Corporate Financial Reporting and Analysis: A Global Perspective 4th Edition by S. David Young, ISBN-13: 978-1119494577


Corporate Financial Reporting and Analysis: A Global Perspective 4th Edition by S. David Young, ISBN-13: 978-1119494577

[PDF eBook eTextbook]

  • Publisher: ‎ Wiley; 4th edition (November 28, 2018)
  • Language: ‎ English
  • 368 pages
  • ISBN-10: ‎ 1119494575
  • ISBN-13: ‎ 978-1119494577

Corporate Financial Reporting Analysis combines comprehensive coverage and a rigorous approach to modern financial reporting with a readable and accessible style. Merging traditional principles of corporate finance and accepted reporting practices with current models enable the reader to develop essential interpretation and analysis skills, while the emphasis on real-world practicality and methodology provides seamless coverage of both GAAP and IFRS requirements for enhanced global relevance.

Two decades of classroom testing among INSEAD MBA students has honed this text to provide the clearest, most comprehensive model for financial statement interpretation and analysis; a concise, logically organized pedagogical framework includes problems, discussion questions, and real-world case studies that illustrate applications and current practices, and in-depth examination of key topics clarifies complex concepts and builds professional intuition. With insightful coverage of revenue recognition, inventory accounting, receivables, long-term assets, M&A, income taxes, and other principle topics, this book provides both education and ongoing reference for MBA students.

Table of Contents:

About the Authors iv

1 An Introduction to Financial Statements 1

The Three Principal Financial Statements, 2

Other Items in the Annual Report, 9

Generally Accepted Accounting Principles: The Rules of the Game, 12

The Barriers to Understanding Financial Statements, 12

Key Lessons from the Chapter, 14

Key Terms and Concepts from the Chapter, 15

Questions, 15

Problems: 15

1.1 Balance Sheet Terminology, 15

1.2 Understanding Balance Sheet Relationships, 16

1.3 Interpreting an Auditor’s Opinion, 16

Case Studies: 17

1-1 Apple: An Introduction to Financial Statement Analysis, 17

1-2 Pepsico: Communicating Financial Performance, 20

Notes, 23

2 The Balance Sheet and Income Statement 24

A Further Look at the Balance Sheet, 24

Assets, 25

Liabilities, 27

Shareholders’ Equity, 28

A Further Look at the Income Statement, 29

Other Things You Should Know About the Balance Sheet and the Income Statement, 30

