INSTRUCTORS/SOLUTIONS MANUAL

FINANCIAL REPORTING, FINANCIAL

STATEMENT ANALYSIS, AND VALUATION
A STRATEGIC PERSPECTIVE
SEVENTH EDITION
JAMES M. WAHLEN
Professor of Accounting
James R. Hoge !"air of E#ce$$ence
%e$$e& Sc"oo$ of 'usiness
Indiana University
STEPHEN P. 'A(INS%I
Her)ert E. Mi$$er !"air in *inancia$ Accounting
J. M. Tu$$ Sc"oo$ of Accounting
Terr& !o$$ege of 'usiness
The University of Georgia
MAR% T. 'RADSHAW
Associate Professor of Accounting
!arro$$ Sc"oo$ of Management
Boston College
This page is intentina!!" !e#t $!an%&
CONTENTS
S'e S(ggestins #) Using This Te*t$%............................................ I+i to I+#
Sc"eu$e ,............................................................................................. I+#i
Sc"eu$e -............................................................................................. I+#ii
Sc"eu$e .............................................................................................. I+#iii to I+#i/
S!(tins t +(estins, E*e),ises an- P)$!e's, an- Tea,hing Ntes t Cases
!"a0ter , O/er/ie1 of *inancia$ Re0orting2 *inancia$ Statement
Ana$&sis2 an Va$uation............................................. ,+, to ,+.3
!"a0ter -4 Asset an Lia)i$it& Va$uation an Income
Measurement.............................................................. -+, to -+.,
!"a0ter . Income *$o1s Versus !as" *$o1s4 5nerstaning t"e
Statement of !as" *$o1s........................................... .+, to .+67
!"a0ter 6 Profita)i$it& Ana$&sis....................................................... 6+, to 6+6,
!"a0ter 8 Ris9 Ana$&sis................................................................... 8+, to 8+67
!"a0ter : *inancing Acti/ities......................................................... :+, to :+6,
!"a0ter ; In/esting Acti/ities.......................................................... ;+, to ;+67
!"a0ter < O0erating Acti/ities......................................................... <+, to <+.3
!"a0ter 3 Accounting =ua$it&.......................................................... 3+, to 3+,;
!"a0ter ,7 *orecasting *inancia$ Statements.................................... ,7+, to ,7+,7.
!"a0ter ,, Ris9+A>uste E#0ecte Rates of Return an t"e
Di/iens Va$uation A00roac".................................. ,,+, to ,,+-7
!"a0ter ,- Va$uation4 !as"+*$o1+'ase A00roac"es...................... ,-+, to ,-+:7
!"a0ter ,. Va$uation4 Earnings+'ase A00roac"es......................... ,.+, to ,.+-6
!"a0ter ,6 Va$uation4 Mar9et+'ase A00roac"es............................ ,6+, to ,6+-3
This page is intentina!!" !e#t $!an%&
Introduction
Some Suggestions for Using this Textbook
S'e S(ggestins #) Using this Te*t$%
Our iscussions 1it" 0rofessors 1"o teac" courses in financia$ re0orting2 financia$
statement ana$&sis2 an e?uit& /a$uation an our stu& of t"e course out$ines of users of
0re/ious eitions of t"is )oo9 $ea us to ma9e t"e fo$$o1ing o)ser/ations4
,. T"ere is $itt$e consensus regaring t"e o)>ecti/es an content of courses in financia$
statement ana$&sis. !ourses /ar& in t"eir re$ati/e em0"asis on @aA t"e conce0ts2 too$s2
an s9i$$s for ana$&Bing financia$ statements2 @)A t"e effects of a$ternati/e accounting
0rinci0$es on t"e ?ua$it& of accounting information2 an @cA /a$uation.
-. At /arious institutions2 facu$t& in accounting2 finance2 an economics ma& teac" t"is
course.
.. T"e course ma& focus on t"e most recent researc" finings an t"e met"oo$ogica$
issues in conucting em0irica$ researc" using financia$ statement ata.
6. T"e course ma& 0resume t"at stuents "a/e "a on$& an introuctor& financia$
accounting course or t"at stuents "a/e "a t"e e?ui/a$ent of a ma>or in accounting.
It is not sur0rising t"at t"e 0rofessors 1e s0o9e 1it" fe$t t"at t"e te#t)oo9s on t"e
mar9et satisfie some of t"eir nees2 )ut se$om i one te#t)oo9 satisf& a$$ of t"em. We
"a/e no e$usions in t"is regar a)out t"e 0otentia$ for t"is te#t)oo9 eit"er. We "a/e fi/e
0remises in 1riting t"is )oo94
,. Ana$&Bing financia$ statements an /a$uing firms is an integrate 0rocess in 1"ic" t"e
ana$&st must unerstan inustr& com0etiti/e &namics2 firm strateg&2 accounting
information content an ?ua$it&2 0rofita)i$it& an ris9 assessment2 forecasting2 an
/a$uation moe$s. We stri/e to integrate t"ese si# com0onents of t"e 0rocess
t"roug"out t"is )oo9. We iscuss t"is in more etai$ )e$o1 in t"e section on
0ositioning t"is te#t.
-. T"e usua$ goa$ of financia$ statement ana$&sis is to /a$ue a firm. T"erefore2 1e
iscuss t"e im0ortant conce0ts2 too$s2 an s9i$$s of financia$ statement ana$&sis 1it"
t"is o)>ecti/e constant$& in /ie1.
.. T"e financia$ statement ana$&sis course ser/es as a s&nt"esiBing e#0erience for
stuents2 integrating conce0ts an s9i$$s from accounting2 finance2 economics2
)usiness strateg&2 an re$ate isci0$ines.
6. E#am0$es2 i$$ustrations2 0ro)$ems2 an cases )ase on current ata for actua$
com0anies en"ance stuent moti/ation an s9i$$ e/e$o0ment.
