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2 Vice President, Business Publishing: Donna Battista Senior Acquisitions Editor: Lacey Vitetta Editorial Assistant: Christine Donovan Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Senior Product Marketing Manager: Alison Haskins Executive Field Marketing Manager: Lori DeShazo Senior Strategic Marketing Manager: Erin Gardner Team Lead, Program Management: Ashley Santora Program Manager: Mary Kate Murray Team Lead, Project Management: Jeff Holcomb Associate Acquisitions Editor, Global Edition: Suchismita Ukil Associate Project Editor, Global Edition: Amrita Kar Project Manager, Global Edition: Sudipto Roy Manager, Media Production, Global Edition: Vikram Kumar Senior Manufacturing Controller, Production, Global Edition: Trudy Kimber Operations Specialist: Carol Melville Creative Director: Blair Brown Art Director: Jon Boylan Vice President, Director of Digital Strategy and Assessment: Paul Gentile Manager of Learning Applications: Paul DeLuca Director, Digital Studio: Sacha Laustsen Digital Studio Manager: Diane Lombardo Digital Studio Project Manager: James Bateman Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Martha LaChance Full-Service Project Management, Composition, and Interior Design: SPi Global Cover Designer: Lumina Datamatics, Inc. Cover Art: Sukpaiboonwat/Shutterstock Printer/Binder: RR Donnelley Westford, USA Cover Printer: RR Donnelley Westford, USA Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: Pearson Education Limited 2016 The rights of Lyn M. Fraser and Aileen M. Ormiston to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act Authorized adaptation from the United States edition, entitled Understanding Financial Statements, 11th edition, ISBN , by Lyn M. Fraser and Aileen M. Ormiston, published by Pearson Education All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC 1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN-10: ISBN-13: British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Typeset by SPi Global Printed and bound by RR Donnelley Westford in the United States of America

3 Understanding Financial Statements, Global Edition Table of Contents Cover Title Page Copyright Page ACKNOWLEDGMENTS ABOUT THE AUTHORS Contents Preface to the Eleventh Edition Organization of the Eleventh Edition Uses for the Eleventh Edition Acknowledgments About the Authors CHAPTER 1 Financial Statements: An Overview Map or Maze Usefulness Volume of Information Global Economy Where to Find a Companys Financial Statements The Financial Statements Notes to the Financial Statements Auditors Report Financial Reporting Reforms Management Discussion and Analysis Five-Year Summary of Selected Financial Data and Market Data Pandora (a.k.a. PR Fluff) Proxy Statement Missing and Hard-to-Find Information Characteristics, Assumptions, Principles and Basis of Accounting Complexities and the Quality of Financial Reporting Accounting Choices Timing of Revenue and Expense Recognition Discretionary Items The Journey Through the Maze Continues APPENDIX 1A: Sage Inc Case 1.1 Intel Case

4 Case 1.2 Applied Materials Comprehensive Analysis Case Using the Financial Case 1.3 Mattel Inc Case 1.4 Biolase, Inc CHAPTER 2 The Balance Sheet Financial Condition Assets Consolidation Balance Sheet Date Comparative Data Balance Sheet Format Common-Size Balance Sheet Current Assets Cash and Cash Equivalents Marketable Securities Accounts Receivable Inventories Inventory Accounting Methods Prepaid Expenses Property, Plant, and Equipment Straight line Accelerated Goodwill Other Assets Liabilities Current Liabilities Accounts Payable Short-Term Debt Current Maturities of Long-Term Debt Accrued Liabilities Unearned Revenue or Deferred Credits Deferred Federal Income Taxes Long-Term Debt Capital Lease Obligations Pensions and Postretirement Benefits Commitments and Contingencies Stockholders Equity Common Stock Additional Paid-In Capital Retained Earnings Other Equity Accounts

5 Quality of Financial ReportingThe Balance Sheet Other Balance Sheet Items Case 2.1 Intel Case Case 2.2 Applied Materials Comprehensive Analysis Case Using the Financial Case 2.3 Walgreen Co. and Subsidiaries Case 2.4 Hydrogenics Corporation CHAPTER 3 Income Statement and Statement of Stockholders Equity The Income Statement Common-Size Income Statement Net Sales Cost of Goods Sold Gross Profit Operating Expense Operating Profit Other Income (Expense) Equity Earnings Earnings Before Income Taxes/Effective Tax Rate Special Items Net Earnings Earnings per Common Share Comprehensive Income The Statement of Stockholders Equity Earnings Quality, Cash Flow, and Segmental Accounting APPENDIX 3A: A Guide to Earnings Quality Case 3.1 Intel Case Case 3.2 Applied Materials Comprehensive Analysis Case Using the Financial Case 3.3 Logitech International S.A Case 3.4 Hydrogenics Corporation CHAPTER 4 Statement of Cash Flows Why Cash Flow is Important: An Example Statement of Cash Flows: Basic Principle Preparing a Statement of Cash Flows Calculating Cash Flow from Operating Activities

6 Indirect Method Cash Flow from Investing Activities Cash Flow from Financing Activities Change in Cash Analyzing the Statement of Cash Flows Cash Flow from Operations Nocash Corporation Sage Inc.: Analysis of the Statement of Cash Flows Sage Inc. Analysis: Cash Flow from Operating Activities Summary Analysis of the Statement of Cash Flows Analysis of Cash Inflows Analysis of Cash Outflows Qualitative Issues Relating to the Statement of Cash Flows Are We There Yet? APPENDIX 4A: Statement of Cash FlowsDirect Method Case 4.1 Intel Case Case 4.2 Applied Materials Comprehensive Analysis Case Using the Financial Case 4.3 Avnet Inc Case 4.4 Hydrogenics Corporation CHAPTER 5 The Analysis of Financial Statements Objectives of Analysis Sources of Information Proxy Statement Auditors Report Management Discussion and Analysis Supplementary Schedules Form 10-K and Form 10-Q Other Sources Tools and Techniques Common-Size Financial Statements Key Financial Ratios Liquidity Ratios: Short-Term Solvency Cash Conversion Cycle or Net Trade Cycle Activity Ratios: Asset Liquidity, Asset Management Efficiency Leverage Ratios: Debt Financing and Coverage Profitability Ratios: Overall Efficiency and Performance Market Ratios

7 Analyzing the Data Background: Economy, Industry, and Firm Short-Term Liquidity Operating Efficiency Capital Structure and Long-Term Solvency Profitability Relating the RatiosThe Du Pont System Projections and Pro Forma Statements Summary of Analysis Financial Statements: A Map APPENDIX 5A: The Analysis of Segmental Data Case 5.1 Intel Case Case 5.2 Applied Materials Comprehensive Analysis Case Using the Financial Case 5.3 Facebook, Inc Case 5.4 Hydrogenics Corporation APPENDIXES A: Summary of Financial Ratios B: Solutions to s C: Glossary A B C D E F G H I L M N O P Q R S T

8 Index A B C D E F G H I J K L M N O P Q R S T U V W Z U W