&
ACCOUNTING
fr,r i\iIBAs
Ct /
I
s...,i.1:,1.... ,..
Financial & Managerial
Accounting for MBAs
Sixth Edition
Peter D. Easton
University of Notre Dame
Robert F. Halsey
Babson College
Mary Lea McAnally
Texas A&M University
To my daughters, Joanne and Stacey
-PDE
To my wife, Ellie, and children, Grace and Christian
-RFH
To my husband, Brittan, and my children, Loic, Cindy, Maclean, Lacey, Quinn, and Kay
-MLM
Cambridge Business Publishers
FINANCIAL & MANAGERI AL ACCOUNTING FOR MBAs, Sixth Editio n, by Pete r D. Easton,
Robert F. Halsey, and Mary Lea McAnally.
COPYRIGHT © 202 1 by Cambridge Business Publishers, LLC. Published by Cambridge
Business Pub lishers, LLC. Exclusive rig hts by Cambridge Business Publishers, LLC for
manufacture and export.
ALL RIGHTS RESERVED. No part of this publication may be reproduced, distributed, or stored
in a database or retrieval system in a ny form or by any means, without prior written consent of
Cambridge Business Publishers, LLC, including, but not limited to, in any network or other
electronic storage or transmission, or broadcast for distance learning.
Student Edition ISBN 978-1-61853-359-3
Bookstores & Faculty: to order this book, call 800-619-6473 or email
customerser vice@cambridgepub.com.
Students: to order this book, please visit the book's website and order directly online.
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 I
© Cambridge Business Publishers
Preface
Welcome to Financial & Managerial Accounting for MBA s. O ur main goal in writing this book was to satisfy the
needs of today's business manager by creating a contemporary, engaging, and user-oriented textbook. This book is
the product of extensive market research including focus groups, market surveys, class tests, manuscript reviews,
and interviews with fac ulty from around the world. We are grateful to the students and fac ulty who provided us
with usefu l feedback during the preparation of this book.
Target Audience
Financial & Managerial Accounting for MBAs is inte nded for use in full-time, part-time, executive , and evening
MBA programs that include a combined financ ial and managerial accounting course as part of the c urric ulum, and
one in which managerial decision making a nd analysis a re e mphasized. T his book easily accommodates minicourses lasting several days as well as extended courses lasting a fu ll semester.
Innovative Approach
Financial & Managerial Accounting for MBAs is managerially oriented and focuses on the most salient aspects of
accounting. It teaches MBA stude nts how to read, analyze, and inte rpret accounting data to make infom1ed business
decisions. This textbook makes accounting e ngaging, r e leva nt, and conte mpora r y. To that e nd, it consistently
incorporates r eal company data, both in the body of each mod ule and throug hout assignment material.
Flexible Structure
The MBA curricula, instructo r prefere nces, and course leng ths vary across colleges. Accordi ngly and to the extent
possible, the 25 modules that make up Financial & Managerial Accou111ingfor MBAs were designed independently
of one another. Thi s modular presentation e nables each college and instructor to "customize" the book to best fit
the needs of their students. O ur introduction and discussion of fi nanc ial statements constitute Modules I , 2, and
3. Module 4 presents the analys is of financial stateme nts with an emphasis on profita bility analysis . Modules 5
through IO hig hlight major financ ia l accounting topics includi ng assets, liabi lities, equity, and off-balance-sheet
financing. Module 11 details the process for pre paring and analyzing the statement of cash flow. Module 12
explains forecasting financial stateme nts, and Mod ule 13 introduces s imple valuatio n mode ls. At the end of each
fi1ianc ial accounting module (Modules I through 13), we present an o ngoing analysis project that can be used as a
guide for an independent project. Like the rest of the book, the projec t is independent across the various modules.
Module 14 introduces managerial accounting and is followed by a discussion of cost behavior and cost estimatio n
in Module 15. Module 16 explains cost-volume-profit analysis while Module 17 focu ses on using relevant costs
to make business decisions. Job and process costing are covered in a single module, Module 18, followed by
activity-based costing in Module 19 a nd the assignment of indirect costs in Module 20. T he rema ining modules,
21 through 25, hig hlight managerial accounting topics ranging from operational budgets and variance analysis
to segme nt reporting, product prici ng, and capital budgeting. At the e nd of the book, we include several useful
resources. Appendix A contains compound inte rest tables and formulas. Appendix B is a chart o f accounts used
in the book. Appendix C is an illustrative case that applies the techniques described in Modules I through 13 to
an actual company, Harley-Davidson. Appe nd ix C can be used as a g uide, in conjunction with the module-end
project questions, by stude nts required to prepare a company analysis.
Managerial Emphasis
As MBA instructo rs, we recognize that the core MBA accounting course is not directed toward accounting majors.
Financial & Managerial Accounting for MBAs embraces this reality. T his book highlig hts r eporting, analysis,
interpreta tion, and decisio n making. In the financial accounting modules, we incorporate the followi ng financial
sta tement effects template when re levant to train MBA students in understanding the economic ramifications
of transactions and their impact on all key fi nancial statements. This analytical tool is a great resource for MBA
students in learning accounting and applying it to the ir future courses and careers. Each transaction is identified in the
"Transaction" column. Then, the dollar amounts (positive o r negative) of the financial statement e ffects are recorded
in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow
effects (via the cash column) and the statement of stockholders' equity effects (via the contributed capital and earned
capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each
transaction (denoted by the arrow line from ne t income to earned capital). This template is instructive as it reveals the
financial impacts of transactio ns, and it provides insights into the effects of accounting choices.
iii
iv
Preface
© Cambridge Business Publishers
Balance Sheet
Debit . #
Credit.
.#
Acct. Name
Transaction
Cash
Asset
+ Noncash
Assets
=
. .
L1ab1Iities
+
Income Statement
c ontnb.
.
Capital
+ Earned
Capital
Jri
Revenues
_
Expenses
=
Net
Income
#
=
Acct Name
#
=
t
In the margin next to the financial statement
effects template are shown the related
journal entry and T-account effects.
The statement of cash flow effects
is reflected via the Cash Asset
column.
The statement of stockholders' equity
effects is reflected via the Contributed
Capital and Earned Capital columns.
Innovative Pedagogy
Focus Companies for Each Module
In the financial accounting portion of the book, each module's content is explained through the accounting and
reporting activ ities of real companies. To that end, each module incorporates a " focus company" for special
emphasis and demonstratio n. The enhanced instructional value of focus companies comes from the way they
engage MBA students in real analysis and interpretation. Focus companies were selected based on the industries
that MBA students ty pically enter upon graduation. We apply a sim ilar approach to the managerial accounting
modules, but limited access to internal accounting information prevents us from illustrating all managerial
accounting topics using real company data. We do, however, incorporate real-world examples throughout each
module. Each managerial accounting module is presented in context using real-world scenarios from a variety of
service, retail, and manufacturing companies. The follow ing table lists focus companies by module.
MODULE 1
MODULE 2
MODULE 3
MODULE 4
MODULE 5
MODULE 6
MODULE 7
MODULE 8
MODULE 9
Apple
Apple
Apple
Boston Scientific
Pfizer
Home Depot
Verizon
Johnson & Johnson
Google
MODULE 10
MODULE 11
MODULE 12
MODULE 13
MODULE 14
MODULE 15
MODULE 16
MODULE 17
MODULE 18
Microsoft, Deere, HP
Starbucks
Procter & Gamble
Procter & Gamble
Primark
Square
Razor USA, LLC
Uber
Samsung
MODULE 19 Unilever
MODULE 20 Whole Foods
MODULE 21 Roku
MODULE 22 Pinterest
MODULE 23 Southwest Airlines
MODULE 24 Volkswagen
MODULE 25 Amazon
APPENDIX C Harley-Davidson
Real Company Data Throughout
Market research and rev iewer feedback tell us that one of instructors' greatest frustrations w ith other MBA
textbooks is their lack of real company data. We have gone to great lengths to incorporate real company data
throughout each module to reinforce important concepts and engage MBA students. We engage nonaccounting
MBA students specializing in finance, marketing, management, real estate, operations, and so forth, w ith companies
and scenarios that are relevant to them. For representative examples, SEE PAGES 2-6, 4-16, 6-23, 7-3, 8-4, 9-10,
10-4, 11-6, and 12-17.
Decision-Making Orientation
One primary goal of an MBA accounting course is to teach students the sk ill s needed to apply their accounting
knowledge to solv ing real business problems and making informed business decisions. With that goal in mind,
Managerial Decision boxes in each module encourage students to apply the material presented to solv ing actual
business scenarios. For representative examples, SEE PAGES 4-26, 5-4, 8-11, 10-8, and 11-15. Each financ ial
module al so includes Analysis Insight boxes that provide insight into data analysis techniques and model s that
financial analysts typically use. For representative examples, SEE PAGES 2-11, 6-13, 7-15, 9-17, 10-9, 11-28,
and 12-24.
Reviews for Each Learning Objective
Accounting can be challeng ing-especially for MBA students lacking business experience or previous exposure to
business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include
reviews that require students to recall and apply the accounting techniques and concepts described in each module.
Excellent, Class-Tested Assignment Materials
Excellent assignment material is a must-have component of any successful textbook (and class). In keeping w ith
the rest of the book, we used real company data extensivel y. We also ensured that assignments reflect our belief
© Cambridge Business Publishers
Preface
v
that MBA students should be trained in analyzing accounting information to make business decisions, as opposed
to working on mechanical bookkeeping tasks. Assignments encourage students to analyze accounting information,
interpret it, a nd apply the knowledge gained to a busi ness decision.
New Edition Changes
Based on classroom use and reviewer feedback, a number of substantive changes have been made in this edition
to further enhance the MBA students' experie nces:
Financial Accounting Modules (1·13)
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Digital d elivery enhanced To serve the expanding delivery modes of MBA education, we updated our
in-chapter Reviews and Guided Example videos for all chapters (each Learning Objective has a Review/Guided
Example, as well as a corresponding eLecture).
Data visualization and analytics Companies a re increasingly using data visual ization (charts, pictures, and
graphs) to more effectively convey financial information. To support student learning, each module opens
with a data dashboard and includes end-of-chapter assignments that present data g raphically and require students to analyze and inte rpret the data v isualizations. We provide students with o nline access (via MBC) to
author-created PowerBI dashboards where they can interact with the data and learn how to create their own
data visualizations.
Content reflects new standards This edition covers new standards on Revenue Recognition, Leases, and
Marketable Securities. It also includes in-de pth discussion of the Tax Cuts and Jobs Act and how new tax law
impacts fi nancial analysis.
Revenue, Operating Expe nses, and Receivables We expanded the d iscussion of revenue recognition following the new standard and included an illustration and analysis of Microsoft's revenue recognition. We
also discuss sales returns and allowances and the effects of fore ign c urrency exchange rates. Our operating expenses discussion introduces the effects of the Tax Cuts and Jobs Act, with a deepe r discussion in Module I0.
Inventories Our d iscussion of cash conversion cycle includes an illustration o f m anagement actions undertaken by Home Depot to streamline its supply c hain to reduce days inventory outstanding.
Bond rating A new section in Modu le 7 discusses Credit Analysis, including how bond ratings are determined. We provide a n example of S&P Global's ratings for Verizon, follow ing its purchase of Vodafone's
interest in Verizon Wireless. We also simplify our discussion of bond pricing.
Share-based compensation Module 8 includes an expanded discussion of share-based compensation, and
Tesla 's use of convertible debt.
Investments We include a dee per di scussion of the detennination of fair value, including an expanded
d iscussion of Level 3 inputs to value securities with limited marke ts and the accounting for those securities.
Module 6 includes a new, expanded discussion of the new goodwill impainnent standard.
Derivatives We markedly rev ised our discussion of derivatives to simplify the exposition while maintaining
the analysis coverage.
Equity Carve-Outs The discussion of equity carve-outs is simplified and we provide examples of the accounting for Sell-offs, IPOs, Spin-offs, and Split-offs. We also discuss the deconsolidation o f a subsidiary.
Leasing Module 10 reflects the new lease standard including the analysis of right-of-use assets and di fferences between operating and fi nancial leases. We d iscuss retrospective and prospective adoption, using
Microsoft and Delta Airlines.
Pension disclosures We markedly revised our discussion of pension accounting with a detailed illustration
of the pension footnote disclosures. We include a section on fa ir val uation of pens ion obligations and the accounting for plan settle ments.
Taxes We provide an in-depth, compl.e tely revised , discussion of income tax expense, including the effects
of the Tax C uts and Jobs Act and the a nalysis implications during the transition period.
Updated Assignme nts We updated all data and financial statements throughout the book to reflect each
company's latest available financ ial statement fil ings and d isclosures. Assignments include curre nt financial
statement excerpts and reflect new standards for Revenue Recognition, Leases, and Marketable Securi ties
and the Tax Cuts and Jobs Act.
Managerial Accounting Modules (14-25)
•
•
•
Contemporary Topics a nd Examples : The authors have revised and added new Business Insight boxes
throughout each module to bring the accounting to life for students using current, real-world examples. Several new Research lflsight boxes have been incorporated throughout the text to emphasize the im portant
relationship between research and modem business.
Real Company Examples: Dozens of new, real company examples have been integrated throughout the text.
Revised Assignments: Nearly two-thirds of the assignments in each module have been revised and updated.
vi
Preface
© Cambridge Business Publishers
Fundamentals of Financial Accounting Tutorial
This interactive tutorial is intended for use in programs that either require or would like to offer a pre-term tutorial
that creates a baseline of accounting knowledge for students with little to no prior exposure to financ ial accounting.
Initially deve loped as a pre-term tutorial for first-year MBA students, this product can be used as a warm-up
for any introductory-level financial accounting course. It is designed as an asynchronous, interactive, self-paced
experience for students.
Available Learning Modules (You Select)
1. Introducing Financial Accounting (approximate completion time 2 hours)
2. Constructing Financia l Statements (approximate completion time 4 hours)
3. Adjusting Entries and Completing the Accounting Cycle (approximate completion time 4 hours)
4. Reporting and Analyzing Cash Flows (approximate completion time 3.5 hours)
5. Analyzing and Interpreting Financial Statements (approximate completion time 3.5 hours)
6. Excel and Time-Value of Money Basics (approximate completio n time 2 hours)
This is a separate, saleable item. Contact your sales representative to receive more information or email
customerservice@cambrideepub.com.
Supplement Package
....
~
Mil
For Instructors
!11
BusinessCourse: A web-based
learning and assessment program intended to complement your textbook and
classroom instruction. This easy-to-use course management system grades homework automatically and provides
students with additional he lp when you are not available. In addition, detailed diagnostic tools assess class and
individual performance. myBusinessCourse is ideal for online courses or traditional face-to-face courses for
icon in the margin are
which you want to offer students more resources to s ucceed. Assig nments with the
available in myBusinessCourse. eLecture videos ~ · are available for the module Learning Objectives, and Guided
Examples "' for the in-module Reviews are avai lable for you to assign students.
ft
Solutions Manual: Created by the authors, the Solutions Manual contains complete solutions to all assignments.
PowerPoint: Created by the authors, the PowerPoint slides outline key elements of each module.
Test Bank: Written by the authors, the test bank includes multiple-choice items, matching questions, short essay
questions, and problems.
Website: All instructor materials are accessible via the book 's website (password protected) along with other
useful links and information. www.cambridgepub.com
....
~
Ml
For Students
!11
BusinessCourse is a
web-based learning and assessment program intended to complement your textbook and
faculty instruction. This easy-to-use_JZrogram provides you with additional help when your instructor is not
available. Guided Example videos 0 are available for all in-module Reviews, and eLecture videos ' are
available for each Leaming Objective. With Instructor-Led MBC courses, assignments with the
icon in
the margin are also available and are automatically graded. Access is free w ith new copies o f this textbook (look
for page containing the access code towards the front of the book). If you buy a used copy of the book, you can
purchase access at www.mybusinesscourse.com.
e
eLectures: Each Learning Objective within a module includes an eLecture video available in our online learning
management system, myBusinessCourse (see above for more inform ation).
Guided Examples: Guided Example videos are available for each in-module Review, also in myBusinessCourse
(see above for more information).
Website: Useful links are available to students free of charge on the book's website.
Technology That Improves Learning and Complements
Faculty Instruction
1!'-1
BusinessCoume is an online learning and assessment program intended to complement your textbook and
faculty instruction. Access to myBusinessCourse is FREE ONLY with the purchase of a new textbook, but can
be purchased separately. MBC is ideal for faculty seeking opportunities to augment their course with an online
component. MBC is also a turnkey solution for online courses. The following are some of the features of MBC.
Preface
© Cambridge Business Publishers
vii
Increase Student Readiness
•
•
•
•
•
eLectures cover each chapter's learning objectives and concepts. Consistent with the text
and created by the authors, these videos are ideal for remediation and online instruction.
Guided Examples are narrated video demonstrations created by the authors that show students how to solve the Rev iew problems from the textbook.
Immediate feedback with auto-graded homework.
Test Bank questions that can be incorporated into your assignments.
Instructor gradebook with immediate g rade results.
Make Instruction Needs-Based
•
•
•
Identify where your students are struggling and customize your instruction to
address their needs.
Gauge how your entire class or individual students are performing by viewing the
easy-to-use gradebook.
Ensure your students are gett ing the additional rein forcement and direction they
need between class meetings.
,.._,...,, .,.,....
..·..
........
:~-·- ..,,..,
_
..
....._..,..._,
---·Eilll
--·
--::.:::::----·E:::::3
---·C=:::J
Provide Instruction and Practice 24/7
•
•
•
•
Assign homework from your Cambridge Business Publishers' textbook and have MBC grade
it for you automatically.
With our videos, your students can revisit accounting topics as often as they like or until they
master the topic.
Make homework due before class to ens ure students enter your classroom prepared.
For an additional fee, upgrade MBC to include the eBook and you have all the tools needed
for an onl ine course.
Integrate with LMS
~ integrates with
many learning management systems, including Canvas,
Blackboard, Moodie, D2L, Schoology, and Sakai. Your gradebooks sync automatically.
Acknowledgments
This book benefited greatly from the valuable feedback of focus group anendees, reviewers, students, and
colleagues. We are extreme ly grateful to them for the ir help in making this project a success.
