Financial Reporting and Analysis: Using Financial Accounting Information

643 Pages·2010·32.36 MB·English

by  Charles H. Gibson

12e
Financial Reporting
& Analysis
UsingFinancialAccountingInformation
Charles H. Gibson
TheUniversityofToledo,Emeritus
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About the Author
C
harles Gibson is a certified public accountant who practiced with a Big Four accounting
firmforfouryearsandhashadmorethan30yearsofteachingexperience.Histeachingex-
perience encompasses a variety of accounting courses, including financial, managerial, tax,
cost,andfinancialanalysis.
ProfessorGibsonhastaughtseminarsonfinancialanalysistofinancialexecutives,bankcommer-
cialloanofficers,lawyers,andothers.HehasalsotaughtfinancialreportingseminarsforCPAsand
review courses for both CPAs and CMAs. He has authored several problems used on the CMA
exam.
CharlesGibsonhaswrittenmorethan60articlesinsuchjournalsastheJournalofAccountancy,
AccountingHorizons,JournalofCommercialBankLending,CPAJournal,OhioCPA,Management
Accounting,RiskManagement,TaxationforAccountants,AdvancedManagementJournal,Taxation
for Lawyers, California Management Review, and Journal of Small Business Management. He is a
co-authoroftheFinancialExecutivesResearchFoundationStudyentitled,‘‘DiscountinginFinancial
AccountingandReporting.’’
Dr. Gibson co-authored Cases in Financial Reporting (PWS-KENT Publishing Company). He
has also co-authored two continuing education courses consisting of books and cassette tapes, pub-
lished bythe American Institute of CertifiedPublic Accountants. These courses are entitled ‘‘Funds
FlowEvaluation’’and‘‘ProfitabilityandtheQualityofEarnings.’’
Professor Gibson is a member of the American Accounting Association, American Institute of
Certified Public Accountants, Ohio Society of Certified Public Accountants, and Financial Execu-
tives Institute. In the past, he has been particularly active in the American Accounting Association
andtheOhioSocietyofCertifiedPublicAccountants.
Dr.Gibsonreceivedthe1989OutstandingOhioAccountingEducatorAwardjointlypresentedby
theOhioSocietyofCertifiedPublicAccountantsandtheOhioRegionalAmericanAccountingAsso-
ciation.In1993,hereceivedtheCollegeofBusinessResearchAwardattheUniversityofToledo.In
1996,Dr.Gibsonwashonoredasan‘‘AccomplishedGraduate’’oftheCollegeofBusinessatBowl-
ingGreen StateUniversity. In1999,hewashonoredbytheGammaEpsilonChapterofBetaAlpha
PsioftheUniversityofToledo.
Dedication
T
hisbookisdedicatedtomywifePatriciaanddaughtersAnneElizabethandLaura.
Special Dedication
Tohardworkingstudentsmasteringfinancialreportingandanalysis.
iii
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Brief Contents
Preface xiv
Chapter 1 Introduction to Financial Reporting 1
Chapter 2 Introduction to Financial Statements and Other
Financial Reporting Topics 46
Chapter 3 Balance Sheet 89
Chapter 4 Income Statement 147
Chapter 5 Basics of Analysis 187
Chapter 6 Liquidity of Short-Term Assets; Related
Debt-Paying Ability 210
Chapter 7 Long-Term Debt-Paying Ability 261
Chapter 8 Profitability 306
Chapter 9 For the Investor 346
Chapter 10 Statement of Cash Flows 373
Summary Analysis Nike, Inc. (Includes 2009
Financial Statements of Form 10-K) 415
Chapter 11 Expanded Analysis 463
Chapter 12 Special Industries: Banks, Utilities, Oil and Gas,
