Title Details

Thomas R. Robinson, CFA, is Managing Director of the Education Division of CFA Institute where he leads and develops the teams responsible for producing and delivering educational content and examinations to candidates, members, and other investment professionals encompassing the CFA Program, CIPM Program, Lifelong Learning, Private Wealth, Publications, and Conferences.

Elaine Henry, CFA, is an Assistant Professor of Accounting at the University of Miami where she teaches courses in accounting, financial statement analysis, and valuation. After working in corporate finance at Lehman Brothers, strategy consulting at McKinsey & Company, and corporate banking at Citibank, she obtained a PhD from Rutgers University where she majored in accounting and minored in finance.

Wendy L. Pirie, CFA, is Director, Curriculum Projects, in the Education Division of CFA Institute. Prior to joining CFA Institute in 2008, she taught finance, accounting, statistics, taxation, business law, and marketing for over twenty years at both large and small public and private universities, religious colleges, and military academies. Her work has been published in the Journal of Financial Research and the Journal of Economics and Finance. She holds a PhD from Queen's University in Kingston, Ontario, and MBAs from the University of Toronto and the University of Calgary. Pirie is also coauthor of Investments: Principles of Portfolio and Equity Analysis (Wiley).

Michael A. Broihahn, CFA, is an Associate Professor of Accounting and the Director of Graduate Programs at Barry University in Miami, Florida. His teaching and research interests encompass financial accounting, auditing, and professional ethics. He currently serves CFA Institute in a number of different capacities.

