SE
R
U
JN
, CONTENTS
PART 1 FRAMEWORK
Chapter 1 A Framework for Business Analysis and Valuation
Using Financial Statements 1-3
The Role of Financial Reporting in Capital Markets 1-4
From Business Activities to Financial Statements 1-6
Influences of the Accounting System on Information Quality 1-6
Feature 1: Accrual Accounting 1-6
Feature 2: Accounting Conventions and Standards 1-7
JN
Feature 3: Managers’ Reporting Strategy 1-8
Feature 4: Auditing 1-9
From Financial Statements to Business Analysis 1-10
Analysis Step 1: Business Strategy Analysis 1-11
Analysis Step 2: Accounting Analysis 1-12
U
Analysis Step 3: Financial Analysis 1-12
Analysis Step 4: Prospective Analysis 1-12
Summary 1-13
R
Discussion Questions 1-13
Notes 1-14
SE
PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS
Chapter 2 Strategy Analysis 2-3
Industry Analysis 2-3
Degree of Actual and Potential Competition 2-4
Bargaining Power in Input and Output Markets 2-7
Applying Industry Analysis: The U.S. Retail Department Store Industry 2-8
Competition in the U.S. Retail Department Store Industry 2-8
The Power of Buyers and Suppliers 2-10
Limitations of Industry Analysis 2-11
Competitive Strategy Analysis 2-11
Sources of Competitive Advantage 2-12
Achieving Competitive Advantage 2-13
Sustaining Competitive Advantage 2-13
Applying Competitive Strategy Analysis 2-14
, Corporate Strategy Analysis 2-16
Sources of Value Creation at the Corporate Level 2-17
Applying Corporate Strategy Analysis 2-18
Summary 2-21
Discussion Questions 2-22
Notes 2-23
Chapter 3 Overview of Accounting Analysis 3-1
The Institutional Framework for Financial Reporting 3-1
Accrual Accounting 3-1
Delegation of Reporting to Management 3-2
Generally Accepted Accounting Principles 3-3
External Auditing 3-5
JN
Legal Liability 3-6
Factors Influencing Accounting Quality 3-6
Noise from Accounting Rules 3-7
Forecast Errors 3-7
Managers’ Accounting Choices 3-7
U
Steps in Performing Accounting Analysis 3-9
Step 1: Identify Principal Accounting Policies 3-9
Step 2: Assess Accounting Flexibility 3-9
R
Step 3: Evaluate Accounting Strategy 3-10
Step 4: Evaluate the Quality of Disclosure 3-10
Step 5: Identify Potential Red Flags 3-12
SE
Step 6: Undo Accounting Distortions 3-13
Accounting Analysis Pitfalls 3-14
1. Conservative Accounting Is Not “Good” Accounting 3-14
2. Not All Unusual Accounting Is Questionable 3-14
Value of Accounting Data and Accounting Analysis 3-15
Summary 3-16
Discussion Questions 3-16
Notes 3-17
Chapter 4 Implementing Accounting Analysis 4-1
Recasting Financial Statements 4-2
Making Accounting Adjustments 4-7
Asset Distortions 4-7
Liability Distortions 4-20
Equity Distortions 4-23
Comparing Companies Using U.S. GAAP and IFRS 4-24
Application to TJX and Nordstrom 4-28
, Summary 4-30
Discussion Questions 4-31
Notes 4-36
Appendix A: Recasting Financial Statements into Standardized
Templates 4-37
Appendix B: Nordstrom, Inc. Operating Lease Adjustment 4-45
Chapter 5 Financial Analysis 5-1
Ratio Analysis 5-1
Measuring Overall Profitability 5-3
Decomposing Profitability: Traditional Approach 5-4
Decomposing Profitability: Alternative Approach 5-6
Assessing Operating Management: Decomposing Net Profit Margins 5-8
Gross Profit Margins 5-9
JN
Selling, General, and Administrative Expenses 5-10
Tax Expense 5-11
Evaluating Investment Management: Decomposing Asset Turnover 5-12
Working Capital Management 5-12
Long-Term Assets Management 5-13
U
Evaluating Financial Management: Analyzing Financial Leverage 5-15
Current Liabilities and Short-Term Liquidity 5-16
Debt and Long-Term Solvency 5-17
R
Ratios of Disaggregated Data 5-19
Putting It All Together: Assessing Sustainable Growth Rate 5-20
SE
Historical Patterns of Ratios for U.S. Firms 5-21
Cash Flow Analysis 5-22
Cash Flow and Funds Flow Statements 5-22
Analyzing Cash Flow Information 5-24
Analysis of TJX’s and Nordstrom’s Cash Flow 5-27
Summary 5-27
Discussion Questions 5-28
Notes 5-29
Appendix A: The TJX Companies, Inc. Financial Statements 5-31
Appendix B: Nordstrom, Inc. Financial Statements 5-37
Chapter 6 Prospective Analysis: Forecasting 6-1
The Overall Structure of the Forecast 6-1
A Practical Framework for Forecasting 6-2
Performance Behavior: A Starting Point 6-3
Sales Growth Behavior 6-3
Earnings Behavior 6-4
