Interpreting and Analyzing Financial Statements

by Schoenebeck, Karen P.

• ISBN13: 9780130082169
• ISBN10: 0130082163
• Edition: 3rd
• Format: Paperback
• Copyright: 2004-01-01
• Publisher: Pearson College Div

Summary

Designed for use with Harrison and Horngrens'Financial Accounting , 4th Edition orany financial principles accounting volume, thisactivity workbook helps readers analyze real company financial statement information and helps prepare readers for a capstone project creating a comprehensive financial statement analysis. Each activity concentrates on only one aspect of the analysis and uses data from well-known corporations to pique readers' interest and add relevancy. The workbook provides an introduction to interpretation and analysis, plus guidelines for analyzing the balance sheet, analyzing the income statement, analyzing the statement of cash flows, further ratio analysis, interpreting and understanding specific accounts, comprehensive review, corporate analysis.

Table of Contents

Preface	p. xiii
Introduction to Interpretation and Analysis
Corporations Featured in Chapter 1	p. 1
Examining Total Assets: Comparing Companies	p. 3
Examine the range and magnitude of total assets
Solve for unknowns in the accounting equation
Identify information provided by the balance sheet
Gap Inc.
General Motors
Home Depot
Oracle
Examining Assets: Comparing Companies	p. 4
Examine asset components
Solve for unknown asset components
Understand assets are recorded at historical cost
Apple Computer
IBM
Microsoft
Examining How Assets Are Financed: Comparing Companies	p. 5
Solve for unknown liability and stockholder equity components
Determine the dominant method of financing assets
Apple Computer
IBM
Microsoft
Examining Net Sales: Comparing Companies	p. 6
Examine the range and magnitude of net sales
Solve for unknown income statement components
Identify information provided by the income statement
Intel
Royal Caribbean Cruises
Wal-Mart
Walt Disney
Ratio Analysis: Current Ratio	p. 7
Understand the information provided by the current ratio
Identify the expected range and whether an increasing or decreasing trend is usually preferred
Gap Inc.
General Motors
Home Depot
Oracle
Ratio Analysis: Debt Ratio	p. 8
Understand the information provided by the debt ratio
Identify the expected range and whether an increasing or decreasing trend is preferred
Citigroup
Hewlett-Packard
Johnson and Johnson
Wal-Mart
Ratio Analysis: Return on Sales (ROS)	p. 9
Understand the information provided by the return-on-sales ratio
Identify the expected range and whether an increasing or decreasing trend is preferred
Gap Inc.
General Motors
Home Depot
Oracle
Ratio Analysis: Asset Turnover	p. 10
Understand the information provided by the asset turnover ratio
Identify the expected range and whether an increasing or decreasing trend is preferred
Gap Inc.
General Motors
Home Depot
Oracle
Ratio Analysis: Return on Assets (ROA)	p. 11
Understand the information provided by the return-on-assets ratio
Identify the expected range and whether an increasing or decreasing trend is preferred
Gap Inc.
General Motors
Home Depot
Oracle
Test Your Understanding: A Review of Ratio Analysis	p. 12
Oracle
Trend Analysis: Income Statement	p. 13
Prepare a trend analysis and understand the information provided
Sprint
Trend Analysis: Balance Sheet	p. 14
Prepare a trend analysis and understand the information provided
Best Buy
Common-size Statement Analysis: Income Statement	p. 15
Prepare common-size statements and understand the information provided
ATandT
WorldCom
Sprint
Common-size Statement Analysis: Balance Sheet	p. 16
Prepare common-size statements and understand the information provided
Best Buy
eBay
Sun Microsystems
Test Your Understanding: A Review of Trend Analysis and Common-size Statements	p. 17
Hershey
Gucci Group NV
Internet Research: Using Hoover's Online, The Business Network	p. 18
Use the Internet to research descriptive and financial information for a company
Hoover's, Inc.
Analyzing the Balance Sheet
Corporations Featured in Chapter 2	p. 19
Strategies for Analyzing the Balance Sheet	p. 21
Develop strategies for analyzing the balance sheet
Understand what an increase or a decrease in an account indicates
Outback Steakhouse
Preparing and Interpreting a Classified Balance Sheet: Assets	p. 22
Practice classifying asset account titles
