)
Synthesis of Bankruptcy Prediction Research
313(3)
Market Equity Beta Risk
316(1)
Financial Reporting Manipulation Risk
317(5)
Motivations for Earnings Manipulation
317(1)
Empirical Research on Earnings Manipulation
318(2)
Application of Beneish's Model to Sunbeam Corporation
320(2)
Summary of Income Manipulation Risk
322(1)
Summary
322(1)
Questions and Exercises
323(2)
Problems and Cases
325(8)
Integrative Case 5.1 Starbucks
333(1)
Case 5.2 Massachusetts Stove Company---Bank Lending Decision
333(8)
Case 5.3 Fly-by-Night International Group: Can This Company Be Saved?
341(10)
Case 5.4 Millennial Technologies: Apocalypse Now
351(11)
Quality of Accounting Information and Adjustments to Reported Financial Statement Data
362(72)
Accounting Quality
363(5)
High Quality Reflects Economic Information Content
364(2)
High Quality Signals Earnings Persistence over Time
366(2)
Discontinued Operations
368(3)
Extraordinary Gains and Losses
371(3)
Changes in Accounting Principles
374(3)
Other Comprehensive Income Items
377(1)
Impairment Losses on Long-Lived Assets
378(4)
Restructuring and Other Charges
382(4)
Changes in Estimates
386(2)
Gains and Losses from Peripheral Activities
388(2)
Restated Financial Statement Data
390(3)
Accounting Classification Differences
393(2)
Financial Reporting Worldwide
395(3)
Earnings Management
398(2)
Summary
400(1)
Questions and Exercises
400(2)
Problems and Cases
402(18)
Integrative Case 6.1 Starbucks
420(2)
Case 6.2 Hewlett-Packard: A Pack Ard (of) Mess
422(5)
Case 6.3 International Paper: A Recurring Dilemma
427(7)
Revenue Recognition and Related Expenses
434(88)
Income Recognition
435(17)
Criteria for Revenue Recognition
435(3)
Criteria for Expense Recognition
438(2)
Application of Revenue and Expense Recognition Criteria
440(4)
Income Recognition for Long-Term Contractors
444(4)
Revenue Recognition When Cash Collectibility Is Uncertain
448(4)
Inventory Cost-Flow Assumption
452(9)
FIFO
453(1)
LIFO
453(2)
Weighted Average
455(1)
Conversion from LIFO to FIFO
455(4)
Stock Price Reaction to Changes in Inventory Cost-Flow Assumption
459(1)
Persistent Earnings and the Cost-Flow Assumption
459(2)
Accounting for Fixed Assets
461(7)
Fixed-Asset Valuation
461(1)
Depreciable Life
462(1)
Depreciation Method
463(3)
Impairment of Fixed Assets (Long-Lived Assets)
466(1)
Persistent Earnings and Fixed-Asset Reporting
467(1)
Accounting for Intangible Assets
468(9)
Accounting for Research and Development Costs
470(2)
Accounting for Software Development Costs
472(2)
Accounting for Goodwill
474(2)
Persistent Earnings and Intangible-Asset Reporting
476(1)
Summary
477(1)
Appendix 7.1 Accounting for the Effects of Changing Prices
478(6)
Questions and Exercises
484(2)
Problems and Cases
486(12)
Integrative Case 7.1 Starbucks
498(2)
Case 7.2 Arizona Land Development Company
500(15)
Case 7.3 Chiron Corporation---An R&D Puzzle
515(2)
Case 7.4 Corporacion Industrial Sanluis: Coping with Changing Prices
517(5)
Liability Recognition and Related Expenses
522(108)
Principles of Liability Recognition
523(1)
Principles of Liability Valuation
523(1)
Application of Criteria for Liability Recognition
524(4)
Controversial Issues in Liability Recognition
528(7)
Issuance of Hybrid Securities
528(1)
Off-Balance-Sheet Financing Arrangements
529(6)
Leases
535(10)
Operating Lease Method
536(1)
Capital Lease Method
536(2)
Choosing the Accounting Method
538(2)
Effects on Lessor
540(2)
Lease Accounting for Tax Purposes
542(1)
Converting Operating Leases to Capital Leases
543(2)
Impact of Accounting for Operating Leases as Capital Leases
545(1)
Derivative Instruments
545(16)
Nature and Use of Derivative Instruments
546(2)
Accounting for Derivatives
548(2)
Illustrations of Accounting for Derivatives
550(9)
Summary of Derivative Examples
559(1)
Disclosures Related to Derivative Instruments
559(2)
Accounting Quality Issues and Derivatives
561(1)
Retirement Benefits
561(14)
Pensions
562(9)
Analysts' Treatment of Pensions
571(2)
Postretirement Benefits Other Than Pensions
573(2)
Income Taxes
575(12)
Review of Income Tax Accounting
575(2)
Required Income Tax Disclosures
577(6)
Assessing a Firm's Tax Position
583(1)
