International Financial Statement Analysis

INTERNATIONAL FINANCIAL STATEMENT ANALYSIS......Page 3
Contents......Page 7
Foreword......Page 19
Preface......Page 21
Acknowledgments......Page 23
About the CFA Investment Series......Page 25
 1. Introduction......Page 29
 2. Scope of Financial Statement Analysis......Page 30
 3. Major Financial Statements and Other Information Sources......Page 35
  3.1. Financial Statements and Supplementary Information......Page 36
  3.2. Other Sources of Information......Page 55
 4. Financial Statement Analysis Framework......Page 56
  4.2. Collect Data......Page 58
  4.4. Analyze/Interpret the Processed Data......Page 59
 5. Summary......Page 60
 Problems......Page 62
 Learning Outcomes......Page 65
 2. The Classification of Business Activities......Page 66
 3. Accounts and Financial Statements......Page 67
  3.1. Financial Statement Elements and Accounts......Page 68
  3.2. Accounting Equations......Page 70
  4.1. An Illustration......Page 75
  4.2. The Accounting Records......Page 77
  4.3. Financial Statements......Page 90
  5.1. Accruals......Page 93
 6. Accounting Systems......Page 95
  6.1. Flow of Information in an Accounting System......Page 96
  7.1. The Use of Judgment in Accounts and Entries......Page 97
  7.2. Misrepresentations......Page 98
 Appendix: A Debit/Credit Accounting System......Page 99
 Problems......Page 115
 Learning Outcomes......Page 119
 2. The Objective of Financial Reporting......Page 120
 3. Standard-Setting Bodies and Regulatory Authorities......Page 123
  3.1. Accounting Standards Boards......Page 124
  3.2. Regulatory Authorities......Page 127
 4. Convergence of Global Financial Reporting Standards......Page 132
 5. The International Financial Reporting Standards Framework......Page 135
  5.2. Qualitative Characteristics of Financial Reports......Page 137
  5.3. Constraints on Financial Reports......Page 138
  5.4. The Elements of Financial Statements......Page 140
  5.5. General Requirements for Financial Statements......Page 142
  5.6. Convergence of Conceptual Framework......Page 146
  6.1. Characteristics of an Effective Financial Reporting Framework......Page 147
  6.2. Barriers to a Single Coherent Framework......Page 148
 7. Comparison of IFRS with Alternative Reporting Systems......Page 149
  8.1. New Products or Types of Transactions......Page 151
  8.2. Evolving Standards and the Role of CFA Institute......Page 152
  8.3. Company Disclosures......Page 153
 9. Summary......Page 156
 Problems......Page 158
 Learning Outcomes......Page 161
 1. Introduction......Page 162
 2. Components and Format of the Income Statement......Page 163
 3. Revenue Recognition......Page 167
  3.1. General Principles......Page 168
  3.2. Revenue Recognition in Special Cases......Page 171
  3.3. Implications for Financial Analysis......Page 178
  4.1. General Principles......Page 180
  4.2. Issues in Expense Recognition......Page 184
  4.3. Implications for Financial Analysis......Page 189
 5. Non-Recurring Items and Non-Operating Items......Page 190
  5.2. Extraordinary Items......Page 191
  5.3. Unusual or Infrequent Items......Page 192
  5.4. Changes in Accounting Policies......Page 193
  5.5. Non-Operating Items......Page 196
  6.1. Simple versus Complex Capital Structure......Page 197
  6.2. Basic EPS......Page 198
  6.3. Diluted EPS......Page 199
  7.1. Common-Size Analysis of the Income Statement......Page 206
  7.2. Income Statement Ratios......Page 209
 8. Comprehensive Income......Page 211
 9. Summary......Page 214
 Problems......Page 216
 1. Introduction......Page 221
 2. Components and Format of the Balance Sheet......Page 222
  2.1. Balance Sheet Components......Page 223
  2.2. Current and Non-Current Classification......Page 225
  2.3. Liquidity-Based Presentation......Page 226
  3.1. Current Assets......Page 227
  3.2. Current Liabilities......Page 234
 4. Non-Current Assets......Page 237
  4.1. Property, Plant, and Equipment......Page 239
  4.3. Intangible Assets......Page 240
  4.4. Goodwill......Page 243
  4.5. Financial Assets......Page 245
 5. Non-Current Liabilities......Page 248
  5.2. Deferred Tax Liabilities......Page 250
  6.1. Components of Equity......Page 251
  6.2. Statement of Changes in Equity......Page 253