Interpret parentheses and minus signs reported on the financial statements
Prepare a classified balance sheet using asset accounts
Analyze the balance sheet
Sears
Preparing and Interpreting a Classified Balance Sheet: Liabilities and Stockholders' Equity	p. 24
Practice classifying account titles
Interpret parentheses and minus signs reported on the financial statements
Prepare a classified balance sheet using liabilities and stockholders' equity accounts
Analyze the balance sheet
Sears
Trend Analysis	p. 26
Prepare a trend analysis and understand the information provided
LSI Logic
Common-size Statements	p. 28
Prepare common-size statements and understand the information provided
IHOP
McDonald's
Starbucks
Industry Norms: Eating Places	p. 29
Compare industry norms with a company from within the industry
Starbucks
Analysis of Southwest Airlines	p. 30
Understand and interpret amounts reported on the balance sheet
Southwest Airlines
Analysis of America Online, Inc.	p. 32
Understand and interpret amounts reported on the balance sheet
American Online
Test Your Understanding: Analyzing the Balance Sheet	p. 34
Understand and interpret amounts reported on the balance sheet
Coca-Cola
Nike
Walt Disney
Yahoo!
Internet Research: Using a Company Web Site	p. 36
Use the Internet to research company information
Understand and interpret amounts reported on the balance sheet
Home Depot
Analyzing the Income Statement
Corporations Featured in Chapter 3	p. 37
Strategies for Analyzing the Income Statement	p. 39
Understand the relationship between the trend for net sales and the trend for other items on the income statement
Develop strategies for analyzing the income statement
Guess?
Preparing and Interpreting a Multi-step Income Statement	p. 40
Practice classifying account titles
Interpret parentheses and minus signs reported on the financial statements
Prepare a multi-step income statement
Interpret the income statement
Boeing
Analyzing the Income Statement: Using PepsiCo	p. 43
Understand the relationship between the trend for sales and the trend for other items on the income statement
Use ratios to further understanding of amounts reported on the financial statements
Understand nonrecurring items may distort certain computations
PepsiCo
Trend Analysis: Using the Best Buy Company	p. 45
Prepare a trend analysis and understand the information provided
Best Buy
Common-size Statements	p. 47
Prepare common-size statements and understand the information provided
AMR (American Airlines)
Southwest Airlines
Vanguard Airlines
Industry Norms: Air Transportation, Scheduled	p. 48
Compare industry norms to a company from within the industry
Southwest Airlines
Analysis of Yahoo! Corporation	p. 49
Understand and interpret amounts reported on the income statement
Yahoo!
Analysis of Apple Computer	p. 50
Understand and interpret amounts reported on the income statement
Apple Computer
Test Your Understanding: Analyzing the Income Statement	p. 51
Understand and interpret amounts reported on the income statement
Anheuser-Busch
Merck
Microsoft
Wal-Mart
Internet Research: Using a Company Web Site	p. 53
Use the Internet to research company information
Understand and interpret amounts reported on the income statement
PepsiCo
Analyzing the Statement of Cash Flows
Corporations Featured in Chapter 4	p. 55
Operating Activities	p. 56
Understand operating activities on the statement of cash flows
Procter and Gamble
Investing Activities	p. 59
Understand investing activities on the statement of cash flows
Procter and Gamble
Financing Activities	p. 61
Understand financing activities on the statement of cash flows
Procter and Gamble
Operating, Investing, or Financing?	p. 63
Identify operating, investing, and financing activities on the statement of cash flows
Operating, Investing, or Financing?	p. 64
Identify operating, investing, and financing activities on the statement of cash flows
Understand the amount reported and whether the transaction results in an inflow or an outflow of cash
List Operating, Investing, and Financing Activities	p. 65
List typical operating, investing, and financing activities for both small and large companies
Sears
Wal-Mart
Analysis of Pfizer Incorporated	p. 66
Understand and interpret amounts reported on the statement of cash flows
Pfizer
Analysis of Deckers Outdoor Corporation	p. 68
Understand and interpret amounts reported on the statement of cash flows
Deckers Outdoor
