Financial Reporting Financial Statement Analysis and Valuation 8e
James Wahlen Stephen Baginski Mark Bradshaw (Solutions Manual
All Chapters, 100% Original Verified, A+ Grade)
INTRODUCTION
Some Suggestions for Using this Textbook
Our discussions with professors who teach courses in financial reporting, financial statement
analysis, and equity valuation and our study of the course outlines of users of previous
editions of this book lead us to make the following observations:
1. There is little consensus regarding the objectives and content of courses in financial
statement analysis. Courses vary in their relative emphasis on (a) the concepts, tools, and
skills for analyzing financial statements, (b) the effects of alternative accounting prin-
ciples on the quality of accounting information, and (c) valuation.
2. At various institutions, faculty in accounting, finance, and economics may teach this
course.
3. The course may focus on the most recent research findings and the methodological issues
in conducting empirical research using financial statement data.
4. The course may presume that students have had only an introductory financial accounting
course or that students have had the equivalent of a major in accounting.
It is not surprising that the professors we spoke with felt that the textbooks on the market
satisfied some of their needs, but seldom did one textbook satisfy all of them. We have no
delusions in this regard about the potential for this textbook either. We have five premises in
writing this book:
1. Analyzing financial statements and valuing firms is an integrated process in which the
analyst must understand industry competitive dynamics, firm strategy, accounting infor-
mation content and quality, profitability and risk assessment, forecasting, and valuation
models. We strive to integrate these six components of the process throughout this book.
We discuss this in more detail below in the section on positioning this text.
2. The usual goal of financial statement analysis is to value a firm. Therefore, we discuss
the important concepts, tools, and skills of financial statement analysis with this objective
constantly in view.
3. The financial statement analysis course serves as a synthesizing experience for students,
integrating concepts and skills from accounting, finance, economics, business strategy,
and related disciplines. In so doing, this course helps make accounting “come to life” for
students because it shows the relevance and usefulness of good accounting information in
a valuation context.
4. Examples, illustrations, problems, and cases based on current data for actual companies
enhance student motivation and skill development.
5. The text, questions, exercises, problems, cases, software, and related materials should
provide sufficient flexibility to permit professors to adapt these materials to suit their par-
ticular objectives and needs.
I-1
.
,Introduction
Some Suggestions for Using this Textbook
Positioning of the Book
As we indicate in the preface to the book, we find it helpful to view financial statement
analysis as a triangle. The analysis of profitability and risk using financial statements is in the
center of the triangle. Interpreting profitability and risk ratios requires an understanding of the
economic characteristics of the industries in which a firm competes and the business strategies
a firm has selected to compete in those industries. The analyst should not naively accept
reported financial statement information when performing profitability and risk analysis, but
should first assess its quality and make appropriate adjustments. The assessment of quality and
appropriate adjustments may differ depending on whether the firm’s financial statements have
been prepared in accordance with U.S. GAAP (Generally Accepted Accounting Principles) or
IFRS (International Financial Reporting Standards). The analysis of a firm’s profitability and
risk in the recent past serves as a prelude to forecasting its future profitability and risk.
Forecasts of future earnings, cash flows, and dividends provide the bases for valuing a firm.
We depict these elements below.
Forecasting and Valuation of Firms
Assessment of
Profitability and
Risk
Industry Economics GAAP and IFRS
and and the Quality of
Business Strategy Accounting Information
As authors of this book, we find it useful to reflect on the courses that we teach in finan-
cial statement analysis and then place a dot inside the triangle to indicate the relative empha-
sis on each of the elements depicted as points of the triangle. You may find it useful to do the
same. We discovered that, although the location of our dots differed somewhat, all of the
elements were needed for effective financial statement analysis. De-emphasizing any of the
elements can take away from the potential richness of the course. Thus, we have tried to
position our book to cover this entire triangle. Furthermore, we must not only include each of
these elements in our courses, but we need to cover them in a balanced and integrated
manner. We accomplish this balance and integration in this textbook by continually relating
each of the elements to the others and designing problem and case materials that require
students to do the same.