I-i
Introduction
Some Suggestions for Using this Textbook
8. T"e te#t2 ?uestions2 e#ercises2 0ro)$ems2 cases2 soft1are2 an re$ate materia$s s"ou$
0ro/ie sufficient f$e#i)i$it& to 0ermit 0rofessors to aa0t t"ese materia$s to suit t"eir
0articu$ar o)>ecti/es an nees.
Psitining # the .%
As 1e inicate in t"e 0reface to t"e )oo92 1e fin it "e$0fu$ to /ie1 financia$
statement ana$&sis as a triang$e. T"e ana$&sis of 0rofita)i$it& an ris9 using financia$
statements is in t"e center of t"e triang$e. Inter0reting 0rofita)i$it& an ris9 ratios
re?uires an unerstaning of t"e economic c"aracteristics of t"e inustries in 1"ic" a
firm com0etes an t"e )usiness strategies a firm "as se$ecte to com0ete in t"ose
inustries. T"e ana$&st s"ou$ not nai/e$& acce0t re0orte financia$ statement
information 1"en 0erforming 0rofita)i$it& an ris9 ana$&sis2 )ut s"ou$ first assess its
?ua$it& an ma9e a00ro0riate a>ustments. T"e assessment of ?ua$it& an a00ro0riate
a>ustments ma& iffer e0ening on 1"et"er t"e firmCs financia$ statements "a/e )een
0re0are in accorance 1it" 5.S. (AAP @(enera$$& Acce0te Accounting Princi0$esA or
I*RS @Internationa$ *inancia$ Re0orting StanarsA. T"e ana$&sis of a firmCs 0rofita)i$it&
an ris9 in t"e recent 0ast ser/es as a 0re$ue to forecasting its future 0rofita)i$it& an
ris9. *orecasts of future earnings2 cas" f$o1s2 an i/iens 0ro/ie t"e )ases for
/a$uing a firm. We e0ict t"ese e$ements )e$o14
F)e,asting an- Va!(atin # Fi)'s
In-(st)" E,n'i,s GAAP an- IFRS
an- an- the +(a!it" #
.(siness St)ateg" A,,(nting In#)'atin
As aut"ors of t"is )oo92 1e fin it usefu$ to ref$ect on t"e courses t"at 1e teac" in
financia$ statement ana$&sis an t"en 0$ace a ot insie t"e triang$e to inicate t"e re$ati/e
em0"asis on eac" of t"e e$ements e0icte as 0oints of t"e triang$e. Dou ma& fin it
usefu$ to o t"e same. We isco/ere t"at2 a$t"oug" t"e $ocation of our ots iffere
some1"at2 a$$ of t"e e$ements 1ere neee for effecti/e financia$ statement ana$&sis. De+
em0"asiBing an& of t"e e$ements can ta9e a1a& from t"e 0otentia$ ric"ness of t"e course.
T"us2 1e "a/e trie to 0osition our )oo9 to co/er t"is entire triang$e. *urt"ermore2 1e
must not on$& inc$ue eac" of t"ese e$ements in our courses2 )ut 1e nee to co/er t"em in
I-ii
Assess'ent #
P)#ita$i!it" an-
Ris%


Introduction
Some Suggestions for Using this Textbook
a )a$ance an integrate manner. We accom0$is" t"is )a$ance an integration in t"is
te#t)oo9 )& continua$$& re$ating eac" of t"e e$ements to t"e ot"ers an esigning 0ro)$em
an case materia$s t"at re?uire stuents to o t"e same.
St)(,t()e # the .%
T"e materia$ in t"is te#t)oo9 i/ies into t"ree main segments4
,. !ore conce0ts an too$s of financia$ statement ana$&sis4 !"a0ters , to 8.
-. =ua$it& of accounting information an 5.S. (AAP an I*RS4 !"a0ters : to 3.
.. *orecasting an /a$uation of firms4 !"a0ters ,7 to ,6.
Not on$& o instructors iffer on t"eir re$ati/e em0"asis on eac" of t"ese 0arts2 )ut
t"e& a$so iffer as to t"e se?uence in 1"ic" t"e& co/er t"em. We "a/e esigne t"is
te#t)oo9 so t"at instructors "a/e f$e#i)i$it& to se?uence t"e to0ics to suit t"eir 0articu$ar
0references. !"a0ter , is an o/er/ie1 of financia$ statement ana$&sis an is intene as a
starting 0oint for a$$ courses. We can t"in9 of se/era$ se?uencing scenarios for 1"ic" 1e
fee$ t"e te#t)oo9 is aa0ta)$e4
Scenario 14 'egin 1it" t"e core conce0ts of financia$ statement ana$&sis @!"a0ters ,
to 8A2 mo/e to a$ternati/e (AAP @!"a0ters : to 3A2 an finis" 1it" /a$uation @!"a0ters ,7
to ,6A.
Scenario 24 'egin 1it" t"e too$s of 0rofita)i$it& an ris9 ana$&sis @!"a0ters 6 an 8A
an t"en mo/e to /a$uation @!"a0ters ,7 an ,6A. *i$$ in 1it" materia$s on 0articu$ar
(AAP as neee for assigne 0ro)$ems an cases @!"a0ters : to 3A.
Scenario 4 'egin 1it" conce0ts an 0roceures uner$&ing t"e financia$ statements
@!"a0ters - an .A an t"en mo/e to a$ternati/e (AAP @!"a0ters : to 3A. Mo/e ne#t to
t"e too$s of financia$ statement ana$&sis @!"a0ters 6 an 8A an t"eir a00$ication in
/a$uation settings @!"a0ters ,7 to ,6A.
Ot"er se?uences are a$so 0ossi)$e. T"e 9e& is )a$ance co/erage of eac" of t"e e$ements2
not necessari$& t"eir se?uence.
