TENTH EDITION Lyn M. Fraser Aileen Ormiston International Edition contributions by Abhik Kumar Mukherjee St. Xavier's College, Kolkata PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Preface to the Tenth Edition 11 Organization of the Tenth Edition 12 Uses for the Tenth Edition 14 Features of the Tenth Edition 15 Acknowledgments 17 About the Authors 19 CHAPTER 1 Financial Statements: An Overview 21 Map or Maze 21 Usefulness 23 Volume of Information 24 Where to Find a Company's Financial Statements 27 The Financial Statements 28 Notes to the Financial Statements 29 Auditor's Report 30 Financial Reporting Reforms 31 Management Discussion and Analysis 32 Five-Year Summary of Selected Financial Data and Market Data 34 Pandora (a.k.a. "PR Fluff") 34 Proxy Statement 35 Missing and Hard-to-Find Information 35 Complexities 37 Accounting Choices 37 The Future of Financial Statements 38 Quality of Financial Reporting 38 Timing of Revenue and Expense Recognition 38 Discretionary Items 39 The Journey Through the Maze Continues 39 APPENDIX 1A Sage Inc. 40 Self-Test 52 Study Questions and Problems 55 Case 1.1 Intel Case 56
6 Contents Case 1.2 Avnet Comprehensive Analysis Case Using the Financial Statement Analysis Template 57 Case 1.3 Mattel Inc. 58 Case 1.4 Apple Inc. 59 CHAPTER 2 The Balance Sheet 67 Financial Condition 67 Consolidation 68 Balance Sheet Date 68 Comparative Data 68 Common-Size Balance Sheet 68 Assets 71 Current Assets 71 Cash and Cash Equivalents 71 Marketable Securities 71 Accounts Receivable 73 Inventories 75 Inventory Accounting Methods 76 Prepaid Expenses 79 Property, Plant, and Equipment 79 Straight Line 81 Accelerated 81 Goodwill 83 Other Assets 83 Liabilities 84 Current Liabilities 84 Accounts Payable 84 Short-Term Debt 84 Current Maturities of Long-Term Debt 84 Accrued Liabilities 85 Unearned Revenue or Deferred Credits 86 Deferred Federal Income Taxes 87 Long-Term Debt 90 Capital Lease Obligations 90 Pensions and Postretirement Benefits 90 Commitments and Contingencies 91 Stockholders' Equity 92 Common Stock 92 Additional Paid-in Capital 92 Retained Earnings 93 Other Equity Accounts 93 Quality of Financial Reporting The Balance Sheet 95 Other Balance Sheet Items 96 Self-Test 96 Study Questions and Problems 101
Case 2.1 Intel Case - 106 Case 2.2 Avnet Comprehensive Analysis Case Using the Financial Statement Analysis Template 107 Case 2.3 Logitech International S.A. 108 Case 2.4 Walgreen Co. and Subsidiaries 114 CHAPTER 3 Income Statement and Statement of Stockholders' Equity 117 The Income Statement 118 Common-Size Income Statement 120 Net Sales 120 Cost of Goods Sold 121 Gross Profit 122 Operating Expense 124 Operating Profit 127 Other Income (Expense) 127 Equity Earnings 128 Earnings Before Income Taxes/Effective Tax Rate 130 Special Items 130 Net Earnings * 131 Earnings per Common Share 131 Comprehensive Income 132 The Statement of Stockholders' Equity 133 Earnings Quality, Cash Flow, and Segmental Accounting 135 APPENDIX 3A A Guide to Earnings Quality 136 Self-Test 154 Study Questions and Problems 158 Case 3.1 Intel Case 161 Case 3.2 Avnet Comprehensive Analysis Case Using the Financial Statement Analysis Template 162 Case 3.3 Taser International Inc. 163 Case 3.4 Zebra Technologies Corporation 166 CHAPTER 4 Statement of Cash Flows 168 Why Cash Flow Is Important: An Example 169 Statement of Cash Flows: Basic Principle 170 Preparing a Statement of Cash Flows 172 Calculating Cash Flow from Operating Activities 177 Indirect Method 177 Cash Flow from Investing Activities 179 Cash Flow from Financing Activities 180 Change in Cash 180 Contents 7
8 Contents Analyzing the Statement of Cash Flows 181 Cash Flow from Operations 181 Nocash Corporation 183 Sage Inc.: Analysis of the Statement of Cash Flows 185 Sage Inc. Analysis: Cash Flow from Operating Activities 185 Summary Analysis of the Statement of Cash Flows 186 Analysis of Cash Inflows 187 Analysis of Cash Outflows 188 Qualitative Issues Relating to the Statement of Cash Flows 188 Are We There Yet? 190 APPENDIX 4A Statement of Cash Flows - Direct Method 191 Self-Test 195 Study Questions and Problems 198 Case 4.1 Intel Case 205 Case 4.2 Avnet Comprehensive Analysis Case Using the Financial Statement Analysis Template 206 Case 4.3 Gerber Scientific Inc. 207 Case 4.4 Agilysys Inc. 209 CHAPTER 5 The Analysis of Financial Statements 213 Objectives of Analysis 213 Sources of Information 215 Proxy Statement 215 Auditor's Report 215 Management Discussion and Analysis 215 Supplementary Schedules 216 Form 10-K and Form 10-Q 216 Other Sources 216 Tools and Techniques 217 Common-Size Financial Statements 218 Key Financial Ratios 219 Liquidity Ratios: Short-Term Solvency 221 Cash Conversion Cycle or Net Trade Cycle 224 Activity Ratios: Asset Liquidity, Asset Management Efficiency 225 Leverage Ratios: Debt Financing and Coverage 226 Profitability Ratios: Overall Efficiency and Performance 229 Market Ratios 231 Analyzing the Data 233 Background: Economy, Industry, and Firm 234 Short-Term Liquidity 235 Operating Efficiency 237 Capital Structure and Long-Term Solvency 237 Profitability 241
Relating the Ratios The Du Pont System 242 Projections and Pro Forma Statements 242 Summary of Analysis 242 Financial Statements: A Map 245 APPENDIX 5A The Analysis of Segmental Data 247 Self-Test 252 Study Questions and Problems 258 Case 5.1 Intel Case 264 Case 5.2 Avnet Comprehensive Analysis Case Using the Financial Statement Analysis Template 265 Case 5.3 Spartech Corporation 266 Case 5.4 Applied Materials Inc. 277 APPENDIXES A Summary of Financial Ratios 286 B Solutions to Self-Tests 289 C Glossary 291 Index 299 Contents 9