Structure of the Book
The material in this textbook divides into three main segments:
1. Core concepts and tools of financial statement analysis: Chapters 1 to 5.
2. Quality of accounting information and U.S. GAAP and IFRS: Chapters 6 to 9.
3. Forecasting and valuation of firms: Chapters 10 to 14.
I-2
.
, Introduction
Some Suggestions for Using this Textbook
Not only do instructors differ on their relative emphasis on each of these parts, but they
also differ as to the sequence in which they cover them. We have designed this textbook so
that instructors have flexibility to sequence the topics to suit their particular preferences.
Chapter 1 is an overview of financial statement analysis and is intended as a starting point for
all courses. We can think of several sequencing scenarios for which we feel the textbook is
adaptable:
Scenario 1: Begin with the core concepts of financial statement analysis (Chapters 1 to 5),
move to accounting quality issues and GAAP (Chapters 6 to 9), and finish with forecasting
and valuation (Chapters 10 to 14).
Scenario 2: Begin with the tools of profitability and risk analysis (Chapters 4 and 5) and
then move to forecasting and valuation (Chapters 10 and 14). Fill in with materials on
particular GAAP as needed for assigned problems and cases (Chapters 6 to 9).
Scenario 3: Begin with concepts and procedures underlying the financial statements
(Chapters 2 and 3) and then move to accounting quality and GAAP (Chapters 6 to 9). Move
next to the tools of financial statement analysis (Chapters 4 and 5) and their application in
forecasting and valuation settings (Chapters 10 to 14).
Other sequences are also possible. The key is balanced coverage of each of the elements,
not necessarily their sequence.
Sample Course Outlines
One use of this textbook is in a two-course sequence designed for students who will be
intensive users of financial statements in their professional responsibilities (security analysis,
credit analysts, investment bankers, financial consultants). The first course, Corporate
Financial Reporting, emphasizes alternative accounting principles and their effects on the
financial statements and on assessments of the quality of accounting information. The second
course, Financial Statement Analysis, applies the tools of financial statement analysis to the
financial data of actual companies, both for the purpose of studying their profitability and
risk and for valuing them. Schedules 1 and 2 in this instructor’s/solutions manual present
course outlines for these two courses. Another approach is to use the textbook in a single
course, Financial Reporting and Statement Analysis, which combines the content of the two-
course sequence. Schedule 3 presents an outline for this course.
When students have previously taken courses in intermediate and advanced accounting
principles, the instructor may omit Chapters 6 to 9. Most students, however, will find that the
financial statement user perspective taken in the study of various alternative accounting
principles in these chapters enhances their understanding and broadens their perspective. The
material on valuation in Chapters 11 to 14 is sometimes covered in finance courses instead of
the course in financial statement analysis.
Schedules 1, 2, and 3 also indicated suggested problems and cases for undergraduate and
graduate courses. We suggest making heavy use of questions, exercises, and problems for
undergraduate courses and a mixture of problems and cases for graduate courses. The cases
are more integrative and generally more complex than the problems. The problems, however,
require both analysis and interpretation. In that sense, the problems are like mini-cases.
Term Paper Project
We have found that assigning a term paper project is an excellent synthesizing device for the
financial statement analysis course. Students can either work alone and analyze two compa-
nies in the same industry or work in groups to analyze three or four companies in the same
I-3
.
, Introduction
Some Suggestions for Using this Textbook
industry. Analyzing more than four companies is cumbersome and typically not necessary.
We have students summarize the economics and current conditions in the industry, describe
the strategies of each of the firms, input the financial statement data with appropriate adjust-
ments into a spreadsheet program (such as FSAP), perform a profitability and risk analysis,
prepare forecasted financial statements, and value the firms. We ask students to turn in
progress reports throughout the term to insure that they are making progress on the project.
