1 FUNDAMENTAL CONCEPTS ANDINTRODUCTION TO FINANCIAL REPORTING 1
Development of Generally Accepted Accounting Principles(GAAP) 1
American Institute of Certified Public Accountants(AICPA)·Financial Accounting Standards Board(FASB)·OperatingProcedure for Statements of Financial Accounting Standards(SFAS)·FASB Conceptual FrameworkAdditional Input—American Instit 10
Emerging Issues Task Force(EITF) 11
Traditional Assumptions of the Accounting Model 11
Business Entity·Going Concern or Continuity·TimePeriod·Monetary Unit·Historical Cost·Conservatism·Realization·Matching·Consistency·Full Disclosure·Materiality·Industry Practices·Transaction Approach·Present Value Considerat 23
Questions 23
Problems 27
Case 1-1 Standards Overload? 33
Case 1-2 Standard Setting: A Political Aspect 34
Case 1-3 Standard Setting: By the Way of the United StatesCongress 39
Case 1-4 Recognizing Revenue and Related Costs—ConsiderThese Situations(PartⅠ) 39
Case 1-5 Recognizing Revenue and Related Costs—ConsiderThese Situations(PartⅡ) 41
Case 1-6 Cash Basis—Accrual Basis? 42
Case 1-7 Going Concern? 43
Case 1-8 Economics and Accounting:The Uncongenial Twins 44
Forms of Business Entities 47
2 INTRODUCTION TO FINANCIAL STATEMENTSAND OTHER FINANCIAL REPORTING TOPICS 47
The Financial Statements 48
Balance Sheet (Statement of Financial Position）·Income Statement（Statement of Earnings)·Statement of Owners Equity(Reconcilia-tion of Owners Equity Accounts)·Statement of Cash Flows（Statement of Inflows and Outflows of Cash)·Foot 52
Recording Transactions·Recording Adjusting Entries·Preparingthe Financial StatementsHuman Resources and Social Accounting 56
Auditor s Report 56
Management s Responsibility for Financial Statements·The SEC sIntegrated Disclosure System·ProxySummary Annual Report 66
Ethics 66
Harmonization of International Accounting Standards 68
Questions 71
Summary 71
Problems 73
Case 2-1 The CEO Retires 78
Case 2-2 The Dangerous Morality of Managing Earnings 81
Case 2-3 Frequent-Flier Awards—Tick-Tick,Tick-Tick,Tick-Tick 88
Case 2-4 International Accounting—Harmonization inPractice 89
3 BALANCE SHEET 93
Consolidated Statements 93
Accounting for Business Combinations 94
Basic Elements of the Balance Sheet 95
APB Opinion No.15·FASB Statement No. 128
Summary 134
Assets·Liabilities·Owners Equity·Quasi-Reorganization·Foreign Currency Translation·UnrealizedHolding Gains and Losses·Equity-Oriented DeferredCompensation·Employee Stock Ownership Plans(ESOPs)·Treasury Stock·Owners Equity in Un 134
Questions 135
Problems 138
Case 3-1 Balance Sheet Review 145
Case 3-2 Insight on Liabilities and Shareholders Equity 148
Case 3-3 Insight on Shareholders Investment 149
Case 3-4 Insight on Assets 150
Case 3-5 Selective Review of Balance Sheet 151
Case 3-6 Our Principal Asset Is Our People 154
Case 3-7 Brands Are Dead? 155
Case 3-8 Advertising—Asset? 155
4 INCOME STATEMENT 157
Basic Elements of the Income Statement 157
Net Sales(Revenues)·Cost of Goods Sold or Cost of Sales·Other Operating Revenue·Operating Expenses·OtherIncome and ExpenseSpecial Income Statement Items 160
(A)Unusual or Infrequent Item Disclosed Separately·(B)Equity in Earnings of Nonconsolidated Subsidiaries·Income Taxes Related to Operations·(C)DiscontinuedOperations·(D)Extraordinary Items·(E)CumulativeEffect of Change in Accountin 170
Retained Earnings 171
Dividends and Stock Splits 173
Summary 176
Questions 176
Problems 178
Case 4-1 Single-Step/Multiple-Step Income Statement 185
Case 4-2 Identify Nonrecurrent Items 186
Case 4-3 Review of Income 187
Case 4-4 Examination of Income Statement 188
Case 4-5 The Big Order 189
Ratio Analysis 191
5 BASICS OF ANALYSIS 191
Common-Size Analysis(Vertical and Horizontal) 192
Financial Statement Variations by Type of Industry 193
Review of Descriptive Information 196
Comparisons 199