Transportation, Insurance, and Real Estate
Companies 513
Chapter 13 Personal Financial Statements and Accounting
for Governments and Not-for-Profit
Organizations 554
Appendix Thomson ONE Basics and Tutorial 579
Glossary 585
Bibliography 603
Index 613
iv
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Contents
Preface xiv
Chapter 1 Introduction to Financial Reporting 1
DEVELOPMENTOFGENERALLYACCEPTEDACCOUNTING
PRINCIPLES(GAAP)INTHEUNITEDSTATES 1
AmericanInstituteofCertifiedPublicAccountants (cid:2) FinancialAccounting
StandardsBoard (cid:2) OperatingProcedureforStatementsofFinancial
AccountingStandards (cid:2) FASBConceptualFramework
ADDITIONALINPUT—AMERICANINSTITUTEOFCERTIFIED
PUBLICACCOUNTANTS(AICPA) 7
EMERGINGISSUESTASKFORCE(EITF) 7
ANEWREALITY 8
FASBACCOUNTINGSTANDARDSCODIFICATIONTM
(CODIFICATION) 10
TRADITIONALASSUMPTIONSOFTHEACCOUNTINGMODEL 10
BusinessEntity (cid:2) GoingConcernorContinuity (cid:2) TimePeriod (cid:2)
MonetaryUnit (cid:2) HistoricalCost (cid:2) Conservatism (cid:2) Realization (cid:2) Matching (cid:2)
Consistency (cid:2) FullDisclosure (cid:2) Materiality (cid:2) IndustryPractices (cid:2) Transaction
Approach (cid:2) CashBasis (cid:2) AccrualBasis
USINGTHEINTERNET 18
Companies’InternetWebSites (cid:2) HelpfulWebSites
SUMMARY 19/TOTHENET 19/QUESTIONS 20/
PROBLEMS 22/CASES 27
Case1-1StandardSetting:‘‘APoliticalAspect’’ 27
Case1-2PoliticizationofAccountingStandards—ANecessaryAct? 29
Case1-3IndependenceofAccountingStandardSetters 31
Case1-4LookingOutForInvestors 34
Case1-5FlyingHigh 35
Case1-6HawaiiCentered 36
Case1-7GoingConcern? 37
Case1-8EconomicsandAccounting:TheUncongenialTwins 40
Case1-9IOftenPaintFakes 40
Case1-10Oversight 41
Case1-11RegulationofSmallerPublicCompanies 44
WebCaseThomsonONEBusinessSchoolEdition 44
Chapter 2 Introduction to Financial Statements and Other
Financial Reporting Topics 46
FORMSOFBUSINESSENTITIES 46
THEFINANCIALSTATEMENTS 47
BalanceSheet(StatementofFinancialPosition) (cid:2) StatementofStockholders’
Equity(ReconciliationofStockholders’EquityAccounts) (cid:2) IncomeStatement
(StatementofEarnings) (cid:2) StatementofCashFlows(StatementofInflows
andOutflowsofCash) (cid:2) Notes
v
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vi CONTENTS
THEACCOUNTINGCYCLE 50
RecordingTransactions (cid:2) RecordingAdjustingEntries (cid:2) Preparingthe
FinancialStatements (cid:2) TreadwayCommission
AUDITOR’SOPINION 52
Auditor’sReportontheFirm’sInternalControls (cid:2) ReportofManagementon
InternalControloverFinancialReporting
MANAGEMENT’SRESPONSIBILITYFORFINANCIAL
STATEMENTS 56
THESEC’SINTEGRATEDDISCLOSURESYSTEM 56
PROXY 59
SUMMARYANNUALREPORT 60
THEEFFICIENTMARKETHYPOTHESIS 60
ETHICS 60
SECRequirements—CodeofEthics
HARMONIZATIONOFINTERNATIONALACCOUNTING
STANDARDS 62
CONSOLIDATEDSTATEMENTS 66
ACCOUNTINGFORBUSINESSCOMBINATIONS 67
SUMMARY 67/TOTHENET 67 /QUESTIONS 68/
PROBLEMS 69/CASES 74
Case2-1TheCeoRetires 74
Case2-2TheDangerousMoralityofManagingEarnings 76
Case2-3FirmCommitment? 81
Case2-4RulesorFeel? 81
Case2-5Materiality:InPractice 82
Case2-6Management’sResponsibility 82
Case2-7SafeHarbor 83
Case2-8Enforcement 84
Case2-9ViewofForeignFinancialStatementsReportedtotheSec 85
Case2-10MultipleCountryEnforcement 86
Case2-11NotifytheSec 87
WebCaseThomsonONEBusinessSchoolEdition 87
Chapter 3 Balance Sheet 89
BASICELEMENTSOFTHEBALANCESHEET 89