Helen Adams, Unil'ersity of Washington
Ak inloye Akindayomi. UT- Rio Grande Valley
William Albrecht, Bowling Green Uni,·ersity
Ashiq Ali, Uni,-ersity ofTexas-Dallas
Beverley A lleyne. Belmollf University
Dan Am iram, Tel Aviv Unil'ersity
Walter Austin, Mercer Uni,·ersity
Steve Baginski, Unil'ersity ofGeorgia
Eli Bartov, New York Unil•ersity
Dan Bens, INSEAD
Den ny Beresford, Unil·ersity of Georgia
Richard Bernstein, The University ofToledo
J ames B iagi. Marywood Unil'ersity
J am es Bierstaker, Villanorn Unil'ersity
De nnis Bline, Bryallf Uni,·ersity
Susan Borkowski, LaSalle Unil'ersity
A. F aye Borthick, Georgia State University
Mark Bradshaw. Boston College
Gary Bridges, Unil'ersity of Texas-San Antonio
J oh n Briginshaw, Pepperdine Unil'ersity
Stephen Brown, Unil'ersity of Maryland
Ge ne Bryson, Unil'ersity of Alaba111a-H11111sville
1l1omas Buchman, Uni,•ersity ofColorado-Boulder
Bri an Cadman, The Unil'ersity of Utah
Edgar Carter, Unil'ersity of Massachuseus-Lowell
Mary Elle n Carter, Boston College
Judson Caskey. UCLA
Sand ra Cereola, James Madison University
Sumantra C hakravarty, CSU-Fullerton
Betty Chavis, CSU-Fullerton
Agnes Cheng, Louisiana State Uni,·ersitrl,afayeue
Tom C lausen, The University of Illinois-Springfield
Douglas C linton, Northem Jllinois University
Gary Colbert, University ofColorado-Denver
Joseph Comprix, Syracuse University
Carmen Cook, Baker University
Ellen Cook, University of Louisiana
Dav id Cooper, Baker Uni,•ersity
Michae l Coyne, Fai,field Unil'ersity
Araya Debessay, Unil'ersity of Delaware
Roger Debreceny. Uni,•ersity of Hawaii
Carol Dee, Unil'ersity ofCo/orado-Denl'er
Rosemond Desir. Colorado Stare University
Vicki Dickinson, University of Mississippi
Jeffrey Doyle, University of Utah
Dona ld Drake, Georgia State Uni,•ersity
Phil Drake, Ari:ona State University
Joanne Duke. San Francisco Srate University
Cindy Durtschi, DePaul Unil•ersity
Craig Emby, Simon Fraser Uni,·ersity
' These statistics are based on the results of two surveys in which 2,330 students participated.
Gerard Engeholm, Pace University
Ka thryn Epps, Kennesaw Stole University
Connie Faj ardo, National Unil'ersiry
Andrew Felo, No,•a So111heasrem Uni,·ersity
Bud Fe nnema, Florida Srare University
Mark Finn, Northwesrem University
Carol Fischer, Sr. Bonave11111re Uni,·ersity
Paul M. Fischer, Universiry ofWisconsin---Milwa11kee
T im Fogarty, Case Westem Reserl'e
Benjamin P. Foster, Universiry of Lo11isl'ille
Karen Foust. Tulane University
Nate Franke, University ofCalifomia-lrl'ine
Richa rd Frankel, Washington Uni,•ersity
David P. Franz, San Francisco Srare University
Mark Friedman, University of Miami
Peter Frischmann, /daho Srate University
Margaret Gagne, Marist College
Andy Garcia. Bowling Green Srate University
Maclean Gaulin, Rice Uni,•ersity
Karen Geiger, Ari:ona State Unil'ersity
John Giles, Norrh Carolina Stare Uni,•ersity
Dan Givoly, Pennsylmnia State Uni,•ersity
Julia Grant, Case Westem Reserve
Kr is Gulick, Uni,•ersiry of Iowa
Ka rl Hackenbrack, Vanderbilr Unil'ersity
viii
Preface
Michelle Hanlon, MIT
John Hassell, Indiana Uni,•ersity-lndianapolis
Bob Hartman, Unil'ersity of Iowa
Carla Hayn, UCLA
Frank Hemn, Unil'ersity ofGeorgia
Michele Henney, Unirersiry of Oregon
Elaine Henry, Unil'er.,ity of Miami
Eleanor Henry, Southeast Missouri State University
James Hesford, Cornell Unil'ersity
Clayton Hock, Miami Uni,·ersity
Jay S. Holmen, Unil'ersity of Wisconsin-Eau Claire
David R. Honodel, Uni,•ersity of Denver
Judith Hora, University of San Diego
Herbert Hunt, CSU-Long Beach
Ric hard Hurley. Unil'ersiry ofC01111ecticur
Ross Jennings, University ofTexas
Eric N. Johnson, Indiana Uni,·ersit)--lndianapolis
Greg Jonas, Case Western Reserre
Bill Joyce, Bemidji State Uni,•ersity
Paul Juras, Wake Fore.,t University
Sanjay Kallapur, Indian School of Business
Greg Kane, Unfrersiry of Delaware
Victoria Kaskey. Ashland Unirersiry
Anthony Craig Ke ller, Missouri Stare University
Zafar Khan , Eastern Michigan University
Saleha Khumawala, University of Houston
Suzanne Kiess, Jackson College
Charles Kil e, Middle Tennessee University
Larry N. Killough, Virginia Tech Unil'eristy
Marinilka Kimbro, Unirersity of Washington
Ron King, Washington University
Mic hael Ki rschenheiter, Uni,-ersity of Illinois
John Koeplin, University of San Francisco
Phillip J. Ko rb, University of Baltimore
Susan Kulp, George Washington Unfrersiry
Krishna Kum ar, George Washington Uni,•ersity
Lisa Kutche r, Uni,·ersity ofOregon
William Lathen, Boise State University
James Ledwith, San Diego Stare University
Brian Leventhal, University of Illinois-Chicago
Elliot Levy, Bentley College
Pierre Liang, Camegie Mellon University
Cathy Zishang Liu , Uni,wsiry of Houston
Josh Livnat, New York University
Frank Lo ngo, Centenmy Uni,·ersity
Donna Losell, Uni,•ersity of Toronto
Barbara Lo'Ugee, Unirersity of San Diego
Yvonne Lu, Lehigh University
Luann Lync h, Uni,•ersity of Virginia-Darden
Jason MacGregor, Boy/or Unirersity
Lois Mahoney, Eastem Michigan Unil'ersity
Mic hael Maier. Unirersity of Alberta
Ron Mano, Westminster College
Ronald Marcusson, DePaul University
Ariel Marke levich, Suffolk Unirersiry
Linda M. Marquis, Northem Kenrudy University
Otto B. Martinson, Old Dominion University
© Cambridge Business Publishers
Katie Matt, SUNY Polytechnic
Jason Matthews, Univer.,ity ofGeorgia
Brian McAllister, UC-Colorado Springs
Bruce McClain, Clere/and State University
Karen Mc Dougal, St. Joseph's Unirersity
James Mc Kinney, Uni,•ersity of Ma,y land
Gregory Merrill, Sai111 Mary's Uni,•ersity
Mich.ael J. Meyer, Uni,•ersity of Notre Dame
Greg Miller, Uni,•ersiry of Michigan
Donald Minyard, University ofAlabama-Tuscaloosa
Jose Miranda-Lopez, CSU-Fullerton
Me lanie Mogg, University of Minnesota
Steve Monahan, INSEAD
John Morris, Kansas State Unil'ersity
Philip Morris, Sam Houston Univenity
Dale Morse, University ofOregon
Dennis Murray, University ofColorado-Denver
Sandeep Nabar, Oklahoma State University
Suresh Nallareddy, Columbia University
Ramesh Narasimhan, Montclair State Uni l'ersity
Siva Nathan, Georgia State University
Joshua Neil. Colorado Uni,•ersity-Boulder
Doron Nissim, Columbia Uni,•ersity
Jeanie O ' Laughlin, Peppe11/ine University
Gary Olsen, Carivll Uni,•ersity
Stephen O wusu-Ansah, Houston Baptist Unirersity
Shail Pandit, University of Illinois-Chicago
Larry Paquette, Francis Marian Uni,·ersity
Susan Parker, Sama Clara University
William Pasewark. Texas Tech
Stephen Penman, Columbia University
Mark Penno, Unil'ersity of Iowa
Gary Peters, University ofArkansas
Kathy Petroni. Michigan State Uni,•ersity
Christine Pe trovits, New York University
Kirk Philipich, Uni,•ersiry of Michigan-Dearbom
Matthew Pic kard, University of New Mexico
Morton Pincus, UC--ln•ine
Lincoln Pinto, Concordia Uni ,•ersity
Kay Poston, Uni,•ersity of Indianapolis
Gordon Potter, Cornell University
Grace Pownall, Emory University
Ram Ramanan, University of Notre Dame
David Randolph, Xavier Uni,·ersity
Pau l R ecupero, Newbury College
Barbara Reider, Unirersity of Montana
Laura Ricke tt, Kent State Unil'ersity
Susan Riffe, Southern Methodist University
Maryanne Rouse, University of South Florida
Jack Ruhl, Westem Michigan Unirersity
Jane Saly, Unil'ersity of St. Thomas
Bruce Samuelson, Pepperdine Unil'ersity
Diane Satin, CSU-East Bay
Shahrokh Saudagaran, Uni,•ersity of Washington
Jeffrey Schatzberg, Unil'ersity of Arizona
Andrew Schmidt, Columbia Uni1-ersity
Chandra Seethamraju, Washington Unirersity
Stephen Sefcik, University of Washington
Galen Sevcik, Georgia State University
Ke nnech Shaw, Unil'ersity of Missouri
Lewis Shaw, Suff olk Unil'ersity
Todd Shawver, Bloomsburg Uni,•ersity
Evan Shoug h, UNC--Greensboro
Robin Shuler, Seaule Pacific Unil•ersity
Pau l Simko, Unil'ersity of Virginia-Darden
Andreas Simon, Pepperdine University
He nry Smith, 111, Ouerbein College
Kevin Smith, University of Kansas
Pam Smith, Northern Illinois Unil'ersity
Ro d Smith, Califomia State Unil'ersity-Long Beach
Hakjoon Song, The University of Akron
Xiaofei Song, Sailll Ma1y's Uni,•ersity
Sri Sridharan, Northwestem Unil'ersity
Charles Stanley, Baylor Unirersity
Jens Stephan, Ea.wem Michigan Unil'ersity
Phillip Stocken, Dartmouth College
Jerry Strawser, Texas A&M Uni,•er.,ity
Sherre Strickland, University ofMassachuseus-Lowell
Chandra Subramaniam, Unil'ersity of Texas
K.R. Subramanyam , USC
Ziad Syed, Texas A&M U11irersity
Audrey Taylor, Westem Washi11gto11 University
Gary Tay lor, University ofAlabama
Mark Taylor, Case Western Reserl'e
Therese Tiggeman, Unil-ersity of the Incarnate Word
Sam Tiras, Louisiana Swte U11i1•ersity
Pamela Trafford. University of Massachuseus
Suzanne Traylor, SUNY-Alba11y
Leslie Turner, Northern Kentucky Unfrersity
Jerry Van Os, Westminster College
Mark Vargus, Unil'ersity ofTexa.~allas
Lisa Victoravich, Unil'ersity of Dem•er
She ila Vie l, U11i1•ersity ofWi.,co11si11-Milwa11kee
Marcia Vorholt, Xavier Unfrersity
Charles Wasley, U11i1•ersity of Rochester
Greg Waymire, Emory Uni,•ersity
Andrea Weickgenannt, Xavier Uni,•ersity
Daniel Weimer, Wayne Swte Unil'ersity
Edward We rner, Drexel University
Lourdes White, Unil'ersity of Baltimore
Jonathan M. Wild, Oklahoma State Uni,-ersity
Jeffrey Williams, Unil'ersity of Michigan
Peter Wilson, Babsa11 College
Wallace Wood, Uni,·ersity ofCincimwti
David Wright, Unil'ersity ofMichigan
Michelle Yetman, UC-Dm•is
Tzachi Zack. Ohio Swte Unil'ersity
Kimberly Zahller, UC-Colorado Springs
Xiao-Jun Zhang, UC-Berkeley
Yuan Zhang, Columbia University
Yu ping Zhao, Unil'ersity of Houston
Elisa Zuliani, Unil·ersity of Toronto
Special thanks is extended to Gayle Williams for he r contri bution to this edition. We are grateful to Vicki Dickinson and Brian Cadman
for the ir contributions in previous editions. We would also like to thank Susan Hamlen a nd Paul Hutchison for their thorough accuracy
checking. In addition, we are grateful to George We rthman, Jocelyn Mousel, Lorraine Gleeson, Marnee Fieldman, Beth Nodus, De bbie
McQuade, Te rry McQuade, and the e ntire team at Cambridge Business Publishe rs for their e ncouragement, e nthusiasm, and guidance.
~Lea.
February 2020
© Cambridge Business Publishers
Brief Contents
Preface iii
MODULE 1
Financial Accounting for MBAs....... 1·1
MODULE 2
Introducing Financial Statements .... 2-1
MODULE 3
Transactions, Adjustments, and
Financial Statements ................ 3·1
MODULE 4
Analyzing and Interpreting
Financial Statements ................ 4-1
MODULE 5
Revenues, Receivables, and
Operating Expenses ................. 5·1
MODULE 6
Inventories, Accounts Payable, and
Long-Term Assets ................... 6·1
MODULE 7
Current and Long-Term Liabilities .... 7-1
MODULE 8
Stock Transactions, Dividends,
and EPS ............................. 8·1
MODULE 9
lntercorporate Investments .......... 9·1
MODULE 10
Leases, Pensions, and Income
Taxes ............................. 10·1
MODULE 11
Cash Flows ....................... 11·1
MODULE 12
Financial Statement Forecasting ... 12·1
MODULE 13
Using Financial Statements for
Valuation . . . . . . . . . . . . . . . . . . . . . . . . . 13-1
MODULE 14
Managerial Accounting for MBAs. . . 14·1
MODULE 15
Cost Behavior, Activity Analysis,
and Cost Estimation . . . . . . . . . . . . . . . 15·1
MODULE 16
Cost·Volume-Profit
Analysis and Planning . . . . . . . . . . . . . 16·1
MODULE 17
Relevant Costs and Benefits for
Decision Making ................... 17·1
MODULE 18
Product Costing: Job and Process
Operations . . . . . . . . . . . . . . . . . . . . . . . . 18·1
MODULE 19
Activity-Based Costing, Customer
Profitability, and Activity-Based
Management . . . . . . . . . . . . . . . . . . . . . . 19·1
MODULE 20
Additional Topics in
Product Costing . . . . . . . . . . . . . . . . . . . 20·1
MODULE 21
Pricing and Other Product
Management Decisions . . . . . . . . . . . . 21 ·1
MODULE 22
Operational Budgeting and Profit
Planning . . . . . . . . . . . . . . . . . . . . . . . . . . 22·1
MODULE23
Standard Costs and Performance
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 23·1
MODULE 24
Segment Reporting, Transfer
Pricing, and Balanced Scorecard ... 24·1
MODULE 25
Capital Budgeting Decisions . . . . . . . 25·1
APPENDIX A
Compound Interest Tables . . . . . . . . . . A·1
APPENDIX B
Chart of Accounts
(with Acronyms) . . . . . . . . . . . . . . . . . . . . B-1
APPENDIX C
Comprehensive Case . . . . . . . . . . . . . . . C-1
Glossary
Index
G-1
1-1
ix
© Cambridge Business Publishers
Contents
2-11
Statement of Stockholders' Equity . . . . . . . . . . . . . . • . . . . . . • . . 2-17
Review2·2
Preface v
MODULE 1
~~wN
Financial Accounting for MBAs 1-1
Statement of Cash Flows ............................ . ... 2-18
Statement Format and Data Sources 2-18
Review 2-4 ................................................. 2-20
Articulation of Financial Statements ........................ 2-20
Retained Earnings Reconciliation 2-20
Financial Statement Linkages 2-20
Review 2·5 . . . . . . .
....... ... ....
. . 2-22
Additional Information Sources........................ . ... 2-22
Form 10-K 2·22
Form 20-F and Form 40-F 2-24
Form 8-K 2· 25
Analyst Reports 2-25
Credit Services 2-26
Data Services 2-26
Review 2·6
. 2-26
Global Accounting .... . ... . ...•......•......... . ... . ... 2-26
Guidance Answers
.. . .. .. ...
2-21
Assignments ................................................ 2·27
IFRS Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ 2-38
Management Applications ..................................... 2·38
Ongoing Project
2-39
2-40
Solutions to Review Problems
Preview. . . . . . . . . . . . . . . . . .............. . .............. 1·1
Reporting on Business Activities ............ . .....•........ 1-3
Review 1-1
1-4
Financial Statements: Demand and Supply ................... 1-4
Demand for lnfonnation 1·4
Supply of Information 1·7
International Accounting Standards 1-a
Review 1·2
............
1·9
Structure of Financial Statements .......................... 1·9
Balance Sheet 1·10
Income Statement 1·13
Statement of Stockholders' Equity 1-14
Statement of Cash Flows 1-15
Information Beyond Financial Statements 1-16
Managerial Choices in Financial Accounting 1-17
Review 1·3
1· 18
Analysis of Financial Statements .......................... 1-18
Return on Assets 1-18
Components of Return on Assets 1-18
Return on Equity 1· 20
Are F inancial Statements Relevant? 1-20
Review 1·4
1-21
Financial Statements and Business Analysis ................. 1· 22
Analyzing the Competitive Environment 1-22
SWOT Analysis of the Business Environment 1·23
Analyzing Competitive Advantage 1-24
Review 1·5
...........
1-25
Book Road Map ............... . ....................... 1-25
Global Accounting ..................................... 1-26
Appendix 1A: Financial Statement Data and Analytics ...... 1-26
Data Analy1ics 1-29
Appendix 1 B: Accounting Principles and Governance ....... 1-30
Financial Accounting Environment 1-30
Audit Report 1·31
Guidance Answers
...............................
1-34
Assignments
..............................
1-34
IFRS Applications
... ... ... .. . .... .... . .. .. .. ...
1-46
Management Applications . . . ................................. 1-47
Ongoing Project ............................................. 1·48
Solutions to Review Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-48
MODULE 2
~8
MODULE3
Transactions, Adjustments, and Financial
Statements 3-1
Preview ............................................... 3·1
Basics of Accounting ............................... • .... 3-3
Four-Step Accounting Cycle 3-3
Financial Statement Effects Template 3·3
Review 3-1 . . . . . . . . . ........................................ 3-5
Accounting Cycle Step 1- Analyze Transactions and Prepare
Entries ............................................. 3·6
Apple's Transactions 3-6
Applying the Financial Statement Effects Template 3-6
Applying the Journal Entry and T·Account 3·6
~~wN
H
Accounting Cycle Step 2-Prepare Accounting Adjustments ...... 3.9
Prepaid Expenses 3·10
Unearned Revenues 3-10
Accrued Expenses 3-11
Accrued Revenues 3·12
Accounting Adjustments for Apple 3-12
Introducing Financial Statements 2-1
~~wN
Preview ......................................•........ 2-1
Balance Sheet ......................................... 2-3
Balance Sheet and the Flow of Costs 2·3
Assets 2-4
Liabilities and Equity 2-6
Review2-1
.........