Sa'p!e C()se O(t!ines
One use of t"is te#t)oo9 is in a t1o+course se?uence esigne for stuents 1"o 1i$$
)e intensi/e users of financia$ statements in t"eir 0rofessiona$ res0onsi)i$ities @securit&
ana$&sis2 creit ana$&sts2 in/estment )an9ers2 financia$ consu$tantsA. T"e first course2
!or0orate *inancia$ Re0orting2 em0"asiBes a$ternati/e accounting 0rinci0$es an t"eir
effects on t"e financia$ statements an on assessments of t"e ?ua$it& of accounting
information. T"e secon course2 *inancia$ Statement Ana$&sis2 a00$ies t"e too$s of
financia$ statement ana$&sis to t"e financia$ ata of actua$ com0anies2 )ot" for t"e
0ur0ose of stu&ing t"eir 0rofita)i$it& an ris9 an for /a$uing t"em. Sc"eu$es , an -
in t"is instructorCsEso$utions manua$ 0resent course out$ines for t"ese t1o courses.
Anot"er a00roac" is to use t"e te#t)oo9 in a sing$e course2 *inancia$ Re0orting an
I-iii
Introduction
Some Suggestions for Using this Textbook
Statement Ana$&sis2 1"ic" com)ines t"e content of t"e t1o+course se?uence. Sc"eu$e .
0resents an out$ine for t"is course.
W"en stuents "a/e 0re/ious$& ta9en courses in intermeiate an a/ance
accounting 0rinci0$es2 t"e instructor ma& omit !"a0ters : to 3. Most stuents2 "o1e/er2
1i$$ fin t"at t"e financia$ statement user 0ers0ecti/e ta9en in t"e stu& of /arious
a$ternati/e accounting 0rinci0$es in t"ese c"a0ters en"ances t"eir unerstaning an
)roaens t"eir 0ers0ecti/e. T"e materia$ on /a$uation in !"a0ters ,, to ,6 is sometimes
co/ere in finance courses instea of t"e course in financia$ statement ana$&sis.
Sc"eu$es ,2 -2 an . a$so inicate suggeste 0ro)$ems an cases for unergrauate
an grauate courses. We suggest ma9ing "ea/& use of ?uestions2 e#ercises2 an
0ro)$ems for unergrauate courses an a mi#ture of 0ro)$ems an cases for grauate
courses. T"e cases are more integrati/e an genera$$& more com0$e# t"an t"e 0ro)$ems.
T"e 0ro)$ems2 "o1e/er2 re?uire )ot" ana$&sis an inter0retation. In t"at sense2 t"e
0ro)$ems are $i9e mini+cases.
Te)' Pape) P)/e,t
We "a/e foun t"at assigning a term 0a0er 0ro>ect is an e#ce$$ent s&nt"esiBing e/ice
for t"e financia$ statement ana$&sis course. Stuents can eit"er 1or9 a$one an ana$&Be
t1o com0anies in t"e same inustr& or 1or9 in grou0s to ana$&Be t"ree or four com0anies
in t"e same inustr&. Ana$&Bing more t"an four com0anies is cum)ersome an t&0ica$$&
not necessar&. We "a/e stuents summariBe t"e economics an current conitions in t"e
inustr&2 escri)e t"e strategies of eac" of t"e firms2 in0ut t"e financia$ statement ata
1it" a00ro0riate a>ustments into a s0reas"eet 0rogram @suc" as *SAPA2 0erform a
0rofita)i$it& an ris9 ana$&sis2 0re0are forecaste financia$ statements2 an /a$ue t"e
firms. We as9 stuents to turn in 0rogress re0orts t"roug"out t"e term to insure t"at t"e&
are ma9ing 0rogress on t"e 0ro>ect. T"e first item turne in2 at a)out t"e one+t"ir 0oint
in t"e course2 is an out$ine of t"e economic c"aracteristics of t"e inustr& an t"e
strategies of t"e firms. T"e secon item turne in2 at a)out t"e t1o+t"irs 0oint in t"e
course2 is a 0rintout of t"e financia$ statements an financia$ statement ratios an a s"ort
escri0tion of t"e accounting ?ua$it& issues @)ot" "ig"+ an $o1+?ua$it&A an t"e ata
a>ustments mae toget"er 1it" a com0arati/e ana$&sis an inter0retation of t"e
0rofita)i$it& an ris9 ratios. T"e t"ir item turne in is a set of forecaste financia$
statements an /a$uations of t"e firms2 1"ic" occurs 1it" a00ro#imate$& t1o 1ee9s $eft
in t"e course. We often e/ote t"e $ast se/era$ c$ass 0erios of t"e term to s"ort 0ro>ect
0resentations )& stuents. A00eni# ,., of t"e te#t 0ro/ies stuents 1it" guiance in
conucting t"e term 0ro>ect.
O0e)0ie1 # Cases
T"e teac"ing note for eac" case escri)es t"e o)>ecti/es of t"e case as 1e$$ as
suggestions for teac"ing it. We 0resent )e$o1 a summar& of t"e 0rinci0a$ 0ur0ose of
eac" case.
Case 2&23 Sta)$(,%s& T"is integrati/e case introuces t"e series of 0arts t"at a00ear
in eac" of t"e remaining c"a0ters. T"e 0ur0ose of t"e integrati/e case series is to 0ermit
stuents to a00$& t"e materia$ co/ere in eac" c"a0ter to t"e financia$ statements an
ot"er information for t"e same com0an&. !ase ,., $eas stuents to re/ie1 t"e im0ortant
I-iv
Introduction
Some Suggestions for Using this Textbook
conce0ts an 0rinci0$es uner$&ing t"e )a$ance s"eet2 income statement2 an statement of
cas" f$o1s an to )egin conucting financia$ statement ana$&sis. T"e case 1or9s 1e$$ for
a first c$ass if stuents "a/e not one an& c$ass 0re0aration2 )ecause t"e instructor can
1a$9 stuents t"roug" se$ecte ?uestions to orc"estrate t"e esire re/ie1. T"e instructor
mig"t a$so 0ro/ie so$utions to t"e first four 0arts of t"e case in/o$/ing eac" financia$
statement an t"e re$ations )et1een t"em2 an t"en s0en time 1it" inter0retations. We
fin Star)uc9s 1or9s 1e$$ for t"is integrati/e case )ecause most stuents are fami$iar
1it" t"eir coffee s"o0s2 t"e firm "as a re$ati/e$& sim0$e )usiness moe$ @1"ic" ma9es
unerstaning t"e accounting an )ui$ing t"e forecasts a )it easierA2 an t"e financia$
statements in/o$/e a )roa range of interesting accounting issues. Of course2 ot"er firms
can )e use as integrati/e cases e?ua$$& effecti/e$&.