Assets (cid:2) Liabilities (cid:2) Stockholders’Equity (cid:2) Quasi-Reorganization (cid:2)
AccumulatedOtherComprehensiveIncome (cid:2) EmployeeStockOwnership
Plans(ESOPs) (cid:2) TreasuryStock (cid:2) Stockholders’EquityinUnincorporated
Firms (cid:2) InternationalConsolidatedBalanceSheet(IFRS)
SUMMARY 120/TOTHENET 121/QUESTIONS 121/
PROBLEMS 123/CASES 130
Case3-1Ready-To-Eat 130
Case3-2TheEntertainmentCompany 133
Case3-3HealthCare 136
Case3-4SpecialtyRetailer 137
Case3-5OurPrincipalAssetisOurPeople 140
Case3-6BrandValue 140
Case3-7Advertising—Asset? 140
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CONTENTS vii
Case3-8TelecommunicationsServices—Part1 140
Case3-9CanadianGAAPvs.U.S.GAAP 144
WebCaseThomsonONEBusinessSchoolEdition 145
Chapter 4 Income Statement 147
BASICELEMENTSOFTHEINCOMESTATEMENT 147
NetSales(Revenues) (cid:2) CostofGoodsSold(CostofSales) (cid:2) OtherOperating
Revenue (cid:2) OperatingExpenses (cid:2) OtherIncomeorExpense
SPECIALINCOMESTATEMENTITEMS 149
(A)UnusualorInfrequentItemDisclosedSeparately (cid:2) (B)EquityinEarnings
ofNonconsolidatedSubsidiaries
INCOMETAXESRELATEDTOOPERATIONS 152
(C)DiscontinuedOperations (cid:2) (D)ExtraordinaryItems (cid:2) (E)Cumulative
EffectofChangeinAccountingPrinciple (cid:2) (F)NetIncome—Noncontrolling
Interest(previouslyminorityshareofearnings)
EARNINGSPERSHARE 156
RETAINEDEARNINGS 156
DIVIDENDSANDSTOCKSPLITS 157
LEGALITYOFDISTRIBUTIONSTOSTOCKHOLDERS 159
COMPREHENSIVEINCOME 160
INTERNATIONALCONSOLIDATEDINCOMESTATEMENT(IFRS) 162
Disclaimer
SUMMARY 166/TOTHENET 166/QUESTIONS 167/
PROBLEMS 168/CASES 176
Case4-1HomeBuildingBlues 176
Case4-2MobileExperiences 177
Case4-3Apparel 179
Case4-4TheBigOrder 180
Case4-5Celtics 181
Case4-6Impairments 182
Case4-7CanadianGAAPvs.U.S.GAAP 184
Case4-8TelecommunicationsServices—Part2 185
WebCaseThomsonONEBusinessSchoolEdition 186
Chapter 5 Basics of Analysis 187
RATIOANALYSIS 187
COMMON-SIZEANALYSIS(VERTICALANDHORIZONTAL) 188
YEAR-TO-YEARCHANGEANALYSIS 188
FINANCIALSTATEMENTVARIATIONBYTYPEOFINDUSTRY 188
REVIEWOFDESCRIPTIVEINFORMATION 191
COMPARISONS 193
TrendAnalysis (cid:2) StandardIndustrialClassification(SIC)Manual (cid:2) North
AmericanIndustryClassificationSystem(NAICS) (cid:2) IndustryAveragesand
ComparisonwithCompetitors (cid:2) CautioninUsingIndustryAverages
RELATIVESIZEOFFIRM 200
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viii CONTENTS
OTHERLIBRARYSOURCES 200
Ward’sBusinessDirectory (cid:2) Standard&Poor’sStockReports (cid:2) Standard&
Poor’sRegisterofCorporations,Directors,andExecutives (cid:2) Standard&
Poor’sAnalyst’sHandbook (cid:2) Standard&Poor’sStandardCorporation
Descriptions(CorporationRecords) (cid:2) Standard&Poor’sSecurityOwner’s
StockGuide (cid:2) Standard&Poor’sStatisticalService (cid:2) Standard&Poor’sNet
Advantage (cid:2) MergentDividendRecordStandard&Poor’sAnnualDividend
Record (cid:2) D&B¤MillionDollarDirectory¤ (cid:2) DirectoryofCorporate
Affiliations(cid:2) (cid:2) ThomasRegisterofAmericanManufacturers (cid:2) Mergent
IndustrialManualandNewsReports (cid:2) D&BReferenceBookofCorporate
Managements (cid:2) CompactDisclosure (cid:2) Lexis-Nexis
THEUSERSOFFINANCIALSTATEMENTS 202
SUMMARY 203/TOTHENET 204/QUESTIONS 205/
PROBLEMS 206
WebCaseThomsonONEBusinessSchoolEdition 209
Chapter 6 Liquidity of Short-Term Assets; Related
Debt-Paying Ability 210