2·13
Income Statement ..................................... 2·13
Recognizing Revenues and Expenses 2·14
Reporting of Transitory Items 2-15
Analyzing the Income Statement 2·16
Accounting Cycle Step 3-Prepare Financial Statements ...... 3-13
Income Statement 3·13
Balance Sheet 3·14
Statement of Stockholders' Equity 3-15
x
~~w~
~ 3
................................................. ~6
Accounting Cycle Step 4-Close the Books.............. . ... 3-16
~~wM
~8
Global Accounting ................................. . ... 3-18
Appendix 3A: FASB's Financial Statement
Presentation Project . . . . .........•.. . ... 3·19
3-19
Guidance Answers
Assignments . . . . .
IFRS Applications
Management Applications . .
Solutions to Review Problems
.. 3-20
3-32
........ . .. . . .... 3.33
3.35
MODULE 4
Analyzing and Interpreting Financial
Statements 4-1
Preview ................ . ........... . ... • ...... . ....... 4-1
Return on Equity (ROE) ...................•......•....... 4-3
Review 4· 1
. ........ .....
4·3
ROE Disaggregation: DuPont Analysis ....... . .............. 4-4
Review 4-2
....... ... .
4-5
Return on Assets and Its Disaggregation ..................... 4-6
Analysis of Profitability and Productivity 4-7
Analysis of Profitability 4-8
Analysis of Productivity 4-9
Analysis of Financial Leverage 4-12
Review4-3 .
4-14
Balance Sheet Analysis with an Operating Focus ............. 4-14
Net Operating Assets (NOA) 4-15
Net Nonoperating Obligations (NNO) 4-17
Review 4-4 ................................................. 4·18
Income Statement Analysis with an Operating Focus .......... 4-19
Review 4-5 .
4·22
Return on Net Operating Assets (RNOA) ...... . ...... . ...... 4-23
Review 4-6
4-25
RNOA Disaggregation into Margin and Turnover . . . . . . . . . . . . . 4-25
Net Operating Profit Margin 4-25
Net Operating Asset Turnover 4-26
Trade-Off between Margin and Turnover 4-27
Review 4-7 . . . . . .
xi
Contents
© Cambridge Business Publishers
.... . .... ...
4-29
Global Accounting ..................................... 4-29
Appendix 4A: Operating versus Nonoperating Classification . 4-30
Appendix 48: Nonoperating Return Component of ROE ..... 4-31
Nonoperating Return 4-31
Nonoperating Return-With Substantial Net Nonoperating
Assets: Amazon 4-33
Nonoperating Return-With Noncontrolling Interest: AT&T 4-34
Review 4-8 . ................................................ 4·35
Appendix 4C: Liquidity and Solvency Analysis....... . ..... 4-35
Liquidity Analysis 4-36
Current Ratio 4-36
Quick Ratio 4·36
Solvency Analysis 4-37
Liabilities-to-Equity 4-37
Times Interest Earned 4-38
Vertical and Horizontal Analysis 4-38
Limitations of Ratio Analysis 4-40
Review 4-9
4-41
Guidance Answers
4-41
Assignments ............................. . .................. 4-42
IFRS Applications . . .
. ....... . ........ . . . . .. .. . ..... . .... 4-57
Management Applications .......... . ... • ... . .. .. ... . .. .... .... 4-57
Ongoing Project
4·58
Solutions to Review Problems
4-59
Analysis of Sales Allowances 5-13
Review 5-2
. .... . .. . .....
5-13
Unearned (Deferred) Revenue ........................ . ... 5-14
Review5-3
5-15
Foreign Currency Effects on Revenue, Expenses, and
Cash Flow ..................................... . ... 5-15
Foreign Currency and Cash Flows 5-16
Foreign Currency and Income 5-17
Foreign Currency and Future Results 5-17
Review 5-4 .
5-18
Accounts Receivable .........................•..... • ... 5·19
Aging Analysis of Receivables 5-19
Accounting for Accounts Receivable 5-20
Analysis of Accounts Receivable-Magnitude 5-21
Analysis of Accounts Receivabl~ u ality 5-22
Review 5·5
5-24
Expenses and Losses .............. . ................... 5-25
Deductions from Income 5-25
Research and Development Expense 5-26
Provision (Benefit) for Taxes on Income 5·28
Discontinued Operations 5-28
Review 5-6
.. ... .. . ... .....
5-30
Pro Forma Income Reporting ......................... . ... 5-31
Regulation G Reconciliation 5-31
SEC Warnings about Pro Forma Numbers 5-32
Disclosures and Market Assessments 5-32
Review 5-7
5-34
Global Accounting ................. . ......... . ..... . ... 5-35
Guidance Answers ...... ... . .. ..
Assignments
. ...
IFRS Applications .
....
Management Applications
..
Ongoing Project .
Solutions to Review Problems
.. ...
....
.....
.....
. .. ..
.....
.....
.....
. ..
...
...
...
.. .
.. .
...
...
. . .. . ........
........
........
........
... . .. . .....
5-35
5-35
5-53
5-54
5-54
5-55
MODULES
Inventories, Accounts Payable, and Long-Term
Assets 6-1
Preview ....................................•..... • .... 6-1
Inventory-Costing Methods . . . . . . . . . • . . • . . ........• • .... 6-3
First-In, First-Out (FIFO) 6-4
Last-In, First-Out (LIFO) 6-5
Average Cost (AC) 6-5
Financial Statement Effects of Inventory Costing 6-7
Review 6-1 . . . .
. ........ . .......................... 6-8
Inventory-Reporting .................................... 6-8
Lower of Cost or Market (LCM) 6-8
LIFO Reserve Adjustments to Financial Statements 6-9
LIFO Liquidations 6-11
Review 6-2
... ..................
6-11
Inventory-Analysis Tools ............................... 6·12
Gross Profit Analysis 6-12
Days Inventory Outstanding and Inventory Turnover 6·13
Days Payable Outstanding 6-15
Cash Conversion Cycle 6-16
Review 6-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-17
PPE Assets-Capitalization and Depreciation ................ 6-17
Plant and Equipment 6-18
Research and Development Facilities and Equipment 6·19
MODULE 5
Revenues, Receivables, and Operating
Expenses 5-1
Review 6-4 . .
. . . . . 6-20
Preview ............................................... 5-1
Revenue .............................................. 5-3
Revenue Recognition Rules 5-4
Complications of Revenue Recognition 5-5
Performance Obligations Satisfied Over Time 5-7
PPE Assets-Sales, Impairments, and Restructuring ...... . ... 6·20
Asset Sales 6-20
Asset lmpa'irments 6-21
Restructuring Costs 6-22
Review5-1 ....
PPE Assets-Analysis Tools ......... . ......... . ......... 6·25
PPE Turnover 6-25
PPE Useful Life 6-26
PPE Percent Used Up 6-27
5-11
Sales Allowances ...................................... 5-11
Accounting for Sales Allowances 5·11
Reporting Sales Allowances 5-12
Review 6-5
... . ... ..... . .. . .....
6-24
Contents
xii
Review 6-6 . . . . . . . . . . . . . . . . . . . . . . . . . .
© Cambridge Business Publishers
..........
. 6-27
Global Accounting . . . . . . . . . . . . . . . . . ........ . .......... 6-27
Guidance Answers
..................................
6-28
Assignments
..............................
6-29
IFRS Applications
..............................
6-40
Management Applications . . . . . . . . . . . . . . . . . . . . . . .
. ........ 6-42
Ongoing Project ... . . . . . . . . . . . .
............
. ........ 6-42
Solutions to Review Problems .................................. 6-43
MODULE 7
Preview ............................................... 7-1
Accrued Liabilities....................................... 7-3
Accrued Liabilities Defined 7-3
Accruals for Contractual Liabilities-Wages Payable
Example 7-4
Accruals for Contractual Liabilities-Deferred
Revenue Example 7-4
Accruals for Contingent Liabilities 7-5
Accruals for Contingent Liabilities-Warranties Example 7-5
7-7
Short-Term Debt. ....................................... 7-7
Accounting for Short-Term Debt 7-7
Current Maturities of Long-Tenn Debt 7-8
Review 7-2
7-9
Long-Term Debt-Pricing ................................. 7-9
Pricing of Bonds Issued at Par 7-10
Pricing of Bonds Issued at a Discount 7-10
Pricing of Bonds Issued at a Premium 7-11
Effective Cost of Debt 1-11
Review 7-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 7-13
Long-Term Debt-Reporting ................. . ... . ...... 7-13
Balance Sheet Reporting 7-13
Income Statement Reporting 7-14
Financial Statement Effects of Bond Repurchase 7-14
Fair Value Disclosures 7-15
Review 7-4 . ................................................ 7-16
Quality of Debt ........................................ 7-16
Credit Analysis 7-16
What Are Credit Ratings? 7-18
What Determines Credit Ratings? 7-18
Verizon Credit Rating Example 7-21
Why Credit Ratings Matter 7-23
Review 7-5 . ................................................ 7-24
Global Accounting ..................................... 7-24
Appendix 7A: Time Value of Money ..................... 7-25
Present Value Concepts 7-25
Present Value of a Single Amount 7-25
Time Value of Money Tables 7-25
Present Value of an Annuity 7-26
Bond Valuation 7-27
Time Value of Money Computations Using a Calculator 7-28
Time Value of Money Computations Using Excel 7-28
Future Value Concepts 7-30
Future Value of a Single Amount 7-30
Future Value of an Annuity 7-30
Review 7-6 . . .
Stock Transactions, Dividends, and EPS 8-1
Preview ............................................... 8-1
Stockholders' Equity and Classes of Stock ................... 8-3
Stockholders' Equity Accounts 8-3
Statement of Stockholders' Equity 8-5
Preferred Stock 8-6
Common Stock 8-7
Review 8-1
Current and Long-Term Liabilities 7-1
Review 7-1
MODULES
. .................................. 7-30
Appendix 78: Amortization of Debt ..................... 7-31
Amortization of Discount 7-31
Amortization of Premium 7-32
Guidance Answers ........................................... 7-32
Assignments .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-32
IFRS Applications ............................................ 7-46
Management Applications
... ... .. . ... .... . .. .. .. .. .
7-47
Ongoing Project
... ... ... .... .... . .. .. .. ...
7-47
Solutions to Review Problems
... ... ... .... .... . .. .. .. ...
7-48
8-8
Stock Transactions ..........................•...... • .... 8-9
Stock Issuance 8-9
Stock Repurchase (Treasury Stock) 8-10
Review 8-2 .
. a-12
Stock-Based Compensation .............................. 8-13
Accounting for Stock-Based Compensation 8-14
Footnote Disclosures for Stock-Based Compensation 8-15
~~wH
~6
Dividends and Stock Splits ............................... 8-16
Cash Dividend Disclosures 8-17
Dividend Payout and Yield 8-17
Cash Dividends Financial Effects 8-17
Stock Split 8-18
Review 8-4 ........ ........................ . ... • .......... 8-19
Accumulated Other Comprehensive Income ............. . ... 8-19
AOCI Components 8-19
AOCI Disclosures and Interpretation 8-20
Review 8-5 . . .
.... ....
. .. 8-21
Convertible Securities................... . ............... 8-22
a-n
~•wH
Earnings per Share (EPS) ............................... 8-23
Review 8-7
8-25
Global Accounting ..................................... 8-25
Appendix SA: Stock-Based Compensation: Reporting and
Analyzing .............................. 8-26
Employee Stock Purchase Plans (ESPP) 8-26
Stock Awards 8-27
Stock Options 8-27
Stock Appreciation Rights (SAR) 8-28
Summary of Share-Based Compensation 8-28
Analysis Implications 8-28
Guidance Answers ........................................... 8-29
Assignments
8-30
IFRS Applications
8-48
Ongoing Project
8-50
Solutions to Review Problems
8-51
MODULE9
lntercorporate Investments 9-1
Preview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 9-1
lntercorporate Investments ............................... 9-3
Passive Investments in Equity Securities 9-4
Investments in Debt Securities 9-8
Review 9-1
9-11
Equity Investments with Significant Influence................. 9-12
Accounting for Investments with Significant Influence 9-12
Equity Method Accounting and ROE Effects 9-14
~~wH ................................................. ~7
Equity Investments with Control ..................... . ..... 9-17
Accounting for Investments with Control 9-18
Review 9-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 9-27
Global Accounting ..................................... 9-28
Appendix 9A: Accounting for Derivatives ................. 9-29
Analysis of Derivatives 9-30
Review 9-4
9-31
Appendix 98: Equity Carve-Outs .......................
Analysis of Equity Carve-Outs 9-36
Guidance Answers
Assignments
IFRS Applications
9-32
9-36
9-36
9-52
Management Applications . . . . . . . . . . . . . . . . . . . . . .
. ... 9.53
Ongoing Project . . .
. . . . . . . . . . . . . . . 9.54
Solutions to Review Problems .
. . . ..... . .. . .. . . .... 9·55
Leases, Pensions, and Income Taxes 10-1
10-11
Pensions ............................................ 10-11
Defined Benefit Pension Plans on the Balance Sheet 10-12
Analysis Issue-Sufficiency of Plan Assets to Pay Pension
Obligations 10-13
Defined Benefit Pension Plans on the Income Statement 10-15
Pension Expense Smoothing 10·16
Fair Value Accounting for Pensions 10-19,
Footnote Disclosure-Key Assumptions 10-21
Analysis Implications 10-22
Other Post-Employment Benefits (OPEB) 10-23
10·23
Income Taxes ........................................ 10-24
Timing Differences Create Deferred Tax Assets and
Liabilities 10-24
Disclosures for Income Taxes 10-29
Analysis of Income Tax Disclosures 10-30
Expanded Explanation of Deferred Taxes 10-31
Review 10·3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 10·33
Global Accounting .................................... 10-35
Appendix 1OA: Lease Accounting ExampleFinance and Operating Leases ...... . .... 10·35
Assignments
10·36
IFRS Applications ....
. ......... . . . . . . . . 10·59
Ongoing Project
10·61
Solutions to Review Problems
10-61
Preview ................................ . ...... • ...... 11-1
Framework for Statement of Cash Flows .................... 11·3
Relation Among Financial Statements 11-3
Statement of Cash Flows Structure 11-4
Operating Activities Preview 11·5
Investing Activities Preview 11-8
Financing Activities Preview 11-8
11-11
Cash Flow from Operating Activities........................ 11-9
Steps to Compute Net Cash Flow from Operating
Activities 11-1 O
Java House Case Illustration 11·11
Review 11·2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-15
Computing Cash Flows from Investing Activities ............. 11-16
Analyze Remaining Noncash Assets 11-16
Java House Case Illustration 11-16
11·18
Cash Flows from Financing Activities ...................... 11-18
Analyze Remaining Liabilities and Equity 11-18
Java House Case Illustration 11-18
Review 11·4A
11-19
Computing Cash Flows from Balance Sheet Accounts 11-19
Supplemental Disclosures for the Indirect Method 11-20
Review 11-48
Review 11·7 . . . . . .
. ........ . ................... 11·32
Guidance Answers ............ . . . ........................... 11·32
Assignments .
.. .. .. . .... ... .. .... ... .. .
11 ·33
IFRS Applications .
11·55
Solutions to Review Problems
... . .. .... .. .. . .....
11·56
MODULE 12
Financial Statement Forecasting 12-1
Preview .......................................... • ... 12-1
Forecasting Process ................................ . ... 12·3
Company Guidance 12-5
Review 12·1
.. ... ... .. . ... .....
12·6
Forecasting the Income Statement ..... . ....... . . . ......... 12-8
Review 12·2
. ... ..... . .. . .....
12-11
Forecasting the Balance Sheet .......................... 12-12
. ........................................ 12·16
Building Forecasts from the Bottom Up .................... 12-16
Segment Data 12·16
Cash Flows 11-1
Review 11·3 . . . .
. ...... 11-27
Appendix 11A: Direct Method Reporting for Statement of Cash
Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-29
Cash Flows from Operating Activities 11·29
Converting Revenues and Expenses to Cash Flows 11-29
Java House Case Illustration 11-29
Convert Sales to Cash Received from Customers 11-30
Convert Cost of Goods Sold to Cash Paid for Merchandise
Purchased 11-30
Convert Wages Expense to Cash Paid to Employees 11-31
Convert Insurance Expense to Cash Paid for Insurance 11·31
Eliminate Depreciation Expense and Other Noncash Operating
Expenses 11 ·31
Convert Income Tax Expense to Cash Paid for Income
Taxes 11-31
Omit Gains and Losses Related to Investing and Financing
Activities 11-31
Cash Flows from Investing and Financing 11·32
Supplemental Disclosures 11·32
Review 12-3 . . .
MODULE 11
Review 11·1
Review 11·5 .................... ..... .
Review 11·6 ............................................... 11·29
Preview .............................................. 10·1
Leases .............................................. 10-3
New Lease Reporting Standard 10-3
Lessee Reporting Example-Microsoft Corporation 10·4
Lease Accounting 10-5
Summary of Lease Accounting and Reporting 10-9
Analysis Issues Relating to Leases 10-10
Review 10·2 .
Cash Flow Patterns 11·23
Usefulness of the Statement of Cash Flows 11-25
Ratio Analyses of Cash Flows 11-27
Free Cash Flow 11-28
MODULE 10
Review 10·1
xiii
Contents
© Cambridge Business Publishers
11-21
Analysis of Cash Flow Information ....... . ................ 11-21
Cash Flow Components 11·21
Review 12·4
12-18
Appendix 12A: Forecasting the Statement of Cash Flows... 12-19
Review 12-5 .......... ..................................... 12-20
Appendix 128: Multiyear Forecasting with Target Cash
and New Debt Financing ................ 12-20
Review 12-6 ......... . .
.................
12-22
Appendix 12C: Parsimonious Method for Forecasting
NOPAT and NOA ...................... 12·22
Multiyear Forecasting with Parsimonious Method 12-22
Review 12·7
12-23
Appendix 120: Morgan Stanley's Forecast Report on
Procter & Gamble ..................... 12-23
12-31
Assignments .
Ongoing Project .
. 12-51
12-51
Solutions to Review Problems
MODULE 13
Using Financial Statements for Valuation 13-1
Preview .............................................. 13·1
Equity Valuation Models . . . . . . . . ............•. . ......... 13-3
Dividend Discount Model 13·3
Discounted Cash Flow Model 13-3
Residual Operating Income Model 13-3
Valuation Model Inputs 13·4
Review 13·1 .......... ...................................... 13-5
Discounted Cash Flow (DCF) Model ... . ................... 13-5
DCF Model Structure 13-5
Contents
xiv
© Cambridge Business Publishers
Steps in Applying the DCF Model 13-6
Illustrating the DCF Model 13-6
Review 13-2 ...