Case 2&43 Ni%e3 S'e1he)e .et1een a S1sh an- A S!a' D(n%. T"is case
re/ie1s t"e )asic conce0ts an 0rinci0$es from t"e introuctor& financia$ accounting
course an introuces too$s for ana$&Bing financia$ statements. T"e case 1or9s 1e$$ for a
first c$ass if stuents "a/e not one an& c$ass 0re0aration2 )ecause t"e instructor can 1a$9
stuents t"roug" se$ecte ?uestions to orc"estrate t"e esire re/ie1. T"e instructor
mig"t a$so 0ro/ie so$utions to t"e first four 0arts of t"e case in/o$/ing eac" financia$
statement an t"e re$ations )et1een t"em2 an t"en s0en c$ass time 1it" inter0retations.
Integ)ati0e Case 4&23 Sta)$(,%s& T"is 0ortion of t"e integrati/e case on Star)uc9s
e#amines t"e firmCs isc$osures on income ta#es2 1it" em0"asis on t"e re$ation )et1een
)oo9 income an ta#a)$e income an inter0retation of c"anges in /arious eferre ta#
accounts.
Integ)ati0e Case 5&23 Sta)$(,%s& T"is case focuses on inter0reting t"e statement of
cas" f$o1s of Star)uc9s. It a$so e#amines t"e re$ation )et1een net income2 cas" f$o1
from o0erations2 an E'ITDA.
Case 5&43 P)i'e Cnt)a,t)s& Prime !ontractors s"ifte its strateg& from an asset+
intensi/e )usiness to a 0eo0$e+intensi/e )usiness. Stuents stu& t"e statement of cas"
f$o1s to see e/ience of t"is strategic s"ift. T"e case a$so i$$ustrates t"at net income an
cas" f$o1 from o0erations can mo/e in o00osite irections an stuents are as9e to
e#0$ain "o1 t"is can "a00en.
Case 5&53 6&T& G)ant ,'pan"3 A Case St(-" # .an%)(pt,"& (rant 1as
0rofita)$e u0 to t"e $ast &ear )efore its )an9ru0tc&2 )ut 1as una)$e to generate cas"
interna$$&. T"is case emonstrates t"e nee for a statement of cas" f$o1s. T"e case
0ro/ies t"e re$e/ant financia$ statement ratios2 so stuents nee not ma9e man&
ca$cu$ations. T"e case emonstrates "o1 a 0oor$& e#ecute )usiness strateg& can sin9
e/en a $arge2 1e$$+esta)$is"e com0an&. It a$so )rings u0 se/era$ accounting issues2
inc$uing inae?uate 0ro/isions for unco$$ecti)$e accounts2 recognition of interest income
on insta$$ment recei/a)$es2 conso$iation 0o$ic&2 an contro$ s&stems for ecentra$iBe
firms. Stuents o not nee )ac9groun in t"e s0ecifics of t"ese accounting issues in
orer to o)ser/e t"eir effect on t"e financia$ statements. T"e W.T. (rant )an9ru0tc&
I-v
Introduction
Some Suggestions for Using this Textbook
occurre in ,3;82 &et continues to ser/e as a c$assic stu& of "o1 cas" f$o1 0ro)$ems can
$ea to financia$ ifficu$t&.
Integ)ati0e Case 7&23 Sta)$(,%s& Part A of t"is case as9s stuents to com0ute
/arious 0rofita)i$it& ratios for Star)uc9s an e#0$ore reasons for c"anges in its
0rofita)i$it& uring t"e most recent t"ree &ears. Part ' of t"e case 0ro/ies t"e same
financia$ ratios for Panera 'rea !om0an& as t"ose com0ute in Part A for Star)uc9s an
as9s stuents to com0are t"e 0rofita)i$it& of t"e t1o firms.
Case 7&43 P)#ita$i!it" an- Ris% Ana!"sis # 6a!'a)t St)es& Part A of t"is case
as9s stuents to ca$cu$ate traitiona$ 0rofita)i$it& an ris9 ratios for t"e most recent &ear
in t"e case an t"en inter0ret t"e c"anges in 0rofita)i$it& an ris9 in recent &ears.
Wa$mart s"ifte its strateg& to @,A increase t"e em0"asis on su0ercenters2 1"ic" com)ine
t"eir traitiona$ iscounts store conce0t 1it" grocer& 0roucts2 an @-A gro1 t"roug"
ac?uisitions a)roa. T"e effects of t"ese strategic s"ifts s"o1 u0 in t"e financia$
statement ratios. T"e instructor can assign t"e 0arts of t"is case in/o$/ing 0rofita)i$it&
ana$&sis 1it" !"a0ter 6 an t"e 0arts in/o$/ing ris9 ana$&sis 1it" !"a0ter 8.
A$ternati/e$&2 t"e instructor can assign t"e case as an integrati/e case for !"a0ters 6 an
8. Pro)$em ,7.: as9s stuents to 0re0are forecaste financia$ statements for Wa$mart an
Pro)$ems ,,.,62 ,-.,;2 ,..-72 an ,6.-. as9 stuents to /a$ue Wa$mart. T"us2 t"e
instructor can use !ase 6., an t"ese four su)se?uent 0ro)$ems for an integrate stu& of
Wa$mart. Part ' of t"is case 0ro/ies 0rofita)i$it& an ris9 ratios for !arrefour an
Target an as9s stuents to com0are t"e 0rofita)i$it& an ris9 of t"ese firms 1it"
Wa$mart. Differences in t"e esign an effecti/eness of t"e strategies of t"ese t"ree
firms come out c$ear$& in t"is 0art of t"e case. As 1it" Part A2 instructors can assign t"e
0rofita)i$it& 0arts of Part ' 1"en co/ering !"a0ter 6 an t"e ris9 0arts 1"en co/ering
!"a0ter 8 or assign it as an integrati/e case after co/ering )ot" !"a0ters 6 an 8.