Trend Analysis·Standard Industrial Classification Manual(SIC)·Industry Averages and Comparison with Competitors·Caution inUsing Industry AveragesRelative Size of Firm 217
Other Library Sources 217
Standard Poor s Reports·Standard Poor s Register of Corpora-tions,Directors,and Executives·Standard Poor s Analyst sHandbook·Standard Poor s Corporation Records·America sCorporate Families:TM The Billion Dollar Directory？· 221
Company s Intemet Home Page·Accounting-Oriented Home PagesThe Users of Financial Statements 223
Questions 225
Summary 225
Problems 227
6 AN ILLUSTRATION OF STATEMENT ANALYSIS:PART Ⅰ—COOPER TIRE RUBBER COMPANY 229
Cooper Tire Rubber Company Operations 229
Products and Sales·Raw Materials·Research,Development,andProduct Improvement 229
1995 Financial Statements for Cooper Tire Rubber Company 231
The Tire Industry 232
Questions 249
Problems 250
Case 6-1 Comprehensive Review of Statements 250
7 LIQUIDITY OF SHORT-TERM ASSETS;RELATED DEBT-PAYING ABILITY 253
Current Assets,Current Liabilities,and the Operating Cycle 253
Cash·Marketable Securities·Receivables·Inventories·Prepayments·Other Current Assets·Current LiabilitiesCurrent Assets Compared with Current Liabilities 279
Working Capital·Current Ratio·Acid-Test Ratio(QuickRatio)·Cash RatioOther Liquidity Considerations 286
Sales to Working Capital(Working Capital Turnover)·LiquidityConsiderations Not on the Face of the StatementsSummary 288
Questions 290
Problems 293
Case 7-1 LIFO-FIFO 309
Case 7-2 Rising Prices,a Time to Switch Off LIFO? 311
Case 7-3 The Other Side of LIFO 312
Case 7-4 Booming Retail 314
8 LONG-TERM DEBT-PAYING ABILITY 317
Income Statement Consideration when Determining Long-TermDebt-Paying Ability 317
Times Interest Earned·Fixed Charge CoverageBalance Sheet Consideration when Determining Long-TermDebt-Paying Ability 322
Debt Ratio·Debt/Equity Ratio·Debt to Tangible Net WorthRatio·Other Long-Term Debt-Paying Ability RatiosSpecial Items that Influence a Firm s Long-Term Debt-PayingAbility 332
Long-Term Assets Versus Long-Term Debt·Long-TermLeasing·Pension Plans·Postretirement Benefits Other thanPensions·Joint Ventures·Contingencies·Financial Instrumentswith Off-Balance-Sheet Risk and Financial Instruments withConcentra 355
Questions 356
Problems 358
Case 8-1 Deferred Taxes?The Answer Is Yes! 368
Case 8-2 Expensing Interest Now and Later 373
Case 8-3 Consideration of Leases 374
Case 8-4 Consider These Contingencies 376
Case 8-5 Insight on Pensions and Postretirement Benefits 377
Case 8-6 Retirement Plans Revisited 381
Case 8-7 Fair Value of Financial Instruments 382
9 ANALYSIS OF PROFITABILITY 385
Profitability Measures 385
Net Profit Margin·Total Asset Turnover·Return onAssets·DuPont Return on Assets·Interpretation ThroughDuPont Analysis·Variation in Computation of DuPont RatiosConsidering Only Operating Accounts·Operating IncomeMargin·Operating As 400
Segment Reporting 400
Gains and Losses that Bypass the Income Statement 404
Interim Reports 406
Summary 408
Questions 410
Problems 411
Case 9-1 Johnny s Self-Service Station 420
Case 9-2 The Tale of the Segments 421
Case 9-3 Insights on Geographic Area 424
Case 9-4 Profitability Analysis 425
10 ANALYSIS FOR THE INVESTOR 429
Leverage and Its Effect on Earnings 429
Definition of Financial Leverage and MagnificationEffects·Computation of the Degree of FinancialLeverage·Summary of Financial LeverageEarnings per Common Share 433
Price/Earnings Ratio 436
Percentage of Earnings Retained 437
Dividend Payout 438
Dividend Yield 440
Book Value per Share 440
Stock Options 441
Stock Appreciation Rights 444
Summary 445
Questions 446
Problems 447
Case 10-1 Stock Split 454
Case 10-2 View This Investment 457
Case 10-3 Stock Option Plan 460
Case 10-4 Consideration of Stock Dividend 462
Case 10-5 Stock Split Revisited 468
11 STATEMENT OF CASH FLOWS 473
A Review of the Funds Statement 474
Basic Elements of the Statement of Cash Flows 477