Analyzing PepsiCo's Income Tax Disclosures
584(3)
Summary of Income Taxes
587(1)
Understanding Reserves in the Financial Statements
587(4)
Nature of a Reserve Account
588(1)
Use of Reserve Accounts
589(1)
Summary of Reserves
590(1)
Summary
591(1)
Questions and Exercises
591(2)
Problems and Cases
593(27)
Integrative Case 8.1 Starbucks
620(1)
Case 8.2 American Airlines and United Airlines: A Pension for Debt
621(9)
Intercorporate Entities
630(91)
Corporate Acquisitions
631(6)
Purchase Method
631(5)
Corporate Acquisitions and Income Taxes
636(1)
Corporate Disclosures on Acquisitions
636(1)
Investments in Securities
637(19)
Accounting for Investments
638(1)
Percentage of Voting Stock
638(1)
Minority, Passive Investments
639(4)
Minority, Active Investments
643(1)
Majority, Active Investments
644(9)
Primary Beneficiary of a Variable-Interest Entity
653(2)
Income Tax Consequences of Investments in Securities
655(1)
Foreign Currency Translation
656(11)
Functional Currency Concept
656(2)
Translation Methodology---Foreign Currency Is Functional Currency
658(4)
Translation Methodology---U.S. Dollar Is Functional Currency
662(1)
Implications of Functional Currency Determination for Analysis
663(3)
Foreign Currency Translation and Income Taxes
666(1)
Interpreting the Effects of Exchange Rate Changes on Operating Results
666(1)
Accounting for Stock-Based Compensation
667(4)
Summary
671(1)
Questions and Exercises
671(2)
Problems and Cases
673(21)
Integrative Case 9.1 Starbucks
694(1)
Case 9.2 Fisher Corporation
695(16)
Case 9.3 Clark Equipment Company: Analyzing a Joint Problem
711(7)
Case 9.4 Loucks Corporation: Obtaining Security in Translation
718(3)
Forecasting Financial Statements
721(91)
Overview
721(1)
Introduction to Forecasting
722(2)
Preparing Financial Statement Forecasts
724(6)
General Forecasting Principles
724(1)
Six-Step Forecasting Game Plan
725(1)
Practical Tips for Implementing the Six-Step Forecasting Game Plan
726(3)
Using FSAP to Prepare Forecasted Financial Statements
729(1)
Step 1: Projecting Sales and Other Revenues
730(7)
Projecting Revenues from Sales
730(6)
Projecting Other Revenues
736(1)
Step 2: Projecting Operating Expenses
737(3)
Step 3: Projecting the Assets on the Balance Sheet
740(14)
Step 4: Projecting Liabilities and Shareholders' Equity
754(7)
Step 5: Projecting Interest Expense, Interest Income, Nonrecurring or Unusual Items, Provision for Income Tax, and the Change in Retained Earnings
761(6)
Closing the Loop: Solving for Co-Determined Variables
766(1)
Step 6: Projecting the Statement of Cash Flows
767(5)
Shortcut Approaches to Forecasting
772(3)
Analyzing Projected Financial Statements
775(3)
Sensitivity Analysis and Reactions to Announcements
778(1)
Summary
779(1)
Questions and Exercises
780(2)
Problems and Cases
782(12)
Income Statement
788(3)
Balance Sheet
791(2)
Statement of Cash Flows
793(1)
Integrative Case 10.1 Starbucks
794(8)
Case 10.2 Massachusetts Stove Company: Analyzing Strategic Options*
802(10)
Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
812(43)
Introduction and Overview
812(4)
Equivalence among Dividends, Cash Flows, and Earnings Valuation
814(2)
Risk-Adjusted Expected Rates of Return
816(12)
Cost of Common Equity Capital
816(4)
Adjusting Market Equity Beta to Reflect a New Capital Structure
820(2)
Evaluating the Use of the CAPM to Measure the Cost of Equity Capital
822(1)
Cost of Debt Capital
823(1)
Cost of Preferred Equity Capital
824(1)
Computing the Weighted Average Cost of Capital
824(4)
Rationale for Dividends-Based Valuation
828(4)
Dividends-Based Valuation Concepts
829(3)
The Dividends Valuation Model
832(2)
Implementing the Dividends Valuation Model
834(14)
Measuring Periodic Dividends
834(2)
Selecting a Forecast Horizon
836(2)
Continuing Value of Future Dividends
838(4)
Using the Dividends Valuation Model to Value PepsiCo
842(3)
Sensitivity Analysis and Investment Decision Making
845(1)
Evaluation of the Dividends Valuation Method
846(2)
Summary
848(1)
Questions and Exercises
848(1)
Problems and Cases
849(4)
Integrative Case 11.1 Starbucks
853(2)
Valuation: Cash-Flow-Based Approaches
855(77)
Introduction and Overview
855(2)