Case 8&43 Massa,h(setts St0e C'pan"3 .an% Len-ing De,isin& T"is case is
)ase on an actua$2 0ri/ate$&+"e$ com0an& t"at as9e t"at its ientit& not )e re/ea$e.
T"e setting of t"e case an t"e financia$ statement ata are a$most ientica$ to t"ose for
t"e com0an& in t"e time 0erio set fort" in t"e case. T"e inustr& face a o1nsiBing as
a resu$t of ne1 en/ironmenta$ regu$ations an a ecrease in eman. T"is com0an&
focuses on retai$ irect mar9eting an "as a00arent$& car/e itse$f a uni?ue nic"e.
Su)stantia$ uncertaint& surrouns t"e future of t"is com0an& @unsett$e $a1suit2 continue
esign an testing costs to meet EPA regu$ationsA2 so t"e $oan ecision is not an eas& ca$$.
Case 8&53 F!"9$"9Night Inte)natina! G)(p3 Can This C'pan" .e Sa0e-:
T"is case2 )ase on t"e financia$ statements of *$ig"t (rou0 Internationa$2 ana$&Bes a
com0an& a00roac"ing )an9ru0tc&. Stuents must ientif& causes of t"e firmCs 0ro)$ems
an suggest c"anges t"e& 1ou$ ma9e to 9ee0 t"e firm out of )an9ru0tc&. Stuents are
a$so as9e to a00$& t"e A$tman )an9ru0tc& 0reiction moe$ to t"is firm. A uni?ue
as0ect of t"e case is t"at t"e ma>orit& s"are"o$er is a$so t"e c"ief e#ecuti/e officer an
c"airman of t"e )oar. Part of t"e firmCs ifficu$ties re$ates to ea$ings )& t"is ini/iua$
1it" t"e firm2 1"ic" are not e#act$& armsC $engt". T"is case ser/es as an e#ce$$ent
/e"ic$e for iscussions of cor0orate go/ernance an et"ica$ issues.
I-vi
Introduction
Some Suggestions for Using this Textbook
Case 8&73 Mi!!ennia! Te,hn!gies3 Ap,a!"pse N1& T"is case is )ase on
financia$ ata for !entennia$ Tec"no$ogies an i$$ustrates t"ree essentia$ ana$&ses4 @,A
etecting t"e games firms can 0$a& to ma9e t"emse$/es a00ear more 0rofita)$e t"an t"e&
are2 @-A assessing creit ris9 of a firm 1it" a /ia)$e 0rouct )ut significant s"ort+term
$i?uiit& ris92 an @.A assessing )an9ru0tc& ris9 for a firm t"at "as $imite access to
ca0ita$ mar9ets )ecause of 0ur0orte frauu$ent re0orting. T"is case as9s stuents to
a00$& 'eneis"Cs moe$ for etecting earnings mani0u$ation an t"e A$tman moe$ for
0reicting )an9ru0tc&.
Integ)ati0e ;&23 Sta)$(,%s& Star)uc9s ma9es use of o0erating $eases for muc" of its
store s0ace an2 t"erefore2 $ea/es 0ro0ert&2 0$ant an e?ui0ment2 an e)t off its )a$ance
s"eet. T"is case as9s stuents to com0ute t"e 0resent /a$ue of o0erating $ease
commitments an ca$cu$ate se/era$ e)t ratios )ot" 1it"out an 1it" ca0ita$iBation of
o0erating $eases.
Case ;&43 O)a,!e C)p)atin3 Sha)e9.ase- C'pensatin E##e,ts/State'ent #
Sha)eh!-e)s E<(it"& Orac$e !or0orationCs Statement of S"are"o$ersC E?uit& re0orts
se/era$ materia$ e?uit& transactions. Stuents are as9e to com0ute t"e $ong+term+e)t+
to+s"are"o$ersC+e?uit& ratio to measure t"e e#tent to 1"ic" Orac$e uses $e/erage. T"en2
stuents must ientif& "o1 Orac$eCs s"are+)ase com0ensation 0$ans an stoc9
re0urc"ase 0$ans affect $e/erage an future return on e?uit&. *ina$$&2 stuents must
escri)e "o1 t"e e?uit& transactions re0orte in t"e statement are s"o1n in t"e statement
of cas" f$o1s.
Case ;&53 Lng9Te)' S!0en," Ris%3 S(th1est an- L(#thansa Ai)!ines& Actua$
Sout"1est Air$ines @5.S. (AAPA an Luft"ansa Air$ines @I*RSA )a$ance s"eets an note
e#cer0ts s"o1 t"e e#tent to 1"ic" t"e t1o air$ines use o0erating $eases. Stuents use
t"ese t1o /er& ifferent financia$ statement an note 0resentations to ca0ita$iBe o0erating
$eases an com0are $ong+term so$/enc& ris9 )et1een t"ese t1o com0anies )efore an
after effecti/e $ease ca0ita$iBation.
Integ)ati0e Case =&23 Sta)$(,%s& T"is com0re"ensi/e case co/ers a$$ of Star)uc9sC
in/esting acti/ities. Stuents must rea an e/a$uate accounting 0o$ic& for $ong+$i/e
o0erationa$ assets inc$uing fi#e assets2 $ease"o$ im0ro/ements2 asset retirement
o)$igations2 an asset im0airment an RFD @t"ese $atter t1o as com0are to I*RS ru$esA.