. ................................ 13-8
Residual Operating Income (ROPI) Model ................... 13-9
ROPI Model Structure 13-9
Steps in Applying the ROPI Model 13-9
Illustrating the ROPI Model 13-10
Review 13-3
13-11
Further Considerations Involving Valuation Models ........... 13-11
Managerial Insights from the ROPI Model 13-11
Assessment of Valuation Models 13-12
Review 13·4
13-13
Global Accounting .................................... 13-14
Appendix 13A: Derivation of Free Cash Flow Formula ..... 13-14
Appendix 136: Deutsche Bank Valuation of Procter &
Gamble ............................. 13-14
Qualitative and Quantitative Summary 13-14
Concluding Observations of Analyst Report 13-25
Guidance Answers
Assignments
Management Applications
Ongoing Project
Solutions to Review Problems
13-25
13·25
13-36
13-37
13-38
Total Cost Function for an Organization or Segment 15·6
Relevant Range 15-7
Additional Cost Behavior Patterns 15-8
Committed and Discretionary Fixed Costs 15-10
Review 15·2
15-11
Cost Estimation ...................................... 15-11
High-Low Cost Estimation 15-11
Scatter Diagrams 15-13
Least-Squares Regression 15-14
Review 15·3 ........... ................................... 15-16
Additional Issues in Cost Estimation ...................... 15-17
Changes in Technology and Prices 15-17
Matching Activity and Costs 15-17
Identifying Activity Cost Drivers 15-18
Review 15·4
15-18
Alternative Cost Driver Classifications ...........•......... 15-18
Manufacturing Cost Hierarchy 15-19
Customer Cost Hierarchy 15-20
Review 15·5
15-21
Guidance Answers
15-21
Assignments
15-22
Management Applications . . .
.........
. .. 15-29
Solutions to Review Problems ................................. 15-32
MODULE 16
MODULE14
Managerial Accounting for MBAs 14-1
Cost-Volume-Profit Analysis and Planning 16-1
Preview .............................................. 14-1
Uses of Accounting Information ........................... 14-3
Financial Accounting 14-3
Managerial Accounting 14-4
Preview .............................................. 16-1
Cost-Volume-Profit Analysis .......................... . ... 16-3
Key Assumptions 16·3
Profit Formula 16-5
Review 14· 1
14·5
Review 16·1
14-6
Contribution and Functional Income Statements ...•...... • ... 16-7
Contribution Income Statement 16-7
Functional Income Statement 16-7
Analysis Using Contribution Margin Ratio 16-8
Strategic Cost Management 14-5
Review 14-2
Missions, Goals, and Strategies .......................... 14-6
An Organization's Mission and Goals 14-6
Strategic Position Analysis 14-7
Managerial Accounting and Goal Attainment 14-9
Planning, Organizing, and Controlling 14-10
Review 14-3 ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ 14-11
Changing Environment of Business ...................... 14-12
Global Competition and Its Key Dimensions 14-12
Big Data and Analysis 14-12
Robotics and Cognitive Technologies 14-12
Enterprise Risk Management (ERM) 14-13
Review 14-4
14-13
Ethics in Managerial Accounting ......................... 14-13
Codes of Ethics 14-15
Corporate Governance 14-15
Sustainability Accounting and Corporate Social
Responsibility 14-16
Review 14-5 .
..... .. ... .. .. . .. .. .
. ................. 14-17
Cost Drivers . . ...................................... 14-17
Structural Cost Drivers 14-18
Organizational Cost Drivers 14-19
Activity Cost Drivers 14-19
Review 14·6
.. ... .... .... . .. ... . ..
Guidance Answers
.............................
Assignments
.... .. ... .... .... . .. .. .. ..
Management Applications . . . . . . . . . . . . . . . . . . . . . . .
Solutions to Review Problems .................................
14-20
14-20
14-21
14·24
14-26
MODULE15
Cost Behavior, Activity Analysis, and Cost
Estimation 15-1
Preview ......................................•....... 15-1
Cost Behavior Analysis .................................. 15·3
Four Basic Cost Behavior Patterns 15-3
Factors Affecting Cost Behavior Patterns 15-5
Review 15-1
15·5
16·6
Review 16-2 . ............................................... 16·8
Break-Even Point and Profit Planning ...................... 16-9
Determining Break-Even Point in Units 16-9
Profit Planning 16-1 o
Cost-Volume-Profit Graph 16-11
Profit-Volume Graph 16-11
Impact of Income Taxes 16-13
Review 16·3
16-14
Multiple-Product Cost-Volume-Profit Analysis ............... 16-15
Determining Break-Even and Target Profit Sales Dollars 16-15
Sales Mix Analysis 16-15
Review 16-4 ..... . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 16-18
Analysis of Operating Leverage .......................... 16-18
Review 16·5
16-20
Appendix 16A: Profitability Analysis with Unit and
Nonunit Cost Drivers ................... 16-21
Multi-Level Contribution Income Statement 16-21
Variations in Multi-Level Contribution Income Statement 16-23
Review 16·6 ........... .................................... 16-24
Guidance Answers . . . . . . . . . . . . • . . . . . . . . . . . . . . . .
. . . . . . . 16-24
Assignments . . . . . . .
.... ....
. 16-24
Management Applications .
. 16-35
Solutions to Review Problems . . . . . . . . . . .
. ...... 16-36
MODULE 17
Relevant Costs and Benefits for Decision
Making 17-1
Preview .............................................. 17-1
Identifying Relevant Costs ........................... . ... 17-3
Relevance of Future Revenues 17-4
Relevance of Outlay Costs 17-4
Irrelevance of Sunk Costs 17-4
Sunk Costs Can Cause Ethical Dilemmas 17-5
Relevance of Disposal and Salvage Values 17-5
Review 19·1 ...
Relevance of Opportunity Costs 17-5
Review 17·1
1Hi
Differential Analysis of Relevant Costs ...................... 17-7
Review 17·2
............
17-8
Applying Differential Analysis ............................. 17-8
Multiple Changes in Profit Plans 17-8
17.9
Review 17·3
Special Orders 17-10
Review 17·4 .
. .............. 17·12
Outsourcing Decisions (Make or Buy) 17-13
Review 17·5 ........... .................................... 17-16
Sell or Process Further 17-16
Review 17·6 .
. . . . . . . . ..•..................... 17·18
Use of Limited Resources .............................. 17-18
Single Constraint 17·19
Multiple Constraints 17-19
Theory of Constraints 17·20
Limitations of Decision Analysis Models 17-21
Review 17·7 ......... ................................. 11-21
Guidance Answers
Assignments
Management Applications
Solutions to Review Problems
... ... ...
............
.............
17·21
11-22
17.33
17-36
MODULE 18
Product Costing: Job and Process
Operations 18-1
Preview ................................•............. 18·1
Inventory Costs in Various Organizations.................... 18-3
Review 18·1 . ............................................. 18-3
Inventory Costs for Financial Reporting ..................... 18·4
Product Costs and Period Costs 18·4
Three Components of Product Costs 18-5
A Closer Look at Manufacturing Overhead 18-6
Review 18·2
18-8
The Production Environment ............................. 18·9
Production Files and Records 18-10
Review 18·3
xv
Contents
© Cambridge Business Publishers
.............
18·10
. . . . . . . . . . . ....
. ...... 19·4
Activity-Based Costing Concepts 19-4
ABC Product Costing Model 19-5
Review 19·2
19·6
Traditional Product Costing and ABC Compared .......... .... 19-6
Applying Overhead with a Plantwide Rate 19·7
Applying Overhead with Department Rates 19-7
Applying Overhead with Activity-Based Costing 19·9
Review 19·3
19-12
Implementation of ABC ................................. 19-13
Limitations of ABC Illustration 19-13
Comparing Traditional and Activity-Based Costing 19·13
ABC Implementation Issues 19-14
Review 19·4 .
. . . . . . . . . . . . . . . . 19-15
ABC and Customer Profitability Analysis ................... 19·16
Customer Profitability Profile 19-16
ABC Customer Profitability Analysis Illustrated 19-16
Review 19·5 .......... ..................................... 19-19
Activity-Based Management. ............................ 19-19
The Difference Between ABC and Activity-Based
Management 19-19
Review 19·6
. .......................
19-20
Guidance Answers .
. . . . . . . . . . . . . . . . . . . . . . . . . . .. . ..
. 19-20
Assignments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-21
Management Applications .................................... 19-33
Solutions to Review Problems ................................ 19-37
MODULE20
Additional Topics in Product Costing 20-1
Preview .......................................... . ... 20-1
Production and Service Department Costs ........ . ..... .. .. 20-3
Review 20· 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20·3
Service Department Cost Allocation ..............•......... 20-4
Direct Method 20-5
Step Method 2o-6
Linear Algebra (Reciprocal) Method 20-7
Dual Rates 20·9
Review 20·2
20·9
Job Costing for Products and Services .................... 18-11
Job Costing Illustrated 18·12
Statement of Cost of Goods Manufactured 18·16
Overapplied and Underapplied Overhead 18-17
Job Costing in Service Organizations 18-18
Lean Production and Just-in-Time Inventory Management ..... 20·10
Reducing Incoming Materials Inventory 20-10
Reducing Work-in-Process Inventory 20·11
Reducing Finished Goods Inventory 20-12
Review 18·4 . . . . . . . . . . . . . . . . . . . . . ......................... 18·19
Process Costing ...................................... 18-20
Cost of Production Report 18-21
Weighted Average and First-In, First-Out Process Costing 18·24
Process Costing in Service Organizations 18·25
Review 18·5
18·25
Appendix 18A: Absorption and Variable Costing .......... 18-26
Basic Concepts 18·26
Inventory Valuations 18-26
Income Under Absorption and Variable Costing 18-27
Production Equals Sales 18-27
Production Exceeds Sales 18-28
Sales Exceed Production 18·29
Evaluating Alternatives to Inventory Valuation 18-30
Review 18·6
18·31
Performance Evaluation and Recordkeeping with Lean
Production and JIT.................................. 20-13
Performance Evaluation 20-13
Simplified Recordkeeping 20·14
Guidance Answers . .
. . .............
18·31
Assignments
. .............
18·32
Management Applications . . . .
.. . .... . ..
. 18·44
Solutions to Review Problems ................................. 18·46
MODULE 19
Review 20·3
Review20·4 . . . . . . . . . . . . . .
20-12
. ............ 20-15
Increased Focus on Data-Driven Decision Making ........... 20-15
Review 20·5
Guidance Answers
Assignments
Management Applications
Solutions to Review Problems
.........
. ... .. ... ... .. . ... .....
..................
... . .. . .....
20-16
20-17
20-11
20-26
20-21
MODULE21
Pricing and Other Product Management
Decisions 21-1
Preview...... . ..................................... 21·1
Understanding the Value Chain ........................... 21-3
Usefulness of a Value Chain Perspective 21-5
Value-Added and Value Chain Perspectives 21-6
Review 21·1
21·7
Activity-Based Costing, Customer Profitability,
and Activity-Based Management 19-1
The Pricing Decision .................................... 21·7
Economic Approaches to Pricing 21·7
Cost-Based Approaches to Pricing 21·8
Preview .............................................. 19·1
Activity-Based Costing (ABC) ..............•............. 19-3
Changing Cost Environment 19-3
Target Costing ....................................... 21·12
Target Costing Is Proactive for Cost Management 21-12
Review 21·2 .......... ..................................... 21·11
Contents
xvi
Target Costing
Target Costing
Target Costing
Target Costing
Target Costing
Target Costing
© Cambridge Business Publishers
Encourages Design for Production 21-13
Reduces Time to Introduce Products 21-14
Requires Cost Information 21-14
Requires Coordination 21-14
Is Key for Products with Short Life Cycles 21-15
Helps Manage Life-Cycle Costs 21-16
Review 21-3 ...... ......................................... 21-17
Continuous Improvement Costing ........................ 21-17
Review 21·4
....................
21-18
Benchmarking ........................................ 21-18
Review 21·5
.. ... ... .... .. .. . .... .... . .. ... . ..
21-20
Guidance Answers
.......... .... ..
21-20
Assignments . . . . . . . . . . . . . . . . ............................. 21-20
Management Applications .................................... 21-26
Solutions to Review Problems ................................. 21-27
Operational Budgeting and Profit Planning 22-1
Preview .............................................. 22-1
Reasons for Budgeting .................................. 22-3
Compel Planning 22-3
Promote Communication and Coordination 22-3
Provide a Guide to Action and Basis of Evaluation 22-3
Aid in Risk Management 22-3
.. .... .... . .. ... . ...
. 22-4
General Approaches to Budgeting ......................... 22-4
OutpuVlnput Approach 22-5
Activity-Based Approach 22-5
Incremental Approach 22·5
Minimum Level Approach 22-5
Review 22-2
. .... .... . .. ... . .. .
22-6
Master Budget . . . . . . . . . ............... . .. . ..•....... 22·7
Sales Budget 22-9
Purchases Budget 22-10
Selling Expense Budget 22-10
General and Administrative Expense Budget 22-11
Cash Budget 22-11
Budgeted Financial Statements 22-13
Finalizing the Budget 22-14
Review 22-3
Review 23-3 . . .
.... .........
. 23·13
Establishing and Using Standards for Direct Labor 23-13
Review 23-4 ............................................... 23-15
Establishing and Using Standards for Variable Overhead 23-15
Fixed Overhead Variances 23-17
Review 23-5
23-18
Performance Reports for Revenue Centers ................. 23-18
Inclusion of Controllable Costs 23·19
Revenue Centers as Profit Centers 23-20
Review 23-6 ............................................... 23-21
Appendix 23A: Fixed Overhead Variances .............. 23-21
Review 23-7 .
23-23
Appendix 238: Reconciling Budgeted and Actual Income ... 23·23
MODULE 22
Review 22-1 .
Variance Analysis for Costs .............................. 23-9
Components of Standard Cost Analysis 23-9
Establishing and Using Standards for Direct Materials 23-10
22-15
Budget Development in Manufacturing Organizations ......... 22-16
Production Budget 22-16
Manufacturing Cost Budget 22-16
Review 22-4 . .............................................. 22-19
Budget Development and Manager Behavior................ 22-20
Employee Participation 22-20
Budgeting Periods 22·21
Forecasts 22·21
Ethics 22-22
Open Book Management 22-22
Review 22-5 .............................................. 22-23
22-23
22-23
22-35
22-37
Guidance Answers
Assignments
Management Applications
Solutions to Review Problems
MODULE 23
Standard Costs and Performance Reports 23-1
Preview .......................................... 23-1
Responsibility Accounting ................................ 23-3
Performance Reporting and Organization Structures 23-4
Types of Responsibility Centers 23-4
Financial and Nonfinancial Performance Measures 23-5
Review 23-8
23-24
Guidance Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23·25
Assignments
23-25
Management Applications . . . . . . . . . . . .
. . . . . . . . . . . . 23·35
Solutions to Review Problems . . . . . . . . . . . .................... 23-38
MODULE24
Segment Reporting, Transfer Pricing, and
Balanced Scorecard 24-1
Preview .............................................. 24-1
Strategic Business Segments and Segment Reporting ......... 24-3
Multilevel Segment Income Statements 24·5
Interpreting Segment Reports 24-5
Review 24-1
24·7
Transfer Pricing ................................... . ... 24-7
Management Considerations 24·8
Determining Trans1er Prices 24-10
Review 24-2
Investment Center Evaluation Measures
Return on Investment 24-13
Investment Center Income 24-15
Investment Center Asset Base 24-16
Other Valuation Issues 24-16
Residual Income 24·17
Economic Value Added 24-17
Which Measure Is Best? 24-18
24-13
..... . •......... 24-13
Review 24-3
24-20
Balanced Scorecard ................................... 24-20
Balanced Scorecard Framework 24-20
Balanced Scorecard and Strategy 24-22
Review 24-4 ............................................... 24-24
Guidance Answers . . . ...................................... 24-24
Assignments
24-24
Management Applications
24-36
Solutions to Review Problems
24-38
MODULE25
Capital Budgeting Decisions 25-1
Preview ............... . .............................. 25-1
Long-Range Planning and Capital Budgeting ................ 25-3
Review 25-1
25·6
Capital Budgeting Models That Consider Time Value of Money .. 25·6
Expected Cash Flows 25·6
Manager Behavior and Expected Cash Flows 25-8
Net Present Value 25-8
Internal Rate of Return 25-9
Cost of Capital 25-10
Review 23-1 ................................................ 23-6
Review 25-2 . . . . . . . . . . . . . . . . . . . . . . ....................... 25-1 1
Performance Reporting for Cost Centers .................... 23·6
Development of Flexible Budgets 23-6
Flexible Budgets Emphasize Performance 23-7
Standard Costs and Performance Reports 23-8
Capital Budgeting Models That Do Not Consider Time
Value of Money .................................... 25-11
Payback Period 25.12
Accounting Rate of Return 25-13
Review 23-2
Review 25-3
23-8
25-13
Contents
© Cambridge Business Publishers
Evaluation of Capital Budgeting Models ....... . ...... . ..... 25-14
APPENDIX A
Review 25·4
Compound Interest Tables A-1
25-16
Additional Aspects of Capital Budgeting .................... 25-16
Using Multiple Investment Criteria 25-16
Evaluating Risk 25-17
Differential Analysis of Project Cash Flows 25-17
Predicting Differential Costs and Revenues for
High-Tech Investments 25-19
Review 25-5
• ............
25-20
Taxes in Capital Budgeting Decisions .... • ................ 25-20
Depreciation Tax Shield 25-21
Investment Tax Credit 25-22
Review 25-6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 25-23
Appendix 25A: Time Value of Money................... 25-23
Future Value 25-24
Present Value 25-24
Annuities 25-25
Unequal Cash Flows 25-26
Deferred Returns 25-28
Review25-7
25-28
Appendix 258: Table Approach to Determining
Internal Rate of Return ............ • .... 25·29
Equal Cash Inflows 25-29
Unequal Cash Inflows 25-29
Review25-8
Guidance Answers
Assignments
Management Applications
Solutions to Review Problems
25-30
. 25-30
25-31
25-37
25-42
xvii
APPENDIX B
Chart of Accounts with Acronyms B-1
Assets B-1
Liabilities B-1
Equity B-1
Revenues and Expenses B-1
APPENDIX C (Online)
Comprehensive Case C-1
Preview ...........................................C-1
Reviewing Financial Statements ...................... . .... C-3
Business Environment for Financial Reporting C-3
Income Statement Reporting and Analysis C-3
Balance Sheet Reporting and Analysis C-9
Statement of Cash Flows Reporting and Analysis C-21
Independent Audit Opinion C-22
Assessing Profitability and Creditworthiness ................. C-23
ROE Disaggregation-DuPont Analysis C-23
ROE Disaggregation-Operating Focus C-24
Disaggregation of RNOA-Margin and Turnover C-25
Credit Analysis C-26
Summarizing Profitability and Creditworthiness C-26
Forecasting Financial Statements ......................... C-27
Valuing Equity Securities ................................ C-30
Discounted Cash Flow Valuation C-31
Residual Operating Income Valuation C-32
Assessment of the Valuation Estimate C-32
Summary Observations C-33
Index 1-1
1
Module
Financial Accounting
for MBAs
c::;
/
Module Organization visually depicts key topics and their sequence.