Key Lessons from the Chapter, 32

Key Terms and Concepts from the Chapter, 33

Questions, 33

Appendix 2.1 The Mechanics of Financial Accounting: The Double-Entry System, 33

Key Terms and Concepts from the Appendix, 42

Key Lessons from the Appendix, 42

Problem: 42

2.1 Preparing a Balance Sheet and an Income Statement, 42

Case Study: 43

2-1 JanMar Fabrics: Preparing the Balance Sheet and Income Statement, 43

3 A Brief Overview of GAAP and IFRS: The Framework for Financial Accounting 45

The Core Principles of GAAP and IFRS, 45

The Key Qualitative Characteristics of Financial Information, 47

The Key Assumptions of Financial Information, 48

Modifying Conventions, 48

The Future of Financial Reporting, 49

Key Lessons from the Chapter, 50

Key Terms and Concepts from the Chapter, 51

Questions, 51

4 Revenue Recognition 52

Introduction, 52

The Five-Step Revenue Recognition Model, 52

Revenue-Recognition Controversies, 65

Key Lessons from the Chapter, 68

Key Terms and Concepts from the Chapter, 68

Questions, 68

Problems: 68

4.1 Revenue Recognition at and After Time of Sale, 68

4.2 Recognizing Revenue Over Time, 69

4.3 Journal Entries for Gift Cards, 69

4.4 Recognizing Revenue Over Time, 69

4.5 Revenue Recognition in Different Types of Businesses, 69

Case Studies: 70

4-1 Kiwi Builders, Ltd., 70

4-2 Revenue Recognition at Starbucks Corporation, 70

4-3 Network Associates (McAfee): A Case of “Channel Stuffing”, 77

Notes, 79

5 The Statement of Cash Flows 80

Introduction, 80

The Reporting of Cash Flows from Operations, 80

Preparing the Statement of Cash Flows, 82

IFRS and the Statement of Cash Flows, 90

Analyzing the Statement of Cash Flows, 90

Key Lessons from the Chapter, 94

Key Terms and Concepts from the Chapter, 94

Questions, 95

Problems: 95

5.1 Interpreting the Statement of Cash Flows, 95

5.2 Adjustments on the Statement of Cash Flows, 95

5.3 Preparing and Analyzing a Statement of Cash Flows, 97

5.4 Interpreting the Role of Accounts Payable in Cash Flow from Operations, 97

5.5 Manipulating the Statement of Cash Flows, 98

5.6 Analysis of the Statement of Cash Flows, 98

5.7 Cash Flow and Credit Risk, 99

5.8 Preparing and Interpreting the Statement of Cash Flows, 100

Case Studies: 100

5-1 Blockbuster Inc.: Movie Rentals, Profits, and Operating Cash, 100

5-2 Monahan Manufacturing: Preparing and Interpreting a Statement of Cash Flows, 107

5-3 A Tale of Three Companies: Cash Flows at Sun Microsystems,Wal-Mart, and Merck, 108

5-4 Inditex: Analyzing the Statement of Cash Flows, 110

Notes, 114

6 Financial Statement Analysis 115

Introduction, 115

Business and Industry Analysis, 116

Accounting Analysis, 119

Financial Analysis, 119

Dupont Analysis, 122

ROE and the Analysis of Financial Risk, 129

Key Lessons from the Chapter, 136

Key Terms and Concepts from the Chapter, 137

Questions, 137

Appendix 6.1 An Industry and Competitive Analysis of Taiwan Semiconductor Manufacturing Company (TSMC), 137