The first deliverable, at about the one-third point in the course, is an outline of the economic
characteristics of the industry and the strategies of the firms. The second deliverable, at about
the two-thirds point in the course, is a brief report on the financial statements and financial
statement ratios and a short description of the accounting quality issues (both high- and low-
quality) and the data adjustments made together with a comparative analysis and interpreta-
tion of the profitability and risk ratios. The third deliverable is a set of forecasted financial
statements and valuations of the firms, which occurs with approximately two weeks left in
the course. We often devote the last several class periods of the term to short project presen-
tations by students. Appendix 1.1, found at www.cengagebrain.com, of the text provides
students with guidance in conducting the term project.
Overview of Cases
The teaching note for each case describes the objectives of the case as well as suggestions for
teaching it. We present below a summary of the principal purpose of each case.
Case 1.1: Starbucks. This integrative case introduces the series of parts that appear in each
of the remaining chapters. The purpose of the integrative case series is to permit students to
apply the material covered in each chapter to the financial statements and other information
for the same company. Case 1.1 leads students to review the important concepts and prin-
ciples underlying the balance sheet, income statement, and statement of cash flows and to
begin conducting financial statement analysis. The case works well for a first class if students
have not done any class preparation, because the instructor can walk students through
selected questions to orchestrate the desired review. We find Starbucks works well for this
integrative case because most students are familiar with their coffee shops, the firm has a
relatively simple business model (which makes understanding the accounting and building
the forecasts a bit easier), and the financial statements involve a broad range of interesting
accounting issues.
Case 1.2: Nike: Somewhere Between a Swoosh and a Slam Dunk. This case reviews the
basic concepts and principles from the introductory financial accounting course and introduc-
es tools for analyzing financial statements. The case works well for a first class if students
have not done any class preparation, because the instructor can walk students through
selected questions to orchestrate the desired review. The instructor might also provide
solutions to the first four parts of the case involving each financial statement and the relations
between them, and then spend class time with interpretations.
Integrative Case 2.1: Starbucks. This portion of the integrative case on Starbucks examines
the firm’s disclosures on income taxes, with emphasis on the relation between book income and
taxable income and interpretation of changes in various deferred tax accounts.
Integrative Case 3.1: Starbucks. This case focuses on interpreting the statement of cash
flows of Starbucks. It also examines the relation between net income, cash flow from opera-
tions, and EBITDA.
I-4
.
James Wahlen Stephen Baginski Mark Bradshaw (Solutions Manual
All Chapters, 100% Original Verified, A+ Grade)
INTRODUCTION
Some Suggestions for Using this Textbook
Our discussions with professors who teach courses in financial reporting, financial statement
analysis, and equity valuation and our study of the course outlines of users of previous
editions of this book lead us to make the following observations:
1. There is little consensus regarding the objectives and content of courses in financial
statement analysis. Courses vary in their relative emphasis on (a) the concepts, tools, and
skills for analyzing financial statements, (b) the effects of alternative accounting prin-
ciples on the quality of accounting information, and (c) valuation.
2. At various institutions, faculty in accounting, finance, and economics may teach this
course.
3. The course may focus on the most recent research findings and the methodological issues
in conducting empirical research using financial statement data.
4. The course may presume that students have had only an introductory financial accounting
course or that students have had the equivalent of a major in accounting.
It is not surprising that the professors we spoke with felt that the textbooks on the market
satisfied some of their needs, but seldom did one textbook satisfy all of them. We have no
delusions in this regard about the potential for this textbook either. We have five premises in
writing this book:
1. Analyzing financial statements and valuing firms is an integrated process in which the
analyst must understand industry competitive dynamics, firm strategy, accounting infor-
mation content and quality, profitability and risk assessment, forecasting, and valuation
models. We strive to integrate these six components of the process throughout this book.
We discuss this in more detail below in the section on positioning this text.
2. The usual goal of financial statement analysis is to value a firm. Therefore, we discuss
the important concepts, tools, and skills of financial statement analysis with this objective
constantly in view.
3. The financial statement analysis course serves as a synthesizing experience for students,
integrating concepts and skills from accounting, finance, economics, business strategy,
and related disciplines. In so doing, this course helps make accounting “come to life” for
students because it shows the relevance and usefulness of good accounting information in
a valuation context.
4. Examples, illustrations, problems, and cases based on current data for actual companies
enhance student motivation and skill development.
