Understanding Financial Statements

by Ormiston, Aileen; Fraser, Lyn M.

• ISBN13: 9780131878563
• ISBN10: 0131878565
• Edition: 8th
• Format: Paperback
• Copyright: 2010-01-01
• Publisher: Prentice Hall

Summary

A supplementary text for a variety of Business courses, including Financial Statement Analysis, Principles of Financial Accounting, Intermediate Accounting, Investments, Personal Finance, and Financial Planning and Analysis. Understanding Financial Statements, retains its reputation for readability, concise coverage, and accessibility while incorporating the many new requirements and changes in accounting reporting and standards. The text gives students the conceptual background and analytical tools necessary to understand and interpret business financial statements. Its ultimate goal is to improve students' ability to translate financial statement numbers into a meaningful map for business decisions and thus enable each student to approach financial statements with enhanced confidence.

Table of Contents

Preface	xi
Uses for the Eighth Edition	xv
Features of the Eighth Edition	xvii
Acknowledgments	xix
About the Authors	xxi
Financial Statements: An Overview	1	(43)
Map or Maze	1	(2)
Usefulness	3	(1)
Volume of Information	3	(17)
Where to Find a Company's Financial Statements	5	(1)
The Financial Statements	6	(2)
Notes to the Financial Statements	8	(5)
Auditor's Report	13	(3)
Management Discussion and Analysis	16	(2)
Five-Year Summary of Selected Financial Data and Market Data	18	(1)
Pandora (A.K.A. ``PR Fluff'')	18	(1)
Proxy Statement	19	(1)
Missing and Hard-to-Find Information	20	(1)
Complexities	21	(3)
A Global Marketplace	21	(1)
Mythical Mountain	22	(1)
Other Discretionary Issues	23	(1)
More Complications	24	(1)
Quality of Financial Reporting	25	(5)
Accounting Policies, Estimates---Choices and Changes	26	(1)
Timing of Revenue and Expense Recognition	27	(1)
Discretionary Items	27	(2)
Nonrecurring and Nonoperating Items	29	(1)
The Journey Through the Maze Continues	30	(1)
Self-Test	30	(3)
Study Questions and Problems	33	(3)
Case 1.1 The Walt Disney Company	36	(4)
Case 1.2 Ultimate Electronics, Inc.	40	(4)
The Balance Sheet	44	(43)
Financial Condition	44	(4)
Consolidation	45	(1)
Balance Sheet Date	45	(1)
Comparative Data	45	(1)
Common-Size Balance Sheet	45	(3)
Assets	48	(10)
Current Assets	48	(1)
Cash and Marketable Securities	48	(2)
Accounts Receivable	50	(2)
Inventories	52	(1)
Inventory Accounting Methods	53	(2)
Prepaid Expenses	55	(1)
Property, Plant, and Equipment	55	(2)
Other Assets	57	(1)
Liabilities	58	(9)
Current Liabilities	58	(1)
Accounts Payable	58	(1)
Notes Payable	59	(1)
Current Maturities of Long-Term Debt	59	(1)
Accrued Liabilities	60	(1)
Unearned Revenue or Deferred Credits	60	(1)
Deferred Federal Income Taxes	61	(4)
Long-Term Debt	65	(1)
Capital Lease Obligations	65	(1)
Postretirement Benefits Other Than Pensions	65	(1)
Commitments and Contingencies	66	(1)
Hybrid Securities	66	(1)
Stockholders' Equity	67	(2)
Common Stock	67	(1)
Additional Paid-In Capital	67	(1)
Retained Earnings	67	(1)
Other Equity Accounts	68	(1)
Other Balance Sheet Items	69	(1)
Self-Test	69	(5)
Study Questions and Problems	74	(5)
Case 2.1 Lucent Technologies	79	(2)
Case 2.2 1-800 Contacts, Inc.	81	(6)
Income Statement and Statement of Stockholders' Equity	87	(30)
The Income Statement	88	(15)