~
Environment
Statements
Reporting
on Business
Activities
Analysis
Balance Sheet
Measuring Return
on Assets
Income Statement
Demand for
Information
Statement of
Stockholders'
Equity
Supply of
Information
Statement of
Cash Flows
Review 1·1
Environment
Disaggregating
Return on Assets
Legal Environment
Competitive
Analysis
Business Analysis
Measuring Return
on Equity
Audits and
Governance
Analyzing
Competitive
Advantage
SEC and the
Courts
Relevance of
Accounting
Review 1·2
Review 1·3
Financial
Accounting
Environment
Review 1·4
Review 1-5
A Preview introduces each module
------
PREVIEW
AAPL
-----We introduce four financial statements
• Balance sheet
• Income statement • Statement of stockholders' equity • Statement of cash flows
We provide a simple, powerful set of metrics to analyze financial statements
• Return on assets (ROA) • Net profit margin • Total asset 1urnover • Return on equity (ROE)
We discuss the broad context for analyzing a company's business
• Porter's five forces
• SWOT analysis
• Analysis of competitive advantage
Each module lays out Learning Objectives and maps them to the module's eLectures, guided examples, and end-of·
chapter problem assignments. Use the roadmap in each module to track your learning. Consider looping back to the
Learning Objectives as we work through each module and ask whether we have learned that content.
A focus company in
__,.
Apple Inc. is the Module 1 focus company and we refer to its financial statements to illustrate key financial
each module provides a
accounting issues. The dashboard here conveys information about Apple's balance sheet, income statement, and
real-world application.
statement of cash flows over the past nine years.
Assets
Liabilities
Equity
$OB
2010
1-1
2012
2014
2016
2018
• Net Income •
$3006
Revenue -
Market Cap
$1,2006
• Ope1111ingCashAow •
2018
1n..-ingCuhF1ow •
FinancingCashF1Dw
yr
Road Map
Road Maps visually organize the topics, eLecture videos,
_..-- Guided Example videos, and assignments by Learning Objective.
Planning :: Operating :: Investing : : Financing
Identify and discuss the users and suppliers of
financial statement information.
1-4
e1-2
Review 1-2
8, 9, 13, 17,18, 22 , 35,
39,60
1-9
e1 - 3
Review 1-3
2, 3, 4, 5,6, 7,21 , 23,
24,25, 26, 27,28, 33,
34, 36, 42, 43,44, 45,
46,52, 56, 58,59
1-18
e1 - 4
Review 1-4
19, 20, 31 , 37,38, 40,
41,42, 43, 44,47, 48,
49, 50, 51 , 57,59
1·22
e1 - 5
Review 1-5
10, 11 , 30
1-26
e1 - 6
12, 26, 27, 31
1-30
e1-7
14, 15, 16, 29,32, 53,
54, 55, 61 , 62
Information Demand :: Information Supply :: Global Setting
Describe and examine the four financial statements,
and define the accounting equation.
Balance Sheet :: Income Statement of Stockholders' Equity ::
Statement of Cash Flows
Explain and apply basic profitability analysis.
Return on Assets :: Return on Equity :: Relevance of Financial
Statements
Assess business operations within the context of a
competitive environment.
Competitive Environment :: Business Environment ::
Competitive Advantage
Access and analyze financial datasets.
Datasets:: www.SEC.gov :: Data Analytics:: Excel::
Data Visualization
Describe the accounting principles and regulations
that frame financial statements (Appendix 1B).
Accounting Environment:: Auditing:: Regulatory and Legal
1-2
1-3
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Reporting on Business Activities
I
assess the
four main
business activities.
electure icons identify
topics for which there
are instructional videos
in myBusinessCourse
(MBC). See the Preface
for more information on
MBC.
The main objective of financial reporting is to provide users with information that supports investment
and management decisions. Although there are many users of financial statements provided by companies, there are three main user groups:
•
In vestors and equity analysts who use financial stateme nt information to judge the company's
profitability and financial strength and to make reasonable estimates of the value of the company's
equity securities.
•
Lenders and credit analysts who use financial statement information to assess the company's ability to repay its debts and to determine how to manage credit risk associated with the company's
debt securities.
Company managers who use financial statements to inform decisions such as where to invest
scarce resources, how to finance those investments, how to maximize the company's profitability,
and how much cash to maintain.
Business Activities To effectively analyze and use accounting information, we must consider the
larger business context- see Exhibit 1.1. The yellow circle at the center of the exhibit captures the
three types of ongoi ng business activities at every firm.
1. Operating activities: companies hire and train employees, manufacture products, deliver services, market and sell the ir products and serv ices, and manage after-sale customer support.
2. Investing activities: companies acquire land, buildings and equipment, grow the business with
new products and services, or acquire other companies to expand into new markets.
3. Financing activities: companies raise cash to fu nd the operating and investing activities. This
includes se lling stock to equity investors and borrowing from banks and other lenders.
Business activities occur within a particular business environment characterized by a number of business forces, including market conditions, competitive pressures, and regulations. These forces affect
the way the company does business and shapes the company 's overarching goals and objectives a long
with the company 's strategy and its strategic planning process. Exhibit 1.1 depicts these forces and
strategic plans in the outer (purplish) ring.
Exhibit 1.1 • Business Activities
_... _
-------~-____
__ .._
----..--....------·---- _____..
•w,.
_______
H
. . .O
....,__
-.-- ·--- ..___,..
..-·-------·.... ....._..._, __..·-..
,. ,,,.
,
, ..,. ,,,.
c..rent financial statements
are inputs into planning
reflect performance and rondition
Income statement
Statement of stockholders' equity
Statement of cash flows
Income statement
Statement of stockholders' equrty
Statement of cash flows
.....__~-----------------~...
~-----------------~"
Reports prepared
!prior year)
I
lnfographics are used
to convey concepts and
procedures.
Period of time
Reports prepared
[current year]
Business Strategy A company's strategic (or business) plan re flects how it plans to achieve its
goals and objectives. A plan's success depends on an effective analysis of market demand and supply.
Module 1
© Cambridge Business Publishers
1-4
Financial Accounting for MBAs
Specifically, a company must assess demand for its products and services and assess the supply of
its inputs (both labor and capital). The plan must a lso include competitive analyses, opportunity assessments, and consideration of business threats. We discuss competiti ve forces later in the module.
Past financial statements (depicted on the left of Exhibit 1.1 ) are an important input into the planning
process. They provide information about the relative success of past strategic plans. Managers use that
information to take corrective action and make new operating, investing, and financing decisions. These
new actions yield the current financial statements (on the right hand side of Exhibit 1.1) and the process
starts anew. Understanding a company's s trategic plan helps focus our analysis o f financial statements by
placing them in proper context.
Lo1
Review 1 ·1
Complete the statements by filling in the blanks .
I. Companies e ngage in the followi ng three types of ongoi ng business activ ities: _ _ _ _ activities,
_ _ _ _ activities, and
ac11v111es.
2. A company's
reflects how it plans to achieve its goals and objectives.
3. In vestors use financial statement information to make reasonable estimates of the value of _ __
4. Lenders use financial statement infonnation to assess the company's ability to _ _ __
5. Company managers use financial statements to decide where to invest
resources.
6. Indicate whether the fo llowing business activities are operating, investing, or finan c ing acti vities.
•
•
•
•
•
•
•
•
•
Manufacturing products
Issuing stock to investors
Repaying a mortgage
Selling services to a cl ient
Acquiring land
Engaging in after-sales support
•
Constructing new manufacturing facil ities
Hiring and training employees
Gaining control of the voting stock of a
supplie r to secure the s upply c hain
Ente ring into a bank loan
Solution on p. 1-48.
Financial Statements: Demand and Supply
Demand for financial statemen ts has existed for centuries as a means to facilitate efficient contracting and ris k-sharing. Decision makers and other stakeho lders demand in formatio n o n a company 's past and prospective retu rn s and ri sks. Supply of financ ial s tatements is dri ven by
companies' wish to lower financing costs and other costs such as political, contracting, and labor.
Managers decide how much financial information to supply by weighing the costs of disclosure against
the benefits of disclosure. Regulatory agencies intervene in this process w ith various di sclosure requirements that establish a minimum supply of information.
Demand for Information
The following broad c lasses of users demand financial accou nting information.
•
Managers and employees
Stockho lders and directors
•
Investment analysts and information
intermediaries
Customers and strategic partners
•
Regulators and tax agencies
•
Creditors and suppliers
•
Voters and their representatives
Managers and Employees
Managers and employees are interested in the company's current and future financial health. This
leads to a demand for accounting information on the financial conditio n, profitability, and prospects
of their companies as well as comparative financial information on competing companies and business
opportunities. This perm its them to benchmark their company's performance and condition. Managers and employees also demand financial accounting information for use in compensatio n and bonus
contracts that are tied to such numbers. The popularity of employee profit sharing and stock ownership
plans has further increased demand for financial information. Other sources of demand include union
contracts that link wage negotiations to accounting numbers and monitor pe nsion and benefit plans
•"ectu,~
L02
' Identify and
discuss the
users and
suppliers of 1inancial
statement in1ormation.
f
Learning Objectives are
highlighted at the start of
the section covering that
topic.
1-5
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
whose solvency depends on company performance. Financia l statements provide useful info rmation
to company managers to address the following types of questions.
•
What product lines, geographic areas, or other segments are performing well compared with our
peer companies and our own benchmarks?
•
Should we consider expanding or contracting o ur business?
•
How w ill current profit levels impact incentive and share-based compensation?
Investment Analysts and Information Intermediaries
Investment analysts and other infonnation intennediaries, suc h as financ ial press writers and business
commentators, are interested in predicting companies' future performance. Expectations about future
profitability and the ability to generate cash impact stock price and a company's ability to borrow
money at favorable terms. Financial reports re flect information about past perfo rmance and curre nt
resources available to companies. These reports also provide infonnation about claims on those resources, including claims by suppliers, creditors, lenders, and stockholders. This information allows
ana lysts to make informed assessments about future financial perfonnance and condition so they can
provide stock recommendations or write commentaries. Financial statements provide useful information to investment analysts to address the following types of questions.
Excerpts of reports
from agencies such as
Credit Suisse, Moody's,
and Deutsche Bank
illustrate how accounting
information is used by
financial services.
•
What are expected future profits, cash flows, and dividends for input into stock-price mode ls?
•
Is the company financ ially solvent and able to meet its financial obligations?
•
How do expectations about the economy, interest rates, a nd the competitive environment affect
the company?
Analysts use financial information to pre pare research reports similar to the one issued in 2019 by
Credit Suisse on Apple Inc. (below). Analysts use balance sheet numbers, inc luding debt and equity
alo ng with income statement numbers, inc luding revenue, earnings per share (EPS), and earnings before inte rest, tax, depreciatio n, and amortization (EBITDA) to compute ratios that inform their price
target ($209) and the ir stock rating (Neutral). We will discuss analysts and the ir activities in mo re
depth later. For now, know that accounting information is a bedrock fo r equity analysis.
11 April 2019
Americas/Un~ed States
Equity Research
CREDIT SUISS~
Rating
Price (09-Apr-19, USS)
Target price (USS)
52-week price range (USS)
Market cap (USS m)
Enterprise value (USS m)
Ta,oet pnoe b r 12 monlhS
NEUTRAL
199.50
209.00
232.07 - 142.19
940,698
1,027,028
Researc:h Analysts
Matthew Cabral
415 249 7929
matthf/'N.cabra'@credrt-suisse.com
Dan Knauff, CFA
415 249 7925
daniet knauff@cfedll-suisse com
Micha el Allen
415 249 7926
michaet alleo@credil-suisse.com
IT Hardware
Aigle Inc (AAPL)
INITIATION
Services Protential vs. iPhone Maturation
•
Initiate at Neutral, $209 TP: As Apple's iPhone matures, the company is
looking to transfonn itse~ into a more recurring, higher.grow1h, and ultimately
higher-value business as it pushes to increasingly monetize its massive
900mm iPhone installed base. We recognize the potential in the shift to
Services, which we expect will reach S65bn in revenue by FY21. but believe
~ will take time for that view to play out. Near-tenn upside from here likely
requires the multiple to re-rate higher, investor perception of Apple as a
hardware-centric company will be hard to shake against a backdrop of
double-dig~ iPhone sales declines (CSe -11% y/y in CY19). in our view. Wrth
the stock up 40% from ~s Jan low and near a peak multiple (1 Sx CY20 EPS),
we remain on the sidelines awaiting a better entry point and/or line-of-sight to
significant Services-led upside to break out of the historical valuation range.
Creditors and Suppliers
Banks and other lenders demand financ ial accounting infonnation to he lp determine loan terms, loan
amounts, interest rates, and required collateral. Loan agreements often include contractual requirements, called covenants, that restrict the borrower 's behav ior in some fashion. For example, loan
covenants might require the loan recipient to maintain minimum levels of working capital, retained
© Cambridge Business Publishers
Module 1
1-6
Financial Accounting for MBAs
earnings, and interest coverage to safeguard lenders. If covenants are violated, the lender can demand
early payment or other compensation. Suppliers demand financ ial information to establish credit terms
and to determine their long-term commitment to supply-cha in relations. Both credito rs and suppl iers
use financ ia l information to monitor and adjust their contracts and commitments with a company.
Financial statements provide usefu l information to creditors and suppliers to address the following
types of questions.
•
Should we extend credit in the form of a loan or line of credit for inventory purchases?
•
What interest rate is reasonable given the company's current debt load and overall risk profile?
•
Is the company in compliance with the existing loan covenants (loan conditions that restrict the
borrower's behavior in some fashion, such as minimum levels of working capital, retained earnings, and cash flow, which safeguard lenders)?
Follow ing is Apple, Inc's disclosure of loan covenants on its credit faci lity (a line of credit) from a
recent ann ual report.
Credit Facility We are party to a credit agreement that provides revolving commitments for up to $1.25
billion of borrowings, as well as term loan commitments, in each case maturing in January 2021 .. ..
The credit agreement contains negative covenants that, subject to significant exceptions, limit our
ability to, among other things, incur additional indebtedness, make restricted payments, pledge our
assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a ratio
of consolidated EBITDA, as defined in the credit agreement, to consolidated interest expense of not
less than 3.50 to 1.00 and are not permitted to allow the ratio of consolidated total indebtedness
to consolidated EBITDA to be greater than 3.25 to 1.00 .. . . As of December 31 , 2018, we were in
compliance with these ratios.
Stockholders and Directors
Stockholders and directors and others (such as investment analysts, brokers, and potential investors)
de mand fi nancial accounting informatio n to assess the profitabi lity and risks of companies and other
information useful in their in vestment decisions. Fundamental analysis use s financial information
to estimate company value and to fo rm buy-sell stock strategies. Both directors and stockholders use
accounting information to evaluate managerial performance. Outside directors are crucial to determining who runs the company, and these directors use accounting information to help make leadership
decisions. Financial statements provide useful information to stockholders and directors to address
the fo llowing questions.
•
Is company management demonstrating good stewardship of the resou rces that have been entrusted to it?
•
Do we have the information we need to critically evaluate strategic initiatives that management
proposes?
Customers and Strategic Partners
Customers (both current and potential) demand accounting information to assess a company's ability
to provide products or services and to assess the company's staying power and reliability. Strategic partners wish to estimate the compa ny's profitability to assess the fairness of returns on mutual
transactions and strategic a lliances. Financ ial statements provide useful info rmation to customers and
strategic partners to address the fo llowing questions.
•
Will the company be a re liable supplier?
•
Is the strategic partnership providing reasonable returns to both parties?
Regulators and Tax Agencies
Reg ulators (such as the Sec urities and Exchange Commission [SEC], the Federal Trade Commissio n, and the Federal Reserve Bank) and tax agencies demand accounting information for antitrust
Excerpts from recent
financial statements are
used to illustrate and
reinforce concepts.
/
1-7
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
assessments, public protection, setting prices, import-export analyses, and setting tax polic ies. Timely
and reliable information is crucia l to effective regulatory policy, and accounting information is often
central to social and economic policies. For example, governments often grant monopoly rights to
electric and gas companies serving specific areas in exchange for regulation over prices charged to
consumers. These prices are mainly determined from accounting meas ures.
Voters and Their Representatives
Voters and their representatives to national, state, and local governments demand accounting information for policy decisions. The dec isions can invo lve economic, social, taxation, and other initiatives.
Voters and their representatives also use accounting information to monitor government spending.
Contributors to nonprofit organizations a lso demand accounting information to assess the impact of
their donations.
Supply of Information
In general, the quantity and quality of accounting information that companies supply are determined
by managers' assessment of the benefits and costs of disclos ure . Managers release information provided the benefits of disclosing that information outweigh the costs of doing so. Both regulation and
bargaining power affect disclosure costs and benefits and thus play roles in determining the supply of
accounting information. Most areas of the world regulate the minimum levels of accounting disclosures. In the United States, publicly traded firms must file financial accounting information with the
SEC. There are two mai_n compulsory SEC filings.
•
Form 10-K: the audited annual report that includes the four financial statements, discussed below,
with explanatory notes and the management's discussion and analysis (MD&A) of financial results.
•
Form 10-Q: the unaudited quarterly report that includes summary versions of the four financial
statements and limited additional disclosures.
Forms 10-K (which must be filed within 60 [90) days of the year-end for larger [smaller] companies) and
I 0-Q (which must be filed within 40 [45] days of the quarter-end for larger [smaller] companies, except
for the fourth quarter, when it is part of the I 0-K) are available electronically from the SEC website
(see Appendix l A). The minimum, regulated level of information is prescribed by SEC regulations, but
both the quantity and quality of information differ across companies and over time. We need only look
at several annual reports to see considerable variance in the amount and type of accounting i_nformation
supplied. For example, differences abound on disclosures for segment operations, product performance
reports, and financing activ ities. Further, some stakeholders possess ample bargaining power to obtain
accounting information for themselves. These typically include private lenders and major suppliers and
customers.
There are a number of datasets that aggregate financial statement data (including SEC data), to aid
access to financial statement information for a single firm or for large sets of firms. Most university
libraries have subscriptions to one or more of the following datasets that we can access without charge.
•
Compustat
•
Mergent Online
•
EMIS (for emerging-market companies)
Datasets consist of data that are "scrubbed" and formatted. Yet, we can use computer languages such
as Python, R , or Java to gathe r data di_rectly from the SEC website. This makes it poss ible to perform
more-sophisticated textual analyses. For analyses in this text we use ex isting datasets and simpler
programs such as Excel and Power BI, which are w idely available Microsoft tools. We discuss this in
more detail in Appendix lA.
Benefits of Disclosure
The benefits of supplying accounting information extend to a company's capital, labor, input, and
output markets. Companies must compete in these markets. For example, capital mar kets provide
debt and equity financing; the better a company's prospects, the lower is its cost of capital (as reflected in lower inte res t rates or higher stock prices). The same holds for a company's recruiting
© Cambridge Business Publishers
Module 1
Financial Accounting for MBAs
efforts in labor markets and its ability to establish superior supplier-customer relations in the input
and output markets.
A company's performance in these markets depends on success with its business activities and the
market's awareness of that success. Companies reap the benefits of disclosure with good news about
their products, processes, management, and so forth. That is, there are real economic incentives for
companies to disclose reliable (audited) accounting information, enabling them to better compete in
capital, labor, input, and output markets.