  7.1. Common-Size Analysis of the Balance Sheet......Page 255
  7.2. Balance Sheet Ratios......Page 263
 8. Summary......Page 265
 Problems......Page 267
 1. Introduction......Page 271
 2. Components and Format of the Cash Flow Statement......Page 272
  2.1. Classification of Cash Flows and Non-Cash Activities......Page 273
  2.2. A Summary of Differences between IFRS and US GAAP......Page 275
  2.3. Direct and Indirect Methods for Reporting Cash Flow from Operating Activities......Page 276
  3.1. Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet......Page 286
  3.2. Steps in Preparing the Cash Flow Statement......Page 288
  3.3. Conversion of Cash Flows from the Indirect to the Direct Method......Page 300
 4. Cash Flow Statement Analysis......Page 301
  4.1. Evaluation of the Sources and Uses of Cash......Page 302
  4.2. Common-Size Analysis of the Statement of Cash Flows......Page 305
  4.3. Free Cash Flow to the Firm and Free Cash Flow to Equity......Page 310
  4.4. Cash Flow Ratios......Page 311
 5. Summary......Page 313
 Problems......Page 314
 1. Introduction......Page 319
 2. The Financial Analysis Process......Page 320
  2.1. The Objectives of the Financial Analysis Process......Page 321
  2.2. Distinguishing between Computations and Analysis......Page 322
 3. Analytical Tools and Techniques......Page 324
  3.1. Ratios......Page 328
  3.2. Common-Size Analysis......Page 332
  3.3. The Use of Graphs as an Analytical Tool......Page 339
  3.4. Regression Analysis......Page 340
  4.1. Interpretation and Context......Page 341
  4.2. Activity Ratios......Page 342
  4.3. Liquidity Ratios......Page 348
  4.4. Solvency Ratios......Page 353
  4.5. Profi tability Ratios......Page 357
  4.6. Integrated Financial Ratio Analysis......Page 361
  5.1. Valuation Ratios......Page 369
  5.2. Industry-Specific Ratios......Page 372
  5.3. Research on Ratios in Equity Analysis......Page 374
  6.1. The Credit Rating Process......Page 375
  6.2. Research on Ratios in Credit Analysis......Page 377
  7.1. Segment Reporting Requirements......Page 378
  7.2. Segment Ratios......Page 379
 9. Summary......Page 381
 References......Page 382
 Problems......Page 383
 1. Introduction......Page 391
 2. Cost of Inventories......Page 393
 3. Inventory Valuation Methods......Page 394
  3.3. Weighted Average Cost......Page 395
  3.5. Calculation of Cost of Sales, Gross Profit, and Ending Inventory......Page 396
  3.6. Periodic versus Perpetual Inventory Systems......Page 398
  3.7. Comparison of Inventory Valuation Methods......Page 401
  4.1. LIFO Reserve......Page 403
  4.2. LIFO Liquidations......Page 410
 6. Inventory Adjustments......Page 414
 7. Evaluation of Inventory Management......Page 421
  7.2. Inventory Ratios......Page 422
  7.3. Financial Analysis Illustrations......Page 423
 8. Summary......Page 434
 Problems......Page 436
 Learning Outcomes......Page 449
 1. Introduction......Page 450
  2.1. Property, Plant, and Equipment......Page 451
  2.2. Intangible Assets......Page 454
  2.3. Capitalizing versus Expensing—Impact on Financial Statements and Ratios......Page 457
  2.4. Capitalization of Interest Costs......Page 462
  2.5. Capitalization of Internal Development Costs......Page 465
 3. Depreciation and Amortization of Long-Lived Assets......Page 468
  3.1. Depreciation Methods and Calculation of Depreciation Expense......Page 469
  3.2. Amortization Methods and Calculation of Amortization Expense......Page 477
 4. The Revaluation Model......Page 478
 5. Impairment of Assets......Page 481
  5.1. Impairment of Property, Plant, and Equipment......Page 482
  5.5. Reversals of Impairments of Long-Lived Assets......Page 483
  6.1. Sale of Long-Lived Assets......Page 484
  6.2. Long-Lived Assets Disposed of Other Than by a Sale......Page 485
 7. Presentation and Disclosures......Page 486
 8. Investment Property......Page 497
 9. Leasing......Page 499
  9.2. Finance versus Operating Leases......Page 500
 10. Summary......Page 521
 Problems......Page 523
 Learning Outcomes......Page 533
  2.1. Accounting for Bond Issuance......Page 534
  2.2. Accounting for Bond Amortisation, Interest Expense, and Interest Payments......Page 538
  2.3. Current Market Rates and Fair Value Reporting Option......Page 543
