Interpreting and Analyzing Financial Statements (5th Edition)
PREFACEWhile this book can be used to supplement any financial accounting text, the activities have been designed to accompany Financial Accounting, 4th edition by Walter T. Harrison, Jr. and Charles T. Horngren (Prentice Hall, 2001).WHY THESE ACTIVITIES WERE DEVELOPEDWhen I first started assigning a comprehensive financial statement analysis as a capstone project, it became evident many students didn't know where to begin. They were overwhelmed by all of the numbers and felt frustrated. As a result, this series of preliminary activities was developed to prepare students for the capstone project. Each activity concentrates on only one aspect of financial statement analysis. After completing the preliminary activities, students feel confident in their strategies and ability to successfully complete a comprehensive financial statement analysis.USING DATA FROM WELL-KNOWN CORPORATIONSThese activities use financial data from companies familiar to students. The actual numbers make the class relevant and more interesting to students. Because students are already familiar with the companies, they more easily grasp the material and remember the concepts.FOCUS IS ON INTERPRETING AND ANALYZINGMost amounts are provided and calculations are kept to a minimum so students can focus their time and attention on interpretation and analysis. Fifteen minutes on average is required for completion of each activity.INTERNET AND OTHER TYPES OF RESEARCHThere is at least one Internet activity for each chapter. Other research activities require reading The Wall Street Journal, calling a local bank, or utilizing library resources that are available. The final chapter contains a corporate analysis that requires in-depth research of a company. These research activities inform students of the many resources available and utilize their analyzing skills.FOUR-YEAR COMPARISONFinancial statements are introduced using four years of comparative information. Each line item is studied and the student develops an overall strategy to analyze the financial statement. Questions lead to increased understanding and highlight important trends.RATIO ANALYSISActivities point out the significant role ratios have in analyzing financial statements. Students acquire a "feel" for the expected range and magnitude of the ratios and identify whether a high or low ratio is usually preferred. Commonly used ratios are studied.TREND ANALYSISTrend analysis is used to evaluate both the income statement and the balance sheet. Emphasis is placed on comparing the rate of increase or decrease of various account classifications within each financial statement.COMMON-SIZE STATEMENT ANALYSISCommon-size statements are used to compare companies of different size.ETHICAL ISSUESEthical issues are incorporated into a number of the activities.RANGE AND MAGNITUDE OF AMOUNTSCompanies are carefully selected so students get a "feel" for the range and magnitude of expected amounts and ratios in the corporate world.REVIEWReview exercises titled "Test Your Understanding" are located at the end of each chapter. In addition, Chapter 6 provides a thorough review of each balance sheet account, and Chapter 7 provides a comprehensive review of all the financial statements.CLASS FORMATThese activities can be utilized as individual homework assignments, small group discussions in class, a review, or a combination of all three. Whichever approach is used, these assignments result in thorough understanding and lively classroom discussion.CORPORATE ANALYSISThe final project requires students to research, analyze, and prepare a comprehensive written report on the public corporation of their choice. To complete the project, students must obtain a copy of the corporate financial statements and utilize a variety of resources. Because the company is the student's choice, interest is high and a quality product results. This project has several parts. The parts may be assigned throughout the semester, or as a capstone project at the end of the semester.   TO THE INSTRUCTOR...This book contains a series of activities designed to help students acquire the necessary skills to interpret, analyze, and research financial statement information. A user-oriented approach is maintained throughout the book, utilizing financial information from companies familiar to students. For successful completion of the problem materials, both a conceptual understanding and mathematical ,computations are required. Activities employ written exercises, Internet activities, and other research opportunities to strengthen understanding. Ethical issues are raised. With over 90 activities to choose from, instructors can select activities appropriate to their individual needs.Chapter 1 is designed to accompany the first few weeks of a semester course. Basic accounting concepts are reinforced. An early introduction of ratios, trend analysis, and common-size statements enhance understanding of the relationship between amounts on the balance sheet and the income statement throughout the course. The analysis activities require no previous introduction. Allow 5 to 15 minutes to complete each activity.Chapters 2, 3, and 4 are designed as a step-by-step guide for analyzing each of the three major financial statements. Questions lead to increased understanding and highlight important trends. These activities can be assigned anytime after the first few weeks of a semester course. They can be used concurrently with the financial statement coverage in the text, after the statement coverage, as a review to reinforce understanding, or simply as a stand-alone assignment at any point throughout the semester. The activities in these chapters start basic and progress to more complex. Allow 15 to 30 minutes for each activity.Chapter 5 introduces industry norms for the ratios and reviews thirteen commonly used ratios. Ratios from well-known corporations provide the foundation for activity questions. Allow 5 to 10 minutes to complete each activity.Chapter 6 is designed to be used throughout the semester as the topics arise.Activities 63 through 72 present specific balance sheet account information followed by a series of questions that test for understanding. A thorough understanding of the material is required for successful completion. These activities are appropriate for individual homework assignments, quizzes, small group discussion in class, or as review materials. Allow 5 to 15 minutes for each activity.  