What inhibits companies from providing false or misleading good news? There are several constraints. An important constraint imposed by stakeholders is that of audit requirements and legal
repercussions associated with inaccurate accounting information. Another relates to reputation effects
from disclosures as subsequent events either support or refute earlier news.
Costs of Disclosure
Costs of supplying financial information include the following.
•
Preparation and dissemination costs. Even though companies might already have gathered
information for internal use, the cost of auditing the information and complying with the SEC's
rules can be time consuming and costly.
•
Competitive disadvantages. Disclosing product or segment successes, strategic alliances or pursuits, technological or system innovations, and product or process quality improvements could
reduce or eliminate a company's competitive advantage.
•
Litigation. Ri sk of litigation increases if companies disclose information that c reates expectations
that are not met. The cost of defending against customer or investor lawsuits in not inconsequential even for cases that are di smissed.
•
Political costs. Hi ghly visible companies can face political and public pressure. For example,
government defense contractors, large software conglomerates, and oil companies are favorite
targets of public scrutiny. Extra disclosure can increase this scrutiny.
The SEC adopted Regulation Fair Disclosure (FD), or Reg FD for short, to curb the practice of selective disclosure by public companies (called issuers by the SEC) to certain stockholders and financial
analysts. In the past, many companies disclosed important information in meetings and conference
calls that excluded indi vidual stockholders. The goal of this rule is to level the playing field for all
investors. Reg FD reads as follows: "Whenever an issuer discloses any material nonpublic information
regarding that issuer, the issuer shall make public disclosure of that information ... simultaneously,
in the case of an intentional disclosure; and ... promptly, in the case of a non-intentional disclosure."
Reg FD increased the cost of voluntary financial disclosure and led some companies to curtail the
supply of financial information to all users.
International Accounting Standards
Companies in more than 120 countries, including the European Union, the United Kingdom, Canada,
and Japan use International Financial Reporting Standards (IFRS) for their financial reports. Headquartered in London, the International Accounting Standards Board (IASB) oversees the development
of IFRS. While the IASB and the Financial Accounting Standards Board (FASB) operate as indepe ndent standard-setting bodies, the two boards work together cooperatively, often undertaking joint
projects. Consequently, IFRS and U.S. GAAP (generally accepted accounting principles) are generally
more alike than different for most transactions.
Currently, there is no formal plan for the U.S. to transition to IFRS or for the IASB and FASB to
converge; however, both boards believe comparable global accounting standards are desirable because
comparability would
•
Improve the quality of financial reports.
•
Benefit investors, companies, and other market participants who make global investment decisions.
•
Reduce costs for both users and preparers of financial statements.
•
Make worldwide capital markets more efficient.
1-8
1-9
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Evidence of increasing " comparability" of U.S. GAAP and IFRS includes the following.
•
Since 2007, the SEC has permitted foreign companies to file IFRS financial statements without
requiring reconciliation to U.S. GAAP. Currently, more than 500 companies with a cumulative
market capitalizatio n of trillions of dollars report to the SEC using IFRS.
•
The FASB participates actively in the development of IFRS, providing input on IASB projects
through the IASB 's Accounting Standards Advisory Forum (ASAF).
•
Recent joint projects between the two boards relate to leases, financial instruments, revenue recognitio n, and insura nce contracts.
We might ask: are fi_nancial statements prepared under IFRS substantially different from those prepared under U.S. GAAP? At a broad level, the answer is no. Both are prepared using accrual accounting
and utilize somewhat similar conceptual frameworks. Both require the same set of financial statements:
a balance sheet, an income statement, a statement of cash flows, a statement of stockholders' equity,
Review Problems are
and a set of explanatory footnotes. That does not mean that no differences exist. However, the differself-study tools that
ences are typica lly technical in nature , and do not differ on broad principles di scussed in this book.
require the application
of accounting topics
At the end of each module, we summarize key differences between U.S. GAAP and IFRS. Also,
covered in each section.
there are a variety of sources that provide more detailed and technical analysis of similarities and difTo aid learning, solutions
ferences between U.S. GAAP and IFRS. The FASB, the IASB, and each of the "Big 4" accounting
are provided at the end of
firms al so maintain we bsites devoted to this issue. Search under IFRS and PwC, KPMG, EY, and
the module.
Deloitte. The two standard-setting bodies also provide usefu l information. See: FASB (www.fasb
.org/intl/) and IASB (www.ifrs.org).
\
Review 1 ·2
Lo2
Required
Match the users of fi nancial statement infonnation with the types of questions they would typically ask and
answer using accounting data .
I.
II.
m.
IV.
Y.
- - VI.
Managers and employees
Investment analysts
and infonnation
intermed iaries
Cred itors and s upplie rs
Stoc kholders a nd
directors
Customers and strategic
partne rs
Regulators and tax
agenc ies
a.
h.
c.
d.
e.
f.
Solution on p. 1-49.
ls company manageme nt demonstrating good stewardship of
the resources that have been e ntrusted to it?
W hat product lines have pe rformed well compared with
competito rs?
What regulated price is appro priate give n the company's
fi nancial condition?
Is the strategic partne rship providing reasonable returns to
both parties?
W hat expectations abo ut the company's future profit and
cash now should we use as input into the pric ing of its stock?
Is the company in compliance with the contractual te m1s of
its e xisting loan co venants?
Structure of Financial Statements
and
examine
the four financial
statements,
and define the
accounting equation.
Companies use four financial statements to periodically report on business activities. These statements
are the balance sheet, income statement, statement of stockholders' equity, and statement of cash
flows. Exhibit 1.2 shows how these statements are linked across time. A balance sheet reports on a
company's financial positio n at a point in time. The income statement, statement of stockholders'
equity, and the statement of cash flows report on performance over a period of time. The three statements in the middle of Exhibit 1.2 (period-of-time statements) link the balance sheet from the beginning to the end of a period.
A one-year, or annual, reporting period is common and is called the accounting (fiscal) year.
Of course, firms prepare financial statements more frequently; semiannual, quarterly, and month ly
financial statements are common. Calendar-year companies have reporting periods beginning on
January I and ending on December 3 1. Some companies choose a fiscal year ending on a date other
than December 31. Sometimes the fiscal year end coincides with a time when inventory is at a low
© Cambridge
Module 1 Financial Accounting for MBAs
Bus iness Publishers
point or at the end of a natural business cycle. Other times, the fiscal year is an industry standard. Most
companies end their fiscal year on the same date each year (such as May 3 1). Other companies select
a fiscal year that ends on the same week day each year. For example, many U .S. retaile rs have a fiscal
year ending on the Saturday c losest to Fe bruary !-some years that will be in late January, other years
in early February. Apple, Inc. ends its fiscal year on the last Saturday in September.
Exhibit 1.2 • Financial Statement Links across Time
Statement of
Cash Flows
Statement of
Stockholders'
Equity
(beginning-ofperiod)
1=
Balance Sheet
(end-ofperiod)
Income
Statement
L======~~~=·=~
Balance Sheet
A balance sheet reports a company's financial position at a point in time. T he balance sheet reports
the company's resources (assets), namely, what the company owns. The balance sheet al so reports the
sources of asset financin g. There are two ways a company can finance its assets. It can raise money
from stockholders; this is owner f inancing. It can also raise money from banks or other creditors and
sup pliers; this is nonownerfinancing. T his means both owners and nonowne rs hold claims on compa ny assets. Owner claims on assets are referred to as equity, and nonowner claims are referred to as
liabilities (or debt). Since all financing m ust be invested in something, we obtain the following basic
relation: investing equals financing. This equality is called the accounting equation, which follows.
'
Assets
/
Nonowner
F inancing
=
Investing
=
+
+
Liabilities
Owner
F ina ncing
Equity
The accounting equation works for all companies at all points in time.
Apple 's balance sheet (condensed) is in Exhibit 1.3. Its accounting equation follows($ millions).
Real Companies and
Institutions are highlighted
in bold, blue font.
Assets
$365,725
=
Liabilities
+
Equity
$258,578
+
$ 107,147
Investing Activities
Balance sheets are prepared at a point in time and are organized like the acco unting eq uation. Investing activities are represented by the company's assets. These assets are financed by a combination of
nonowner fi nancing (liabilities) and ow ner financing (equity).
Apple's condensed balance sheet in Exhibit 1.3 categorizes assets into short-term and long-term assets (Module 2 explains the compositio n of assets in more detail). Assets are listed on the balance sheet
in order of their nearness to cash, with short-term assets (also called current assets) expected to generate
1-10
1-11
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
cash within one year from the balance sheet date. For example, the first short-term asset listed is cash,
then accounts receivable (amounts owed to Apple by its customers that will be collected in cash in the
near future), and then inventories (goods available for sale that must first be sold before cash can be collected). Land, buildings, and equipment (often referred to as property, plant, and equipment or just PPE)
will generate cash over a long period of time and are, therefore, classified as long-term assets.
Real financial
data for focus
companies
illustrate key
concepts of each
module.
Report amounts
at a point in time
r
~
~===~
r
Investing
~------~
Assets
Short-term assets ....... . . • .................•......•...........•...... • ...... • .
$131,339
234,386
~: ;a~-~:~:t:sset·s· : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :
$365,725
Li~~i~~~=rm liabilities ..... . ................... . .... . ............. • ...... • ... .. . . .
Long-te rm lia bilities . .... . . . .... . .. .. ...... . .. • . .. . .. • . ....... . .. • ..... . • . .. . .. • .
$116,866
141 ,712
Total resources
Financing
:======::::
Nonowner
financing
---+
Total liabilities . .. . ... .. . . . .. ... .. .. ... .. . ...•.. . .. . • .. .. . . ... .. • ... ...•.. . .. . ..
258,578
St ockholders' Equity
Contributed capital ... .. . .. . . ... . .... .. .. . .. . ... . .. .. .. .. . . ... .. . . ... ..... . .. . . .
Retained earnings . ... ..... . . . .... .. .......... . . ...... . .•.... . ........... . ..... .
I
40,201
70,400
(3,454)
Owner financing
' - - - - - - - - - '~
Other equity · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · • · · · · · · · · · · · · · · ·
Total stockholders' eq uityt ....................•......•...........•...... • ...... • .
107,147
-
Total liabilities and equity .....................•......•...........•...... • ...... • .
$365,725
Total financing of
resources
• Financial statement titles often begin with the word consolidated. This means the financial statement includes a parent company
and one or more subsidiaries. which are companies the parent company controls.
t Components of equity are explained as part of Exhibit 1.5.
The relative proportion of short- a nd long-term assets is largely de termined by a company's
industry and business mode l. Th is is evident in the graph to the side that depicts the relative proportion of short- and long-term assets fo r a number of well-known companies.
•
Larger investments in short-term assets occur at companies such as Best Buy, Starbucks, and
Nordstrom's that carry re latively high levels of inventories. High current assets also occur for
technology companies like Alphabet (formerly Google) and Cisco that have high cash balances
and large investments in marketable securities that are classified as short-term because they can
be sold quickly in financial markets.
Manufacturers such as 3M, Johnson & Johnson, and Colgate-Palmolive require more investment in property, plant, and equipment in addition to large investments in inventories and accounts receivable fro m customers.
•
Relative Proportion of Short-Term and Long-Term Assets
100%
I
60% I
40% I
20% I
0% I
I
I
I
I
I
{!><c
,J~·
80%
IIIIII
IIIIII
IIIIII
IIIIII
IIIIII
I
I
I
I
I
II
II
II
II
II
I
I
I
I
I
II
II
II
II
II
I
I
I
I
I
II
II
II
II
II
I
I
I
I
I
~0~~~~~~~~~ffe~~~~~0
e:,G e:,<o ,$'- ,,.-v. ~~ ~"?' 0\1:. ~ ~ ,.S, ~ /. ~ .f2 ~ 0<:-:,·
~~0~"\?t":~o~ ~·f':,§"'·:,i:~~:.~~~<:-"0:0~-S-<~o<:-:~:~~".~~:-s'l>~<o~~~
~<c~:i;~###~
"?' ·ip
/
~
(]
•
~
~o:,
(]
~#~?/~~/
,._~ ,ou $
?:f
§Po
'§''<:-
Short-term assets
,<:-
•
~
e:,O
,l
Long-term assets
At the other end of the spectrum are
transportation companies like Southwest Airlines and communicati ons
companies like Comcast whose business mode ls require significant in vestment in lo ng-term equi pment, such as
planes and te lecom infrastructure.
Although managers can infl uence the relative amounts and proportion of assets, the ir
flexibi lity is somewhat limited by the nature
of their ind ustries.
Module 1
© Cambridge Business Publishers
1-12
Financial Accounting for MBAs
Financing Activities
To pay for assets, companies use a combination of owner (or equity) and nonowner financing (liabilities or debt). Owner financing has two components: resources (mostly cash, but sometimes noncash
assets) contributed to the company by its owners, and profits retained by the company. Nonowner
financing is borrowed money. We distingu ish between these two financing sources for a reason: borrowed money must be repaid , and failure to do so can result in severe consequences for the borrower.
Equ ity financing entails no such obligation for repayment.
The relative proportion of nonowner and owner financing is largely determ ined by a company's
industry and bus iness model. This is evident in the graph to the side.
•
Companies with relatively stable cash flows
can operate more comfortably with a higher
level of debt. Caterpillar, for example, sells
much of its equipment on lease and the predictability of lease payments allows CAT
to carry more debt. General Mills operates
in the relatively stable consumer staples
industry.
•
Relative Proportion of Liabilities and Equity
100% ,._.._.........
80% ______
60% i-m__..........
40% i-m-.i-mr20% ~--I-ml-
Colgate-Palmolive, Starbucks, and Best
Buy have used their stable cash flow to repurchase significant amounts of their common stock in order to boost returns for their
shareholders. This has the effect of increasing debt relative to equity.
•
•
Liabilities
•
Equity
Manager Insights
challenge us to
think like a manager
and consider
the company's
accounting
choices and their
consequences.
At the other end of the spectrum are companies like Alphabet, and Intel that, like most technology companies, have higher levels of business risk. To offset the higher business risk, these
companies reduce the level of financial risk by substituting equity capital for borrowed funds.
Most public companies tend to use slightly more debt than equity in their capital structures.
Manager Insights
Balance sheet considerations
We have provided a sneak preview into the interplay among financial statements, managerial decisions, economic
conditions, and the competitive landscape. We have used terms and concepts that might be unfamiliar to you. We
might start thinking about the following sorts of questions from a manager's perspective.
•
•
/
Alphabet reports $109.1 billion of cash on its 2018 balance sheet, nearly half of its total assets. Many high-tech
companies do likewise. Why is that? Is it costly to carry too much cash?
A company's business model largely dictates the relative proportion of short- and long-term assets. Why is this
the case? Why is the composition of assets similar for companies in the same industry?
•
What are the trade-offs in financing a company by owner versus nonowner financing? If nonowner financing
is less costly, why don't companies finance themselves entirely with borrowed money?
How might stockholders influence the strategic direction of a company? What about bankers and other lenders
-can they influence strategic direction?
IFRS Insights
examine issues related
to similarities and
differences in accounting
practices of U.S. and
other countries.
Most assets and liabilities are reported on the balance sheet at the price the company paid to acquire them
(called historical cost). Would reporting assets and liabilities at fair values be more informative? What problems
might that cause?
I FRS Insight
•
Balance Sheet Presentation and IFRS
Balance sheets prepared under IFRS often classify accounts in reverse order of liquidity (lack of nearness to cash),
which is the opposite of what U.S. companies do. For example, intangible assets are typically listed first, and cash
is listed last among assets. Also, equity is often listed before liabilities, where liabilities are again listed in order of
decreasing liquidity. These choices reflect convention and not IFRS requirements.
/
1-13
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Income Statement
An income statement re ports on a company's performance over a period of time and I ists amounts for
its top line revenues (also called sales) and its expenses. Revenues less expenses equals the bottom-line
net income amount (also called profit or earnings). Apple, as is typica l of companies that sell products,
reports two basic kinds o f operating ex penses.
•
Cost of goods sold (COGS, also called cost of sales). Whi le revenues rep resent the retai l selling
price of the goods sold to customers, cost of goods sold is the amount Apple paid to purchase or
manufacture the goods (invento rie s) that it sold. Manu facturing and merchandising companies
typically include a subtotal called gross profit, which is revenues less cost of goods sold. For
example , if it costs a company $7 to purchase or manu facture an item of inventory and the item
se lls fo r $ 10, the income statement reports revenues of $ 10, cost of goods sold of $7, and a
gross profit of $3. We use the term gross to mean the profit available to cover all other expense s.
•
SelJing, general, and administrative expenses (SG&A). This is Apple's ove rhead and incl udes
salaries, marketing costs, occ upancy costs, HR and IT costs, and all the other operating expenses
the company incurs other than the cost of purchasing o r manufacturing inventory (which is included in cost of goods sold).
Apple's income stateme nt is in Exhibit 1.4. Refer to the income statement to verify the fo llowing: revenues of $265,595 mill ion, cost of goods sold of $ 163,756 million, and operating expenses of $30,94 1
million. After interest income, net and income taxes, the company reports net income of $59,53 1 million. Net income reflects the profit (or earnings) to the company's shareholders for the period.
Report amounts over a period of time
I Sales to customers
Cost to purchase or manufacture the
inventory sold
~ - -..
• Net revenues .. .. ... . . .. . . . .. . . . . . .. . . . . . .. .. .... .. . . . .
1 - - - - -• Cost of goods sold ... . ...... . • . .. . ... . .. ..... ... •. . .....
I Company overhead
Gross profit. . .. . .... .. ........ . ...... . ... . ... .. . . .... . .
1-----•11o Selling, general and administrative expenses .. ... . ... • ..... . •
I investment income or expense
Income from operations .... . . .. . .. . ... . . . . ..... . ... .. . . .•
1-----•11o Interest income, net . ........ . • . .. . . . .. . ...... . .. • . . ... . •
70,898
2,005
Income before taxes . ........ . . . . . .. . .. . .... . .... . . .... . .
-ln-co_m_e-ta_x_e_s_o_n_p_ro-f-it-ea_r_n-ed------,>-----+Jlo Provision for income taxes ... ..• .. . .. • .. . ....... . .• .. .....
72,903
13 ,372
~ - - + Net income .. ... . .... . .... .. • . . . .... . . • ........ . .... . ..
$ 59,531
I'
Remaining profit available to shareholders
To generate net income, companies engage in operating activities that use company resources to produce, promote, and sell products and services. T hese activitie s extend from input markets involving
suppliers of materia ls and labor to a company's o utput markets, involving c ustomers of products and
servi ces. Input markets generate most expenses (or costs) suc h as inventory, salaries, materials, and
log istics. Output marke ts ge nerate revenues (or sales) to customers. Output markets a lso generate
some expe nses such as marketing and distributing prod ucts and services to customers. Net income
arises when revenues exceed expense s. A net loss occurs when expenses exceed reve nues.