Test Your Understanding: Statement of Cash Flows	p. 69
Understand and interpret amounts reported on the statement of cash flows
Home Depot
Johnson and Johnson
Vanguard Airlines
Internet Research: Using a Company Web Site	p. 70
Use the Internet to research company information
Understand and interpret amounts reported on the statement of cash flows
General Motors
Further Ratio Analysis
Corporations Featured in Chapter 5	p. 71
Researching Industry Norms	p. 73
Introduce the concept of industry norms and how to research these averages
Acid-test (Quick) Ratio	p. 74
Understand the information provided and the expected range of the Acidtest Ratio
Home Depot
IHOP
PepsiCo
Procter and Gamble
Days' Sales in Receivables	p. 75
Understand the information provided and the expected range of the days' sales in receivables ratio
Kroger
Oracle
PepsiCo
Procter and Gamble
Accounts Receivable Turnover	p. 76
Understand the information provided and the expected range of the accounts receivable turnover ratio
Kroger
Oracle
PepsiCo
Procter and Gamble
Gross Margin Percentage	p. 77
Understand the information provided by the gross margin percentage
Understand that the expected range varies by industry
Bristol-Myers Squibb
General Motors
Kroger
May Department Stores
Inventory Turnover	p. 78
Understand the information provided by the inventory turnover ratio
Understand that the expected range varies by industry
Deckers Outdoor
General Motors
Home Depot, Kroger
Times-Interest-Earned	p. 79
Understand the information provided and the expected range of the times-interest-earned ratio
General Motors
May Department Stores
Oracle
PepsiCo
Return on Assets (ROA)	p. 80
Understand the information provided and the expected range of the rate of return on total assets ratio
General Motors
Home Depot
IHOP
Oracle
Return on Equity (ROE)	p. 81
Understand the information provided and the expected range of the rate of return on common stockholders' equity
Home Depot
Oracle
PepsiCo
Procter and Gamble
Earning Per Share (EPS)	p. 82
Understand the information provided by the earnings per share ratio
Deckers Outdoor
General Motors
IHOP
Procter and Gamble
Earning Per Share (EPS)	p. 83
Understand that caution should be used when comparing earnings per share between companies
Price/Earnings (P/E) Ratio	p. 84
Understand the information provided by the price/earnings ratio
Bristol-Myers Squibb
Gap Inc.
General Motors
Home Depot
IHOP
May Department Stores
Oracle
PepsiCo
Procter and Gamble
Dividend Yield	p. 85
Understand the information provided and the expected range of the dividend yield ratio
Bristol-Myers Squibb
Gap Inc.
General Motors
Home Depot
IHOP
May Department Stores
Oracle, PepsiCo
Procter and Gamble
Book Value Per Share	p. 86
Understand the information provided and the expected range of the book value per share of common stock
Understand the difference between book value and market value per share
Coca-Cola
Deckers Outdoor
General Motors
Home Depot
IHOP
Oracle
Procter and Gamble
Test Your Understanding: A Review of Further Ratio Analysis	p. 87
Internet Research: Using the Fortune Magazine Web Site	p. 89
Use the Fortune Web site to research and compare return on sales, return on assets, and return on equity between companies within the same industry
Wal-Mart
Interpreting and Understanding Specific Accounts
Corporations Featured in Chapter 6	p. 91
Cash and Cash Equivalents	p. 92
Reinforce understanding of cash and cash equivalents
Intel
Short-term Investments	p. 93
Reinforce understanding of amounts reported on the financial statements for short-term investments
Accounts Receivable	p. 94
Reinforce understanding of amounts reported on the financial statements for accounts receivable
Ethics Affecting Financial Statement Amounts: Accounts Receivable	p. 95
Understand the effect ethical decisions have on amounts reported on the financial statements
Inventory	p. 96
Reinforce understanding of amounts reported on the financial statements for inventory as a result of using the LIFO cost-flow assumption
General Electric
Ethics Affecting Financial Statement Amounts: Inventory	p. 97
Understand the effect ethical decisions have on amounts reported on the financial statements
Property, Plant, and Equipment	p. 98
Reinforce understanding of property, plant, and equipment amounts reported on the financial statements
Long-term Investments	p. 99
