Financial Statement Analysis

by Bergevin, Peter M.

• ISBN13: 9780130325341
• ISBN10: 0130325341
• Format: Paperback
• Copyright: 2002-01-01
• Publisher: Pearson College Div

Summary

For one-semester, undergraduate-level courses in Financial Statement Analysis. Filling an important gap in business education, this text stresses the relationship between business and financial disclosures. It emphasizes business context and research in financial statement analysis. As an introduction to the discipline, students learn how to analyze financial statements by actively engaging in the research process, especially on the Internet, and understanding environmental influences on financial disclosures. In doing so, this book develops critical thinking, research, and analytical skills, as well as a technical understanding of the subject matter.

Table of Contents

Preface	xix
Introduction to Financial Statement Analysis	1	(22)
Objective	2	(1)
Comprehensive Analysis	2	(2)
Business Environment	2	(1)
Data Sources	3	(1)
What's Your Analysis? Analysts' Ethics	3	(1)
Analysts' Objectives	4	(4)
Equity Investors	4	(1)
Credit Granters	5	(1)
Corporate Managers	6	(1)
Mergers and Acquisition Specialists	6	(1)
Internal and External Auditors	7	(1)
Regulators	7	(1)
Corporate Employees	8	(1)
Reporting Standards	8	(3)
A Collaborative Partnership	8	(1)
Financial Reporting Standards	9	(1)
The International Dimension	9	(1)
What's Your Analysis? Corporate Financing	10	(1)
Disclosure Challenges	11	(3)
Capital Maintenance Selection	11	(1)
What's Your Analysis? Major League Reporting	12	(1)
Information Complexities	13	(1)
Summary	14	(9)
Key Terms	15	(1)
Introductory Note to End of Chapter Assignments	15	(1)
Internet Industry Cases	16	(1)
Conceptual Cases	16	(7)
Information Management	23	(38)
What's Your Analysis? Field of Inquiry	24	(1)
A Framework for Managing Information	24	(5)
Information Characteristics	24	(1)
Classifying Data	25	(1)
Interacting with Decision Experts	26	(1)
An Information Processing Model	26	(3)
What's Your Analysis? Do the Means Justify the Ends?	29	(1)
Information Sources	29	(6)
Economic Conditions	29	(1)
Industry Considerations	30	(1)
What's Your Analysis? Industry Classifications	31	(1)
Corporate Disclosures	32	(1)
Securities and Exchange Commission Fillings	33	(1)
Keeping Current	34	(1)
What's Your Analysis? Ideas as Information Sources	34	(1)
Technological Advances	35	(3)
Advantages	35	(1)
Disadvantages	36	(2)
What's Your Analysis? Massive Substitution Can Kill an Analysis	38	(1)
Summary	38	(23)
Key Terms	39	(1)
Internet Industry Cases	39	(1)
Conceptual Cases	40	(4)
Appendix: Resource Guide	44	(17)
Financial Statements	61	(21)
Financial Statement Concepts	62	(3)
Objectives	62	(1)
What's Your Analysis? Broadening Financial Disclosures	62	(1)
Assumptions	63	(1)
Principles	64	(1)
What's Your Analysis? Revenue Recognition	64	(1)
Interrelationship of Financial Statements	65	(1)
Additional Financial Statement Disclosures	65	(1)
Financial Statement Orientation	65	(3)
eXTREMESTUFF.com	66	(1)
eSTUFF's Financial Statements	66	(1)
Financial Statement Numbers	67	(1)
Income Statement	68	(4)
Income Statement Components	68	(2)
What's Your Analysis? Internet Revenues	70	(1)
Disclosure Conventions	70	(1)
Line Item Disclosures	71	(1)
What's Your Analysis? Matching Expenses	71	(1)
Statement of Shareholders' Equity	72	(1)
Contributed Capital	72	(1)
Retained Earnings	73	(1)
Balance Sheet	73	(3)
Assets	73	(1)
Current Assets	74	(1)
Property, Plant, and Equipment	74	(1)
Intangible Assets	74	(1)
Liabilities	75	(1)
Current Liabilities	75	(1)
Long-Term Liabilities	75	(1)
Shareholders' Equity	75	(1)
What's Your Analysis? Did They Lie?	75	(1)
Statement of Cash Flows	76	(1)
Cash Flows from Operating Activities	76	(1)
Cash Flows from Investing Activities	76	(1)
Cash Flows from Financing Activities	77	(1)
Summary	77	(5)
Key Terms	77	(1)
Numerical Cases	78	(3)
Industry Cases	81	(1)
Financial Statement Comparability	82	(18)
Basic Common Size Financial Statement Considerations	83	(6)
Vertical Common Size Financial Statements	84	(1)