Stuents ientif& Star)uc9sC use of fair /a$ue in accounting for ma>orit&+o1ne e?uit&
in/estments2 "o1 Star)uc9s 1i$$ incor0orate accounting stanar c"anges in t"e area2 an
"o1 Star)uc9s accounts for resu$ting goo1i$$ an its 0otentia$ im0airment. Stuents
a$so must e/a$uate "o1 Star)uc9s ref$ects its minorit& 0assi/e in/estments in net income
an ot"er com0re"ensi/e income an "o1 it ref$ects its minorit& acti/e in/estments in net
income. Stuents are re?uire to effecti/e$& conso$iate its minorit& acti/e in/estments.
Case =&43 Disne" A,<(isitin # Ma)0e! Ente)tain'ent& Stuents must ans1er
se/era$ ?uestions a)out "o1 Disne& must account for its Se0tem)er -7732 G6 )i$$ion cas"
an stoc9 ac?uisition of Mar/e$. Em0"asis is 0$ace on t"e ne1 accounting ru$es in t"e
area @t"e ac?uisition met"oA.
I-vii
Introduction
Some Suggestions for Using this Textbook
Integ)ati0e Case >&23 Sta)$(,%s& Star)uc9s recogniBes re/enue in retai$
transactions2 as a su00$ier of ot"er com0anies2 an from transactions 1it" franc"isees.
T"is 0ortion of t"e integrati/e case as9s stuents to aress ?uestions regaring
Star)uc9sC accounting for re/enue recognition.
Case >&43 A)i?na Lan- De0e!p'ent C'pan"& T"is case i$$ustrates t"e effects
of a$ternati/e income recognition met"os on t"e t"ree 0rinci0a$ financia$ statements.
T"e case 0ro/ies fu$$ financia$ statements uner eac" income recognition met"o.
Stuents t"erefore e/ote time to unerstaning t"e ifferent effects on t"e financia$
statements instea of 0erforming t"e $a)orious ca$cu$ations. T"e $in9 )et1een asset
/a$uation an income recognition2 iscusse in !"a0ter -2 come t"roug" c$ear$&. T"e
case a$so emonstrates t"at t"e a$ternati/e income recognition met"os o not affect cas"
f$o1s. Stuents must ma9e a >ugment as to t"e a00ro0riate time to recogniBe income.
Case >&53 C,a9C!a Pensins& Stuents ana$&Be !oca+!o$aCs 0ension footnote to
e#0$ain c"anges in t"e net 0ension $ia)i$it&2 trace c"anges in 0ension assets an $ia)i$ities
to net income @t"roug" 0ension e#0enseA an to ot"er com0re"ensi/e income. Stuents
must a$so e#0$ain "o1 a c"ange in an e#0ecte com0ensation $e/e$ increase assum0tion
affects t"e 0ension $ia)i$it& an current an future 0ension e#0ense.
Integ)ati0e Case @&23 Sta)$(,%s& T"is 0ortion of t"e integrati/e case re?uires
stuents to ana$&Be issues of earnings ?ua$it& for Star)uc9s. S0ecifica$$&2 stuents must
ta9e a 0osition on "o1 t"e& 1i$$ treat Star)uc9sC restructuring c"arges2 accounting
c"anges2 se$f+insurance reser/es2 an ot"er com0re"ensi/e income items 1"en
forecasting future earnings.
Case @&43 Citi3 A Ve)" .a- Yea)& !iti "as re0orte a $arge $oss uring t"e recent
financia$ crisis. Stuents are re?uire to ana$&Be !itiCs earnings ?ua$it& )& e#amining
!itiCs financia$ statements an note isc$osures. S0ecific re?uirements re$ate to 0rinci0a$
transactions2 rea$iBe gains an $osses from sa$es of in/estments2 0ro/isions for $oan
$osses2 restructuring c"arges2 goo1i$$ im0airments2 an iscontinue o0erations.
Integ)ati0e Case 2A&23 Sta)$(,%s& T"is case re?uires stuents to construct a
s0reas"eet or use *SAP to 0re0are forecaste financia$ statements for Star)uc9s.
Stuents must ecie on a00ro0riate assum0tions to 0re0are t"e forecaste financia$
statements. '& t"is 0oint2 stuents s"ou$ )e fami$iar 1it" Star)uc9s2 a$t"oug" it is not
essentia$ t"at stuents 1i$$ "a/e 0re0are t"e 0ortions of t"e integrati/e cases in 0rior
c"a0ters in orer to ecie on a00ro0riate assum0tions. T"ese forecaste amounts
)ecome t"e )ase for t"e integrati/e cases on /a$uation in !"a0ters ,, to ,6.
Case 2A&43 Massa,h(setts St0e C'pan"3 Ana!"?ing St)ategi, Optins& T"is
case fo$$o1s u0 !ase 8.-2 1"ic" ana$&Bes t"e creit ris9 of Massac"usetts Sto/e
!om0an&. T"e setting of !ase ,7.- is fi/e &ears $ater. T"e firm is "ea$t"ier )ut its 1oo
sto/e 0roucts "a/e reac"e maturit&. Stuents are as9e to 0re0are forecaste financia$
statements to assess t"e esira)i$it& of aing gas sto/es to t"e 1oo sto/e $ine of
0roucts. T"e case 0ro/ies forecaste assum0tions for t"e )est case2 most $i9e$& case2
I-viii
Introduction
Some Suggestions for Using this Textbook
an 1orst case scenarios. Stuents must esign a s0reas"eet to 0ermit ana$&sis of t"ese
o0tions.
Integ)ati0e Case 22&23 Sta)$(,%s& Stuents com0ute t"e cost of e?uit& ca0ita$ for
Star)uc9s an t"en a00$& t"e i/ien+)ase /a$uation met"o2 using forecaste amounts
from Integrati/e !ase ,7.,. Stuents must a$so stu& t"e sensiti/it& of t"e /a$uation to
c"anges in iscount rate an t"e $ong+term gro1t" rate.