R
U
JN
, CONTENTS
PART 1 FRAMEWORK
Chapter 1 A Framework for Business Analysis and Valuation
Using Financial Statements 1-3
The Role of Financial Reporting in Capital Markets 1-4
From Business Activities to Financial Statements 1-6
Influences of the Accounting System on Information Quality 1-6
Feature 1: Accrual Accounting 1-6
Feature 2: Accounting Conventions and Standards 1-7
JN
Feature 3: Managers’ Reporting Strategy 1-8
Feature 4: Auditing 1-9
From Financial Statements to Business Analysis 1-10
Analysis Step 1: Business Strategy Analysis 1-11
Analysis Step 2: Accounting Analysis 1-12
U
Analysis Step 3: Financial Analysis 1-12
Analysis Step 4: Prospective Analysis 1-12
Summary 1-13
R
Discussion Questions 1-13
Notes 1-14
SE
PART 2 BUSINESS ANALYSIS AND VALUATION TOOLS
Chapter 2 Strategy Analysis 2-3
Industry Analysis 2-3
Degree of Actual and Potential Competition 2-4
Bargaining Power in Input and Output Markets 2-7
Applying Industry Analysis: The U.S. Retail Department Store Industry 2-8
Competition in the U.S. Retail Department Store Industry 2-8
The Power of Buyers and Suppliers 2-10
Limitations of Industry Analysis 2-11
Competitive Strategy Analysis 2-11
Sources of Competitive Advantage 2-12
Achieving Competitive Advantage 2-13
Sustaining Competitive Advantage 2-13
Applying Competitive Strategy Analysis 2-14
, Corporate Strategy Analysis 2-16
Sources of Value Creation at the Corporate Level 2-17
Applying Corporate Strategy Analysis 2-18
Summary 2-21
Discussion Questions 2-22
Notes 2-23
Chapter 3 Overview of Accounting Analysis 3-1
The Institutional Framework for Financial Reporting 3-1
Accrual Accounting 3-1
Delegation of Reporting to Management 3-2
Generally Accepted Accounting Principles 3-3
External Auditing 3-5
JN
Legal Liability 3-6
Factors Influencing Accounting Quality 3-6
Noise from Accounting Rules 3-7
Forecast Errors 3-7
Managers’ Accounting Choices 3-7
U
Steps in Performing Accounting Analysis 3-9
Step 1: Identify Principal Accounting Policies 3-9
Step 2: Assess Accounting Flexibility 3-9
R
Step 3: Evaluate Accounting Strategy 3-10
Step 4: Evaluate the Quality of Disclosure 3-10
Step 5: Identify Potential Red Flags 3-12
SE
Step 6: Undo Accounting Distortions 3-13
Accounting Analysis Pitfalls 3-14
1. Conservative Accounting Is Not “Good” Accounting 3-14
2. Not All Unusual Accounting Is Questionable 3-14
Value of Accounting Data and Accounting Analysis 3-15
Summary 3-16
Discussion Questions 3-16
Notes 3-17
Chapter 4 Implementing Accounting Analysis 4-1
Recasting Financial Statements 4-2
Making Accounting Adjustments 4-7
Asset Distortions 4-7
Liability Distortions 4-20
Equity Distortions 4-23
Comparing Companies Using U.S. GAAP and IFRS 4-24
Application to TJX and Nordstrom 4-28
, Summary 4-30
Discussion Questions 4-31
Notes 4-36
Appendix A: Recasting Financial Statements into Standardized
Templates 4-37
Appendix B: Nordstrom, Inc. Operating Lease Adjustment 4-45
Chapter 5 Financial Analysis 5-1
Ratio Analysis 5-1
Measuring Overall Profitability 5-3
Decomposing Profitability: Traditional Approach 5-4
Decomposing Profitability: Alternative Approach 5-6
Assessing Operating Management: Decomposing Net Profit Margins 5-8
Gross Profit Margins 5-9
JN
Selling, General, and Administrative Expenses 5-10
Tax Expense 5-11
Evaluating Investment Management: Decomposing Asset Turnover 5-12
Working Capital Management 5-12
Long-Term Assets Management 5-13
U
Evaluating Financial Management: Analyzing Financial Leverage 5-15
Current Liabilities and Short-Term Liquidity 5-16
Debt and Long-Term Solvency 5-17
R
Ratios of Disaggregated Data 5-19
Putting It All Together: Assessing Sustainable Growth Rate 5-20
SE
Historical Patterns of Ratios for U.S. Firms 5-21
Cash Flow Analysis 5-22
Cash Flow and Funds Flow Statements 5-22
Analyzing Cash Flow Information 5-24
Analysis of TJX’s and Nordstrom’s Cash Flow 5-27
Summary 5-27
Discussion Questions 5-28
Notes 5-29
Appendix A: The TJX Companies, Inc. Financial Statements 5-31
Appendix B: Nordstrom, Inc. Financial Statements 5-37
Chapter 6 Prospective Analysis: Forecasting 6-1
The Overall Structure of the Forecast 6-1
A Practical Framework for Forecasting 6-2
Performance Behavior: A Starting Point 6-3
Sales Growth Behavior 6-3
Earnings Behavior 6-4