Reinforce understanding of amounts reported on the financial statements for long-term investments classified as available-for-sale securities
Coca-Cola
IBM
Current and Long-term Liabilities	p. 100
Reinforce understanding of amounts reported on the financial statements for current and long-term liabilities
Stockholders' Equity	p. 101
Reinforce understanding of amounts reported on the financial statements for stockholders' equity
Coca-Cola
Current Market Interest Rates	p. 102
Benchmark current market rates and understand why they differ
Examining Bond Yields	p. 103
Understand why bond yields differ
Examining the Bond Market	p. 104
Understand why bonds sell at a premium, at par, or at a discount
Sprint
Trump
Examining the Dow Jones Industrial Average: Using The Wall Street Journal	p. 105
Identify the companies that comprise the Dow Jones Industrial Average (DJIA)
Understand how the DJIA is computed
Understand the information provided by the average
How to Read Stock Quotes: Using The Wall Street Journal	p. 107
Locate and understand the stock quote information reported in The Wall Street Journal
American Online
Best Buy
PepsiCo
Following the Stock Market: Using The Wall Street Journal or the Internet	p. 108
Follow the stock market quotes for three companies and the Dow Jones Industrial Average (DJIA) for four weeks
Understand market value per share
Internet Research: Using the Internet to Research Stock Information	p. 110
Use the Internet to research stock quotes and historical stock information for specific companies
Use the Internet to research historical information for the Dow Jones Industrial Average
Microsoft
Oracle
Comprehensive Review
Corporations Featured in Chapter 7	p. 111
Transactions Affecting Total Assets	p. 112
Review the effect of various transactions on total assets
Transactions Affecting Total Liabilities	p. 113
Review the effect of various transactions on total liabilities
Transactions Affecting Total Stockholders' Equity	p. 114
Review the effect of various transactions on total stockholders' equity
Transactions Affecting Net Income	p. 115
Review the effect of various transactions on net income
Which Financial Statement?	p. 116
Reinforce understanding of the information provided by each financial statement
Financial Statement Preparation	p. 117
Apply the revenue recognition and the matching principles
Differentiate between accrual accounting and cash accounting
Prepare a multi-step income statement, the statement of retained earnings, a classified balance sheet, and the operating activity section of the statement of cash flows
Test Your Understanding: Comprehensive Analysis	p. 119
Analyze the income statement, the balance sheet, and the statement of cash flows
Prepare a statement of retained earnings
LSI Logic
Test Your Understanding: Comprehensive Analysis	p. 123
Analyze the income statement, the balance sheet, and the statement of cash flows
Prepare a statement of retained earnings
Royal Caribbean Cruises
Internet Research: Using the EDGAR Database	p. 127
Use the EDGAR Database to research financial statements
Ford Motor Company
Corporate Analysis
Corporate Analysis Purpose	p. 129
Part I: Tell Me About Your Company	p. 130
Use a variety of resources to research a corporation
Prepare a well-written paper describing your corporation
Part II: Prepare Financial Statements in Condensed Format and a Written Analysis	p. 131
Use resources available to obtain financial statements for the past four fiscal years
Prepare a classified balance sheet, multi-step income statement, and the statement of cash flows using the condensed format provided
Prepare trend analyses and common-size statements
Prepare a well-written analysis of each financial statement using appropriate business/accounting vocabulary
Part III: Compute Ratios and Compare to Industry Norms	p. 132
Research the primary SIC (Standard Industrial Classification) Code for your company
Use resources available to obtain industry averages for commonly used ratios
Compare company ratio results to industry averages
Prepare a well-written report summarizing the ratio analysis using appropriate accounting/business vocabulary
Part IV: Would You Advise a Friend to Invest in this Company?	p. 133
Base a recommendation on previous research, analysis, and sound reasoning
Prepare a well-written analysis using appropriate business/accounting vocabulary
Corporate Analysis Forms	p. 134
Table of Contents provided by Syndetics. All Rights Reserved.

