International Financial Statement Analysis

864 Pages·2008·5.02 MB·English

Robinson
(continued from front flap) $95.00 USA/$105.00 CAN
van Greuning
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well as concise learning outcome statements and Henry
summary chapter overviews.
Broihahn
Straightforward and accessible, International Financial
PPRRAAIISSEE FFOORR INTERNATIONAL
Statement Analysis provides you with the continuity
of topic coverage that is so critical to the learning IINNTTEERRNNAATTIIOONNAALL FFIINNAANNCCIIAALL T
process. Filled with in-depth insights and expert he process of fi nancial statement analysis
advice, this practical guide offers a detailed look at II allows you to gain important insights into
SSTTAATTEEMMEENNTT AANNAALLYYSSIISS
how fi nancial statement analysis can be understood nn the true fi nancial condition of a company.
in a global context and applied around the world. FINANCIAL With it, realistic valuations can be made for invest-
ment, lending, or merger and acquisition purposes.
tt
THOMAS R. ROBINSON, CFA, is Managing Di- While this discipline has increased in complexity—
rector, Education Division of CFA Institute, where SS ee especially on an international level—there are ways
he leads and develops the teams responsible for “International Financial Statement Analysis is arriving on the scene at the right time with a to deal with the practical challenges you’ll face.
tt
producing and delivering educational content and rr As part of the CFA Institute Investment Series,
new and useful orientation and comprehensive coverage. It should be an important
examinations to candidates, members, and other aa STATEMENT International Financial Statement Analysis has been
investment professionals encompassing the CFA and valuable resource.” nn designed to help you effectively evaluate fi nancial
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Program, CIPM Program, Lifelong Learning, Private —GARY JOHN PREVITS, E. Mandell de Windt Professor, statements in today’s volatile markets and uncer-
Wealth, Publications, and Conferences. Case Western Reserve University ee aa tain global economy.
HENNIE van GREUNING, CFA, is a Senior Advisor mm tt With International Financial Statement Analysis,
ANALYSIS
at the World Bank. His World Bank publication on “This text is the basis for analyzing and interpreting fi nancial statements of companies the distinguished team of Thomas Robinson,
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International Financial Reporting Standards has ap- around the globe and appeals to both the student and seasoned investor. It is an Hennie van Greuning, Elaine Henry, and Michael
peared in four editions. Mr. van Greuning has also ee oo Broihahn—together with a number of experienced
essential read and reference book for the global investor in search of alpha.”
coauthored Analyzing and Managing Banking Risk. contributors—provides you with complete cover-
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—CHRIS SENYEK, CFA, CPA, Managing Director–Accounting & Tax Policy nn age of the most important issues in this fi eld.
ELAINE HENRY, CFA, is an Assistant Professor of Research, ISI Group, Inc.
Accounting at the University of Miami, where she tt Written with both the established and aspiring
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teaches courses in accounting, fi nancial statement fi nancial professional in mind, this book will help
“This text is a valuable addition to the fi nancial statement analysis literature with its
analysis, and valuation. After working in corporate you understand the mechanics of the accounting
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fi nance at Lehman Brothers, strategy consulting at emphasis on fi nancial reporting from an IFRS perspective, while highlighting major process, which is the foundation for fi nancial
McKinsey & Company, and corporate banking at differences between IFRS and U.S. GAAP throughout. With IFRS rapid global adoption, nn reporting; comprehend the differences and similari-
Citibank, she obtained a PhD from Rutgers Univer- FF ties in income statements, balance sheets, and cash
it provides a fi nancial statement analysis foundation for analysts globally who will be
sity where she majored in accounting and minored fl ow statements around the globe; and assess the
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in fi nance. comparing IFRS and U.S. GAAP fi nancial statements in the coming years as conver- aa implications for securities valuation of any fi nancial
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gence continues. The authors’ integration of the IFRS framework throughout the text statement element or transaction. You’ll also dis-
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MICHAEL A. BROIHAHN, CFA, is an Associate cover how different fi nancial analysis techniques—
is particularly noteworthy, since it is the fi rst source of guidance that professionals
Professor of Accounting and the Director of Gradu- yy aa such as ratio analysis and common-size fi nancial
ate Programs at Barry University in Miami, Florida. utilize when applying IFRS in practice.” statements—can provide valuable clues into a
His teaching and research interests encompass —DAVID R. CAMPBELL SR., Professor of Accounting, Drexel University ss nn company’s operations and risk characteristics.
fi nancial accounting, auditing, and professional ii
ethics. He currently serves CFA Institute in a num- Along the way, you’ll also become familiar with
ss cc
ber of capacities. many other essential aspects of this discipline,
including the importance of income tax accounting
Don’t forget to pick up the International Financial Statement Analysis Workbook. ii
and reporting, the diffi culty of measuring the value
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Jacket Design: Loretta Leiva A companion study guide that mirrors this text chapter by chapter. of employee compensation, and the impact of for-
Jacket Illustration: © Getty Images eign exchange rates on the fi nancial statements of
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a multinational corporation.