Appendix 6.2 Summary of Financial Statement Ratios, 139

Problems: 141

6.1 Financial Statement Detective Exercise, 141

6.2 Effects of Transactions on Selected Balance Sheet Figures, 143

6.3 Calculating and Interpreting PP&E Turnover Ratios, 144

6.4 Financial Statement Detective Exercise in the Pharmaceutical Industry, 144

6.5 Comprehensive Financial Ratio Analysis, 146

6.6 Profitability Analysis for The Home Depot, 146

6.7 Comparative Analysis of Receivables and Inventories, 147

Case Studies: 147

6-1 Profitability Analysis and WalMart’s Suppliers, 147

6-2 LVMH and Warnaco: Strategy and Financial Statement Analysis, 148

Notes, 153

7 Business Valuation and Financial Statement Analysis 154

Valuation Principles, 154

Valuation: From Theory to Practice, 155

The Economic Profit Approach to Valuation, 156

A Case Study in Valuation: TSMC, 158

A Brief Word on Growth Rates, 162

Key Lessons from the Chapter, 165

Key Terms and Concepts from the Chapter, 165

Questions, 165

Problems: 165

7.1 Estimating the Value of The Home Depot, 165

7.2 Explaining Differences in P/E Ratios, 166

7.3 Explaining Differences in P/E Ratios, 166

Case Study: 166

7-1 Valuation Based on Discounted Cash Flows: The Case of Vardon Golf Ltd., 166

Notes, 167

8 Accounting for Receivables and Bad Debts 168

Introduction, 168

Estimating Bad Debts, 168

Writing off Accounts, 169

The Direct Method: An Alternative Approach, 169

What Happens When Written-off Accounts are Later Collected?, 170

The “Aging” of Accounts Receivable, 170

Sales Returns and Allowances, 171

Analyzing Receivables, 172

Key Lessons from the Chapter, 173

Key Terms and Concepts from the Chapter, 173

Questions, 173

Appendix 8.1 Accounting for Loan Loss Reserves, 173

Problems: 175

8.1 Bad Debts on Loans Receivable, 175

8.2 Determining Bad Debt Expense from an Aging Schedule, 175

8.3 Analyzing Receivables and the Allowance for Doubtful Accounts, 175

8.4 Provisions for Credit Losses, 181

Case Studies: 182

8-1 Receivables and Bad Debts at Toyota, 182

8-2 Johnson Perry, 182

8-3 Citigroup Inc.: Accounting for Loan Loss Reserves, 185

Notes, 191

9 Accounting for Inventory 192

Introduction, 192

Inventory Valuation: LIFO, FIFO, and the Rest, 195

The Lower of Cost or Net Realizable Value Rule, 196

The Cost-Flow Assumptions: An Example, 196

Inventory Cost-Flow Assumptions: A Summary, 199

Key Lessons from the Chapter, 200

Key Terms and Concepts from the Chapter, 200

Questions, 200

Problems: 201

9.1 Calculating Inventory Under the FIFO and Average-Cost Methods, 201

9.2 Inventories and Ratio Analysis, 201

9.3 Correcting Inventory Errors, 201

9.4 The Lower of Cost or Net Realizable Value Rule, 201

9.5 Calculating Cost of Goods Sold Under FIFO and Specific Identification, 201

Case Studies: 202

9-1 LIFO Accounting at Tamar Chemicals, 202

9-2 Deere and CNH Global: Performance Effects of Inventory Accounting Choice, 202