What's Your Analysis? Microsoft's Success	85	(1)
Horizontal Common Size Financial Statements	86	(1)
Alternative Disclosures of Horizontal Analysis	87	(1)
Mathematical Properties of Common Size Statements	88	(1)
Common Size Financial Statement Extensions	89	(6)
Compound Annual Growth Rates	89	(2)
Financial Statement Profiles	91	(1)
What's Your Analysis? Wal-Mart Is Winning	92	(1)
Moving Averages	93	(1)
What's Your Analysis? Common Sizing Must Address the Issue	93	(2)
Data Considerations	95	(2)
Observation Quantity	95	(1)
Financial Statement Inconsistencies	95	(1)
Scaling Disclosures	95	(1)
Ratio Computations	96	(1)
Numerical Rounding	96	(1)
Qualitative Statements	97	(1)
Summary	97	(3)
Key Terms	97	(1)
Numerical Case	98	(1)
Industry Cases	98	(1)
Industry Internet Cases	98	(2)
Data Disclosures	100	(18)
Economic Conditions	101	(3)
U.S. Economy	101	(2)
Global Economy	103	(1)
Personal Computer Industry	104	(7)
What's Your Analysis? Moore's Law	104	(1)
What's Your Analysis? Data Inputs	105	(1)
Industry Changes	106	(1)
Market Share	107	(1)
What's Your Analysis? The PC War	108	(1)
Industry Environment	109	(1)
Maturing Markets	110	(1)
Personal Computer Companies	111	(3)
What's Your Analysis? First Movers	111	(1)
Apple Computer's Financial Performance	112	(1)
Company Comparability	112	(2)
Economic Change	114	(1)
Summary	115	(3)
Key Terms	115	(1)
Industry Cases	116	(1)
Industry Internet Cases	116	(2)
Financial Statement Influences	118	(18)
Financial Reporting Judgment	119	(1)
Basic Cost Considerations	119	(4)
Capital and Revenue Expenditures	120	(1)
What's Your Analysis? Disappearing Assets	121	(1)
Product and Period Costs	122	(1)
Other Cost Factors	123	(5)
Cost Control	123	(1)
Cost Behavior	124	(1)
What's Your Analysis? Industry-Specific Measures	125	(1)
Cost Composition	126	(1)
What's Your Analysis? Ford's Product Mix	127	(1)
Managerial Judgment and Estimates	128	(2)
Accounting Methods	128	(1)
Estimation of Future Events	128	(1)
Revenue Recognition Policy	129	(1)
Matching Expenses to Revenues	129	(1)
Audit Opinions	130	(2)
What's Your Analysis? A Matter of Independence	131	(1)
Factors Influencing Apple Computer and the Personal Computer Industry	132	(1)
What's Your Analysis? Apple Computer's Audit Opinion	133	(1)
Summary	133	(3)
Key Terms	133	(1)
Industry Cases	134	(1)
Industry Internet Cases	135	(1)
Reporting Requirements	136	(21)
Business Acquisitions	137	(4)
Financial Reporting Requirements	137	(1)
Analytical Implications	138	(1)
What's Your Analysis? Buy High, Sell Low	139	(1)
Reporting Examples and Observations of Business Acquisitions	140	(1)
What's Your Analysis? Research and Development Write-Offs	140	(1)
Security Investments	141	(3)
Financial Reporting Requirements	141	(1)
Analytical Implications	142	(1)
Reporting Examples and Observations of Security Investments	143	(1)
Foreign Investments	144	(1)
Financial Reporting Requirements	144	(1)
Analytical Implications	145	(1)
Reporting Examples and Observations of Foreign Investments	145	(1)
Risk Management	145	(1)
Financial Reporting Requirements	145	(1)
Analytical Implications	146	(1)
Reporting Examples and Observations of Risk Management	146	(1)
Deferred Compensation Arrangements	146	(3)
Financial Reporting Requirements	147	(1)
Analytical Implications	147	(1)
What's Your Analysis? Off-Balance Sheet Assets	148	(1)
Reporting Examples and Observations of Deferred Compensation Arrangements	149	(1)
Deferred Taxes	149	(2)
Financial Reporting Requirements	149	(1)
Analytical Implications	150	(1)
Reporting Examples and Observations of Deferred Taxes	150	(1)
Summary	151	(6)
Key Terms	151	(1)
Conceptual Cases	152	(3)
Industry Internet Cases	155	(2)
Introduction to Short-Term Liquidity Analysis	157	(25)
The Objective of Liquidity Analysis	158	(1)
Financing and Investing Activities	158	(4)
Primary Business Model	159	(1)
Operating Business Model	159	(2)
What's Your Analysis? Unbalanced Balance Sheets	161	(1)
Terms and Concepts	162	(3)
Operating Cycle	162	(1)
Current Accounts	162	(2)
Working Capital	164	(1)
Liquidity Measures	165	(8)
Current Ratio	165	(1)
Quick Ratio	166	(1)