5. The text, questions, exercises, problems, cases, software, and related materials should
provide sufficient flexibility to permit professors to adapt these materials to suit their par-
ticular objectives and needs.
I-1
.
,Introduction
Some Suggestions for Using this Textbook
Positioning of the Book
As we indicate in the preface to the book, we find it helpful to view financial statement
analysis as a triangle. The analysis of profitability and risk using financial statements is in the
center of the triangle. Interpreting profitability and risk ratios requires an understanding of the
economic characteristics of the industries in which a firm competes and the business strategies
a firm has selected to compete in those industries. The analyst should not naively accept
reported financial statement information when performing profitability and risk analysis, but
should first assess its quality and make appropriate adjustments. The assessment of quality and
appropriate adjustments may differ depending on whether the firm’s financial statements have
been prepared in accordance with U.S. GAAP (Generally Accepted Accounting Principles) or
IFRS (International Financial Reporting Standards). The analysis of a firm’s profitability and
risk in the recent past serves as a prelude to forecasting its future profitability and risk.
Forecasts of future earnings, cash flows, and dividends provide the bases for valuing a firm.
We depict these elements below.
Forecasting and Valuation of Firms
Assessment of
Profitability and
Risk
Industry Economics GAAP and IFRS
and and the Quality of
Business Strategy Accounting Information
As authors of this book, we find it useful to reflect on the courses that we teach in finan-
cial statement analysis and then place a dot inside the triangle to indicate the relative empha-
sis on each of the elements depicted as points of the triangle. You may find it useful to do the
same. We discovered that, although the location of our dots differed somewhat, all of the
elements were needed for effective financial statement analysis. De-emphasizing any of the
elements can take away from the potential richness of the course. Thus, we have tried to
position our book to cover this entire triangle. Furthermore, we must not only include each of
these elements in our courses, but we need to cover them in a balanced and integrated
manner. We accomplish this balance and integration in this textbook by continually relating
each of the elements to the others and designing problem and case materials that require
students to do the same.
Structure of the Book
The material in this textbook divides into three main segments:
1. Core concepts and tools of financial statement analysis: Chapters 1 to 5.
2. Quality of accounting information and U.S. GAAP and IFRS: Chapters 6 to 9.
3. Forecasting and valuation of firms: Chapters 10 to 14.
I-2
.
, Introduction
Some Suggestions for Using this Textbook
Not only do instructors differ on their relative emphasis on each of these parts, but they
also differ as to the sequence in which they cover them. We have designed this textbook so
that instructors have flexibility to sequence the topics to suit their particular preferences.
Chapter 1 is an overview of financial statement analysis and is intended as a starting point for
all courses. We can think of several sequencing scenarios for which we feel the textbook is
adaptable:
Scenario 1: Begin with the core concepts of financial statement analysis (Chapters 1 to 5),
move to accounting quality issues and GAAP (Chapters 6 to 9), and finish with forecasting
and valuation (Chapters 10 to 14).
Scenario 2: Begin with the tools of profitability and risk analysis (Chapters 4 and 5) and
then move to forecasting and valuation (Chapters 10 and 14). Fill in with materials on
particular GAAP as needed for assigned problems and cases (Chapters 6 to 9).
Scenario 3: Begin with concepts and procedures underlying the financial statements
(Chapters 2 and 3) and then move to accounting quality and GAAP (Chapters 6 to 9). Move
next to the tools of financial statement analysis (Chapters 4 and 5) and their application in
forecasting and valuation settings (Chapters 10 to 14).
Other sequences are also possible. The key is balanced coverage of each of the elements,
not necessarily their sequence.
Sample Course Outlines
One use of this textbook is in a two-course sequence designed for students who will be
intensive users of financial statements in their professional responsibilities (security analysis,
credit analysts, investment bankers, financial consultants). The first course, Corporate
Financial Reporting, emphasizes alternative accounting principles and their effects on the
financial statements and on assessments of the quality of accounting information. The second
course, Financial Statement Analysis, applies the tools of financial statement analysis to the
financial data of actual companies, both for the purpose of studying their profitability and
risk and for valuing them. Schedules 1 and 2 in this instructor’s/solutions manual present
course outlines for these two courses. Another approach is to use the textbook in a single
course, Financial Reporting and Statement Analysis, which combines the content of the two-
course sequence. Schedule 3 presents an outline for this course.
