Financial Statement Analysis Workbook E-Book

Martin S. Fridson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 155

Veröffentlichungsjahr: 2011

Beschreibung

All too often, financial statements conceal more than they reveal. Even after the recent economic crisis, those analyzing financial statements face serious new concerns and challenges. The Fourth Edition of Financial Statement Analysis skillfully puts this discipline in perspective, and now, with this companion Workbook, you can hone your skills and test the knowledge you've gained from the actual text, before putting them to work in real-world situations. Question-and-answer sections within this Workbook correspond to each chapter of Financial Statement Analysis, Fourth Edition. Part One (Questions) provides chapter-by-chapter fill-in-the-blank questions, as well as financial statement and computational exercises. They are designed to be thought-provoking and require analysis and synthesis of the concepts covered in the book. The answers to all questions, which can be found in Part Two, are provided in boldfaced italic type in order to facilitate the checking of answers and comprehension of material. By enhancing your understanding of financial statement analysis, you can begin to undertake genuine, goal-oriented analysis and prepare for the practical challenges of contemporary business. This reliable resource will help you achieve such a difficult goal and allow you to make more informed decisions--whether you're evaluating a company's stock price or determining valuations for a merger or acquisition.

Leseprobe

Contents

Cover

Endorsement

Series

Title Page

Copyright

Dedication

Preface to Fourth Edition Workbook

Acknowledgments

Part One: Questions

Questions on Each Chapter

CHAPTER 1: THE ADVERSARIAL NATURE OF FINANCIAL REPORTING

CHAPTER 2: THE BALANCE SHEET

CHAPTER 3: THE INCOME STATEMENT

CHAPTER 4: THE STATEMENT OF CASH FLOWS

CHAPTER 5: WHAT IS PROFIT?

CHAPTER 6: REVENUE RECOGNITION

CHAPTER 7: EXPENSE RECOGNITION

CHAPTER 8: THE APPLICATIONS AND LIMITATIONS OF EBITDA

CHAPTER 9: THE RELIABILITY OF DISCLOSURE AND AUDITS

CHAPTER 10: MERGERS-AND-ACQUISITIONS ACCOUNTING

CHAPTER 11: IS FRAUD DETECTABLE?

CHAPTER 12: FORECASTING FINANCIAL STATEMENTS

CHAPTER 13: CREDIT ANALYSIS

CHAPTER 14: EQUITY ANALYSIS

Financial Statement Exercises

Computational Exercises

THE ARITHMETIC OF GROWTH VALUATIONS

MARKET VALUE VERSUS BOOK VALUE OF BONDS

ACQUISITIONS DRIVEN BY P/E MULTIPLES

STOCK PRICES AND GOODWILL

PROJECTING INTEREST EXPENSE

SENSITIVITY ANALYSIS IN FORECASTING FINANCIAL STATEMENTS

Part Two: Answers

Answers to Questions on Each Chapter

CHAPTER 1: THE ADVERSARIAL NATURE OF FINANCIAL REPORTING

CHAPTER 2: THE BALANCE SHEET

CHAPTER 3: THE INCOME STATEMENT

CHAPTER 4: THE STATEMENT OF CASH

CHAPTER 5: WHAT IS PROFIT?

CHAPTER 6: REVENUE RECOGNITION

CHAPTER 7: EXPENSE RECOGNITION

CHAPTER 8: THE APPLICATIONS AND LIMITATIONS OF EBITDA

CHAPTER 9: THE RELIABILITY OF DISCLOSURE AND AUDITS

CHAPTER 10: MERGERS-AND-ACQUISITIONS ACCOUNTING

CHAPTER 11: IS FRAUD DETECTABLE?

CHAPTER 12: FORECASTING FINANCIAL STATEMENTS

CHAPTER 13: CREDIT ANALYSIS

CHAPTER 14: EQUITY ANALYSIS

Financial Statement Exercises

Computational Exercises

THE ARITHMETIC OF GROWTH VALUATIONS

MARKET VALUE VERSUS BOOK VALUE OF BONDS

ACQUISITIONS DRIVEN BY P/E MULTIPLES

STOCK PRICES AND GOODWILL

PROJECTING INTEREST EXPENSE

SENSITIVITY ANALYSIS IN FORECASTING FINANCIAL STATEMENTS

Additional Praise for Financial Statement Analysis, Fourth Edition

“This is an illuminating and insightful tour of financial statements, how they can be used to inform, how they can be used to mislead, and how they can be used to analyze the financial health of a company.”