Relative profitability (net income as a percent of sales) di ffers widely across ind ustries and even
among companies in the same industry. Although effective managers can increase the ir company's
profi tabi lity, business models play a large part in determining profit leve ls. These d ifferences a re
illustrated in the graph ( be low) of net income as a percent of sales for several companies.
•
Retailers such as Best Buy, CVS, Target, Nordstrom and Macy's operate in a mature industry and
have difficulty differe ntiating their products. Hence, their net income as a percent of sales is low.
•
At the other end of the spectrum are companies like Intel, Apple, Johnson & Johnson, Cisco,
and Alphabet that enjoy higher levels of operating profit res ulting fro m patent protectio n
© Cambridge Business Publishers
for their intellectual property and companies like
Colgate-Palmolive, Procter & Gamble, and 3M
whose brands are well-established and command
highe r market prices and yield highe r levels of
profitability.
Module 1
Financial Accounting for MBAs
Operating Income as a Percent of Sales
Companies' ability to create barriers to competitive pressure, either by patent protection, effective marketing, or
otherwise, is a key factor in determining their level of
profitability. Those that compete in highly competiti ve
markets with little product differentiati on must concentrate on controll ing operating expenses to offset lower
gross profits.
Manager Insights
•
Income statement considerations
Put yourself in the position of a senior company manager and think about the following situations.
•
You sel l to customers who promise to pay in 30 days. When should you (the seller) recognize the sale-when
it is made or when cash is collected?
•
Your company purchases a new building and reports the cost on the balance sheet as a long-term asset. What
do you think of recording the entire cost of the building as an expense on the income statement in the year it
is acquired?
•
As a manufacturer, your company reports the cost of a product as an expense when the product is sold. How
might you measure that cost? What sorts of items might be included in the calculation?
If a piece of land increases in value, that increase is not reported as income until the land is sold. What consequences can you imagine if land appreciation was reported as income each year?
Most of your employees are paid with a two-week lag. When should your company (the employer) record
wages expense-in the period the employees worked or when you eventually pay the wages?
•
Companies are not allowed to report profit when they sell their own shares of stock. Nor do they report an
expense when dividends are paid to stockholders. Why do you suppose this is the case?
Statement of Stockholders' Equity
The statement of stockholders' equity reports on year-over-year changes in the equity accounts that
are reported on the balance sheet. For each type of equity, the statement reports the beginning balance,
a s ummary of the activity in the account during the year, and the ending balance. Apple's statement
of stockholders' equity is in Exhibit 1.5. During the recent period, its equity changed because Apple
issued shares and retained a profit. The company classifies these changes into three categories.
•
Contributed capital, the stockholde rs' net contributi ons to the company.
•
•
Retained earnings, net income over the life of the company minus a ll div idends ever paid.
Other equity, consists of amounts we explain later in the book.
Exhibit 1.5 reconci les the activity in each of the equity accounts from the balance sheet in Exhibit
1.3. We briefly discuss the two larger accounts here and explain the accounts in depth in Module 8.
•
Contributed capital represents assets the com pany received from issuing stock to stockholders
(also called shareholders). T he balance of th is account at the beginning of the year was $35,867
million. During the year, Apple sold additional shares for $4,334 million to yield a year-end balance of $40,20 1 million.
•
Retained earnings (also called earned capital or reinvested capital) re present the c umulative
total amount of income the company has earned and that has been retained in the business; that
is, not distributed to stockholders in the form of dividends. The change in retained earnings links
consecutive balance sheets via the income statement:
1-14
1-15
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Beginning retained earnings
+ Net income for the period
- Dividends for the period
Ending retained earnings
Apple 's retained earnings increased by the $59,531 milli on of net income reported in its income
statement and decreased by the $ 13,735 mi ll ion of dividends paid to shareholders. These dividends
are a distribution of the shareholders' investment in the company and are not treated as an expense in
the income statement. T hat is why they are included as a separate row in the computation of ending
retained earnings. The ta ble also reveals a decrease of ($73,056 + $670) million in retained earnings.
This represents another distribution to the shareholders: the amount Apple paid to repurchase commo n
stock from shareholders (Apple retired those shares, which we explain in Module 8).
Exhibit 1.5 • Statement of Equity ($ millions)
APPLE, INC.
Statement of Stockholders' Equity
For Year Ended September 29, 2018
Report amounts over
a period of time
,___ __
Beginning period
amounts
L _ _ _ _ _ _- - 1 - - --
september 30, 2017 ........•...... • .. .. ..
Net income ............... . ............ .
Dividends ......... • . .. ...• ... ...•.. . ...
Stock repurchase ... • ......•......•......
Other. ................... .. ..... . ..... .
4,334
1-----1~~september 29, 2018 ............... . ..... .
$40,201
Change in balances
during the period
I Ending period
Contributed
Capital
U
Retained
Earnings
.....
Other
Equity
Total
'
••
• •
$70,400
••
••
(3,304)
$(3,454)
..
$107, 147
amounts
Annotations are
used to aid learning.
Statement of Cash Flows
The statement of cash flows reports the change (either an increase or a decrease) in a company's
cash balance over a period of time. The statement reports cash inflows and outflows from operating,
investing, and financing activities over a period of time. Apple's statement of cash flows is shown in
Exhibit 1.6.
Exhibit 1.6 • Statement of Cash Flows($ millions)
Report amounts over
a period of time
Cash amounts per
balance sheet
APPLE, INC.
Statement of Cash Flows
For Year Ended September 29, 2018
Operating cash flows .. .... • .. . .. .. •........
Investing cash flows ..... .. ........ . ....... .
Financing cash flows ......• ....... • ........
$77,434
16,066
(87,876)
Net increase in cash ........ . . . .... . ...... . .
Cash, September 30, 2017 .. ....... .... .. .. . .
5,624
20,289
Cash, September 29, 2018 .......... . ....... .
--$25,913
Apple's cash balance inc reased by $5,624 million in fiscal 2018 owing to the following three activities:
•
Operating activities. The increase of $77,434 million from operating activities represents the
net cash that Apple generated from its core business activities of making and selling products and
services to its customers.
•
Investing activities. Investing cash flows inc lude cash outflows for the purchase of property,
plant and equipment (PPE assets) and inflows and outflows of cash for sales and purchases of
Module 1
© Cambridge Business Publishers
Financial Accounting for MBAs
1-16
marketable securities. ln 2018, Apple red uced its investments in marketable securities, which
generated cash.
•
Financing activities. Financing cash flows relate to borrowing and repayment of debt, sales and
repurchases of stock, and the payment of dividends. During 2018, Apple's most significant items
included a cash outflow of $ 13,712 million for dividends paid to shareholders and a cash outflow
of $72,738 million to repurchase common stock from Apple shareholders.
It is important to re inforce one point that we c ite above: Apple's cash flow from operating activities of $77,434 million does not equal its net income of $59,531 million. This is typical and is due to
timing differences between when revenue and expense items are recognized on the income statement
and when cash is received and paid. (We discuss this concept further in subsequent modules.)
Both cash flow and net income numbers are important for business decis ions. Each is used in security valuation models, and both help users of accounting reports understand and assess a company 's
past, present, and future business activities.
Manager Insights
•
Statement of cash flows considerations
Put yourself in the position of a senior company manager and consider the following issues.
•
Your accounting department prepares the statement of cash flows. Aren't the balance sheet and income state·
ment sufficient?
•
What types of information, disclosed in the statement of cash flows, can help you make important decisions?
Is it critical for your company to report positive operating cash flow? What are the implications if operating cash
flows are negative for an extended period of time?
•
Why is it important for your company to report its investing cash flows? Which is more favorable, positive or
negative investing cash flows?
Is it useful to know the cash implications of your company's financing activities? What questions might that
information help you answer?
How might the composition of operating, investing, and financing cash flows change over your company's
life cycle?
Review the Apple statement of cash flows summarized in Exhibit 1.6, and think about these questions.
We provide answers for each of these questions as we progress through the book.
Information Beyond Financial Statements
Important financial information about a company is communicated to various decision makers through
means other than the four financial state ments. These include the following.
•
Management Discussion and Analysis (MD&A)
•
Independent auditor report
•
Financial statement footnotes
•
Regulatory filings, including proxy statements and other SEC fi lings
We describe and explain the usefulness of these additional information sources throughout the book.
Managerial Decision
•
You Are the Product Manager
The,e ;, olteo frictioo betweeo ;a,,stms' oeed Im ;,to,matioo aod a compaoy's desie to safeg,a<d compem,e /
advantages. Assume you are a key-product manager at your company. Your department has test-marketed a potentially lucrative new product, which it plans to further finance. You are asked for advice on the extent of information to
disclose about the new product in the MD&A section of the company's upcoming annual report. What advice do you
provide and why? (Answer, p. 1·34]
Managerial
Decisions require
us to assume
various roles within
a business and
use our accounting
knowledge to
address an issue.
Solutions are
provided at the end
of the module.
1-17
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Managerial Choices in Financial Accounting
Some people mistakenly assume financial accounting is an exact di sc ipline- that is, companies se lect
the one proper accounting method to account for a transactio n and then fo llow the rules. The reality
is that GAAP allows companies choices in preparing financ ial statements. The choice of methods can
yield financial statements that are markedly different from one another in terms of reported income,
assets, liabilities, and equity amounts.
People often are surprised that financ ia l statements comprise numerous esti mates. For example,
companies must est ima te the amounts that will eventuall y be collected from customers, the length
of time that buildings a nd equipment will be productive, the value impairments of assets, the fu ture
costs of warranty claims, the eventua l payouts on pension plans, and numerous other estimates.
Historically, the FASB has promulgated standards that were quite complicated and replete with
guidelines. In recent years, the pendulum has begun to swing away from such rigid ity. Now, once
fi nancial statements are prepared, company management is re quired to step back from the details and
make a judgment on whether the statements taken as a who le " fairly present" the fi nancial condition
of the company as is asserted in the company's audit report (see below).
Moreove r, since the enactment of the Sarbanes-Oxley Act (SOX) in 2002, the SEC requires the
chief executive officer (CEO) of the company and its chief financial officer (CFO) to personally sign
a statement attesting to the accuracy and completeness of the financ ial statements. This requirement
is an im portant step in maintaining confidence in the integrity of financial accounting. The statements
signed by both the CEO and CFO contain the following declarations.
•
Both the CEO and CFO have personally reviewed the annua l report.
•
There are no untrue statements of a materia l fact that would make the statements misleading.
•
Financial statements fairly present in all material respects the fi nancial condition of the company.
•
All material facts are disclosed to the company's auditors and board of directors.
•
No changes to its system of internal controls are made unless properly communicated.
SOX also imposed fi nes and potential jail t ime for executives for untrue statements or omissions
of important facts. Pres umably, the prospect of personal losses is designed to make these exec utives more vigilant in mon itoring the financial accounting system. More recently, Congress passed
the Wall Street Reform and Consumer Protection Act of 20 IO (or the Dodd-Frank Act). Among the
provisions of the act are rules that strengthened SOX by augmenting "claw-bac k" provisions for
executives' ill-gotten gains.
Research Insight
/
Research Insights
introduce relevant
research findings on
the topics presented.
•
Quality of Earnings
A recent study conducted a survey of nearly 400 CFOs on the definition and drivers of earnings quality, with an
emphasis on the prevalence and detection of earnings misrepresentation. The CFOs cited the hallmarks of earnings
quality as sustainability, absence of one-time items, and backing by actual cash flows. However, they also believe
that, in any given period, a remarkable 20% of companies intentionally distort earnings, even while adhering to GAAP.
The magnitude of the average misrepresentation is large: 10% of reported earnings.
What are the lessons for us? We can become informed and critical readers of financial reports by first understanding how reports are constructed and the types of assumptions and estimates that are used in their preparation.
Much of this information is contained in the footnotes to the financial statements. This textbook will help you acquire
the knowledge needed to become an informed and critical reader of financial reports.
Source: Ilia Dichev, John Graham, Campbell R. Harvey, and Shiva Rajgopal. 2016. ''The Misrepresentation of Ea rnings" by Financial Analyst Journal, vol. 72, no. 1, pages 22- 35.
Module 1
© Cambridge Business Publishers
1-18
Financial Accounting for MBAs
L03
Review 1 ·3
The following financial informat ion is from Samsung Electronics, a competitor of Apple, for December 31,
20 18 (in billions Korean won).
Short-term liabilities ...............
Cash flows from financing ..........
Revenues ............ . ..........
Stockholders' equity .......... ... ..
Cash flows from operations . . .. .....
SG&A expenses ..................
Long-term assets .................
Interest income, net ...............
. W 69,082
(14,996)
.
.
243,771
.
247,752
.
67,032
.
52,490
.
164,660
.
2,273
Cost of goods sold ...... . ... . . .... . W132,394
Cash, beginning-year . ... . ......... .
30,545
Income tax expense ..... . .... . .... .
16,815
Short-term assets ..... ... . ........ .
174,697
Long-term liabilities .... ... . ... . .... .
22,523
Cash, end of year ............ • .....
30,341
(52,240)
Cash flows from investing........... .
Required
I. Prepare an income statement and statement of cash nows for Samsung Electronics for the year ended December 3 1, 2018. Prepare Samsung Electronics's balance sheet as of December 3 1, 2018.
2. Compare the balance sheet and income statement of Samsung Electronics w ith those of Apple, Inc. in
Exhibits 1.3 and 1.4. What differences do we observe?
,
Guided Examples
icons denote the
availability of a
demonstration
video in
myBusinessCourse
(MBC) for each
Review Problem
see the Preface for
moreonMBC.
Solution on p. 1-49.
Analysis of Financial Statements
This section previews the analysis framework of this book. This framework is used extensively by
market professionals who analyze financial reports to evaluate company management and val ue the
company 's debt and equity securities. Analysis of financial performance is c rucial in assessing prior
strategic decisions and evaluating strategic alternatives.
Return on Assets
Suppose we learn that a company reports a profit of $ 10 million. Does the $ 10 mi ll ion profit indicate
the company is performing well? Knowing a company reports a profit is certainly positive as it indicates customers value its goods or services, and its revenues exceed expenses. However, we cannot
assess how well it is performing without considering the context. To explain, suppose we learn this
company has $500 million in assets. We now assess the $ 10 million profit as low because, relative to
the size of its asset investment, the company earned a paltry 2% return ($10 million/$500 million).
A 2% return on assets is what a lower- risk investment in government-backed bonds might yield. The
important point is that a company's profitability must be assessed with respect to the size of its investment. This is done with a common metric: the return on assets (ROA)-defined as net income for that
period divided by the average total assets during that period.
Components of Return on Assets
To further isolate components that are driving return on assets, we can separate ROA into two components: profitability and productivity.
•
Profitability relates profit to sales. This ratio is called the profit margin (PM), and it reflects
the net income (profit after tax) earned on each sales dollar. Management wants to earn as much
profit as possible from sales.
•
Productivity relates sales to assets. This component, called asset turnover (AT), reflects sales
generated by each dollar of assets. Management wants to maximize asset productivity to achieve
the highest possible sales level for a given level of assets (or to achieve a given level of sales with
the smallest level of assets).
e'-ectv,•,
L04
Explain and
apply basic
profitability
analysis.
1-19
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Exhibit 1.7 depicts the disaggregation of ROA into these two components. Profitabili ty (PM)
and productivity (AT) are multiplied to y ie ld the ROA. Average assets are commonl y defined as
(beg inning-year assets+ ending-year assets)/2.
Exhibit 1.7 • Return on Assets Disaggregation
Return on assets
I
Net income
Average assets
r
Profitability (Profit margin: PM)
I
Net income
Sales
x
Productivity (Asset turnover: AT)
x
Sales
Average assets
I
There are an infinite number of combinations of profit marg in (PM) and asset turnover (AT) that
yield the same ROA. To illustrate, Exhibit 1.8 graphs actual combinations of these two components
for companies we highlight in this book (each is identified by its ticker symbol) . The graph 's green
line represents poss ible combinations of marg in and turnover to y ie ld the 7 .7% median ROA for the
companies graphed here . T he 7 .7% ROA is higher than the 5. 7% median ROA for all of the Standa rd
& Poor 's 500 companies for this same year. (Exhibit 1.8 foc uses on core operating profit where we
use earnings before unus ual items and apply standardized tax rates to reduce variatio ns from unusu al
activities.) Following ar e some general observatio ns on Exhibit 1.8.
•
High margin and Low turnover. Techno logy companies like Intel (INTC), Cisco (CSCO ),
Johnson & Johnson (JNJ), and Apple (AAPL) are ch aracterized by high net profit margins
resulting from patent protection that increase barriers to entry and reduce competition. T hese companies also report substantial assets, typically in the form of marketable securities and intangible
assets that arise when these companies acquire othe r companies (a typical method of expansion
in the hig h-tech ind ustry). Because these securities and intang ible assets do not generate "sales,"
the productivity ratio (AT ) is decreased by the inflated assets in the deno minator.
•
Low margin and High turnover. At the other end of the spectrum, retailers like Nordstrom
(JWN) and Target (TGT ), Macy's (M ), CVS (CVS ), and Darden Restaurants (DRI) find it difficult to differentiate their products. This open competition keeps prices down, which yields lower
profit margins. These retailing companies must focus on jncreasing AT to mainta in an acceptable
ROA . To do this, they watch inventory and PPE assets care full y and rare ly have accounts receivable because most of their trade is cash-and-carry.
•
High performance. The return on assets (ROA) is the product o f pro fit marg in and asset turnover
and is higher as we move furth er away from the orig in. Companies like Intel (INTC), Apple
(AAPL), Colgate Palmolive (CL), Starbucks (SB UX), and Home Depot (HD) have higher
ROAs than other companies. As we see, to achieve a high level of ROA, companies need to ma nage both profit margin and asset turnover. This is an important point-companies must manage
both the income statement and the balance sheet to achieve high levels o f financ ial perfo rmance.
Managing one, but not the other, is generally not sufficie nt.
Module 1
© Cambridge Business Publishers
Financial Accounting for MBAs
Exhibit 1.8 • Profitability and Productivity across Companies
25%
20%
c
·e,
-"'
E
'E
15%
~
-~
:.c
s
:g
ct
10%
5%
•
TGT
0%
0.00
0.50
1.00
1.50
JWN
2.00
2.50
3.00
Productivity (Asset turnover)
Return on Equity
Another important analysis measure is return o n equity (ROE), which is defined as net income divided by average stockholders' equity, w here average equity is commonly de fined as (beginning-year
equity + ending-year equity)/2. In this case, company earnings are compared to the level of stockholde r investment. ROE reflects the return to stockholders, which is diffe rent from the return for the
entire company (ROA). We return to ROE in more detail in Module 4.
Are Financial Statements Relevant?
Accounting, finance, and economic researchers have long invest igated the ro le of financial statement
data in capital markets.
Relation between Earnings and Stock Prices Early research focused on whether and how
reported earnings are related to stock prices. There is a natural positive relation between expected earnings and stock prices, because stockholders expect dividends, which are paid o ut of earnings. Early research by Ball and Brown confirmed this expected relation, and the study produced the seminal graph
shown here. (Source: Ball, R. , and P. Brown. 1968. "An Empirical Evaluation of Accounting Income
Numbers." Journal of Accounting Research (Autumn): 159-178.) It shows stock returns trending up
during the year for companies that subsequently reported higher earnings (as compared with the prior
year) and trending down for companies that subsequentl y reported lower earnings.
