International Financial Statement Analysis

Preface xix Acknowledgments xxi About the CFA Investment Series xxiii CHAPTER 1 Financial Statement Analysis: An Introduction 1 Learning Outcomes 1 1. Introduction 1 2. Scope of Financial Statement Analysis 2 3. Major Financial Statements and Other Information Sources 7 4. Financial Statement Analysis Framework 28 5. Summary 32 References 34 Problems 34 CHAPTER 2 Financial Reporting Mechanics 37 Learning Outcomes 37 1. Introduction 38 2. The Classification of Business Activities 38 3. Accounts and Financial Statements 39 4. The Accounting Process 47 5. Accruals and Valuation Adjustments 65 6. Accounting Systems 67 7. Using Financial Statements in Security Analysis 69 8. Summary 71 Appendix: A Debit/Credit Accounting System 71 Problems 87 CHAPTER 3 Financial Reporting Standards 91 Learning Outcomes 91 1. Introduction 92 2. The Objective of Financial Reporting 92 3. Standard-Setting Bodies and Regulatory Authorities 95 4. Convergence of Global Financial Reporting Standards 104 5. The International Financial Reporting Standards Framework 107 6. Effective Financial Reporting 119 7. Comparison of IFRS with Alternative Reporting Systems 121 8. Monitoring Developments in Financial Reporting Standards 123 9. Summary 128 Problems 130 CHAPTER 4 Understanding Income Statements 133 Learning Outcomes 133 1. Introduction 134 2. Components and Format of the Income Statement 135 3. Revenue Recognition 139 4. Expense Recognition 152 5. Non-Recurring Items and Non-Operating Items 162 6. Earnings per Share 169 7. Analysis of the Income Statement 178 8. Comprehensive Income 183 9. Summary 186 Problems 188 CHAPTER 5 Understanding Balance Sheets 193 Learning Outcomes 193 1. Introduction 193 2. Components and Format of the Balance Sheet 194 3. Current Assets and Current Liabilities 199 4. Non-Current Assets 209 5. Non-Current Liabilities 220 6. Equity 223 7. Analysis of the Balance Sheet 227 8. Summary 237 Problems 239 CHAPTER 6 Understanding Cash Flow Statements 243 Learning Outcomes 243 1. Introduction 243 2. Components and Format of the Cash Flow Statement 244 Operating Activities 248 3. The Cash Flow Statement: Linkages and Preparation 258 4. Cash Flow Statement Analysis 273 5. Summary 285 Reference 286 Problems 286 CHAPTER 7 Financial Analysis Techniques 291 Learning Outcomes 291 1. Introduction 291 2. The Financial Analysis Process 292 3. Analytical Tools and Techniques 296 4. Common Ratios Used in Financial Analysis 313 5. Equity Analysis 341 6. Credit Analysis 347 7. Business and Geographic Segments 350 8. Model Building and Forecasting 353 9. Summary 353 References 354 Problems 355 CHAPTER 8 Inventories 363 Learning Outcomes 363 1. Introduction 363 2. Cost of Inventories 365 3. Inventory Valuation Methods 366 4. The LIFO Method 375 5. Inventory Method Changes 386 6. Inventory Adjustments 386 7. Evaluation of Inventory Management 393 8. Summary 406 Problems 408 CHAPTER 9 Long-Lived Assets 421 Learning Outcomes 421 1. Introduction 422 2. Acquisition of Long-Lived Assets 423 3. Depreciation and Amortization of Long-Lived Assets 440 4. The Revaluation Model 450 5. Impairment of Assets 453 6. Derecognition 456 7. Presentation and Disclosures 458 8. Investment Property 469 9. Leasing 471 10. Summary 493 Problems 495 CHAPTER 10 Non-Current (Long-Term) Liabilities 505 Learning Outcomes 505 1. Introduction 506 2. Bonds Payable 506 3. Leases 525 4. Introduction to Pensions and Other Post-Employment Benefits 544 5. Evaluating Solvency: Leverage and Coverage Ratios 547 6. Summary 551 Problems 552 CHAPTER 11 Financial Reporting Quality 555 Learning Outcomes 555 1. Introduction 556 2. Conceptual Overview 557 3. Context for Assessing Financial Reporting Quality 573 4. Detection of Financial Reporting Quality Issues 581 5. Summary 609 References 610 Problems 611 CHAPTER 12 Financial Statement Analysis: Applications 613 Learning Outcomes 613 1. Introduction 614 2. Application: Evaluating Past Financial Performance 614 3. Application: Projecting Future Financial Performance 623 4. Application: Assessing Credit Risk 633 5. Application: Screening for Potential Equity Investments 637 6. Analyst Adjustments to Reported Financials 640 7. Summary 656 References 656 Problems 657 CHAPTER 13 Income Taxes 661 Learning Outcomes 661 1. Introduction 662 2. Differences between Accounting Profi t and Taxable Income 662 3. Determining the Tax Base of Assets and Liabilities 667 4. Temporary and Permanent Diff erences between Taxable and Accounting Profi t 672 in Joint Ventures 677 5. Unused Tax Losses and Tax Credits 677 6. Recognition and Measurement of Current and Deferred Tax 678 7. Presentation and Disclosure 682 8. Comparison of IFRS and US GAAP 687 9. Summary 690 Problems 691 CHAPTER 14 Employee Compensation: Post-Employment and Share-Based 697 Learning Outcomes 697 1. Introduction 697 2. Pensions and Other Post-Employment Benefits 698 3. Share-Based Compensation 726 4. Summary 732 Reference 733 Problems 733 CHAPTER 15 Intercorporate Investments 739 Learning Outcomes 739 1. Introduction 739 2. Basic Corporate Investment Categories 741 3. Investments in Financial Assets: Standard IAS 39 (as of December 2012) 742 4. Investments in Financial Assets: IFRS 9 (as of December 2012) 752 5. Investments in Associates and Joint Ventures 755 6. Business Combinations 767 7. Summary 789 Problems 790 CHAPTER 16 Multinational Operations 799 Learning Outcomes 799 1. Introduction 800 2. Foreign Currency Transactions 801 3. Translation of Foreign Currency Financial Statements 814 4. Multinational Operations and a Company's Effective Tax Rate 853 5. Additional Disclosures on the Eff ects of Foreign Currency 856 6. Summary 860 Problems 862 CHAPTER 17 Evaluating Quality of Financial Reports 869 Learning Outcomes 869 1. Introduction 869 2. Quality of Financial Reports 871 3. Evaluating the Quality of Financial Reports 884 4. Earnings Quality 889 5. Cash Flow Quality 911 6. Balance Sheet Quality 921 7. Sources of Information about Risk 925 8. Summary 937 References 939 Problems 940 CHAPTER 18 Integration of Financial Statement Analysis Techniques 943 Learning Outcomes 943 1. Introduction 944 2. Case Study 1: Long-Term Equity Investment 945 3. Case Study 2: Off -Balance Sheet Leverage from Operating Leases 972 4. Case Study 3: Anticipating Eff ects of Changes in Accounting Standards 976 5. Summary 980 Problems 981 Glossary 987 About the Authors 999 About the CFA Program 1003 Index 1005