Financial Ratios and the Statement of Cash Flows 486
Procedures for Development of the Statement of Cash Flows 490
Operating Cash Flow/Current Maturities of Long-Term Debt andCurrent Notes Payable·Operating Cash Flow/TotalDebt·Operating Cash Flow per Share·Operating Cash Flow/Cash DividendsAlternative Cash Flow 490
Summary 499
Questions 499
Problems 501
Case 11-1 Cash Flow Tales 517
Case 11-2 Watch the Cash 519
Case 11-3 Rapidly Expanding 521
Case 11-4 Cash Movements and Periodic Income Determination 530
12 STATEMENT ANALYSIS:PART Ⅱ—COOPER TIRE RUBBER COMPANY 533
Eleven-Year Summary 533
Comments Related to Eleven-Year Summary 533
Liquidity·Long-Term Debt-PayingAbility·Profitability·Investor Analysis·OtherManagement s Discussion and Analysis 541
Selected Comments Under Financial Condition ·SelectedComments Under Results of Operations Five-Year Ratio Comparison 544
Liquidity·Long-Term Debt-PayingAbility·Profitability·Investor AnalysisRatio Comparison with Industry Averages 548
Liquidity·Long-Term Debt-PayingAbility·Profitability·Investor AnalysisSummary 552
13 EXPANDED UTILITY OF FINANCIAL RATIOS 553
Financial Ratios as Perceived by Commercial Loan Departments 553
Most Significant Ratios and Their Primary Measure·RatiosAppearing Most Frequently in Loan AgreementsFinancial Ratios as Perceived by Corporate Controllers 555
Most Significant Ratios and Their Primary Measure·Key FinancialRatios Included as Corporate ObjectivesFinancial Ratios as Perceived by Certified Public Accountants 558
Financial Ratios as Perceived by Chartered Financial Analysts 559
Financial Ratios Used in Annual Repots 560
Degree of Conservatism and Quality of Earnings 562
Inventory·Fixed Assets·Intangible Assets·Pensions·LeasesForecasting Financial Failure 564
Univariate Model·Multivariate ModelAnalytical Review Procedures 568
Management s Use of Analysis 569
Use of LIFO Reserves 569
Summary 573
Graphing Financial Information 573
CoNTENTSQuestions 576
Problems 578
Case 13-1 What Position? 599
14 IMPACT OF CHANGING PRICES ON FINANCIALSTATEMENTS 603
Constant Dollar Accounting(Price-Level) 603
Current Cost Accounting 612
Financial Reporting and Changing Prices 614
Summary 617
Questions 617
Problems 619
15 STATEMENT ANALYSIS FOR SPECIAL INDUSTRIES:BANKS,UTILITIES,OIL AND GAS,TRANSPORTATION,INSURANCE,REAL ESTATE COMPANIES 625
Banks 625
Balance Sheet·Income Statement·Ratios for BanksElectric Utilities 636
Financial Statements·Ratios for Electric UtilitiesOil and Gas 646
Successful Efforts Versus Full Cost·Supplementary Informationon Oil and Gas Exploration,Development,and ProductionActivities·Cash FlowTransportation 650
Financial Statements·RatiosInsurance 657
Balance Sheet Under GAAP·Income Statement UnderGAAP·RatiosReal Estate Companies 665
Summary 666
Questions 671
Problems 673
Case 15-1 Allowance for Funds 678
Case 15-2 In Progress 681
Case 15-3 Loans and Provision for Loans 685
Case 15-4 You Can Bank on It 686
Case 15-5 Proved Reserves 691
Case 15-7 Insight 693
Case 15-6 Heavenly Flying 693
16 PERSONAL FINANCIAL STATEMENTS ANDACCOUNTING FOR GOVERNMENTS ANDNOT-FOR-PROFIT ORGANIZATIONS 695
Personal Financial Statements 695
Form of the Statements·Suggestions for Reviewing the Statementof Financial Condition·Suggestions for Reviewing the Statement ofChanges in Net Worth·Illustration of Preparation of the Statementof Financial Condition·Illustration of P 705
Accounting for Not-For-Profit Organizations Other thanGovernments 710
1．SFAS No.93. Recognition of Depreciation by Not-for-ProfitOrganizations (August 1987)·2．SFAS No.116, Accounting forContributions Received and Contributions Made (June 1993)·3．SFAS No.117, Financial Statements of Not-for-Profit Org 722
Questions 725
Problems 726
Case 16-1 Governor Lucas-This Is Your County 731
COMPREHENSIVE CASE—Worthington Industries 741
GLOSSARY 759
BIBLIOGRAPHY 779
INDEX 789