Integ)ati0e Case 24&23 Sta)$(,%s& T"is 0ortion of t"e integrati/e case guies
stuents t"roug" t"e /a$uation of Star)uc9s using t"e 0resent /a$ue of free cas" f$o1s to
common e?uit& s"are"o$ers an t"e 0resent /a$ue of free cas" f$o1s to a$$ e)t an
e?uit& sta9e"o$ers. T"e case a$so as9s stuents to assess t"e sensiti/it& of t"eir
/a$uations to c"anges in assum0tions a)out costs of ca0ita$ an $ong+term gro1t" rates.
Case 24&43 B!'es C)p)atin3 L.O Va!(atin& T"is case in/o$/es t"e fu$$
range of ana$&ses for a $e/erage )u&out @L'OA2 inc$uing ientif&ing t"e esira)$e
attri)utes of an L'O caniate2 0re0aring 0ro>ecte financia$ statements2 an /a$uing t"e
com0an& using 0resent /a$ues of cas" f$o1s2 0resent /a$ues of resiua$ income2 0resent
/a$ue of resiua$ RO!E2 an mar9et mu$ti0$es. Ho$mes is not an o)/ious c"oice for an
L'O2 so goo iscussions e/e$o0 a)out 1"et"er or not to 0ursue t"e firm. T"e
0re0aration of forecaste financia$ statements is re$ati/e$& straig"tfor1ar )ecause
Ho$mesC financia$ statement re$ations "a/e )een fair$& sta)$e in t"e 0ast. A$t"oug" 1e
0$ace t"is case at t"e en of !"a0ter ,-2 instructors can assign a00ro0riate 0arts as t"e&
co/er !"a0ters ,7 to ,62 or use it as a s&nt"esis case after co/ering a$$ of t"ese c"a0ters.
T"e case re?uires a00ro#imate$& t"ree "ours of c$ass time.
Integ)ati0e Case 25&23 Sta)$(,%s& T"is 0ortion of t"e integrati/e case guies
stuents t"roug" t"e /a$uation of Star)uc9s using t"e resiua$ income /a$uation met"o.
It a$so as9s stuents to assess t"e sensiti/it& of t"eir /a$uations to c"anges in t"e iscount
rate an $ong+term gro1t" rate.
Integ)ati0e Case 27&23 Sta)$(,%s& Stuents are as9e to a00$& t"e /a$ue+to+)oo9
an /a$ue+earnings /a$uation met"os to Star)uc9s. T"e& a$so a00$& t"ese /a$uation
met"os 1it" ifferent assum0tions a)out t"e iscount rate an $ong+term gro1t" rate to
stu& t"e sensiti/it& of t"e /a$uations to t"ese assum0tions. !om0arisons of /a$ue+to+
)oo9 an /a$ue+earnings ratios to mar9et+to+)oo9 an 0rice+earnings ratios 0ro/ie a
)asis for e/a$uating current mar9et 0rices. Stuents are a$so as9e to re/erse engineer t"e
iscount rate an $ong+term gro1t" rate consistent 1it" current mar9et 0rices.
C'p(te) S#t1a)e
A *inancia$ Statement Ana$&sis Pac9age @*SAPA is a/ai$a)$e on t"e 1e) site to a$$
ao0ters of t"e )oo9. *SAP 0ermits stuents to enter financia$ statement ata for a
com0an&2 1"ic" t"e& can t"en ana$&Be using *SAP. *SAP a$so "as ca0a)i$ities for t"e
0re0aration of forecaste financia$ statements an /a$uation of a firm using t"e /a$uation
met"os iscusse in !"a0ters ,, to ,6. T"e out0ut of *SAP for Pe0si!o a00ears in
I-ix
Introduction
Some Suggestions for Using this Textbook
A00eni# !. *SAP contains a user manua$ 1it" man& $ine+)&+$ine guies for "o1 to use
*SAP.
We 1e$come suggestions an comments t"at mig"t 0ro/ie guiance for future
eitions of t"is )oo9. T"e re/isions for t"is eition attem0t to ref$ect t"e e#ce$$ent
suggestions 1e "a/e recei/e on t"e si#t" eition.
I-x
Introduction
Some Suggestions for Using this Textbook
S,he-(!e 2
C)p)ate Finan,ia! Rep)ting C()se O(t!ine
CT1ent" @A9Min(te C!ass SessinsD
C!ass P)epa)e
Pe)i- Tpi, Rea- Un-e)g)a-(ate G)a-(ate
, O/er/ie1 of *inancia$ Re0orting !". , Pro). ,.,8 !ase ,.,
- Asset Va$uation an Income !". - !ase -., !ase -.,
Measurement Pro). -.,: Pro). -.,:
. Income *$o1s /ersus !as" *$o1s !". . !ase .., !ase ..,
Pro). ..-. Pro). ..-.
6 De)t *inancing !". : Pro). :.82 :.,7 Pro). :.82 :.,7
8 S"are"o$ersC E?uit&EStoc9 !". : Pro). :.-,2 :.-- Pro). :.-6
O0tions !ase :.-
: Off+'a$ance S"eet *inancing !". : Pro). :.,;2 :.-7 Pro). :.,;
!ase :.,
; Long+Li/e O0erationa$ Assets !". ; Pro). ;.,82 ;.,:2 !ase ;., @Parts I F VA
;.,;
< *irst E#amination
3 Intercor0orate In/estments !". ; Pro). ;.,,2 ;.,< !ase ;., @Parts III
F IVA
,7 !or0orate Ac?uisitions !". ; Pro). ;.--2 ;.-. Pro). ;.-.