Notes, 208

10 Accounting for Property, Plant, and Equipment 209

Introduction, 209

Initial Recognition of PP&E, 210

Subsequent Expenditures: Repair or Improvement?, 211

Accounting for Depreciation, 211

Changes in Depreciation Estimates or Methods, 213

Asset Impairment, 214

Fair Value vs. Historical Cost, 215

Divestitures and Asset Sales, 216

Intangible Assets, 216

Key Lessons from the Chapter, 218

Key Terms and Concepts from the Chapter, 218

Questions, 218

Problems: 219

10.1 Comparing the Effects of Depreciation Choice on Financial Ratios, 219

10.2 Analyzing Depreciation on PP&E, 219

10.3 Calculating and Analyzing Amortization Expense, 220

10.4 Calculating Depreciation Expense, 220

10.5 Effects of Changes in Estimates on Depreciation Expense, 221

10.6 Interpreting Disclosures for Property, Plant and Equipment, 221

10.7 Capitalizing or Expensing Costs, 224

10.8 Journal Entries for Depreciation and Amortization Expense, 224

11 Leases and Off-Balance-Sheet Debt 225

Introduction, 225

Leasing Accounting Before 2018: Capital vs. Operating Leases, 225

Accounting for Capital Leases, 226

Accounting for Operating Leases, 227

Lease Accounting: An Example, 227

Interpreting Lease Disclosures, 229

Off-Balance-Sheet Debt, 230

Recent Developments in Lease Accounting, 231

Key Lessons from the Chapter, 233

Key Terms and Concepts from the Chapter, 233

Questions, 233

Problem: 233

11.1 The Financial Reporting Effects of Selling Receivables, 233

Case Studies: 234

11-1 Lease Accounting at Metro AG, 234

11-2 Pennzoil-Quaker State and the Sale of Receivables, 235

11-3 Executory Contracts, 235

Note, 235

12 Accounting for Bonds 236

Introduction, 236

Accounting for Bond Issuance, 237

Accounting for Bonds Sold at Par, 238

Accounting for Bonds Sold at a Premium, 238

Bond Redemption Before Maturity, 242

Accounting for Bonds Issued at a Discount, 242

Zero-Coupon Bonds, 244

Key Lessons from the Chapter, 246

Key Terms and Concepts from the Chapter, 246

Questions, 247

Problems: 247

12.1 Journal Entries and Balance Sheet Presentation for Bonds, 247

12.2 Amortization of Bond Discount and Premium, 247

12.3 Journal Entries for Bond Issuance and Subsequent Interest Payments, 247

13 Provisions and Contingencies 248

Introduction, 248

Defining Provisions, 249

Measuring the Provision, 249

Disclosure of Provisions: Interpreting the Notes, 250

Contingent Liabilities, 251

Contingent Assets, 254

Key Lessons from the Chapter, 254

Key Terms and Concepts from the Chapter, 254

Questions, 254

Problems: 255

13.1 Accounting for Warranties, 255

13.2 Analyzing and Interpreting Disclosures on the Provision for Warranties, 255

Case Studies: 255

13-1 Accounting for Contingent Assets: The Case of Cardinal Health, 255

13-2 Firestone Tire and Rubber Company (A), 257

13-3 Firestone Tire and Rubber Company (B), 259

Notes, 259

14 Accounting for Pensions 260

Introduction, 260

A Brief Word on Defined Contribution Plans, 260

Unfunded Defined Benefit Plans, 261

Funded Defined Benefit Plans, 261

American Airlines: An Example of Defined Benefit Plan Disclosure, 267

Key Lessons from the Chapter, 269

Key Terms and Concepts from the Chapter, 270

Questions, 270

Case Study: 270

14-1 Comprehensive Pension Review Problem: Cathay Pacific, 270

Note, 273

15 Accounting for Income Tax 274

Introduction, 274

Temporary and Permanent Differences, 275

Deferred Taxes and the Balance Sheet Approach, 276

The Balance Sheet Approach: An Example, 277

Interpreting Income Tax Disclosures: The Case of Intel Corporation, 279

Why Deferred Income Tax is Important, 284

Key Lessons from the Chapter, 285

Key Terms and Concepts from the Chapter, 285

Questions, 285

Problems: 285

15.1 Calculating Temporary and Permanent Differences, 285

15.2 Interpreting Income Tax Disclosures, 286

15.3 Deferred Income Taxes and the Statement of Cash Flows, 286

Case Study: 288

15-1 Deferred Tax Assets and the Valuation Allowance: The Case of Ford Motor Company, 288

Notes, 292

16 Accounting for Shareholders’ Equity 293

Introduction, 293

Shareholders’ Equity: An Introduction, 293

More on Contributed Capital, 297

Accounting for Stock Transactions, 298

Dividends on Common Stock, 301

Stock Dividends and Stock Splits, 303

Accumulated Other Comprehensive Income, 305

Convertible Bonds, 305

The Statement of Shareholders’ Equity, 307

Key Lessons from the Chapter, 308

Key Terms and Concepts from the Chapter, 308

Questions, 308

Problems: 309

16.1 Effect of Selected Transactions on Net Income and Shareholders’ Equity, 309

16.2 Share Buybacks, 309

16.3 The Financial Statement Effects of Dividend Payments and Buybacks, 309

16.4 The Accounting and Economic Consequences of Stock Splits and Stock Dividends, 310

Case Studies: 310

16-1 Stock Options, Stock Dividends, and Stock Splits, 310

16-2 Share Buybacks: Economic Rationale and Financial Reporting Effects, 311

16-3 The Accounting for Convertible Bonds, 311

16-4 Why Do Companies Buy Back Their Own Shares? The Case of the Scomi Group, 311