And to enhance your understanding of the tools
and techniques presented here, don’t forget to
pick up the International Financial Statement Analysis
Workbook. This companion guide contains carefully
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INTERNATIONAL
FINANCIAL
STATEMENT
ANALYSIS
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CFA Institute is the premier association for investment professionals around
the world, with over 95,000 members in 134 countries. Since 1963 the orga-
nization has developed and administered the renowned Chartered Financial
Analyst® Program. With a rich history of leading the investment profession,
CFA Institute has set the highest standards in ethics, education, and profes-
sional excellence within the global investment community, and is the fore-
most authority on investment profession conduct and practice.
Each book in the CFA Institute Investment Series is geared toward indus-
try practitioners, along with graduate-level fi nance students, and covers the
most important topics in the industry. The authors of these cutting-edge
books are themselves industry professionals and academics and bring their
wealth of knowledge and expertise to this series.
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INTERNATIONAL
FINANCIAL
STATEMENT
ANALYSIS
Thomas R. Robinson, CFA
Hennie van Greuning, CFA
Elaine Henry, CFA
Michael A. Broihahn, CFA
John Wiley & Sons, Inc.
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Copyright © 2009 by CFA Institute. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
International fi nancial statement analysis / Thomas R. Robinson . . . [et al.].
p. cm.—(CFA Institute investment series)
Includes index.
ISBN 978-0-470-28766-8 (cloth)
1. Financial statements. 2. International business enterprises—Accounting. I. Robinson, Thomas R.
HF5681.B2I5788 2008
657'.3—dc22
2008014644
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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CONTENTS
Foreword xvii
Preface xix
Acknowledgments xxiii
Introduction xxv
CHAPTER 1
Financial Statement Analysis: An Introduction 1
Learning Outcomes 1
1. Introduction 2
2. Scope of Financial Statement Analysis 2
3. Major Financial Statements and Other Information Sources 5
3.1. Financial Statements and Supplementary Information 6
3.2. Other Sources of Information 16
4. Financial Statement Analysis Framework 18
4.1. Articulate the Purpose and Context of Analysis 19
4.2. Collect Data 20
4.3. Process Data 21
4.4. Analyze/Interpret the Processed Data 21
4.5. Develop and Communicate Conclusions/Recommendations 21
4.6. Follow Up 22
5. Summary 22
Practice Problems 23
CHAPTER 2
Financial Reporting Mechanics 25
Learning Outcomes 25
1. Introduction 26
2. The Classifi cation of Business Activities 26
3. Accounts and Financial Statements 27
3.1. Financial Statement Elements and Accounts 28
3.2. Accounting Equations 30
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vi Contents
4. The Accounting Process 36
4.1. An Illustration 36
4.2. The Accounting Records 36
4.3. Financial Statements 50
5. Accruals and Valuation Adjustments 52
5.1. Accruals 52
5.2. Valuation Adjustments 54
6. Accounting Systems 55
6.1. Flow of Information in an Accounting System 55
6.2. Debits and Credits 55
7. Using Financial Statements in Security Analysis 57
7.1. The Use of Judgment in Accounts and Entries 57
7.2. Misrepresentations 58
8. Summary 59
Practice Problems 59
Appendix 2A: A Debit/Credit Accounting System 62
CHAPTER 3
Financial Reporting Standards 79
Learning Outcomes 79
1. Introduction 80
2. The Objective of Financial Reporting 80
3. Financial Reporting Standard-Setting Bodies and Regulatory Authorities 82
3.1. International Accounting Standards Board 83
3.2. International Organization of Securities Commissions 83
3.3. Capital Markets Regulation in Europe 84
3.4. Capital Markets Regulation in the United States 85
4. Convergence of Global Financial Reporting Standards 87
5. The International Financial Reporting Standards Framework 89
5.1. Objective of Financial Statements 89
5.2. Qualitative Characteristics of Financial Statements 91