— Jay O. Light, Dean Emeritus, Harvard Business School

“Financial Statement Analysis should be required reading for anyone who puts a dime to work in the securities markets or recommends that others do the same.”

— Jack L. Rivkin, Director, Neuberger Berman Mutual Funds and Idealab

“Fridson and Alvarez provide a valuable practical guide for understanding, interpreting, and critically assessing financial reports put out by firms. Their discussion of profits---`quality of earnings'---is particularly insightful given the recent spate of reporting problems encountered by firms. I highly recommend their book to anyone interested in getting behind the numbers as a means of predicting future profits and stock prices.”

— Paul Brown, Associate Dean, Executive MBA Programs, Leonard N. Stern School of Business, New York University

“Let this book assist in financial awareness and transparency and higher standards of reporting, and accountability to all stakeholders.”

— Patricia A. Small, Treasurer Emeritus, University of California; Partner, KCM Investment Advisors

“This book is a polished gem covering the analysis of financial statements. It is thorough, skeptical, and extremely practical in its review.”

— Daniel J. Fuss, Vice Chairman, Loomis, Sayles & Company, LP

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Copyright © 2011 by Martin Fridson and Fernando Alvarez. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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ISBN 978-0-470-64003-6 (paperback); ISBN 978-1-118-09749-6 (ebk); ISBN 978-1-118-09747-2 (ebk); ISBN 978-1-118-09748-9 (ebk)

In memory of my father, Harry Yale Fridson, who introduced me to accounting, economics, and logic, as well as the fourth discipline essential to the creation of this book—hard work!

M. F.

For Shari, Virginia, and Armando.

F. A.

Preface to Fourth Edition Workbook

This fourth edition of Financial Statement Analysis, like its predecessors, seeks to equip its readers for practical challenges of contemporary business. Once again, the intention is to acquaint readers who have already acquired basic accounting skills with the complications that arise in applying textbook-derived knowledge to the real world of extending credit and investing in securities. Just as a swiftly changing environment necessitated extensive revisions and additions in the second edition, new concerns and challenges for users of financial statements have accompanied the dawn of the twenty-first century.

For one thing, corporations have shifted their executive compensation plans increasingly toward rewarding senior managers for “enhancing shareholder value.” This lofty-sounding concept has a dark side. Chief executive officers who are under growing pressure to boost their corporations’ share prices can no longer increase their bonuses by goosing reported earnings through financial reporting tricks that are transparent to the stock market. They must instead devise more insidious methods that gull investors into believing that the reported earnings gains are real. In response to this trend, we have expanded our survey of revenue recognition gimmicks designed to deceive the unwary.

Another innovation that demands increased vigilance by financial analysts is the conversion of stock market proceeds into revenues. In terms of accounting theory, this kind of transformation is the equivalent of alchemy. Companies generate revenue by selling goods or services, not by selling their own shares to the public.

During the Internet stock boom of the late 1990s, however, clever operators found a way around that constraint. Companies took the money they raised in initial public offerings, bought advertising on one another’s web sites, and recorded the shuttling of dollars as sales. Customers were superfluous to the revenue recognition process. In another variation on the theme, franchisers sold stock, lent the proceeds to franchisees, then immediately had the cash returned under the rubric of fees. By going out for a short stroll and coming back, the proceeds of a financing mutated into revenues.

The artificial nature of these revenues becomes apparent when readers combine an understanding of accounting principles with a corporate finance perspective. We facilitate such integration of disciplines throughout Financial Statement Analysis, making excursions into economics and business management as well. In addition, we encourage analysts to consider the institutional context in which financial reporting occurs. Organizational pressures result in divergences from elegant theories, both in the conduct of financial statement analysis and in auditors’ interpretations of accounting principles. The issuers of financial statements also exert a strong influence over the creation of the financial principles, with powerful politicians sometimes carrying their water.