Excerpts

While this book can be used to supplement any financial accounting text, the activities have been designed to accompanyFinancial Accounting,5th edition, by Walter T. Harrison, Jr., and Charles T. Horngren (Prentice Hall, 2004). WHY THESE ACTIVITIES WERE DEVELOPED When I first started assigning a comprehensive financial statement analysis as a capstone project, it became evident many students didn't know where to begin. They were overwhelmed by all of the numbers and felt frustrated. As a result, this series of preliminary activities was developed to prepare students for the capstone project. Each activity concentrates on only one aspect of financial statement analysis. After completing the preliminary activities, students feel confident in their strategies and ability to successfully complete a comprehensive financial statement analysis. USING DATA FROM WELL-KNOWN CORPORATIONS These activities use financial data from companies familiar to students. The actual numbers make the class relevant and more interesting to students. Because students are already familiar with the companies, they more easily grasp the material and remember the concepts. FOCUS IS ON INTERPRETING AND ANALYZING Most amounts are provided and calculations are kept to a minimum so students can focus their time and attention on interpretation and analysis. Fifteen minutes on average is required for completion of each activity. RATIO ANALYSIS Activities point out the significant role ratios have in analyzing financial statements. Students acquire a "feel" for the expected range and magnitude of the ratios and identify whether a high or low ratio is usually preferred. Commonly used ratios are studied. TREND PERCENTAGES AND COMMON-SIZE STATEMENT ANALYSIS Trend percentages are used to evaluate both the income statement and the balance sheet. Emphasis is placed on comparing the rate of increase or decrease of various account classifications within each financial statement. Common-size statements are used to compare companies of different size. EXCEL SPREADSHEETS Financial statements are prepared and analyzed using Excel spreadsheets. To reinforce understanding, students are required to prepare formulas to create common-size statements, trend percentages, and ratios. A comparative analysis of two companies is used to demonstrate the effectiveness of Excel formulas. An Excel graph is created in one activity and then pulled into a PowerPoint presentation. Excel techniques introduced provide valuable tools for successful completion of the comprehensive analysis project and presentation in Chapter 10. INTERNET RESEARCH Internet activities are used to introduce a comprehensive set of websites offering financial information while also requiring financial statement analysis. These Internet websites provide valuable sources of information for successful completion of the comprehensive analysis project in Chapter 10. OTHER RESEARCH Other research activities require readingThe Wall Street Journal,calling a local bank, or utilizing library resources that are available. The final chapter contains a corporate analysis that requires in-depth research of a company. These research activities expose students to a variety of resources available to help with gathering financial information. FOUR-YEAR COMPARISON Financial statements are introduced using four years of comparative information. Each line item is studied and the student develops an overall strategy to analyze the financial statement. Questions lead to increased understanding and highlight important trends. ETHICAL ISSUES Ethical issues are incorporated into a number of the activities. RANGE AND MAGNITUDE OF AMOUNTS Companies are carefully selected so students get a "feel" for the range and magnitude of expected amounts and ratios in the corporate world.

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