Foreword xvii

Preface xix

Acknowledgments xxiii

About the CFA Institute Investment Series xxv

CHAPTER 1 Financial Statement Analysis: An Introduction 1

Learning Outcomes 1

1. Introduction 1

2. Scope of Financial Statement Analysis 2

3. Major Financial Statements and Other Information Sources 7

4. Financial Statement Analysis Framework 27

4.5. Develop and Communicate Conclusions/Recommendations 30

4.6. Follow-Up 31

5. Summary 31

Problems 33

CHAPTER 2 Financial Reporting Mechanics 35

Learning Outcomes 35

1. Introduction 36

2. The Classification of Business Activities 36

3. Accounts and Financial Statements 37

4. The Accounting Process 46

5. Accruals and Valuation Adjustments 62

6. Accounting Systems 65

7. Using Financial Statements in Security Analysis 67

8. Summary 69

Appendix 2A: A Debit/Credit Accounting System 69

Problems 85

CHAPTER 3 Financial Reporting Standards 89

Learning Outcomes 89

1. Introduction 90

2. The Objective of Financial Reporting 90

3. Standard-Setting Bodies and Regulatory Authorities 93

4. Convergence of Global Financial Reporting Standards 102

5. The International Financial Reporting Standards Framework 106

6. Effective Financial Reporting 118

7. Comparison of IFRS with Alternative Reporting Systems 120

8. Monitoring Developments in Financial Reporting Standards 122

9. Summary 127

Problems 129

CHAPTER 4 Understanding Income Statements 133

Learning Outcomes 133

1. Introduction 134

2. Components and Format of the Income Statement 135

3. Revenue Recognition 140

4. Expense Recognition 152

5. Nonrecurring Items and Nonoperating Items 163

6. Earnings per Share 169

7. Analysis of the Income Statement 178

8. Comprehensive Income 183

9. Summary 186

Problems 188

CHAPTER 5 Understanding Balance Sheets 193

Learning Outcomes 193

1. Introduction 193

2. Components and Format of the Balance Sheet 194

3. Current Assets and Current Liabilities 199

4. Noncurrent Assets 210

5. Noncurrent Liabilities 222

6. Equity 224

7. Analysis of the Balance Sheet 229

8. Summary 240

Problems 242

CHAPTER 6 Understanding Cash Flow Statements 245

Learning Outcomes 245

1. Introduction 246

2. Components and Format of the Cash Flow Statement 247

3. The Cash Flow Statement: Linkages and Preparation 261

4. Cash Flow Statement Analysis 277

5. Summary 290

Problems 291

CHAPTER 7 Financial Analysis Techniques 297

Learning Outcomes 297

1. Introduction 297

2. The Financial Analysis Process 298

3. Analytical Tools and Techniques 302

4. Common Ratios Used in Financial Analysis 319

5. Equity Analysis 348

6. Credit Analysis 353

7. Business and Geographic Segments 356

8. Model Building and Forecasting 360

9. Summary 360

Problems 361

CHAPTER 8 Financial Statement Analysis: Applications 369

Learning Outcomes 369

1. Introduction 369

2. Application: Evaluating Past Financial Performance 370

3. Application: Projecting Future Financial Performance 379

4. Application: Assessing Credit Risk 389

5. Application: Screening for Potential Equity Investments 393

6. Analyst Adjustments to Reported Financials 397

7. Summary 413

Problems 413

CHAPTER 9 Inventories 417

Learning Outcomes 417

1. Introduction 417

2. Cost of Inventories 419

3. Inventory Valuation Methods 420

4. The LIFO Method 429

5. Inventory Method Changes 440

6. Inventory Adjustments 441

7. Evaluation of Inventory Management 448

8. Summary 462

Problems 463

CHAPTER 10 Long-Lived Assets 479

Learning Outcomes 479

1. Introduction 480

2. Acquisition of Long-Lived Assets 481

3. Depreciation and Amortization of Long-Lived Assets 498

4. The Revaluation Model 508

5. Impairment of Assets 512

6. Derecognition 515

7. Presentation and Disclosures 517

8. Investment Property 528

9. Leasing 531

10. Summary 553

Problems 555

CHAPTER 11 Income Taxes 567

Learning Outcomes 567

1. Introduction 568

2. Differences between Accounting Profit and Taxable Income 568

3. Determining the Tax Base of Assets and Liabilities 574

4. Temporary and Permanent Differences between Taxable and Accounting Profit 579

5. Unused Tax Losses and Tax Credits 584

6. Recognition and Measurement of Current and Deferred Tax 585

7. Presentation and Disclosure 589

8. Comparison of IFRS and U.S. GAAP 595

9. Summary 599

Problems 599

CHAPTER 12 Noncurrent (Long-Term) Liabilities 605

Learning Outcomes 605

1. Introduction 605

2. Bonds Payable 606

3. Leases 625

4. Introduction to Pensions and Other Postemployment Benefits 644

5. Evaluating Solvency: Leverage and Coverage Ratios 648

6. Summary 651

Problems 653

CHAPTER 13 Employee Compensation: Postemployment and Share-Based 657

Learning Outcomes 657

1. Introduction 658

2. Pensions and Other Postemployment Benefits 658

3. Share-Based Compensation 699

4. Summary 705

Problems 707

CHAPTER 14 Intercorporate Investments 717

Learning Outcomes 717

1. Introduction 717

2. Basic Corporate Investment Categories 718

3. Investments in Financial Assets 720

4. Investments in Associates 729

5. Joint Ventures 742

6. Business Combinations 746

7. Variable Interest and Special Purpose Entities 764

8. Summary 773

Problems 775

CHAPTER 15 Multinational Operations 785

Learning Outcomes 785

1. Introduction 785

2. Foreign Currency Transactions 786

3. Translation of Foreign Currency Financial Statements 800

4. Summary 843

Problems 845

CHAPTER 16 Evaluating Financial Reporting Quality 853

Learning Outcomes 853

1. Introduction 853

2. Discretion in Accounting Systems 854

3. Financial Reporting Quality: Definitions, Issues, and Aggregate Measures 863

4. A Framework for Identifying Low-Quality Financial Reporting 881

5. The Implications of Fair Value Reporting for Financial Reporting Quality: A Brief Discussion 915

6. Summary 915

Problems 917

CHAPTER 17 Integration of Financial Statement Analysis Techniques 921

Learning Outcomes 921

1. Introduction 921

2. Case Study 1: Long-Term Equity Investment 923

3. Case Study 2: Off-Balance Sheet Leverage from Operating Leases 953

4. Case Study 3: Anticipating Effects of Changes in Accounting Standards 957

5. Summary 962

Problems 963

Glossary 969

References 981

About the Authors 983

About the CFA Program 987

Index 989