Title Details

Hennie Van Greuning, CFA, is a Senior Advisor at the World Bank. His World Bank publication on International Financial Reporting Standards has appeared in four editions. Mr. van Greuning has also coauthored Analyzing and Managing Banking Risk.

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.

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 capacities.

Preface xix

Acknowledgments xxiii

Introduction xxv

CHAPTER 1 Financial Statement Analysis: An Introduction 1

Learning Outcomes 1

1. Introduction 2

2. Scope of Financial Statement Analysis 2

3. Major Financial Statements and Other Information Sources 5

4. Financial Statement Analysis Framework 18

CHAPTER 2 Financial Reporting Mechanics 25

Learning Outcomes 25

1. Introduction 26

2. The Classifi cation of Business Activities 26

3. Accounts and Financial Statements 27

4. The Accounting Process 36

5. Accruals and Valuation Adjustments 52

6. Accounting Systems 55

7. Using Financial Statements in Security Analysis 57

8. Summary 59

CHAPTER 3 Financial Reporting Standards 79

Learning Outcomes 79

1. Introduction 80

2. The Objective of Financial Reporting 80

3. Financial Reporting Standard-Setting Bodies and Regulatory Authorities 82

4. Convergence of Global Financial Reporting Standards 87

5. The International Financial Reporting Standards Framework 89

6. Comparison of IFRS with Alternative Reporting Systems 98

7. Effective Financial Reporting 102

8. Monitoring Developments in Financial Reporting Standards 104

9. Summary 109

CHAPTER 4 Understanding the Income Statement 113

Learning Outcomes 113

1. Introduction 114

2. Components and Format of the Income Statement 114

3. Revenue Recognition 118

4. Expense Recognition 129

5. Nonrecurring Items and Nonoperating Items 139

6. Earnings Per Share 144

7. Analysis of the Income Statement 152

8. Comprehensive Income 157

9. Summary 160

CHAPTER 5 Understanding the Balance Sheet 165

Learning Outcomes 165

1. Introduction 166

2. Components and Format of the Balance Sheet 166

3. Measurement Bases of Assets and Liabilities 177

4. Equity 194

5. Uses and Analysis of the Balance Sheet 200

6. Summary 210

CHAPTER 6 Understanding the Cash Flow Statement 215

Learning Outcomes 215

1. Introduction 216

2. Components and Format of the Cash Flow Statement 217

3. The Cash Flow Statement: Linkages and Preparation 228

4. Cash Flow Statement Analysis 243

5. Summary 253

CHAPTER 7 Financial Analysis Techniques 259

Learning Outcomes 259

1. Introduction 260

2. The Financial Analysis Process 261

3. Analysis Tools and Techniques 264

4. Common Ratios Used in Financial Analysis 276

5. Equity Analysis 302

6. Credit Analysis 308

7. Business and Geographic Segments 311

8. Model Building and Forecasting 314

9. Summary 314

CHAPTER 8 International Standards Convergence 323

Learning Outcomes 323

1. Introduction 324

2. The IFRS Framework 325

3. The Balance Sheet 326

4. The Income Statement 336

5. The Cash Flow Statement 339

6. Standard Setters’ Agenda for Convergence 340

7. Effect of Differences Between Accounting Standards 341

8. Summary 344

CHAPTER 9 Financial Statement Analysis: Applications 349

Learning Outcomes 349

1. Introduction 350

2. Application: Evaluating Past Financial Performance 351

3. Application: Projecting Future Financial Performance 356

4. Application: Assessing Credit Risk 364

5. Application: Screening for Potential Equity Investments 367

6. Analyst Adjustments to Reported Financials 371

7. Summary 385

CHAPTER 10 Inventories 389

Learning Outcomes 389

1. Introduction 390

2. Inventory Cost and Inventory Accounting Methods 390

3. Financial Analysis of Inventories 395

4. LIFO Accounting Method Under U.S. GAAP 403

5. Effects of Inventory Method Choice 413

6. Summary 415

CHAPTER 11 Long-Lived Assets 419

Learning Outcomes 419

1. Introduction 420

2. Accounting for the Acquisition of Long-Lived Tangible Assets 420

3. Accounting for the Acquisition of Long-Lived Intangible Assets 428

4. Depreciating Long-Lived Tangible Assets 435

5. Amortizing Intangible Assets with Finite Useful Lives 444

6. Asset Retirement Obligations 444

7. Disposal of Long-Lived Operating Assets 449

8. Impairment of Long-Lived Assets 456

9. Revaluation of Long-Lived Assets 461

10. Summary 464

CHAPTER 12 Income Taxes 469

Learning Outcomes 469

1. Introduction 470

2. Differences Between Accounting Profi t and Taxable Income 470

3. Determining the Tax Base of Assets and Liabilities 476

4. Temporary and Permanent Differences Between Taxable and Accounting Profi t 481

5. Unused Tax Losses and Tax Credits 486

6. Recognition and Measurement of Current and Deferred Tax 486

7. Presentation and Disclosure 490

8. Comparision of IFRS and U.S. GAAP 496

9. Summary 499

CHAPTER 13 Long-Term Liabilities and Leases 505

Learning Outcomes 505

1. Introduction 506

2. Bonds Payable 506

3. Debt with Equity Features 519

4. Leases 527

5. Other Types of Off-Balance-Sheet Financing 545

6. Summary 549

CHAPTER 14 Employee Compensation: Postretirement and Share-Based 555

Learning Outcomes 555

1. Introduction 556

2. Pensions and Other Postretirement Benefi ts 556

3. Share-Based Compensation 589

4. Summary 595

CHAPTER 15 Intercorporate Investments 605

Learning Outcomes 605

1. Introduction 605

2. Basic Corporate Investment Categories 606

3. Minority Passive Investments 608

4. Minority Active Investments 612

5. Joint Ventures 622

6. Controlling Interest Investments 624

7. Variable Interest and Special Purpose Entities 642

8. Summary 648

CHAPTER 16 Multinational Operations 657

Learning Outcomes 657

1. Introduction 657

2. Foreign Currency Transactions 658

3. Translation of Foreign Currency Financial Statements 671

4. Summary 713

CHAPTER 17 Evaluating Financial Reporting Quality 723

Learning Outcomes 723

1. Introduction 724

2. Discretion in Accounting Systems 725

3. Financial Reporting Quality: Defi nitions, Issues, and Aggregate Measures 733

4. A Framework for Identifying Low-Quality Financial Reporting 750

5. The Implications of Fair Value Reporting for Financial Reporting Quality: A Brief Discussion 782

6. Summary 782

Practice Problems 783

Glossary 789

References 803

About the Authors 807

About the CFA Program 811

Index 813