Financial Statement Analysis

by WILD

• ISBN13: 9780073100234
• ISBN10: 0073100234
• Edition: 9th
• Format: Hardcover
• Copyright: 2005-11-28
• Publisher: McGraw-Hill/Irwin

Summary

Financial Statement Analysis, 9e, emphasizes effective business analysis and decision making by analysts, investors, managers, and other stakeholders of the company. It continues to set the standard (over 8 prior editions and hundreds of thousands in unit book sales) in showing students the keys to effective financial statement analysis. It begins with an overview (chapters 1-2), followed by accounting analysis (chapters 3-6) and then financial analysis (chapters 7-11). The book presents a balanced view of analysis, including both equity and credit analysis, and both cash-based and earnings-based valuation models. The book is aimed at accounting and finance classes, and the professional audience as it shows the relevance of financial statement analysis to all business decision makers. The authors:1. Use numerous and timely "real world" examples and cases2. Draw heavily on actual excerpts from financial reports and footnotes3. Focus on analysis and interpretation of financial reports and their footnotes4. Illustrate debt and equity valuation that uses results of financial statement analysis5. Have a concise writing style to make the material accessible

Author Biography

Robert F. Halsey is an associate professor at Babson College. K. R. Subramanyam is associate professor of accounting and the Leventhal Research Fellow at the Marshall School of Business, University of Southern California. John J. Wild is professor of accounting and the Robert and Monica Beyer Distinguished Professor at the University of Wisconsin at Madison.