!ase ;.-
,, *oreign !urrenc& Trans$ation !". ; Pro). ;.-82 ;.-: Pro). ;.-82 ;.-:
,- Re/enue Recognition !". < !ase <., !ase <.,
,. Re/enue Recognition !". < Pro). <.,32 <.-, !ase <.-
,6 Secon E#amination
,8 Income Ta#es !". < Pro). <.-: Pro). <.-:
,: Pensions an Hea$t"care 'enefits !". < Pro). <.-- Pro). <.--
,; Deri/ati/es !". < Pro). <.-.2 <.-6 Pro). <.-.2 <.-6
,< Accounting =ua$it& !". 3 Pro). 3.,72 3.,, !ase 3.,2 3.-
,3 Pro>ect Presentations
-7 Pro>ect Presentations
I-xi
Introduction
Some Suggestions for Using this Textbook
S,he-(!e 4
Finan,ia! State'ent Ana!"sis C()se O(t!ine
CT1ent" @A9Min(te C!ass SessinsD
C!ass P)epa)e
Pe)i- Tpi, Rea- Un-e)g)a-(ate G)a-(ate
, Introuction to *inancia$ State+ !". , !ase ,., !ase ,.,
ment Ana$&sis
- O/er/ie1 of Profita)i$it& Ana$&sis !". 6 Pro). 6.-, !ase 6., @Part AA
. Ana$&Bing Restaurant an !". 6 Pro). 6.-.2 6.-6 Pro). 6.-.2 6.-6
!a0ita$+Intensi/e *irms
6 Ana$&Bing Personne$ an *inancia$ !". 6 Pro). 6.--2 6.-8 Pro). 6.--2 6.-8
Ser/ices 'usinesses
8 O/er/ie1 of Ris9 Ana$&sis !". 8 Pro). 8.,.2 6.,: !ase 8.,
: !ross Section Profita)i$it& an !ase 6., @Part 'A !ase 6., @Part 'A
Ris9 Ana$&sis
; !reit Ris9 Ana$&sis !". 8 !ase 8.- !ase 8.-
< 'an9ru0tc& Ris9 Ana$&sis !". 8 !ase 8.. !ase 8..
3 *inancia$ Re0orting Mani0u$ation !". 8 Pro). 8.,3 !ase 8.6
Ris9 Ana$&sis
,7 E#amination
,, *orecaste *inancia$ Statements !". ,7 !ase ,7., !ase ,7.,
,- Va$uation4 Di/iens+'ase !". ,, !ase ,,., !ase ,,.,
A00roac"es
,. Va$uation4 !as"+*$o1+'ase !". ,- !ase ,-., !ase ,-.,
A00roac"es
,6 Va$uation4 Earnings+'ase !". ,. !ase ,.., !ase ,..,
A00roac"es
,8 Va$uation4 Mar9et Mu$ti0$es !". ,6 !ase ,6., !ase ,6.,
,: S&nt"esis !ase !ase ,-., !ase ,-.,
,; S&nt"esis !ase !ase ,-., !ase ,-.,
,< Pro>ect Presentations !ase ,,., !ase ,,.,
,3 Pro>ect Presentations
-7 E#amination
I-xii
Introduction
Some Suggestions for Using this Textbook
S,he-(!e 5
Finan,ia! Rep)ting an- State'ent Ana!"sis
CThi)t" @A9Min(te C!ass SessinsD
C!ass P)epa)e
Pe)i- Tpi, Rea- Un-e)g)a-(ate G)a-(ate
, Introuction to *inancia$ Re0orting !". , Pro). ,.,8 !ase ,.,
an *inancia$ Statement Ana$&sis
- Asset Va$uation an Income !". - !ase -., !ase -.,
Measurement Pro). -.,: Pro). -.,:
. Income *$o1s /ersus !as" *$o1s !". . !ase .., !ase ..,
Pro). ..-. Pro). ..-.
6 Introuction to Profita)i$it& !". 6 Pro). 6.-, !ase 6., @Part AA
Ana$&sis
8 Introuction to Ris9 Ana$&sis !". 8 Pro). 8.,. !ase 8.,
: !ross Section Profita)i$it& Ana$&sis !ase 6., @Part 'A !ase 6., @Part 'A
; *inancia$ Re0orting Mani0u$ation !". 8 Pro). 8.,3 !ase 8.6
Ris9 Ana$&sis
< De)t *inancing !". : Pro). :.82 :.,7 Pro). :.82 :.,7
3 S"are"o$ersC E?uit&EStoc9 !". : Pro). :.-,2 :.-- Pro). :.-6
O0tions !ase :.-
,7 Off+'a$ance S"eet *inancing !". : Pro). :.,;2 :.-7 Pro). :.,;
!ase :.,
,, Long+Li/e O0erationa$ Assets !". ; !ase ;.,82 ;.,: !ase ;., @Parts I
F VA
,- *irst E#amination
,. Intercor0orate In/estments !". ; Pro). ;.,,2 ;.,< !ase ;., @Parts III
F IVA
,6 !or0orate Ac?uisitions !". ; Pro). ;.--2 ;.-. Pro). ;.-.
!ase ;.-
,8 *oreign !urrenc& Trans$ation !". ; Pro). ;.-82 ;.-: Pro). ;.-82 ;.-:
,: Re/enue Recognition !". < !ase <., !ase <.,
I-xiii
Introduction
Some Suggestions for Using this Textbook
,; Re/enue Recognition !". < Pro). <.,32 <.-, !ase <.-
,< Income Ta#es !". < Pro). <.-: Pro). <.-:
,3 Pensions an Hea$t"care 'enefits !". < Pro). <.-- Pro). <.--
-7 Deri/ati/es !". < Pro). <.-.2 <.-6 Pro). <.-.2 <.-6
-, Accounting =ua$it& !". 3 Pro). 3.,72 3.,, !ase 3.,2 3.-
-- Secon E#amination
-. *orecaste *inancia$ Statements !". ,7 Pro). ,7., !ase ,7.,
-6 Va$uation4 Di/iens+'ase !". ,, !ase ,,., !ase ,,.,
A00roac"es
-8 Va$uation4 !as"+*$o1+'ase !". ,- !ase ,-., !ase ,-.,
A00roac"es
-: Va$uation4 Earnings+'ase !". ,. !ase ,.., !ase ,..,
A00roac"es
-; Va$uation4 Mar9et Mu$ti0$es !". ,6 !ase ,6., !ase ,6.,
-< Pro>ect Presentations
-3 Pro>ect Presentations
.7 T"ir E#amination
I-xiv