  2.4. Derecognition of Debt......Page 545
  2.5. Debt Covenants......Page 548
  2.6. Presentation and Disclosure of Long-Term Debt......Page 550
 3. Leases......Page 553
  3.2. Finance (or Capital) Leases versus Operating Leases......Page 554
 4. Introduction to Pensions and Other Post-Employment Benefits......Page 572
 5. Evaluating Solvency: Leverage and Coverage Ratios......Page 575
 6. Summary......Page 579
 Problems......Page 580
 Learning Outcomes......Page 583
 1. Introduction......Page 584
 2. Conceptual Overview......Page 585
  2.1. GAAP, Decision-Useful, Sustainable, and Adequate Returns......Page 586
  2.2. GAAP, Decision-Useful, but Sustainable?......Page 587
  2.3. Biased Accounting Choices......Page 588
  2.4. Departures from GAAP......Page 595
  2.5. Differentiate between Conservative and Aggressive Accounting......Page 597
  3.1. Motivations......Page 601
  3.2. Conditions Conducive to Issuing Low-Quality Financial Reports......Page 602
  3.3. Mechanisms That Discipline Financial Reporting Quality......Page 603
  4.1. Presentation Choices......Page 609
  4.2. Accounting Choices and Estimates......Page 614
  4.3. Warning Signs......Page 631
 5. Summary......Page 637
 References......Page 638
 Problems......Page 639
 Learning Outcomes......Page 641
 2. Application: Evaluating Past Financial Performance......Page 642
 3. Application: Projecting Future Financial Performance......Page 651
  3.1. Projecting Performance: An Input to Market-Based Valuation......Page 652
  3.2. Projecting Multiple-Period Performance......Page 657
 4. Application: Assessing Credit Risk......Page 661
 5. Application: Screening for Potential Equity Investments......Page 665
  6.1. A Framework for Analyst Adjustments......Page 668
  6.3. Analyst Adjustments Related to Inventory......Page 669
  6.4. Analyst Adjustments Related to Property, Plant, and Equipment......Page 673
  6.5. Analyst Adjustments Related to Goodwill......Page 674
  6.6. Analyst Adjustments Related to Off -Balance-Sheet Financing......Page 677
 References......Page 684
 Problems......Page 685
 Learning Outcomes......Page 689
 2. Differences between Accounting Profit and Taxable Income......Page 690
  2.1. Current Tax Assets and Liabilities......Page 691
  2.2. Deferred Tax Assets and Liabilities......Page 692
 3. Determining the Tax Base of Assets and Liabilities......Page 695
  3.1. Determining the Tax Base of an Asset......Page 696
  3.2. Determining the Tax Base of a Liability......Page 697
  3.3. Changes in Income Tax Rates......Page 699
 4. Temporary and Permanent Differences between Taxable and Accounting Profit......Page 700
  4.2. Deductible Temporary Differences......Page 701
  4.3. Examples of Taxable and Deductible Temporary Differences......Page 702
  4.4. Temporary Differences at Initial Recognition of Assets and Liabilities......Page 704
 5. Unused Tax Losses and Tax Credits......Page 705
 6. Recognition and Measurement of Current and Deferred Tax......Page 706
  6.2. Recognition of Current and Deferred Tax Charged Directly to Equity......Page 707
 7. Presentation and Disclosure......Page 710
 8. Comparison of IFRS and US GAAP......Page 715
 9. Summary......Page 718
 Problems......Page 719
 1. Introduction......Page 725
  2.1. Types of Post-Employment Benefit Plans......Page 726
  2.2. Measuring a Defined Benefit Pension Plan’s Obligations......Page 729
  2.3. Financial Statement Reporting of Pension Plans and Other Post-Employment Benefits......Page 730
  2.4. Disclosures of Pension and Other Post-Employment Benefits......Page 743
 3. Share-Based Compensation......Page 754
  3.1. Stock Grants......Page 756
  3.2. Stock Options......Page 757
 4. Summary......Page 760
 Problems......Page 761
 1. Introduction......Page 767
 2. Basic Corporate Investment Categories......Page 769
 3. Investments in Financial Assets: Standard IAS 39 (as of December 2012)......Page 770
  3.2. Fair Value through Profit or Loss......Page 771
  3.3. Available-for-Sale......Page 772
  3.4. Loans and Receivables......Page 773
  3.5. Reclassification of Investments......Page 774
  3.6. Impairments......Page 775
  4.1. Classification and Measurement......Page 780
  4.2. Reclassification of Investments......Page 782