5.3. Constraints on Financial Statements 92
5.4. The Elements of Financial Statements 92
5.5. General Requirements for Financial Statements 94
6. Comparison of IFRS with Alternative Reporting Systems 98
6.1. U.S. GAAP 98
6.2. Implications of Other Reporting Systems 99
6.3. Reconciliation of Financials Prepared According to Different Standards 101
7. Effective Financial Reporting 102
7.1. Characteristics of an Effective Financial Reporting Framework 102
7.2. Barriers to a Single Coherent Framework 102
8. Monitoring Developments in Financial Reporting Standards 104
8.1. New Products or Types of Transactions 104
8.2. Evolving Standards and the Role of CFA Institute 105
8.3. Company Disclosures 106
9. Summary 109
Practice Problems 110
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Contents vii
CHAPTER 4
Understanding the Income Statement 113
Learning Outcomes 113
1. Introduction 114
2. Components and Format of the Income Statement 114
3. Revenue Recognition 118
3.1. General Principles 119
3.2. Revenue Recognition in Special Cases 121
3.3. Implications for Financial Analysis 128
4. Expense Recognition 129
4.1. General Principles 130
4.2. Issues in Expense Recognition 134
4.3. Implications for Financial Analysis 139
5. Nonrecurring Items and Nonoperating Items 139
5.1. Discontinued Operations 140
5.2. Extraordinary Items 140
5.3. Unusual or Infrequent Items 141
5.4. Changes in Accounting Standards 142
5.5. Nonoperating Items: Investing and Financing Activities 143
6. Earnings Per Share 144
6.1. Simple versus Complex Capital Structure 144
6.2. Basic EPS 145
6.3. Diluted EPS 146
7. Analysis of the Income Statement 152
7.1. Common-Size Analysis of the Income Statement 152
7.2. Income Statement Ratios 154
8. Comprehensive Income 157
9. Summary 160
Practice Problems 161
CHAPTER 5
Understanding the Balance Sheet 165
Learning Outcomes 165
1. Introduction 166
2. Components and Format of the Balance Sheet 166
2.1. Structure and Components of the Balance Sheet 167
2.2. Format of the Balance Sheet 170
3. Measurement Bases of Assets and Liabilities 177
3.1. Current Assets 181
3.2. Current Liabilities 184
3.3. Tangible Assets 187
3.4. Intangible Assets 187
3.5. Financial Instruments: Financial Assets and Financial Liabilities 192
4. Equity 194
4.1. Components of Equity 194
4.2. Statement of Changes in Shareholders’ Equity 196
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viii Contents
5. Uses and Analysis of the Balance Sheet 200
5.1. Common-Size Analysis of the Balance Sheet 201
5.2. Balance Sheet Ratios 207
6. Summary 210
Practice Problems 211
CHAPTER 6
Understanding the Cash Flow Statement 215
Learning Outcomes 215
1. Introduction 216
2. Components and Format of the Cash Flow Statement 217
2.1. Classifi cation of Cash Flows and Noncash Activities 217
2.2. A Summary of Differences between IFRS and U.S. GAAP 219
2.3. Direct and Indirect Cash Flow Formats for Reporting
Operating Cash Flow 221
3. The Cash Flow Statement: Linkages and Preparation 228
3.1. Linkages of the Cash Flow Statement with the
Income Statement and Balance Sheet 228
3.2. Steps in Preparing the Cash Flow Statement 230
3.3. Conversion of Cash Flows from the Indirect to the Direct Method 242
4. Cash Flow Statement Analysis 243
4.1. Evaluation of the Sources and Uses of Cash 243
4.2. Common-Size Analysis of the Statement of Cash Flows 246
4.3. Free Cash Flow to the Firm and Free Cash Flow to Equity 250
4.4. Cash Flow Ratios 251
5. Summary 253
Practice Problems 254
CHAPTER 7
Financial Analysis Techniques 259
Learning Outcomes 259
1. Introduction 260
2. The Financial Analysis Process 261
2.1. The Objectives of the Financial Analysis Process 261
2.2. Distinguishing between Computations and Analysis 261
3. Analysis Tools and Techniques 264
3.1. Ratios 265
3.2. Common-Size Analysis 270
3.3. The Use of Graphs as an Analytical Tool 275
3.4. Regression Analysis 276
4. Common Ratios Used in Financial Analysis 276
4.1. Interpretation and Context 277
4.2. Activity Ratios 278
4.3. Liquidity Ratios 284
4.4. Solvency Ratios 288
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