CHAPTER 1 Financial Statements: An Overview 1
Map or Maze 1
Usefulness 3
Volume of Information 3
Where to Find a Company's Financial Statements 5
The Financial Statements 6
Notes to the Financial Statements 10
Auditor's Report 14
Management Discussion and Analysis 16
Five-Year Summary of Selected Financial Data and Market Data 18
Pandora (A.K.A. "PR Fluff") 19
Proxy Statement 20
Missing and Hard-to-Find Information 20
Complexities 21
A Global Marketplace 21
Mythical Mountain 22
Other Discretionary Issues 23
More Complications 24
Quality of Financial Reporting 25
Accounting Policies, Estimates-Choices and Changes 26
Timing of Revenue and Expense Recognition 27
Discretionary Items 28
Nonrecurring and Nonoperating Items 29
The Journey Through the Maze Continues 30
Self-Test 30
Study Questions and Problems 33
Case 1-1 The Walt Disney Company 36
Case 1-2 Cyberonics, Inc. 40

CHAPTER 2 The Balance Sheet 46
Financial Condition 46
Consolidation 47



Balance Sheet Date 47
Comparative Data 47
Common-Size Balance Sheet 49
Assets 49
Current Assets 49
Cash and Marketable Securities 49
Accounts Receivable 52
Inventories 53
Inventory Accounting Methods 54
Prepaid Expenses 57
Property, Plant, and Equipment 57
Other Assets 58
Liabilities 60
Current Liabilities 60
Accounts Payable 60
Notes Payable 60
Current Maturities of Long-Term Debt 61
Accrued Liabilities 61
Unearned Revenue or Deferred Credits 63
Deferred Federal Income Taxes 63
Long-Term Debt 67
Capital Lease Obligations 67
Postretirement Benefits Other Than Pensions 68
Commitments and Contingencies 68
Hybrid Securities 69
Stockholders' Equity 69
Common Stock 69
Additional Paid-In Capital 70
Retained Earnings 70
Other Equity Accounts 70
Other Balance Sheet Items 72
Self-Test 72
Study Questions and Problems 76
Case 2-1 US Airways, Inc. 80
Case 2-2 Royal Appliance Mfg. Co. 82

CHAPTER 3 Income Statement and Statement of Stockholders' Equity 88
The Income Statement 89
Common-Size Income Statement 91
Net Sales 91
Cost of Goods Sold 93
Gross Profit 93
Operating Expense 94
Depreciation and Amortization 95
Operating Profit 96
Other Income (Expense) 97
Equity Earnings 97
Earnings Before Income Taxes 99



Special Items 100
Net Earnings 102
Earnings Per Common Share 102
Comprehensive Income 103
The Statement of Stockholders' Equity 104
Earnings Quality, Cash Flow, Segmental Accounting 105
Self-Test 106
Study Questions and Problems 110
Case 3-1 The Walt Disney Company 113
Case 3-2 Micron Technology, Inc. 119

CHAPTER 4 Statement of Cash Flows 122
Preparing a Statement of Cash Flows 123
Calculating Cash Flow from Operating Activities 128
Indirect Method 128
Cash Flow from Investing Activities 131
Cash Flow from Financing Activities 131
Change in Cash 132
Analyzing the Statement of Cash Flows 132
Cash Flowfrom Operations 133
Nocash Corporation 134
R.E.C. Inc.: Analysis of the Statement of Cash Flows 136
R.E.C. Inc. Analysis: Cash Flowfrom Operating Activities 136
Summary Analysis of the Statement of Cash Flows 137
Analysis of Cash Inflows 138
Analysis of Cash Outflows 138
Are We There Yet? 140
Self-Test 140
Study Questions and Problems 144
Case 4-1 Hasbro, Inc. 150
Case 4-2 Amazon.com, Inc. 152
Supplement: Statement of Cash Flows-Direct Method 155
Direct Method 155

CHAPTER 5 The Analysis of Financial Statements 159
Objectives of Analysis 159
Sources of Information 161
Proxy Statement 161
Auditor's Report 161
Management Discussion and Analysis 161
Supplementary Schedules 161
Form 10-K and Form 10-Q 162
Other Sources 162



Tools and Techniques 164
Common-Size Financial Statements 164
Key Financial Ratios 165
Liquidity Ratios: Short-Term Solvency 165
Net Trade Cycle 170
Activity Ratios: Asset Liquidity, Asset Management Efficiency 171
Leverage Ratios: Debt Financing and Coverage 172
Profitability Ratios: Overall Efficiency and Performance 174
Analyzing the Data 176
Background: Economy, Industry, and Firm 177
Short-Term Liquidity 179
Operating Efficiency 181
Capital Structure and Long-Term Solvency 181
Profitability 185
Relating the Ratios-The Du Pont System 186
Projections, Pro Forma Statements, and Market Ratios 188
Summary of Analysis 190
Self-Test 191
Study Questions and Problems 196
Case 5-1 Apple Computer, Inc. 203
Case 5-2 Zila, Inc. 210

APPENDIXES 217
A A Guide to Earnings and Financial Reporting Quality 217
B The Analysis of Segmental Data 236
C Summary of Financial Ratios 243
D Solutions to Self-Tests 246
E Glossary 248
Index 257