Activity Measures	167	(1)
Inventory Activity Measures	167	(1)
What's Your Analysis? Category Killer Killed: Just for Feet Stopped Dead in Its Tracks	168	(1)
Accounts Receivable Activity Measures	169	(1)
Inventory Conversion Cycle	169	(1)
What's Your Analysis? Converting Inventory into Cash	170	(1)
Accounts Payable Activity Measures	170	(1)
Net Cash Conversion Cycle	171	(1)
What's Your Analysis? Liquid Companies Pay Their Bills	172	(1)
Liquidity Analysis of the Personal Computer Industry	173	(9)
Working Capital Analysis	174	(1)
Inventory Activity Measures	175	(1)
Other Activity Measures	176	(1)
Conversion Cycles	177	(3)
Key Terms	180	(1)
Numerical Case	180	(1)
Industry Cases	180	(1)
Industry Internet Cases	181	(1)
Advanced Short-Term Liquidity Analysis	182	(20)
Current Asset Liquidity	183	(6)
What's Your Analysis? Just in Time Inventory and Then Some	184	(1)
Inventory Cost Flow Methods	185	(2)
LIFO Reserves	187	(1)
LIFO Liquidation	188	(1)
Manufacturing Considerations	188	(1)
Accounts Receivable Activity Measures	189	(3)
Sales Type	189	(1)
What's Your Analysis? Large, Small, and Missing Receivables	190	(1)
Bad Debts	190	(1)
What's Your Analysis? Sears, Roebuck & Really Big Receivables	191	(1)
Accounts Payable Activity Measures	192	(1)
Accrued Liability Activity Measures	192	(1)
Conceptual Consideration for Current Liability Measures	193	(1)
Financial Flexibility	193	(2)
What's Your Analysis? Car Sellers' Financial Flexibility	194	(1)
Apple Computer and the Personal Computer Industry	195	(4)
Inventory Analysis	196	(1)
What's Your Analysis? E-commerce Alters Inventory Analysis	197	(1)
Receivable Analysis	197	(2)
Current Liability Analysis	199	(1)
Financial Flexibility	199	(1)
Summary	199	(3)
Key Terms	200	(1)
Numerical Case	200	(1)
Industry Cases	201	(1)
Industry Internet Cases	201	(1)
Introduction to Cash Flow Analysis	202	(21)
What's Your Analysis? Understand the Money!	203	(1)
The Objective of Cash Flow Analysis	204	(1)
Business Decisions and Cash Flows	204	(2)
Cash Flows and Corporate Life	205	(1)
Statement of Cash Flows	206	(1)
Cash Flows from Operating Activities	206	(4)
Operating Cash Flow Reporting Methods	207	(1)
Converting Indirect Operating Cash Flows to Direct Operating Cash Flows	207	(3)
Interpreting Operating Cash Flows	210	(5)
Alternative Outcomes	210	(1)
What's Your Analysis? Controlling Cash Flows	211	(1)
Operating Cash Flow Trends	212	(1)
Operating Cash Flow and Liquidity	213	(1)
Forecasting Operating Cash Flows	214	(1)
What's Your Analysis? Cashing in on a Home Run	214	(1)
Apple Computer and the Personal Computer Industry	215	(5)
Industry Cash Flows	215	(1)
Apple Computer's Direct Cash Flows	216	(1)
Operating Cycle Cash Flows	217	(2)
Analysis of Operating Cycle Cash Flows	219	(1)
Summary	220	(3)
Key Terms	221	(1)
Numerical Case	221	(1)
Industry Cases	221	(1)
Industry Internet Cases	222	(1)
Advanced Cash Flow Analysis	223	(20)
Cash Flows from Investing and Financing Activities	224	(4)
What's Your Analysis? Internet Retailing and the Need for Cash	224	(1)
Cash Flows from Investing Activities	225	(1)
Cash Flows from Financing Activities	226	(1)
What's Your Analysis? Cash Earning per Share	227	(1)
Cash Flow Relationships	228	(1)
Cash Flow Measures	228	(5)
Primary Cash Sufficiency Measures	228	(2)
Other Cash Sufficiency Measures	230	(1)
Cash Efficiency Measures	231	(2)
What's Your Analysis? Future Cash Flows and the Value Trap	233	(1)
Apple Computer and the Personal Computer Industry	233	(10)
Investing and Financing Activities	234	(1)
Cash Sufficiency Measures	234	(3)
Cash Efficiency Measures	237	(2)
Cash Forecast	239	(1)
Key Terms	240	(1)
Numerical Case	241	(1)
Industry Cases	241	(1)
Industry Internet Cases	241	(2)
Operating Performance Analysis	243	(27)
Objectives for Analyzing Operating Performance	244	(1)
Income and Wealth	244	(4)
Income Theory	245	(1)
Income Composition	245	(2)
Earnings per Share	247	(1)
Earnings Quality	248	(11)
What's Your Analysis? Getting to the Core of the Matter	249	(1)
Earnings Sustainability	249	(2)
What's Your Analysis? Restructuring Charges and Earnings Management	251	(1)