Notes, 312

17 Investments 313

Introduction, 313

Investments at Microsoft, 313

Debt and Passive Equity Investments, 314

The Fair Value Hierarchy, 316

Equity Method, 317

A Further Look at Microsoft’s Investments, 319

Consolidation, 321

Key Lessons from the Chapter, 323

Key Terms and Concepts from the Chapter, 324

Questions, 324

Problems: 324

17.1 Classification of Long-Term Investments, 324

17.2 The Effect of Transaction Cost on Marketable Securities and Investments, 325

17.3 Journal Entries and Analysis Under the Equity Method, 325

17.4 Review Problem, 325

17.5 Mark-to-Market Accounting for Trading Securities, 326

17.6 The Equity Method and the Statement of Cash Flows, 326

Case Studies: 327

17-1 Stora Enso: Accounting for Investments, 327

17-2 Coca-Cola and Coca-Cola Enterprises: The Equity

Method in Practice, 328

Notes, 328

18 Accounting for Mergers and Acquisitions 329

Introduction, 329

Purchase Price/Cost of Acquisition, 329

Contingent Consideration, 330

Recognition and Measurement of Identifiable Assets, 330

Subsequent Adjustments to Acquired Assets and Liabilities, 334

Goodwill Impairment, 334

Noncontrolling Interest, 335

Key Lessons from the Chapter, 336

Key Terms and Concepts from the Chapter, 336

Questions, 336

Problems: 336

18.1 Journal Entry for an Acquisition, 336

18.2 Analysis of an Acquisition, 337

18.3 Accounting for an Acquisition: Carrefour and BLC (China), 337

18.4 Business Combinations at Tesco, 338

18.5 AB InBev acquires SABMiller, 338

Appendix: Tables for Present Value and Future Value Factors 342

Index 351

S. David Young is Professor of Accounting and Control at INSEAD, based in Fontainebleau (France) and Singapore. He has been there since 1989. Professor Young holds a PhD from the University of Virginia and is both a Certified Public Accountant (USA) and a Chartered Financial Analyst. His primary areas of expertise are corporate financial reporting and value-based management, with works published in a wide variety of academic and professional journals, including several articles in the Harvard Business Review.

Professor Young is the author or coauthor of several books, including EVA and Value- Based Management: A Practical Guide to Implementation (McGraw-Hill, 2001), Profits You Can Trust: Spotting and Surviving Accounting Landmines (Financial Times, Prentice Hall, 2003), and Attracting Investors: A Marketing Approach to Finding Funds for Your Business (John Wiley & Sons, 2004). His most recent book is The Blue Line Imperative: What Managing for Value Really Means (John Wiley & Sons, 2013).

Professor Young is also the recipient of several Outstanding Teaching Awards from the INSEAD MBA program and the Distinguished Alumni Scholar Award from his undergraduate alma mater, The George Washington University. He has consulted extensively for companies in Europe, the United States, and Asia, mainly on issues related to value-based management and financial analysis.

Jake Cohen is Senior Associate Dean for Undergraduate and Masters’ Programs at MIT Sloan School of Management and Senior Lecturer in Accounting and Law, where he has been since 2012. In his role, he oversees strategy for eight programs. From 2003 to 2011, Jake was an Affiliate Professor of Accounting and Control at INSEAD and was based in France and Singapore. He served as Director of the INSEAD-PricewaterhouseCoopers Research Center from 2004 to 2008 and as Dean of the MBA Program from 2008 to 2011.

He teaches courses in financial and managerial accounting, financial statements analysis, mergers and acquisitions, corporate restructuring, and business law. Cohen is a recipient of Outstanding Teaching Awards from the INSEAD MBA for both core and elective courses.

Prior to joining INSEAD, Cohen was a Senior Teaching Fellow in the Accounting and Control group at the Harvard Business School, where he was a founding member of the MBA Analytics Program. Prior to teaching at Harvard, he taught at Syracuse University as an assistant professor and was named “Professor of the Year.”

Jake Cohen received a Bachelor of Science degree in accounting from Lehigh University, where he graduated with honors, a Master of Science degree in accounting, and a Juris Doctor degree in law from Syracuse University.

Prior to his academic career, he worked as a tax accountant at KPMG LLP in Philadelphia and as a mergers and acquisition consultant for PricewaterhouseCoopers LLP in New York City.

Daniel Bens is a Professor at INSEAD, currently serving as the Chair of the Accounting and Control area. Previously, he was a faculty at the University of Arizona serving as Associate Dean of MBA programs. Prior to that he was a faculty at the University of Chicago, Booth School of Business from 1999 to 2005.

Professor Bens received his PhD from the Wharton School at the University of Pennsylvania, his MBA from Indiana University, and his BS from Penn State University. He was a licensed Certified Public Accountant (CPA) in Pennsylvania, working for Price Waterhouse and then Westinghouse prior to graduate school.

He has taught in full-time, evening, and executive MBA programs, as well as non-degree executive education programs throughout his career. His teaching has received special recognition at INSEAD in 2014 and 2015, and at the University of Arizona with awards in 2011 and 2007. His research has been cited or he has been quoted in Fortune, Business Week, and various newspapers via the Associated Press and Reuters news services. His research has appeared in the leading academic journals including Accounting Horizons, The Accounting Review, Contemporary Accounting Research, Journal of Accounting, Auditing & Finance, Journal of Accounting and Economics, and Journal of Accounting Research.

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