A final area in which the new edition offers a sharpened focus involves success stories in the critical examination of financial statements. Wherever we can find the necessary documentation, we show not only how a corporate debacle could have been foreseen through application of basis analytical techniques, but also how practicing analysts actually did detect the problem before it became widely recognized. Readers will be encouraged by these examples, we hope, to undertake genuine, goal-oriented analysis, instead of simply going through the motions of calculating standard financial ratios. Moreover, the case studies should persuade them to stick to their guns when they spot trouble, despite management’s predictable litany. (“Our financial statements are consistent with generally accepted accounting principles. They have been certified by one of the world’s premier auditing firms. We will not allow a band of greedy short-sellers to destroy the value created by our outstanding employees.”) Typically, as the vehemence of management’s protests increases, conditions deteriorate and accusations of aggressive accounting give way to revelations of fraudulent financial reporting.

The principles and theories put forth in the University Edition of Financial Statement Analysis, fourth edition, are reinforced through the questions and exercises in this workbook. Part One, Questions, provides chapter-by-chapter fill-in-the-blank questions, financial statement exercises, and computational exercises. They are designed to be thought-provoking exercises requiring analysis and synthesis of the concepts covered in the book. In short, these questions do not call for “regurgitation of information.”

The answers to all questions can be found in Part Two. Answers are provided in boldfaced, italic type in order to facilitate the checking of answers and comprehension of the material.

Financial markets continue to evolve, but certain phenomena appear again and again in new guises. In this vein, companies never lose their resourcefulness in finding new ways to skew perceptions of their performance. By studying their methods closely, analysts can potentially anticipate the variations on old themes that will materialize in years to come.

MARTIN FRIDSON FERNANDO ALVAREZ

Acknowledgments

Mukesh AgarwalStan ManoukianJohn BaceMichael MaroccoMimi BarkerTom MarshellaMitchell BartlettEric MatejevichRichard BernsteinJohn MattisRichard ByrnePat McConnellRichard CagneyOleg MelentyevGeorge ChalhoubKrishna MemaniTiffany CharbonierAnn Marie MullanSanford CohenKingman PennimanMargarita DecletStacey RiveraMark DunhamRichard RolnickKenneth EmeryClare SchiedermayerBill FalloonGary SchienemanSylvan FeldsteinBruce SchwartzDavid FittonDevin ScottThomas Flynn IIIDavid ShapiroDaniel FridsonElaine SismanIgor FuksmanCharles SnowRyan GelrodVladimir StadnykKenneth GoldbergJohn ThieroffSusannah GrayScott ThomasEvelyn HarrisJohn TinkerDavid HawkinsKivin VargheseEmilie HermanDiane VazzaAvi KatzPamela Van GiessenRebecca KeimSharyl Van WinkleJames KenneyDavid WaillAndrew KrollSteven WaiteLes LeviDouglas WatsonRoss LevyBurton WeinsteinMichael LiskStephen WeissDavid LuggDavid WhitcombJennie MaMark Zand

Part One

Questions

Questions on Each Chapter

CHAPTER 1: THE ADVERSARIAL NATURE OF FINANCIAL REPORTING

1. Three ways that corporations can use financial reporting to enhance their value are:

a.

b.

c.

2. The true purpose of financial reporting is .

3. Corporations routinely because the appearance of receives a higher multiple.

4. According to the , reversals of the excess write-offs offer an artificial means of in subsequent periods.

5. The following are some of the powerful limitations to continued growth faced by companies:

a.

b.

c.

6. Some of the commonly heard rationalizations for declining growth are:

a.

b.

c.

7. reached its zenith of popularity during the movement of the 1960s. However, by the 1980s, the stock market had converted the into a .

8. is one of the ways that the notion of diversification as a means of maintaining is revived from time to time.

9. The surprise element in Manville Corporation's 1982 bankruptcy was, in part, a function of .

10. The analyst's heightened awareness of legal risks are a result of bankruptcies associated with:

a.

b.

c.

11. Some of the stories used to sell stocks to individual investors are:

a.

b. A “play” in some current economic trend such as

i.

ii.

c.

12. When the story used to sell stocks to individual investors originates among stockbrokers or even , the zeal with which the story is disseminated may depend more on than the .

13. The ostensible purpose of financial reporting is of a corporation's earnings.

14. Over a two-year period BGT paid L&H $35 million to develop translation software. L&H then bought BGT and the translation product along with it. The net effect was that instead , L&H recognized .

CHAPTER 2: THE BALANCE SHEET

1. A study conducted on behalf of Big Five accounting firm Arthur Andersen showed that between and , book value fell from percent to percent of the stock market value of public companies in the United States.