Activities 73-79 examine the stock and bond markets using a variety of research activities that utilize The Wall Street Journal, the Internet, and other business resources. These activities enhance the coverage of liabilities and stockholders' equity. Allow 15 to 30 minutes to complete each activity.Chapter 7 provides a comprehensive review of all three major financial statements. The activities review understanding of transaction analysis, finding specific account information, interpreting financial information, and analyzing all three major financial statements.Chapter 8 is a Corporate Analysis project with four parts. It can be assigned as a capstone project at the end of the semester, or as a series of assignments spread throughout the semester. This final project requires students to research, analyze, and prepare a comprehensive, written report on the public corporation of their choice. This project provides an opportunity to apply and reinforce learning from previous activities and from the accounting course.Have fun with these assignments. Bring real-world numbers into the classroom in an organized series of assignments. My students enjoy these assignments and the learning that results. I hope you do too. Please feel free to contact me with comments and questions regarding these activities. My e-mail address is schoeneb@twsuvm.uc.twsu.Karen Schoenebeck, author   TO THE STUDENT...WARNING!!!MANY OF THE QUESTIONS CONTAINED IN THIS BOOK REQUIRE THOUGHT!You are about to embark on a journey into the world of business. Some of you read The Wall Street Journal on a regular basis, while others have not yet been introduced to assets and liabilities. This series of activities is designed to introduce you to the financial information for a variety of familiar companies and financial statement analysis. After completing these activities you should feel confident in your ability to research and understand any set of corporate financial statements. Below is a summary of each chapter followed by a question answered in the chapter material.Chapter 1 introduces the range and magnitude of amounts reported on financial statements of well-known companies. Trend analysis and common-size statements are introduced. An understanding is developed for the information provided by ratios and whether an increasing or decreasing trend is usually preferred. For major corporations, are sales usually reported in the range of millions, billions, or trillions?Chapter 2 introduces strategies for analyzing the balance sheet and then applies those strategies. Classified balance sheets, trend analyses, and common-size statements are prepared and followed by questions that lead you through interpretation to understanding. Does an increase in retained earnings indicate the company issued more stock, purchased more assets, or reported net income?Chapter 3 introduces strategies for analyzing the income statement and then applies those strategies. Multi-step income statements, trend analyses, and common-size statements are prepared and followed by questions that lead you through interpretation to understanding. If sales increase by 10%, would you also expect expenses to increase?Chapter 4 introduces strategies for analyzing the statement of cash flows and then applies those strategies. Operating, investing, and financing activities are identified and analyzed. The primary source of cash for an established company with a strong cash position should be operating, investing, or financing activities?Chapter 5 reinforces the information provided by various financial ratios and introduces industry norms. Industry average information is reported using which four-digit code?Chapter 6 reinforces understanding of amounts reported on the financial statements. It also includes activities that examine the stock and bond market, and benchmark current interest rates and the Dow Jones Industrial Average. Research activities require use of The Wall Street Journal, the Internet, and other business publications. For property, plant, and equipment (PPE), is acquisition cost or book value added to calculate total assets?Chapter 7 provides a comprehensive review of all three major financial statements. The activities review understanding of transaction analysis, finding specific account information, interpreting financial information, and analyzing all three major financial statements. When using LIFO, the most recent (current) inventory costs are reported on which financial statement?Chapter 8 is a capstone project that includes researching and analyzing a publicly traded corporation of your choice. This provides an opportunity to apply the knowledge learned to a company of personal interest.   ACKNOWLEDGMENTSI WOULD LIKE TO THANK...The Prentice Hall staff including Deborah Hoffinan who discovered my materials, encouraged me to submit them for publishing, and continues to support my work; Natacha St. Hill Moore for her past encouragement, patience, and assistance; Kathryn Sheehan for her current encouragement and assistance; and Jane Avery for her endless hours of proofing.My students who provide continued opportunities for me to learn, and are always ready to give me honest and helpful feedback.My husband, Dennis, for his support and encouragement; Grant, my son, who assisted with research, math calculations, and typing; and Casey, my son, for just being a neat person.Karen Schoenebeck, author--This text refers to an out of print or unavailable edition of this title.