Earnings Measurement and Management	252	(1)
What's Your Analysis? In-Process Research and Development: High-Tech's Way to Manage Earnings?	253	(1)
Benchmarking	253	(1)
Earnings Sufficiency	254	(1)
Recurring and Nonrecurring Earnings	255	(2)
What's Your Analysis? Soft Dollars, Rebates, and Earnings Quality	257	(1)
Income and Cash Flow Correspondence	257	(2)
Analysis of the Personal Computer Industry	259	(8)
Market Share	259	(1)
Ernings Sufficiency	260	(2)
Earnings Sustainability	262	(5)
Summary	267	(3)
Key Terms	267	(1)
Numerical Cases	268	(1)
Industry Cases	268	(1)
Industry Internet Cases	268	(2)
Asset Utilization Analysis	270	(26)
Objective for Analyzing Asset Utilization	271	(1)
Investment Activities	271	(3)
Assets Valuation	272	(1)
What's Your Analysis? Unreported Knowledge Assets	273	(1)
Capital Concepts	273	(1)
Return on Assets	274	(5)
Managerial Orientation	275	(1)
Components of Return on Assets	275	(2)
What Your Analysis? Retailers Seek Adequate Returns	277	(1)
Technical Adjustments to Return on Assets	278	(1)
Return on Equity	279	(6)
Common Shareholder Orientation	279	(1)
Rate of Return on Equity (ROE) Ratio	280	(1)
Financial Structure Leverage Ratio	280	(1)
Components of Return on Equity	280	(1)
Technical Adjustments to Return on Equity	281	(1)
Additional Asset Utilization Considerations	282	(1)
Fixed Asset Turnover	282	(1)
What's Your Analysis? Slotless in Seattle: Airlines Seek Takeoff and Landing Rights	283	(1)
Asset Impairment	283	(1)
Segment Returns	284	(1)
Knowledge-Based Asset Returns	284	(1)
What's Your Analysis? Knowledge Assets Meld the Old and New Economies	285	(1)
Analysis of the Personal Computer Industry	285	(8)
Intellectual Asset Factors	285	(2)
Return on Assets	287	(3)
Return on Equity	290	(2)
Segment Returns	292	(1)
Summary	293	(3)
Key Terms	294	(1)
Numerical Case	294	(1)
Industry Cases	294	(1)
Industry Internet Cases	295	(1)
Capital Structure Analysis	296	(25)
Objective for Analyzing Capital Structure	297	(1)
Financing Activities	297	(2)
Capital Structure Valuation	298	(1)
Debt and Equity Investors	298	(1)
Financial Leverage	299	(6)
What's Your Analysis? Crushed by Debt	300	(1)
Financial Leverage Concepts	300	(1)
Debt Financing Implications	301	(2)
Financial Leverage Measures	303	(1)
What's Your Analysis? Stock Repurchases Alter Capital Structure	304	(1)
Risk Analysis	305	(2)
Credit Risk	305	(1)
Bankruptcy Risk	306	(1)
Comprehensive Risk	306	(1)
What's Your Analysis? Market Financing: The New Lenders	307	(1)
Capital Structure Measures	307	(2)
Capital Structure Composition	307	(1)
Common Size Statements	308	(1)
What's Your Analysis? Thwarting Takeovers with Poison Pills	309	(1)
Debt to Capital Ratios	309	(3)
Earnings Coverage Ratio	310	(1)
Bankruptcy Prediction	311	(1)
Capital Structure Analysis and the Personal Computer Industry	312	(7)
New Economy Capital Structure	313	(1)
Capital Structure Measures	313	(4)
What's Your Analysis? Apple's Preferred Stock Financing	317	(2)
Summary	319	(2)
Key Terms	319	(1)
Numerical Case	319	(1)
Industry Cases	320	(1)
Industry Internet Cases	320	(1)
Valuation and Forecasts	321	(25)
Valuation and Forecast Objectives	322	(1)
Valuation Methods	323	(2)
Price to Earnings Approach	323	(1)
What's Your Analysis? Do the Old Models Work in the New Economy?	324	(1)
Price to Cash Flow Approach	324	(1)
Price to Equity Approach	325	(1)
Forecasting Techniques	325	(6)
What's Your Analysis? The Securities and Exchange Commission Levels the Playing Field	325	(1)
Statistical Methods	326	(4)
Judgment Methods	330	(1)
Pro Forma Financial Statements	331	(4)
Income Statement Projection	331	(1)
Balance Sheet Projection	331	(2)
Statement of Cash Flow Projection	333	(2)
Valuation and Forecast of the Personal Computer Industry	335	(8)
What's Your Analysis? Be an Informed Personal Computer Industry Forecaster	335	(8)
Summary	343	(3)
Key Terms	344	(1)
Numerical Cases	344	(1)
Industry Cases	345	(1)
Industry Internet Cases	345	(1)
Appendix A Personal Computer Industry	346	(39)
Appendix B Airline Industry	385	(44)
Appendix C Athletic Footwear and Apparel	429	(25)