2. As noted by Baruch Lev of New York University, two examples of how traditional accounting systems are at a loss to capture most of what is going on today are:

a.

b.

3. In the examples in Question 2 there is no accounting event because .

4. Some of the distinct approaches that have evolved for assessing real property are:

a.

b.

c.

5. Some financial assets are unaffected by the difficulties of evaluating physical assets because in markets.

6. Under the compromise embodied in SFAS 115, financial instruments are valued according to by the company.

7. If a company wrote off a billion dollars worth of goodwill, its ratio of assets to liabilities would . Its ratio of would not change, however.

8. Through stock-for-stock acquisitions, the sharp rise in equity prices during the late 1990s was transformed into , despite the usual assumption that .

9. Unlike , goodwill is not an asset that can be readily to raise cash. Neither can a company enter into a of its goodwill, as it can with its plant and equipment. In short, goodwill is not that management can either or to extricate itself from a financial tight spot.

10. A reasonable estimate of a low-profit company's true equity value would be .

11. Determining the cost of capital is a notoriously controversial subject in the financial field, complicated by and .

12. Among the advantages of market capitalization as a measure of equity are:

a.

b.

c.

13. A limitation of the peer-group approach to valuation is that and therefore one major benefit of using as a gauge of actual equity value.

14. Instead of striving for theoretical purity on the matter, analysts should adopt a , using the measure of equity value .

15. Historical-cost-based balance sheet figures are the ones that matter in that a company will violate requiring .

16. Users of financial statements can process only , and they do not always have .

17. Deterioration in a company's financial position may catch investors by surprise because it and is .

CHAPTER 3: THE INCOME STATEMENT

1. Students of financial statements must keep up with of the past few years in transforming into .

2. In the , each income statement item is expressed as (sales or revenues), which is represented as .

3. Besides facilitating comparisons between a company's present and past results, the can highlight important facts .

4. Even within an industry, the breakdown of expenses can vary from company to company as a function of and .

5. Percentage breakdowns are also helpful for comparing a single company's performance with and for comparing on the basis of .

6. In essence, Peet's is more of and Starbucks is more involved in .

7. Costs as percentages of sales also vary among companies within an industry for than differences .

8. The more widely diversified pharmaceutical manufacturers can be expected to have percentage , as well as percentage expenses, than industry peers that focus exclusively on .

9. Analysts must take care not to mistake difference that is actually as evidence of . A subtler explanation may be available at the modest cost of .

10. Executives whose bonuses rise have a strong incentive not only , but also to use .

11. On a retrospective basis, a surge or may indicate that .

12. Along with , another major expense category that can be controlled through is .

13. An unusually low ratio of to with the ratios of its industry peers may indicate that management is being unrealistic in acknowledging the pace of wear and tear on fixed assets. Understatement of and overstatement of would result.

14. A company knows that creating expectations about can raise and lower .

15. One way persuading investors that a major development that hurt earnings last year will affect earnings is to suggest that any suffered by the company was somehow , and, by implication, .

16. An extraordinary item is reported on an basis, below the from continuing operations.

17. The accounting rules prohibit corporate officials from displaying certain hits to earnings “above the line,” that is, , and from using the label . Accordingly they employ designations such as or . These terms have , but the highlighted items are .

18. In recent years, has become a catchall for charges that companies wish analysts to consider , but which do not qualify for .

19. Corporate managers commonly perceive that will be if they take (for sake of argument) a $1.5 billion write-off than if . The benefit of exaggerating the damage is that in subsequent years, .

20. The most dangerous trap that users of financial statements must avoid walking into, however, is inferring that the term “restructuring” connotes .

21. The purpose of providing pro forma results was to help analysts accurately when some event caused to convey a misleading impression.

22. Computer software producers got into the act by from the expenses considered in calculating .

23. Unlike operating income, a concept addressed by FASB standards, is a number that subjectively many that lack any standing under GAAP.

24. In fact, analysts who hope to forecast future financial results accurately must apply and set aside genuinely .

25. Analysts must exercise judgment when considering pro forma earnings; however, they must make sure to examine , instead of by relying solely on .

26. An older, but not obsolete, device for beefing up reported income is .

27. A comparatively ratio of PP&E to or is another sign of potential trouble.

28. Management can