Preface
xi
Uses for the Eighth Edition
xv
Fearures of the Eixhth Edition
xvii
Acknowledgments
xu
About the Authors
xxi
CHAPTER 1 Financial Statements:An Overview
Map or Maze
1
Usefulness
1
3
Volume of Information
3
Where to Find a Company's Financial Stalemenls
5
The Financial Statements
6
Notes to the Financial Sfalemenfs 8
Auditor's Report
13
Mnnagement Discussion and Analysir
16
Five-Year Summary of Selecfed F i ~ n c i a Data
l
and Marker Data
Pandora (A.K.A. "PR Fluff)
I8
Proxy Sfafernpnf I 9
Missing and Hard-to-Find Information
Complexities
21
20
A Global Marketplace
21
Mythical Mountain
22
Olher Discretionary Issues
23
More Complications
24
Quality of Financial Reporting
25
Accounting Policies, Estimates- Choices and Changes
Timing of Revenue and Expense Recognition
27
Discretionary lfems
27
Nonrecurring and Nonaperating Items
29
The Journey Through the Maze Continues
Self-Test
30
Study Questions and Problems
33
30
26
18
Case 1.1 The Walt Disney Company
Case 1.2 Ultimate Electronics, Inc.
CHAPTER 2 The Balance Sheet
Financial Condition
44
Consolidation
45
Balance Sheet Date
45
CornparariveData
45
Common-Size Balance Sheet
Assets
40
44
45
48
Current Assets
48
Cash and Marketable Securities
Accounts Receivable
50
Inventories
52
Inventory Accounting Methods
Prepaid Expenses
55
Property, Plant, and Equipment
OtherAssetr
57
Liabilities
36
48
53
55
58
Current Liabilities
58
Accounts Payable
58
Notes Payable
59
Current Maturities of Long-Term Debt
59
Accrued Liabilities
60
Unearned Revenue or Deferred Credits
60
Deferred Federal Income Tmes
61
Long-Term Debt
65
Capital Leare Obligations
65
Postretirement Benefits Other Than Pensions
Commitments and Contingencies
66
Hybrid Securities
66
Stockholders' Equity
65
67
Common Stock
67
Additional Paid-In Capital
67
Retained Earnings
67
Other Equity Accounrs
68
Other Balance Sheet Items
69
Self-Test
69
Study Questions and Problems
74
Case 2.1 Lucent Technologies
79
Case 2.2 14Nl Contacts, Inc.
81
CHAFTER 3 Income Statement and Statement of Stockholders' Equity
The Income Statement
88
Common-SizeIncome Statement
Net Sales
91
90
87
Cost of Goods Sold
91
Gross Profit
92
Operating Expense
93
Depreciation and Amoriization
94
Operating Profit
%
Other Income (Expense)
%
Equity Earnings
97
Earnings Before Income Taxes/Effective Tar Rate
Special Items
100
Net Earnings
101
Earnings Per Common Share
101
I01
Comprehensive Income
99
The Statement of Stockholders' Equity
103
Earnings Quality, Cash Flow, Segmental Accounting
Self-Test
105
Study Questions and Problems
108
Case 3.1 Dillard's Inc.
112
Case 3.2 Applied Materials
115
CHAPTER 4 Statement of Cash Flows
117
Preparing a Statement of Cash Flows
119
Calculating Cash Flow from Operating Activities
Indirect Method
104
123
123
Cash Flow from Investing Activities
125
Cash Flow from Financing Activities
126
Change in Cash
126
Analyzing the Statement of Cash Flows
127
Cash Flow from Operations
Nocash Corporation
128
127
R.E.C. Inc.: Analysis of the Statement of Cash Flows
130
R.E. C. I n c Analysis: Cash Flow from Operating
Activities
I30
Summary Analysis of the Statement
of Cash Flows
I32
Analysis of Cash lnflows
I32
Analysis of Cash Outflows
133
Are We There Yet?
134
Self-Test
134
Study Questions and Problems
Case 4.1 PetMed Express, Inc.
Case 4.2 Candela Corporation
138
144
146
APPENDIX 4A Statement of Cash Flows-Direct Method
Direct Method
148
148
CHAPTER 5 A Guide to Earnings and Financial Reporting Quality
Using the Checklist
154
L Sales or Revenues
154
159
11.Cost of Goods Sold
111.Operating Expenres
161
! . \ I Nonoperating Revenue and Expense
\.! Other Issues
173
168
What Are the Real Earnings?
174
Quality of Financial Reporting-The Balance Sheet
175
Quality of Financial Reporting-The Statement of Cash Flows
Self-Test
177
Study Questions and Problems
180
Case 5.1 Nortel Networks Corporation
182
Case 5.2 FidWhat.com, Inc.
188
CHAPTER 6 The Analysis of Financial Statements
Objectives of Analysis
192
Sources of Information
193
Proxy Statement
194
Auditor's Report
194
Management Discussion and Analysis
Supplementary Schedules
194
Fonn 10-K and Form 1 0 - 9
194
Other Sources
195
Tools and Techniques
192
194
196
Common-Size Financial Statements
197
Key Financial Ratios
197
Liquidity Ratios: Short-Term Solvency
198
Cash Conversion Cycle or Net Trade Cycle
202
Aaivily Ratios:Asset Liquidiry, Asset Management Efficiency
203
Leverage Ratios: Debt Financing and Coverage
204
Profitability Ratios: Overall Efficiency and Performance
207
Marker Ratios
209
Analyzing the Data
211
Background: Economy, Industry, and Firm
212
Short-Term Liquidiry
213
215
Operating EfFciency
Capital Struaure and Long-Term Solvency
215
Profitability
219
Relating the Ratios-The D u Pont System
220
221
Projections and Pro Forma Stmements
Summary ofAnalysis
222
Self-Test
224
Study Questions and Problems
229
152
175
Contents
Case 6.1 Action Performance Companies, Inc.
Case 6.2 Taser International, Inc.
242
235
APPENDIX 6A The Analysis of Segmental Data
249
APPENDIXES
256
A Summary of Financial Ratios
B Solutions to Self-Tests
259
C Glossary
261
256
ix