Table of Contents

Overview of Financial Statement Analysis	2	(58)
Business Analysis	4	(10)
Introduction to Business Analysis	4	(3)
Types of Business Analysis	7	(2)
Components of Business Analysis	9	(5)
Financial Statements---Basis of Analysis	14	(10)
Business Activities	14	(4)
Financial Statements Reflect Business Activities	18	(4)
Additional Information	22	(2)
Financial Statement Analysis Preview	24	(18)
Analysis Tools	24	(11)
Valuation Models	35	(4)
Analysis in an Efficient Market	39	(3)
Book Organization	42	(18)
Financial Reporting and Analysis	60	(54)
Reporting Environment	62	(7)
Statutory Financial Reports	62	(2)
Factors Affecting Statutory Financial Reports	64	(5)
Nature and Purpose of Financial Accounting	69	(4)
Desirable Qualities of Accounting Information	69	(1)
Important Principles of Accounting	70	(1)
Relevance and Limitations of Accounting	71	(2)
Accruals---Cornerstone of Accounting	73	(11)
Accrual Accounting---An Illustration	73	(2)
Accrual Accounting Framework	75	(2)
Relevance and Limitations of Accrual Accounting	77	(4)
Analysis Implications of Accrual Accounting	81	(3)
Introduction to Accounting Analysis	84	(8)
Need for Accounting Analysis	85	(1)
Earnings Management	86	(4)
Process of Accounting Analysis	90	(2)
Appendix 2A:
Auditing and Financial Statement Analysis	92	(5)
Appendix 2B:
Earnings Quality	97	(17)
Analyzing Financing Activities	114	(80)
Liabilities	116	(4)
Current Liabilities	116	(1)
Noncurrent Liabilities	117	(1)
Analyzing Liabilities	118	(2)
Leases	120	(10)
Accounting and Reporting for Leases	121	(4)
Analyzing Leases	125	(3)
Restating Financial Statements for Lease Reclassification	128	(2)
Postretirement Benefits	130	(16)
Pension Benefits	130	(5)
Other Postretirement Employee Benefits (OPEBs)	135	(1)
Reporting of Postretirement Benefits	135	(3)
Analyzing Postretirement Benefits	138	(8)
Contingencies and Commitments	146	(3)
Contingencies	146	(2)
Commitments	148	(1)
Off-Balance-Sheet Financing	149	(7)
Off-Balance-Sheet Examples	149	(7)
Shareholders' Equity	156	(8)
Capital Stock	157	(2)
Retained Earnings	159	(3)
Book Value per Share	162	(2)
Liabilities at the ``Edge'' of Equity	164	(1)
Appendix 3A:
Lease Accounting and Analysis---Lessor	164	(2)
Appendix 3B:
Accounting Specifics for Postretirement Benefits	166	(28)
Analyzing Investing Activities	194	(42)
Introduction to Current Assets	196	(6)
Cash and Cash Equivalents	197	(1)
Receivables	198	(4)
Prepaid Expenses	202	(1)
Inventories	202	(9)
Inventory Accounting and Valuation	202	(2)
Analyzing Inventories	204	(7)
Introduction to Long-Term Assets	211	(2)
Accounting for Long-Term Assets	211	(2)
Capitalizing versus Expensing: Financial Statement and Ratio Effects	213	(1)
Plant Assets and Natural Resources	213	(8)
Valuing Plant Assets and Natural Resources	214	(1)
Depreciation	214	(7)
Intangible Assets	221	(15)
Accounting for Intangibles	222	(1)
Analyzing Intangibles	223	(1)
Unrecorded Intangibles and Contingencies	224	(12)
Analyzing Investing Activities: Intercorporate Investments	236	(60)
Investment Securities	238	(8)
Accounting for Investment Securities	239	(3)
Disclosures for Investment Securities	242	(2)
Analyzing Investment Securities	244	(2)
Equity Method Accounting	246	(3)
Equity Method Mechanics	247	(1)
Analysis Implications of Intercorporate Investments	248	(1)
Business Combinations	249	(14)
Accounting for Business Combinations	250	(4)
Issues in Business Combinations	254	(6)
Pooling Accounting for Business Combinations	260	(3)
Derivative Securities	263	(8)
Defining a Derivative	264	(1)
Accounting for Derivatives	264	(3)
Disclosures for Derivatives	267	(2)
Analysis of Derivatives	269	(2)
Appendix 5A:
International Activities	271	(8)
Appendix 5B:
Investment Return Analysis	279	(17)
Analyzing Operating Activities	296	(76)
Income Measurement	298	(9)
Concept of Income	298	(4)
Measuring Accounting Income	302	(1)
Alternative Income Classifications and Measures	303	(4)
Nonrecurring Items	307	(14)
Extraordinary Items	307	(2)
Discontinued Operations	309	(2)
Accounting Changes	311	(3)
Special Items	314	(7)
Revenue and Gain Recognition	321	(5)
Guidelines for Revenue Recognition	322	(2)
Analysis Implications of Revenue Recognition	324	(2)
Deferred Charges	326	(4)
Research and Development	326	(2)
Computer Software Expenses	328	(1)
Exploration and Development Costs in Extractive Industries	328	(2)
Supplementary Employee Benefits	330	(6)
Overview of Supplementary Employee Benefits	330	(1)
Employee Stock Options	330	(6)
Interest Costs	336	(1)
Interest Computation	336	(1)
Interest Capitalization	336	(1)
Analyzing Interest	336	(1)
Income Taxes	337	(7)
Accounting for Income Tax	337	(3)
Income Tax Disclosures	340	(2)
Analyzing Income Taxes	342	(2)
Appendix 6A:
Earnings per Share: computation and Analysis	344	(3)
Appendix 6B:
Economics of Employee Stock Options	347	(25)
Cash Flow Analysis	372	(44)
Statement of Cash Flows	374	(9)
Relevance of Cash	374	(1)
Reporting by Activities	375	(1)
Constructing the Cash Flow Statement	375	(5)