CURRENTASSETS,CURRENTLIABILITIES,ANDTHEOPERATING
CYCLE 210
Cash (cid:2) MarketableSecurities (cid:2) Receivables (cid:2) Inventories (cid:2) Prepayments (cid:2)
OtherCurrentAssets (cid:2) CurrentLiabilities
CURRENTASSETSCOMPAREDWITHCURRENTLIABILITIES 228
WorkingCapital (cid:2) CurrentRatio (cid:2) Acid-TestRatio(QuickRatio) (cid:2) Cash
Ratio
OTHERLIQUIDITYCONSIDERATIONS 232
SalestoWorkingCapital(WorkingCapitalTurnover) (cid:2) Liquidity
ConsiderationsNotontheFaceoftheStatements
SUMMARY 234/TOTHENET 234/QUESTIONS 235/
PROBLEMS 237/CASES 249
Case6-1Steelmaking 249
Case6-2RisingPrices,aTimetoSwitchoffLifo? 250
Case6-3ImagingInnovator 251
Case6-4DiversifiedTechnologyConsolidatedStatementofIncome 254
Case6-5BoomingRetail 256
Case6-6SocialExpression 256
Case6-7SpecialtyRetailer—LiquidityReview 259
Case6-8EatatMyRestaurant—LiquidityReview 260
WebCaseThomsonONEBusinessSchoolEdition 260
Chapter 7 Long-Term Debt-Paying Ability 261
INCOMESTATEMENTCONSIDERATIONWHENDETERMINING
LONG-TERMDEBT-PAYINGABILITY 261
TimesInterestEarned (cid:2) FixedChargeCoverage
BALANCESHEETCONSIDERATIONWHENDETERMINING
LONG-TERMDEBT-PAYINGABILITY 264
DebtRatio (cid:2) Debt/EquityRatio (cid:2) DebttoTangibleNetWorthRatio (cid:2) Other
Long-TermDebt-PayingAbilityRatios
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CONTENTS ix
SPECIALITEMSTHATINFLUENCEAFIRM’SLONG-TERM
DEBT-PAYINGABILITY 270
Long-TermAssetsversusLong-TermDebt (cid:2) Long-TermLeasing (cid:2) Pension
Plans (cid:2) PostretirementBenefitsOtherthanPensions
JOINTVENTURES 277
Contingencies (cid:2) FinancialInstrumentswithOff-Balance-SheetRiskand
FinancialInstrumentswithConcentrationsofCreditRisk (cid:2) Disclosuresabout
FairValueofFinancialInstruments
SUMMARY 281/TOTHENET 281/QUESTIONS 282/
PROBLEMS 283/CASES 290
Case7-1GEOCare 290
Case7-2ReadingandLearning 292
Case7-3SavingPeopleMoney 295
Case7-4Lockout 296
Case7-5Safe—ManyEmployers 297
Case7-6Safe—OtherThanPensions 297
Case7-7Safeway—Noncontributory 298
Case7-8TransactionPrinters 301
Case7-9SimulationSolutions 301
Case7-10SpecialtyRetailer—DebtView 303
Case7-11EatatMyRestaurant—DebtView 304
WebCaseThomsonONEBusinessSchoolEdition 305
Chapter 8 Profitability 306
PROFITABILITYMEASURES 306
NetProfitMargin (cid:2) TotalAssetTurnover (cid:2) ReturnonAssets (cid:2) DuPont
ReturnonAssets (cid:2) InterpretationThroughDuPontAnalysis (cid:2) Variationin
ComputationofDuPontRatiosConsideringOnlyOperating
Accounts (cid:2) OperatingIncomeMargin (cid:2) OperatingAssetTurnover (cid:2) Return
onOperatingAssets (cid:2) SalestoFixedAssets (cid:2) ReturnonInvestment
(ROI) (cid:2) ReturnonTotalEquity (cid:2) ReturnonCommonEquity (cid:2) The
RelationshipBetweenProfitabilityRatios (cid:2) GrossProfitMargin
TRENDSINPROFITABILITY 316
SEGMENTREPORTING 317
REVENUESBYMAJORPRODUCTLINES 318
GAINSANDLOSSESFROMPRIORPERIODADJUSTMENTS 319
COMPREHENSIVEINCOME 320
PRO-FORMAFINANCIALINFORMATION 321
INTERIMREPORTS 322
SUMMARY 323/TOTHENET 324/QUESTIONS 325/
PROBLEMS 326/CASES 334
Case8-1Jeff’sSelf-ServiceStation 334
Case8-2InternationalNews 335
Case8-3SpecialtyCoffee 336
Case8-4IntegratedVisualDisplay 337
Case8-5OpenPlatforms 339
Case8-6ReturnonAssets—IndustryComparison 341
Case8-7NameTheIndustry 343
Case8-8SpecialtyRetailer—ProfitabilityView 343
Case8-9EatatMyRestaurant—ProfitabilityView 344
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.