 5. Investments in Associates and Joint Ventures......Page 783
  5.1. Equity Method of Accounting: Basic Principles......Page 784
  5.2. Investment Costs That Exceed the Book Value of the Investee......Page 787
  5.3. Amortization of Excess Purchase Price......Page 789
  5.5. Impairment......Page 791
  5.6. Transactions with Associates......Page 792
  5.7. Disclosure......Page 794
 6. Business Combinations......Page 795
  6.1. Pooling of Interests and Purchase Methods......Page 797
  6.2. Acquisition Method......Page 798
  6.3. Impact of the Acquisition Method on Financial Statements, Post-Acquisition......Page 800
  6.4. The Consolidation Process......Page 803
  6.5. Financial Statement Presentation Subsequent to the Business Combination......Page 809
  6.6. Variable Interest and Special Purpose Entities......Page 812
  6.7. Additional Issues in Business Combinations That Impair Comparability......Page 816
 7. Summary......Page 817
 Problems......Page 818
CHAPTER 16 Multinational Operations 799 Learning Outcomes......Page 827
 1. Introduction......Page 828
 2. Foreign Currency Transactions......Page 829
  2.1. Foreign Currency Transaction Exposure to Foreign Exchange Risk......Page 830
  2.2. Analytical Issues......Page 833
  2.3. Disclosures Related to Foreign Currency Transaction Gains and Losses......Page 836
  3.1. Translation Conceptual Issues......Page 842
  3.2. Translation Methods......Page 847
  3.3. Illustration of Translation Methods (Excluding Hyperinflationary  Economies)......Page 855
  3.4. Translation Analytical Issues......Page 858
  3.5. Translation when a Foreign Subsidiary Operates in a Hyperinflationary  Economy......Page 870
  3.6. Companies Use Both Translation Methods at the Same Time......Page 874
  3.7. Disclosures Related to Translation Methods......Page 875
 4. Multinational Operations and a Company’s Effective Tax Rate......Page 881
  5.1. Disclosures Related to Sales Growth......Page 884
  5.2. Disclosures Related to Major Sources of Foreign Exchange Risk......Page 887
 6. Summary......Page 888
 Problems......Page 890
 1. Introduction......Page 897
  2.1. Conceptual Framework for Assessing the Quality of Financial Reports......Page 899
  2.2. Potential Problems That Affect the Quality of Financial Reports......Page 901
 3. Evaluating the Quality of Financial Reports......Page 912
  3.1. General Steps to Evaluate the Quality of Financial Reports......Page 913
  3.2. Quantitative Tools to Assess the Likelihood of Misreporting......Page 914
  4.1. Indicators of Earnings Quality......Page 917
  4.2. Evaluating the Earnings Quality of a Company (Cases)......Page 927
  4.3. Bankruptcy Prediction Models......Page 938
 5. Cash Flow Quality......Page 939
  5.1. Indicators of Cash Flow Quality......Page 940
  5.2. Evaluating Cash Flow Quality......Page 941
 6. Balance Sheet Quality......Page 949
  7.1. Limited Usefulness of Auditor’s Opinion as a Source of Information about  Risk......Page 953
  7.2. Risk-Related Disclosures in the Notes......Page 957
  7.3. Management Commentary (Management Discussion and Analysis, or MD&A)......Page 961
  7.4. Other Required Disclosures......Page 964
 8. Summary......Page 965
 References......Page 967
 Problems......Page 968
 Learning Outcomes......Page 971
 1. Introduction......Page 972
  2.2. Phase 2: Collect Input Data......Page 973
  2.3. Phase 3: Process Data/Phase 4: Analyze/Interpret the Processed Data......Page 974
  2.4. Phase 5: Develop and Communicate Conclusions and Recommendations (e.g.,  with an Analysis Report)......Page 999
 3. Case Study 2: Off -Balance Sheet Leverage from Operating Leases......Page 1000
  3.3. Phase 3: Process Data/Phase 4: Analyze/Interpret the Processed Data......Page 1001
  3.4. Phase 5: Develop and Communicate Conclusions and Recommendations (e.g.,  with an Analysis Report)......Page 1003
 4. Case Study 3: Anticipating Effects of Changes in Accounting Standards......Page 1004
  4.3. Phase 3: Process Data/Phase 4: Analyze/Interpret the Processed Data......Page 1005
 5. Summary......Page 1008
 Problems......Page 1009
Glossary......Page 1015
About the Authors......Page 1027
About the CFA Program......Page 1031
Index......Page 1033
Advert......Page 1062
EULA......Page 1064