When students have previously taken courses in intermediate and advanced accounting
principles, the instructor may omit Chapters 6 to 9. Most students, however, will find that the
financial statement user perspective taken in the study of various alternative accounting
principles in these chapters enhances their understanding and broadens their perspective. The
material on valuation in Chapters 11 to 14 is sometimes covered in finance courses instead of
the course in financial statement analysis.
Schedules 1, 2, and 3 also indicated suggested problems and cases for undergraduate and
graduate courses. We suggest making heavy use of questions, exercises, and problems for
undergraduate courses and a mixture of problems and cases for graduate courses. The cases
are more integrative and generally more complex than the problems. The problems, however,
require both analysis and interpretation. In that sense, the problems are like mini-cases.
Term Paper Project
We have found that assigning a term paper project is an excellent synthesizing device for the
financial statement analysis course. Students can either work alone and analyze two compa-
nies in the same industry or work in groups to analyze three or four companies in the same
I-3
.
, Introduction
Some Suggestions for Using this Textbook
industry. Analyzing more than four companies is cumbersome and typically not necessary.
We have students summarize the economics and current conditions in the industry, describe
the strategies of each of the firms, input the financial statement data with appropriate adjust-
ments into a spreadsheet program (such as FSAP), perform a profitability and risk analysis,
prepare forecasted financial statements, and value the firms. We ask students to turn in
progress reports throughout the term to insure that they are making progress on the project.
The first deliverable, at about the one-third point in the course, is an outline of the economic
characteristics of the industry and the strategies of the firms. The second deliverable, at about
the two-thirds point in the course, is a brief report on the financial statements and financial
statement ratios and a short description of the accounting quality issues (both high- and low-
quality) and the data adjustments made together with a comparative analysis and interpreta-
tion of the profitability and risk ratios. The third deliverable is a set of forecasted financial
statements and valuations of the firms, which occurs with approximately two weeks left in
the course. We often devote the last several class periods of the term to short project presen-
tations by students. Appendix 1.1, found at www.cengagebrain.com, of the text provides
students with guidance in conducting the term project.
Overview of Cases
The teaching note for each case describes the objectives of the case as well as suggestions for
teaching it. We present below a summary of the principal purpose of each case.
Case 1.1: Starbucks. This integrative case introduces the series of parts that appear in each
of the remaining chapters. The purpose of the integrative case series is to permit students to
apply the material covered in each chapter to the financial statements and other information
for the same company. Case 1.1 leads students to review the important concepts and prin-
ciples underlying the balance sheet, income statement, and statement of cash flows and to
begin conducting financial statement analysis. The case works well for a first class if students
have not done any class preparation, because the instructor can walk students through
selected questions to orchestrate the desired review. We find Starbucks works well for this
integrative case because most students are familiar with their coffee shops, the firm has a
relatively simple business model (which makes understanding the accounting and building
the forecasts a bit easier), and the financial statements involve a broad range of interesting
accounting issues.
Case 1.2: Nike: Somewhere Between a Swoosh and a Slam Dunk. This case reviews the
basic concepts and principles from the introductory financial accounting course and introduc-
es tools for analyzing financial statements. The case works well for a first class if students
have not done any class preparation, because the instructor can walk students through
selected questions to orchestrate the desired review. The instructor might also provide
solutions to the first four parts of the case involving each financial statement and the relations
between them, and then spend class time with interpretations.
Integrative Case 2.1: Starbucks. This portion of the integrative case on Starbucks examines
the firm’s disclosures on income taxes, with emphasis on the relation between book income and
taxable income and interpretation of changes in various deferred tax accounts.
Integrative Case 3.1: Starbucks. This case focuses on interpreting the statement of cash
flows of Starbucks. It also examines the relation between net income, cash flow from opera-
tions, and EBITDA.
I-4
.