1.12
~-------....i..._ ._i
1.10
1.08
-----~
1.06
1.04
1.02
1.00
~11!::'::::......- - - - - - - - - - - - - + - - - - - - - - - l
0.98
0.96
0.94
0.92
0.90
0.88
-12
-10
-8
-6
-4
-2
0
Month Relative to Annual Report Disclosure
Firms that reported earnings
higher than prior year
1-20
1-21
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
Subsequent research wou ld show that persistent core earnings have the highest predictive ability
for future earnings and cash flows. Rigorous financial statement analysis seeks to uncover a company's
persistent core operating earnings and cash flows. In a later module, we consider how to forecast fu.
ture earnings and cash flows using current financial statement information. We also consider financial
statement analysis in more depth and conclude that rigorous analysis seeks to uncover the underlying
economic and company-specific factors that drive profit margins and productivity ratios we observe.
Once we understand the underlying dynamics of the business, we are better able to forecast its future
earnings and cash flows .
Relation between Financial Ratios and Credit Ratings Fi nancial markets also use forecasts
to price a company's debt and to determine interest rates. As we will disc uss in the modu le on debt
financing, credit ratings are determined by a numbe r of financial ratios based on balance sheet,
income statement, and c ash flow information. For example, Moody 's Investors Service, one of the
primary credit rating companies for corporate and municipal bonds, uses ratios such as that shown
in the table below to evaluate a borrower 's abil ity to repay its debt. Ratings are progress ive ly riskier
as we move from left to right in the following table. (Source: ' Moody 's Financial Metrics™ Key
Ratios by Rating and Ind ustry for G lobal NonFi nancial Corporates: December 20 17' report dated
25 October 2018.)
Moody's Financial Ratios
Debt/EBITDA . . . . . . . . . . . . . . . . . . .
FCF/Debt . . . . . . . . . . . . . . . . . . . . . .
EBITDA/lnterest expense. . . . . . • . . .
Aaa
Aa
A
Baa
Ba
B
Caa
1.9
40.4%
12.0
1.7
45.9%
20.7
2.2
35.7%
11.4
2.7
28.2%
6.4
3.6
21.5%
3.7
5.2
13.2%
2.0
7.2
5.7%
0.7
These ratios use debt, EBITDA (earnings before interest, taxe s, and amortization expense), and FCF
(free cash flow, which is defined as operating cash flow less purchases of PPE). The table indicates
that as the company c redit ratings decline (Aaa, Aa, A, Baa, etc.), each ratio becomes progressive ly
"weaker." So, to answer the question: Are financial statements relevant? Yes. They provide critical
input into the pricing of equity and debt securities and , therefore, the creation of shareholder wealth.
For that reason, they are also essential in the development and monitoring of corporate strategy.
Managerial Decision
•
You Are the Chief Financial Officer
You are reviewing your company's financial performance for the first six months of the year and are unsatisfied with
the results. How can you disaggregate ROA to identify areas for improvement? [Answer, p. 1-34]
Review 1-4
L04
Following are selected data from Apple's 201 8 10-K.
$ millions
Net sales. . .... . . . . . . . .. . . . .. • . ...
Net income . . ... . ........... . . ... .
Average assets ....... . .. . .. .. • . .. .
Average stockholders' equity ... . • .. . .
Solution on p. 1-50.
2018
$265,595
59,531
370,522
120,597
Required
a. Compute Apple's ROA. Disaggregate the ROA into its profitab ility and productivity components.
b. Compute Apple's ROE.
Module 1
© Cambridge Business Publishers
1-22
Financial Accounting for MBAs
Financial Statements and Business Analysis
Analysis and interpretation of financial statements must consider the broader business context in which
a company operates. This section describes how to systematically consider those broader business
forces to enhance our analysis and interpretation. This business analysis can sharpen our insights and
help us better estimate future performance and company value.
Analyzing the Competitive Environment
•"ecto,.,,. LOS
~
Assess
business
operations
within the context
of a competitive
environment.
Financial statements are influenced by five important forces that determine competitive intensity: (A)
industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of
entry (fo r fu rther discussio n, see Porter, Competitive Strategy: Techniques for Analyzing Industries
and Competitors, 1980 and 1998).
These fi ve forces are depicted graphically in Exhibit 1.9 and are key determinants of profitability.
@
Industry competition Competitio n and rivalry raise the cost of doing business as companies
must hire and train competitive workers, advertise products, research and develop products, and
engage in other related activities.
@
Bargaining power of buyers Buyers wi th strong bargaining power can extract price concessions
and demand a higher level of service and delayed payment terms; this fo rce reduces both profits
from sales and the operating cash flows to sellers.
@
Bargaining power of suppliers S uppliers with strong bargaining power can demand higher
prices and earlier payments, yielding adverse effects on profits and cash flows to buyers.
@
Threat of substitution As the number of product substitutes increases,. sellers have less power
to raise prices and/or pass on costs to buyers; accordingly, threat of substitution places downward
pressure on profits of sellers.
@
Threat of entry New market entrants increase competition; to mitigate that threat, companies
expend monies on activities such as new technologies, promotion, and human development to
erect barriers to entry and to create economies of scale.
Exhibit 1.9 • Competitive Forces within the Broader Business Environment
Stock
Certificate
~ ,oP~yCO {J
Stockholders
~ ·. ·
Regulators
t l~
r oO
• 0o
O
,.
Tax Authorities
Eat,aats ~
I
Suppliers
cj
©
b
• 1
6
•
~
Competitors @
~
non
Oipp1n £
Global Forces
cof"~ E
-o
o1 1£"
.s~lJS"• "
~
-o
Substitutes @
t .. ;•.
Buyers@
Labor Forces
~
tt• l'
Investors
'
Distribution
~ nance
"'
Voters and Public
1-23
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
The relative strength of companies within their industries, and vis-a-vis suppliers and customers, is an
important determinant of both their profitabil ity and the structure of their balance sheets. As competition intensifies, profitability likely decl ines, and the amount of assets companies need to carry on their
balance sheet likely increases in an effort to generate more profit. Such changes are revealed in the
income statement and the balance sheet.
SWOT Analysis of the Business Environment
As an alternative to Porter-based competitive analysis, some prefer a SWOT analysis of a company.
SWOT is an acronym that stands for strengths, weaknesses, opportunities and threats. This analysis
can be applied to a lmost any organization. This approach is universall y applicable and easy to app ly,
and it can be graph ically portrayed as follows:
Factors
Ext ernal
Factors
SWOT
Analysis
Strengths
Opportunities
Positive
Factors
Weaknesses
Threats
Negative
Factors
Internal
SWOT analysis has two parts.
•
Looking internally, we review a company's strengths and weaknesses, whi le for external purposes, we review the opportunities of and threats to the company. SWOT analysis tries to understand particular strengths and weaknesses that give rise to specific opportunities (to exploit the
strengths) and threats (caused by the weaknesses).
•
When used as part of an overall strategic analysis, SWOT can provide a good review of strategic
options.
However, SWOT is sometimes criticized as too subjective. Two individ uals can identify entirely different factors from a SWOT analysis of the same company. This is partly because SWOT is intuitive
and allows varying opinions on the relevant factors.
Following is an example of a SWOT analysis on Apple.
Competitive Analysis ))
Apple, Inc. (AAPL) - Financial and Strategic SWOT Analysis
Strengths
Weaknesses
Strong brand image
High profit margins
Effective rapid innovation processes
Limited distribution network
High selling prices
Dependence of sales on high-end market segments
Opportunities
Threats
Expansion of distribution network
Higher sales volumes based on rising demand
Development of new product lines
Aggressive competition
Imitation
Rising labor cost in various countries
© Cambridge Business Publishers
Module 1
Financial Accounting for MBAs
Analyzing Competitive Advantage
The goal of o ur ana lysis is to identify s ustainable operating income and cash flo w. This is true
whether our analysis is focused on valuatio n of equity securities as a current o r prospective investor o r on a company's ability to repay its debt as a current o r prospective creditor or on trying to
g row company value as part o f management. This analysis is much deeper than merely eliminating
transitory (nonrec urring) ite ms from financ ial statements. It is an exploration of the foll owing two
lines of thoug ht.
1. Does the company have a competitive advantage, and, if so, what factors explain it? Further, is
the competitive advantage s ustaina ble?
2. If the com pany has no competitive advantage, does its manageme nt have a plan to develop a
sustainable competiti ve advantage that can be implemented in an acceptable period of time and
with a reasonable amou nt of inves tment?
Answers to these questions impact forecasts of the company's future performance.
Barriers to Entry Patents and other protections of intellectual property create barriers to entry
that a llow a company to achieve a competitive advantage and charge higher prices for their products
or services and thereby earn excess returns. These legal barriers typically have a finite li fe, however,
and a company must maintain a pipeline of innovations to replace intellectual property that loses patent protection.
Product Differentiation Product differentiation also a11ows companies to earn excess returns.
Ty pically, differentiation is achieved from technological innovation that produces products and serv ices
with attributes valued by c ustomers and not easily replicated by competitors. Differentiation along the dime nsions of product design, marketing, distribution, and after-sale c ustomer support are examples. Such
differentiation has costs such as research and development, advertising, and other marketing expenses.
Cost Leader Another approach to achieve excess returns is to become a cost leader. Cost leadership can result from a number of fac tors, including access to low-cost raw materials or labor (while
maintaining quality), manufacturing or service efficiency in the form of cost-efficient processes and
manufacturing scale efficiencies, g reater bargaining power with suppliers, sophisticated IT systems
tha t permit timely collection of key in formation, and other avenues.
Other Factors In the absence of a competitive advantage, o ur analys is foc uses on the likelihood
tha t a company develops such an advantage. Management often discusses strategy with stockholders
and equity analysts, which are recorded in confe rence calls that are read ily avai lable o r reported in
the financial press. In the case of a turn around situation, our focus is on viability of the plan; that is,
can it be achieved at an acceptable cost given the current state of the industry? Moreove r, o ur focus
is long term. Companies can often achieve short-term gains at long-term cost, such as by selling
profitable segments. Such actions do not create long-term value.
Creating a sustainable com petitive advantage that yields excess returns is difficult, and we are
wary of forecasted excess returns for an extended period. Through a critical and thorough investigatio n of financial statements, and the footnotes, the MD&A, and all publicly available information,
we can identify drivers of a company's competitive ad vantage. We then tes t the sustai nability and
validity of those drivers. This is an important step in assessing competitive advantage.
1-24
Module 1
1-25
Financial Accounting for MBAs
© Cambridge Business Publishers
Review 1 ·5 Los
Required
I. Match each of the followi ng statements a through f with the category to whic h it relates.
I. Analyzing the competitive environment
TI. SWOT analys is of
the business e nv ironment
TIT. Analyzing competitive advantage
a.
b.
c.
d.
e.
f
Internal factors include a company's strengths and weaknesses.
Buyers with strong bargaining power can extract price concessions and demand a higher level of service and delayed
payment terms; this force reduces both profits and operating
cash nows to sellers.
The goal of our analysis is to identify sustainable operating
income and cash flow.
New market e ntrants increase competition; to mitigate that
threat, companies expend monies on activities such as new
technologies, promotio n, and human development to erect
barriers to entry and to create economies of scale.
External factors include opportunities and threats.
Jf the compa ny has no competitive advantage, does its management have a plan to develop a sustainable competitive
advantage that can be implemented in an acceptable period
of time and with a reasonable amount of investment?
2. Following are selected balance sheet and income statement accounts for Apple Inc. and Samsung Electronics. For both companies, compute ROA and its two components, PM and AT. Which company is
pe rforming better on these three measures?
Average assets ......... . .... .
Revenue .............. . .... .
Solution on p. 1-50.
Net income ..... . ........... .
Apple
(S millions)
Samsung Electronics
(Korean won billions)
$370,522
265,595
59,531
W320,555
243,771
44,345
Book Road Map
The book can be broken into fou r parts-see figure be low.
•
Part 1 consists of Modu les I, 2, and 3 and offers an introduction of accounting fundamentals and
the business environment.
•
Part 2 consists of Modu le 4, which introduces analysis of financial statements. Analysis of financial statements is aided by an understanding of how those statements are prepared.
•
Part 3, which consists of Modules 5 through 11 , describes the
accounting for assets, liabilities,
and eq uity; this includes accounting for cash flows.
•
Part 4 consists of Modu les 12
and 13, which explain the forecasting of fi nanc ia l statements
and the valuation of equity. Appendix C is a comprehensive
case, which applies many of the
analysis tools introduced in this
book.
Financial Accounting and Financial Statements
Modules 1, 2, and 3
II
Analysis of Financial Statements
Module 4
Preparing, Analyzing, and Applying Accounting Information
Preparing and Analyzing
Accounting Information
Assets (& lncome)-Modules 5, 6, and 9
Liabilities-Modules 7 and 10
Equity-Module 8
Cash Flows-Module 11
Applying Accounting Information
Forecasting-Module 12
Valuation-Module 13
Case Analysis-Appendix C
Module 1
© Cambridge Business Publishers
1-26
Financial Accounting for MBAs
Global Accounting
As we discussed, the United States is among only a few economically developed countries that do
not use IFRS. While laws and enforcement mechanisms vary across countries, the demand and supply of accounting information are governed by g lobal economic forces. Thus, it is not surpri sing
that TFRS and U.S. GAAP both prescribe the same set of financ ial statements. While account titles
and note details differ, the underly ing principles are the same. That is, U.S. GAAP and IFRS both
capture, aggregate, summarize, and report economic activities on an accrua l basis.
Given the global economy and liquid transnational capital markets, along with the fact that many
non-U.S. companies file IFRS financial statements with the SEC, it is useful for us to be conversant
with both U.S. GAAP and IFRS. For this purpose, the final section of each module includes a summary
of notable differences between these two systems of accounting for topics covered in that module.
Also, each module has assignments that examine IFRS companies and their financial statements.
I
Global Accounting
sections summarize
notable differences
between IFRS and US.
GAAP for topics covered
in the module.
Appendix 1A: Financial Statement Data and Analytics
SEC Filings
As noted in the chapter, all publicly traded companies are required to file various reports with the SEC, two of
which are the 10-Q (quarterly financial statements) and the 10-K (annual financial statements). Following is a
brief tutorial to access these electronic filings. The SEC's website is https://www.sec.,:ov/ed2ar/searched2ar
/companysearch.html.
I. In the Company name box, type in the name of the company we are looking for. In this case, we are
searching for Apple, Inc. (AAPL). Then click Search.
Q
U.S. SECURITIES AND
EXCHANGE COMMISSION
ABOUT
OIVISlrn.s
Ft~FORCFMFrH
RFGUlAllDrJ
FDUCATlON
EDGAR I Company Filings
-
--
Free access to more than 21 mdilon filings
la!HlffnQS
Company Name
llore Oplloo1 •
e
Fil lfJGS
tffWS
maaaa
analyze
financial
statement data.
1-27
Module 1
Financial Accounting for MBAs
© Cambridge Business Publishers
2. Enter the form number under " filing type" we want to access. C lick the Search button. In this case, we are
looking for the I 0-K.
EDGAR :,.~.::"''"
EDGAR Search Results
APPl.E INC C.I.~ -:IOlll 1 - • ca.
SC• ELECTRONIC COUPUTERS
filWRHUlll
.......
lttfl'lS1· 60 · fl'
ri....
CERT
~
~
f"ffel
<«:JeJS1H-10,o
~)
-..
Urnil RtHIIS PtfPa0t
_
!40-
L___j
.._
v!
.....
....,_
Acono 0001J5"5MMI001JO (JOd) Sa 154 KB
2011-0J.14
NOlilalorl Oll'lt rtm<Wat tom bthg Md ~s•IIIIOn OI tnaut d. ttdttmt<I or rtlrtd uo...m,,
AiC:Oof'IO 000111i131~ 1M7..7'().U,CQ 5a 13 KII
Rt glstalionolsto..wtlts [Stdlon 12(bl
Aa>fto 0001193125-1t-07• 8U()4 Ad) Sb. 22 KB
U.129
M.aillin;MOl'HI
ONE APPl.E PARK WAY
CUPERTINO CA 9»'4
art-"HI MdrtH
ONE APA.£ PARIC WAt
aJPERTT/IIO CA t.3014
"'fllintol
I StaltOIK CAI FlsCIIYt¥ End:0930
tormtfty .trPP1.E COMPUTER INC (llwtgt llrougl'l 2007-01-4k)
lormtffr N'PLE COMPUTER INCI FA(llrl9s IW~ 1997-07-28)
CAs••stanlOH dOrOllc:e J)
Cit
kwNs isSUH
Slalj,toQlon.
....
..
...,.
fWtm,._....
2011-0J.1,
....
201~
001-
, ..
m
1Nl16,0
141
1Nl1571
m
11M154t
3. Click on the document link for the year we want to access. The fil ing date listed (2018-1 1-05 for A pple) is
about 5 weeks after the fiscal year end.
'1 , ,..
..... ,
•
' }'•
11e-. .
APPl.E INC C.I.~ -:!Olll l>M
~
• ELECTROf'. C COIIPUTERS
SUttlOcPon- I Stalt Of-.C. CA I r rsaitYurEnd. ODO
lonntlt'f N'P\.E COUPVTER H: (1lngl, l'Wough 2007-01-04)
torm.r,y APPt.E COMPUTER INCIFA(llinQslWOUQh 1997.07-28)
(Al~Stanl0Hd0r09cf J)
Git
Ir
tortil ts..,.
lltfflS 1 · 27 G Rl
Ownttshlp?
o-
®-
BuaintH Mclrt H
L&lilngMdrtH
ONE.4PPLE PARK WAY
CVPERnNOCl"'114
("11!11996-1010
ONE,1,PPLEPARKWAY
QJPERT1NO C.l ,:J014
,.._
.._
o...,
........
Ftff
201~ 11.0S
ICM<
2017-11~3
ICM<
4. Exhibits relating to Apple's 10-K filing appear; click on the I 0-K document.
Fiiing Detail
..,.,_ ,
--
.........
2011-11-t!
·-
......,.,....,,
..._.
2111-11.os ..., ..
•
!c::zmi!lt
lt<lt CM(
EXHEJT 10 17
E»taT 10 11
EXHIBIT 21.1
E.)Q,8f 23.1
'
-*'-?4'
EDGAR ~~~.::......
EDGAR Search Results
FllttRtsUltr
~
;;;
I-EAR
1 CM(
.,~1·20,,...
.,~120,,,.,.
EX-1017
£X.10 11
EX·211
El<s23 1
....
.....
,....
2<I0!8"
,..,.
1172
..
fileKill'l'INllr'nbel'
001 )117')
1111!11711
oc,1->n•>
17117'173
o..,,....7tJ
111'5l070