Special Topics	380	(1)
Direct Method	381	(2)
Analysis Implications of Cash Flows	383	(2)
Limitations in Cash Flow Reporting	383	(1)
Interpreting Cash Flows and Net Income	383	(2)
Analysis of Cash Flows	385	(5)
Case Analysis of Cash Flows of Campbell Soup	386	(1)
Inferences from Analysis of Cash Flows	386	(1)
Alternative Cash Flow Measures	387	(1)
Company and Economic Conditions	388	(1)
Free Cash Flow	389	(1)
Cash Flows as Validators	390	(1)
Specialized Cash Flow Ratios	390	(1)
Cash Flow Adequacy Ratio	390	(1)
Cash Reinvestment Ratio	391	(1)
Appendix 7A:
Analytical Cash Flow Worksheet	391	(25)
Return on Invested Capital and Profitability Analysis	416	(46)
Importance of Return on Invested Capital	418	(1)
Measuring Managerial Effectiveness	418	(1)
Measuring Profitability	419	(1)
Measure for Planning and Control	419	(1)
Components of Return on Invested Capital	419	(7)
Defining Invested Capital	420	(1)
Adjustments to Invested Capital and Income	421	(1)
Computing Return on Invested Capital	421	(5)
Analyzing Return on Net Operating Assets	426	(8)
Disaggregating Return on Net Operating Assets	426	(1)
Relation between Profit Margin and Asset Turnover	427	(7)
Analyzing Return on Common Equity	434	(8)
Disaggregating the Return on Common Equity	435	(2)
Computing Return on Invested Capital	437	(4)
Assessing Growth in Common Equity	441	(1)
Appendix 8A:
Challenges of Diversified Companies	442	(20)
Prospective Analysis	462	(36)
The Projection Process	464	(1)
Projecting Financial Statements	464	(7)
Application of Prospective Analysis in the Residual Income Valuation Model	471	(3)
Trends in Value Drivers	474	(2)
Appendix 9A:
Short-Term Forecasting	476	(22)
Credit Analysis	498	(74)
Section 1: Liquidity	500	(1)
Liquidity and Working Capital	500	(9)
Current Assets and Liabilities	501	(1)
Working Capital Measure of Liquidity	502	(1)
Current Ratio Measure of Liquidity	502	(2)
Using the Current Ratio for Analysis	504	(4)
Cash-Based Ratio Measures of Liquidity	508	(1)
Operating Activity Analysis of Liquidity	509	(6)
Accounts Receivable Liquidity Measures	509	(2)
Inventory Turnover Measures	511	(3)
Liquidity of Current Liabilities	514	(1)
Additional Liquidity Measures	515	(4)
Current Assets Composition	515	(1)
Acid-Test (Quick) Ratio	515	(1)
Cash Flow Measures	515	(1)
Financial Flexibility	516	(1)
Management's Discussion and Analysis	516	(1)
What-If Analysis	516	(3)
Section 2: Capital Structure and Solvency	519	(1)
Basics of Solvency	519	(5)
Importance of Capital Structure	519	(2)
Motivation for Debt Capital	521	(2)
Adjustments for Capital Structure Analysis	523	(1)
Capital Structure Composition and Solvency	524	(4)
Common-Size Statements in Solvency Analysis	525	(1)
Capital Structure Measures for Solvency Analysis	525	(2)
Interpretation of Capital Structure Measures	527	(1)
Asset-Based Measures of Solvency	527	(1)
Earnings Coverage	528	(10)
Relation of Earnings to Fixed Charges	528	(4)
Times Interest Earned Analysis	532	(2)
Relation of Cash Flow to Fixed Charges	534	(1)
Earnings Coverage of Preferred Dividends	535	(1)
Interpreting Earnings Coverage Measures	536	(1)
Capital Structure Risk and Return	537	(1)
Appendix 10A:
Rating Debt	538	(2)
Appendix 10B:
Predicting Financial Distress	540	(32)
Equity Analysis and Valuation	572	(34)
Earnings Persistence	574	(10)
Recasting and Adjusting Earnings	574	(5)
Determinants of Earnings Persistence	579	(2)
Persistent and Transitory Items in Earnings	581	(3)
Earnings-Based Equity Valuation	584	(5)
Relation between Stock Prices and Accounting Data	584	(1)
Fundamental Valuation Multiples	585	(2)
Illustration of Earnings-Based Valuation	587	(2)
Earning Power and Forecasting for Valuation	589	(17)
Earning Power	589	(1)
Earnings Forecasting	590	(3)
Interim Reports for Monitoring and Revising Earnings Estimates	593	(13)
Comprehensive Case: Applying Financial Statement Analysis	606
Steps in Analyzing Financial Statements	608	(2)
Building Blocks of Financial Statement Analysis	610	(1)
Reporting on Financial Statement Analysis	611	(1)
Specialization in Financial Statement Analysis	611	(1)
Comprehensive Case: Campbell Soup Company	612
Preliminary Financial Analysis	612	(1)
Sales Analysis by Source	612	(2)
Comparative Financial Statements	614	(1)
Further Analysis of Financial Statements	615	(8)
Short-Term Liquidity	623	(3)
Capital Structure and Solvency	626	(1)
Return on Invested Capital	627	(4)
Analysis of Asset Utilization	631	(1)
Analysis of Operating Performance and Profitability	632	(3)
Forecasting and Valuation	635	(5)
Summary Evaluation and Inferences	640	(1)
Short-Term Liquidity	641	(1)
Capital Structure and Solvency	641	(1)
Return on Invested Capital	641	(1)
Asset Turnover (Utilization)	641	(1)
Operating Performance and Profitability	641	(1)
Financial Market Measures	642	(1)
Using Financial Statement Analysis	643
Appendix A:
Financial Statements	2	(1)
Dell Inc.	3	(51)
Campbell Soup	54
Interest Tables	1	(1)
References	1	(1)
Index	1	(1)
Quick Review	1