Common-Size Income Statement	90	(1)
Net Sales	91	(1)
Cost of Goods Sold	91	(1)
Gross Profit	92	(1)
Operating Expense	93	(1)
Depreciation and Amortization	94	(2)
Operating Profit	96	(1)
Other Income (Expense)	96	(1)
Equity Earnings	97	(2)
Earnings Before Income Taxes/Effective Tax Rate	99	(1)
Special Items	100	(1)
Net Earnings	101	(1)
Earnings Per Common Share	101	(1)
Comprehensive Income	101	(2)
The Statement of Stockholders' Equity	103	(1)
Earnings Quality, Cash Flow, Segmental Accounting	104	(1)
Self-Test	105	(3)
Study Questions and Problems	108	(4)
Case 3.1 Dillard's Inc.	112	(3)
Case 3.2 Applied Materials	115	(2)
Statement of Cash Flows	117	(35)
Preparing a Statement of Cash Flows	119	(4)
Calculating Cash Flow from Operating Activities	123	(2)
Indirect Method	123	(2)
Cash Flow from Investing Activities	125	(1)
Cash Flow from Financing Activities	126	(1)
Change in Cash	126	(1)
Analyzing the Statement of Cash Flows	127	(3)
Cash Flow from Operations	127	(1)
Nocash Corporation	128	(2)
R.E.C. Inc.: Analysis of the Statement of Cash Flows	130	(4)
R.E.C. Inc. Analysis: Cash Flow from Operating Activities	130	(2)
Summary Analysis of the Statement of Cash Flows	132	(1)
Analysis of Cash Inflows	132	(1)
Analysis of Cash Outflows	133	(1)
Are We There Yet?	134	(1)
Self-Test	134	(4)
Study Questions and Problems	138	(6)
Case 4.1 PetMed Express, Inc.	144	(2)
Case 4.2 Candela Corporation	146	(6)
Appendix 4A Statement of Cash Flows---Direct Method	148	(1)
Direct Method	148	(4)
A Guide to Earnings and Financial Reporting Quality	152	(40)
Using the Checklist	154	(20)
Sales or Revenues	154	(5)
Cost of Goods Sold	159	(2)
Operating Expenses	161	(7)
Nonoperating Revenue and Expense	168	(5)
Other Issues	173	(1)
What Are the Real Earnings?	174	(1)
Quality of Financial Reporting---The Balance Sheet	175	(1)
Quality of Financial Reporting---The Statement of Cash Flows	175	(2)
Self-Test	177	(3)
Study Questions and Problems	180	(2)
Case 5.1 Nortel Networks Corporation	182	(6)
Case 5.2 FindWhat.com, Inc.	188	(4)
The Analysis of Financial Statements	192	(64)
Objectives of Analysis	192	(1)
Sources of Information	193	(3)
Proxy Statement	194	(1)
Auditor's Report	194	(1)
Management Discussion and Analysis	194	(1)
Supplementary Schedules	194	(1)
Form 10-K and Form 10-Q	194	(1)
Other Sources	195	(1)
Tools and Techniques	196	(15)
Common-Size Financial Statements	197	(1)
Key Financial Ratios	197	(1)
Liquidity Ratios: Short-Term Solvency	198	(4)
Cash Conversion Cycle or Net Trade Cycle	202	(1)
Activity Ratios: Asset Liquidity, Asset Management Efficiency	203	(1)
Leverage Ratios: Debt Financing and Coverage	204	(3)
Profitability Ratios: Overall Efficiency and Performance	207	(2)
Market Ratios	209	(2)
Analyzing the Data	211	(13)
Background: Economy, Industry, and Firm	212	(1)
Short-Term Liquidity	213	(2)
Operating Efficiency	215	(1)
Capital Structure and Long-Term Solvency	215	(4)
Profitability	219	(1)
Relating the Ratios---The Du Pont System	220	(1)
Projections and Pro Forma Statements	221	(1)
Summary of Analysis	222	(2)
Self-Test	224	(5)
Study Questions and Problems	229	(6)
Case 6.1 Action Performance Companies, Inc.	235	(7)
Case 6.2 Taser International, Inc.	242	(14)
Appendix 6A The Analysis of Segmental Data	249	(7)
APPENDIXES	256	(13)
A Summary of Financial Ratios	256	(3)
B Solutions to Self-Tests	259	(2)
C Glossary	261	(8)
Index	269