Financial Reporting for Managers: A Value-Creation Perspective, 1st Edition

by Jamie Pratt (Kelley School of Business, Indiana Univ.); D. Eric Hirst (University of Texas at Austin)

• ISBN13: 9780471457497
• ISBN10: 0471457493
• Format: Paperback
• Copyright: 2008-03-01
• Publisher: WILEY

Summary

This brief textbook is designed for business students and managers, with little prior exposure to financial reporting, who wish to understand how financial statements can help them - and encourage others - to make decisions in the long run interest of the firm\'s shareholders. Pratt/Hurst, Financial Reporting for Managers is targeted at thoughtful business students and managers, wishing to learn how financial statement use and analysis can be a path to business success. The text brings together financial reporting and management decision making in a thoughtful, creative and easy to understand manner. Additionally, this text links shareholder value creation and the financial accounting statements to the market value of the firm in a way that can be easily understood by practitioners.

Author Biography

Jamie Pratt is Professor of Accounting at Indiana University, and has taught both around the U.S. and internationally. In 1993, he was the program chair for the American Accounting Association. He has been on the Educational Advisory Committee since 1990, and has also been the secretary of the board for the Pratt Corporation for 17 years.  He has published extensively in research journals and has penned several texts.

D. Eric Hurst is Associate Dean and Professor in the Department of Accounting at the Red McCombs School of Business at The University of Texas at Austin. His research has been published in Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Auditing: A Journal of Practice & Theory, and Organizational Behavior and Human Decision Processes.

Table of Contents

Value Creation, Financial Statements, And The Environment Of Financial Reporting

Value Creation and Successful Management

Value Creation Through Operating, Investing and Financial Activities

Return on Equity (ROE)

A Caution about Measures of Value Creation

Estimating the Cost of Equity - An Intuitive Approach

The Financial Statements - An Introduction

The Balance Sheet

Statement of Cash Flows

Income Statement

Statement of Changes in Shareholders Equity

Did Lowe's Create Value in 2007?

The Economic Context in which Financial Reports are Prepared and Used

Reporting Entities and Industries

Corporate Governance

Financial Information Users and Capital Markets

Contracts: Debt Covenants and Management Compensation

Financial Reporting Regulations and Standards

Generally Accepted Accounting Principles

Independent Auditors

Board of Directors and Audit Committee

Legal Liability

Professional Reputation and Ethics

Sarbanes-Oxley Act and Internal Controls

Global Perspective: Accounting Practices Outside the U.S

Summary

Estimating the Cost of Equity

Case and Review Questions

The Financial Statements - A Closer Look

Operating Activities, the Financial Statements, and Value Creation

Operating Performance and the Income Statement

Operating Performance and Cash Provided by Operating Activities

Investing Activities, Asset Management, and Financial Statement and Value Creation

Working Capital Management.

Long-term (Producing) Assets

Financing Activities, the Financial Statements, and Value Creation

Transactions with Debt Holders

Transactions with Equity Holders

Financial Statement Differences Across Industries

Global Perspective: Financial Statements and Analyses in Other Countries

Summary

Case and Review Questions

Measurement Framework And Mechanics Of Financial Accounting

Measurement Framework for the Financial Statements

Objectives of Financial Reporting

Elements and Their Qualitative Characteristics

Assumptions, Valuation Principles, and Exceptions

Assumptions of Financial Accounting

Markets and Valuations Bases

Valuation Principles of Financial Accounting

Exceptions of Financial Accounting

Mechanics of Financial Accounting

Basic Accounting Equation and Financial Statements

Transactions, Accounts, and the Accounting Equation

Mechanics of Financial Accounting: An Illustration

Global Perspective: Measurement Fundamentals and International Reporting Standards

Case and Review Questions

Appendix 3A

Journal Entries and the Accounting Equation

Permanent, Temporary Accounts, and the Closing Process

Using Financial Statements To Analyze Value Creation

Determinants of Value Creation: Analyzing Return of Equity

Return on Assets (ROA)

Measures of Effective Sales and Expense Management

Measures of Effective Assets Management

Asset Turnover Ratios

Solvency Ratios

Measures of Effective Capital Structure Management

Using Financial Ratios to Analyze Value Creation Structure - Summary

Analyzing the Statement of Cash Flows

Financial Statement Analysis - A Wrap-Up and Industry Comparison

Global Perspective: Working Capital Management

Case and Review Questions

Return On Equity, Value Creation, And Firm Value

A Model of Firm Value Based on ROE and Value Creation

Market-to-Book Ratios

Using the ROE Valuation Model to Estimate Firm Market Value

Predicting Future ROE

Incorporating ROE Predictions into the Valuation Model

Using the Valuation Model to Estimate Nordstrom's Market Value

Implications of Differences Between Actual and Estimated Market Values

Using Financial Statements to Assess the Value of Non-US Firms

Summary

Case and Review Questions

Earnings Management

Incentives to Manage Earnings

Common Forms of Earnings Management

Overstating Operating Performance

Understating Operating Performance

Off-Balance Sheet Financing

How Managers Use Accounting Judgments to Manage Earnings

Materiality Judgments

Recognition versus Disclosure Judgments

Classification Judgments

Measurement Judgments

Measurement Judgments: Summary

"Real" Earnings Management

Earnings Management and Value Creation

A Global Perspective on Earnings Management

Case and Review Questions

Operating Transactions - Revenues, Expenses And Working Capital

Income Statement: Disclosure and Presentation

Operating Revenues and Expenses

Other Revenues and Expenses

Interest Expense, net

Disposal of a Business Segment - Discontinued Operations

Extraordinary Items

Changes in Accounting Methods

Disclosure of Income Taxes

Earnings-Per-Share Disclosure

Working Capital

Cash

Cash Restrictions

Cash Management

Cash Control

Revenue Recognition

Managing Receivables

Valuing Receivables on the Balance Sheet

Accounting for Bad Debts (Uncollectibles)

Accounts Receivable Control and Aging Schedules

Inventory

Accounting for Inventory: Four Important Issues

Acquiring Inventory: What Costs to Capitalize

Carry Inventory: Perpetual Method

Balance Sheet

Income Statement

Which Cost Flow Assumption

Inventory Cost Flow Assumptions: Effects on the Financial Statement

Observations about LIFO: Liquidations and LIFO Reserves

Inventory Cost Flow Assumptions: Tradeoffs

Ending Inventory: Applying the Lower-of-Cost-or-Market Rule

Current Liabilities

Determinable Liabilities

Contingent Liabilities

Statement of Cash Flows: Operating Section

Direct Method

Indirect Method

Summary

Cases and Review Questions

Long-Term Producing Assets And Investments In Equity Securities

Investments in Long-Term Producing Assets

Accounting for Producing Assets: An Overview

Acquisition: What Costs to Capitalize

Post-acquisition Expenditures

Cost Allocation

Estimating Useful Life and Salvage Value

Cost Allocation Methods

Disposal: Retirement, Sales, and Trade-In

Investments in Equity Securities

Cost Method

Mark-to-Market Method

Equity Method

Consolidated Financial Statements

Investing Activities and Statement of Cash Flows

Summary

Cases and Review Questions

Time Value Of Money

Interest: The Price of Money

Time Value

Size of Time Value

Time Value Computations

Future Value

Present Value

An Illustration

Equivalent Value

Computing Implicit Rates of Return

Time Value of Money and Financial Reporting

Cases and Review Questions

Glossary

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