Appendix D Discount Retailer Industry	454	(44)
Appendix E Fast-Food Restaurants	498	(28)
Appendix F Soft Drink Industry	526	(31)
Compendium of Financial Analysis Measures	557	(5)
Glossary	562	(23)
Index	585

Excerpts

Welcome to the world of financial statement analysis! Financial statements contain numerous disclosures about business performance. Analysts convert that data into useful information. Why would anyone want to undertake such a job? The answer is simple: to improve decision making.Financial Statement Analysis: An Integrated Approachhelps you make better economic choices and assist others in that task.Corporate financial statements summarize business transactions in a relatively neutral manner. Analysts must tap into those unbiased reports and assign meaning to them. You learn how to mine rich veins of corporate disclosures and turn them into a mother lode of knowledge by using this text. It trains you to analyze historical results, interpret current operations, and forecast future performance.I wrote this text for the beginning analyst. You only need to understand basic business principles and the workings of a personal computer to master its contents. It builds on those skills in a structured manner, instructing you how to thoroughly analyze financial statements. Moreover, this text teaches you how to supplement financial statements with other information sources, thereby providing the context necessary to produce valid analyses.You will learn financial statement analysis in an exciting environment. This book's integrated nature, vivid examples, participatory format, and strong visual orientation actively engage you in a vibrant learning atmosphere. DISTINCTIVE ATTRIBUTESFinancial Statement Analysis: An Integrated Approachcontains a number of distinctive features that enable you to master this important business discipline. It emphasizes the art as well as the science of financial statement analysis. The book systematizes facts, principles, and methods, along with developing your perception, creativity, and resourcefulness. This text's unique approach to financial statement analysis strengthens comprehension of the subject matter, enlivens the material, and separates it from the competition. We now examine a number of its learning features. PRACTICAL APPLICATIONThis book favors practical application over theoretical discussion. It focuses on the "how to do it" and "what does it mean" aspects of analysis. As an important part of this philosophy, you become an active participant in the learning process. You analyze important issues and use the Internet to find information in every chapter. Real-life examples abound. An analysis of the personal computer (PC) industry, presented throughout the text, illustrates key learning points. End-of-chapter assignments pack a practical punch! Five integrated case studies complement the PC analysis. All of these case studies use existing industry and corporate data as inputs for analysis and decision making. In addition, the book guides you in updating your analysis via the Internet. IN-CHAPTER FEATURESFinancial Statement Analysis: An Integrated Approachcontains an array of exciting features that enliven analysis. Intriguing financial statement discussion items appear in every chapter.What's Your Analysis?sidebars require you to think about topical issues and answer stimulating questions about the subject matter. Shortervignettesalso appear throughout the book. The text'sMicro Analysissegments briefly illustrate important financial statement considerations and provide additional links to the existing business world.WEB exercises,yet another in-chapter feature, capitalizes on the power of the Internet to sharpen your research skills and makes the subject matter timelier. Questions posed and tasks required in theWhat's Your Analysis?, Micro Analysis,andWEB exercisefeatures help you learn the material in a refreshingly nontraditional manner. COMPREHENSIVE ORIENTATIONData drive analysis and information result from research. Numerous information sources