Rationale for Cash-Flow-Based Valuation
857(1)
Free-Cash-Flows-Based Valuation Concepts
858(11)
Risk, Discount Rates, and the Cost of Capital
859(1)
Free Cash Flows Valuation Examples for a Single-Asset Firm
860(2)
Dividends to the Investor versus Cash Flows to the Firm
862(1)
Nominal versus Real Cash Flows
863(1)
Pre-Tax versus After-Tax Free Cash Flows
864(1)
Selecting a Forecast Horizon
865(1)
Computing Continuing Value of Future Free Cash Flows
866(3)
Measuring Periodic Free Cash Flows
869(12)
A Framework for Free Cash Flows
869(3)
Free Cash Flows Measurement
872(9)
Cash-Flow-Based Valuation Models
881(2)
Valuation Models for Free Cash Flows for Common Equity Shareholders
881(1)
Valuation Models for Free Cash Flows for All Debt and Equity Capital Stakeholders
882(1)
Free Cash Flows Valuation of PepsiCo
883(12)
PepsiCo Discount Rates
884(1)
Computing Free Cash Flows for PepsiCo
885(1)
PepsiCo's Free Cash Flows to All Debt and Equity Capital Stakeholders
885(3)
PepsiCo's Free Cash Flows to Common Equity
888(1)
Valuation of PepsiCo Using Free Cash Flows to Common Equity Shareholders
889(1)
Valuation of PepsiCo Using Free Cash Flows to All Debt and Equity Capital Stakeholders
890(3)
Sensitivity Analysis and Investment Decision Making
893(2)
Evaluation of the Free Cash Flows Valuation Method
895(1)
Summary
895(2)
Questions and Exercises
897(1)
Problems and Cases
898(17)
Integrative Case 12.1 Starbucks
915(2)
Case 12.2 Holmes Corporation: LBO Valuation
917(15)
Valuation: Earnings-Based Approaches
932(35)
Introduction and Overview
932(2)
Rationale for Earnings-Based Valuation
934(3)
Earnings-Based Valuation: Practical Advantages and Concerns
937(2)
Theoretical and Conceptual Foundations for Residual Income Valuation
939(6)
Illustrations of Residual Income Measurement and Valuation
941(4)
Residual Income Valuation Model with Finite Horizon Earnings Forecasts and Continuing Value Computation
945(1)
Valuation of PepsiCo Using the Residual Income Model
946(6)
Discount Rates for Residual Income
947(1)
PepsiCo's Book Value of Equity and Residual Income
947(2)
Discounting PepsiCo's Residual Income to Present Value
949(1)
Necessary Adjustments to Compute Common Equity Share Value
949(1)
Sensitivity Analysis and Investment Decision Making
950(2)
Residual Income Model Implementation Issues
952(4)
Consistency in Residual Income, Dividends, and Free Cash Flow Value Estimates
956(1)
Summary
957(1)
Questions and Exercises
957(2)
Problems and Cases
959(6)
Integrative Case 13.1 Starbucks
965(2)
Valuation: Market-Based Approaches
967(54)
Introduction and Overview
968(1)
Market Multiples of Accounting Numbers
969(2)
Market-to-Book and Value-to-Book Ratios
971(4)
A Theoretical Model of the Value-to-Book Ratio
971(4)
Application of the Value-to-Book Model to PepsiCo
975(8)
Reasons Why VB Ratios and MB Ratios May Differ from One
978(2)
Empirical Data on MB Ratios
980(2)
Empirical Research Results on the Predictive Power of MB Ratios
982(1)
Price-Earnings and Value-Earnings Ratios
983(14)
A Model for the Value-Earnings Ratio
983(2)
Price-Earnings Ratios
985(11)
Summary of VE and PE Ratios
996(1)
Using Market Multiples of Comparable Firms
997(1)
Price Differentials
997(3)
Computing PDIFF for PepsiCo
998(2)
Reverse Engineering
1000(2)
Reverse Engineering PepsiCo's Stock Price
1001(1)
The Relevance of Academic Research for the Work of the Security Analyst
1002(5)
Level-of-Aggregation Issue
1003(1)
Theory Development and Practice Feed Each Other
1004(1)
Has the Theory of Capital Market Efficiency Gotten in the Way?
1004(1)
Striking Evidence on the Degree of Market Efficiency and Inefficiency with Respect to Earnings
1005(2)
Summary
1007(1)
Questions and Exercises
1008(1)
Problems and Cases
1009(9)
Integrative Case 14.1 Starbucks
1018(3)
Appendix A Financial Statements and Notes for PepsiCo, Inc. and Subsidiaries 1021(26)
Appendix B Management's Discussion and Analysis for PepsiCo, Inc. and Subsidiaries 1047(24)
Appendix C Financial Statement Analysis Package (FSAP) 1071(39)
Appendix D User Manual for Financial Statement Analysis Package (FSAP) 1110(7)
Index 1117

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