Financial reporting and analysi

Australia • Brazil • Japan • Korea • Mexico • Sin
g
apore • Spain • United Kin
g
dom • United States
13e
Financial Reporting
& Analysis
Using Financial Accounting Information
CHARLES H. GIBSON
The University of Toledo, Emeritus
R Sherwood Veith/iStockphoto.com
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Financial Reporting & Analysis,
Thirteenth Edition
Charles H. Gibson
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Material from the Certified Management Accountant Examination,
Copyright © 1973, 1975, 1976, 1977, 1978, 1979, 1980, 1984, 1988, by
the Institute of Certified Management Accountants, is reprinted
and/or adapted with permission.
Material copyrighted by the Financial Accounting Standards Board, 401
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Dedication
This book is dedicated to my wife, Patricia, and daughters Anne Elizabeth and Laura.

Special Dedication
To hardworking students mastering financial reporting and analysis.
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About the Author
C
harles Gibson is a certified public accountant who practiced with a Big Four account-
ing firm for four years and has had more than 30 years of teaching experience. His
teaching experience encompasses a variety of accounting courses, including financial,
managerial, tax, cost, and financial analysis.
Professor Gibson has taught seminars on financial analysis to financial executives, bank
commercial loan officers, lawyers, and others. He has also taught financial reporting semi-
nars for CPAs and review courses for both CPAs and CMAs. He has authored several prob-
lems used on the CMA exam.
Charles Gibson has written more than 60 articles in such journals as the Journal of
Accountancy, Accounting Horizons, Journal of Commercial Bank Lending, CPA Journal,
Ohio CPA, Management Accounting, Risk Management, Taxation for Accountants,
Advanced Management Journal, Taxation for Lawyers, California Management Review,
and Journal of Small Business Management. He is a co-author of the Financial Executives
Research Foundation Study entitled, “Discounting in Financial Accounting and Reporting.”
Dr. Gibson co-authored Cases in Financial Reporting (PWS-KENT Publishing Company).
He has also co-authored two continuing education courses consisting of books and cassette
tapes, published by the American Institute of Certified Public Accountants. These courses are
entitled “Funds Flow Evaluation” and “Profitability and the Quality of Earnings.”
Professor Gibson is a member of the American Accounting Association, American Insti-
tute of Certified Public Accountants, Ohio Society of Certified Public Accountants, and
Financial Executives Institute. In the past, he has been particularly active in the American
Accounting Association and the Ohio Society of Certified Public Accountants.

Dr. Gibson received the 1989 Outstanding Ohio Accounting Educator Award jointly
presented by the Ohio Society of Certified Public Accountants and the Ohio Regional Ameri-
can Accounting Association. In 1993, he received the College of Business Research Award at
the University of Toledo. In 1996, Dr. Gibson was honored as an “Accomplished Graduate”
of the College of Business at Bowling Green State University. In 1999, he was honored by
the Gamma Epsilon Chapter of Beta Alpha Psi of the University of Toledo.
v
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Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Brief Contents
Preface xix
Chapter 1 Introduction to Financial Reporting 1
Chapter 2 Introduction to Financial Statements and Other
Financial Reporting Topics 54
Chapter 3 Balance Sheet 95
Chapter 4 Income Statement 157
Chapter 5 Basics of Analysis 199
Chapter 6 Liquidity of Short-Term Assets; Related Debt-Paying Ability 223
Chapter 7 Long-Term Debt-Paying Ability 278
Chapter 8 Profitability 323
Chapter 9 For the Investor 365
Chapter 10 Statement of Cash Flows 393
Summary Analysis Nike, Inc. (Includes 2011
Financial Statements of Form 10-K) 438
Chapter 11 Expanded Analysis 482
Chapter 12 Special Industries: Banks, Utilities, Oil and Gas,
Transportation, Insurance, and Real Estate Companies 540
Chapter 13 Personal Financial Statements and Accounting for

Governments and Not-for-Profit Organizations 588
Appendix Thomson ONE Basics and Tutorial 615
Glossary 621
Bibliography 641
Index 653
vii
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Contents
Preface xix
Chapter 1
Introduction to Financial Reporting 1
DEVELOPMENT OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP) IN THE UNITED STATES 1
American Institute of Certified Public Accountants • Financial Accounting
Standards Board • Operating Procedure for Statements of Financial
Accounting Standards • FASB Conceptual Framework
ADDITIONAL INPUT—AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS (AICPA) 7
EMERGING ISSUES TASK FORCE (EITF) 8
A NEW REALITY 8
FASB ACCOUNTING STANDARDS CODIFICATION™
(CODIFICATION) 10
TRADITIONAL ASSUMPTIONS OF THE ACCOUNTING MODEL 10
Business Entity • Going Concern or Continuity • Time Period •
Monetary Unit • Historical Cost • Conservatism • Realization • Matching •
Consistency • Full Disclosure • Materiality • Industry Practices • Transaction
Approach • Cash Basis • Accrual Basis

HARMONIZATION OF INTERNATIONAL ACCOUNTING
STANDARDS 19
FINANCIAL REPORTING STANDARDS FOR SMALL AND MEDIUM-SIZED
ENTITIES (SME
S)22
USING THE INTERNET 23
Companies’ Internet Web Sites • Helpful Web Sites
SUMMARY 24 / QUESTIONS 24 / PROBLEMS 26 / CASES 32
Case 1-1 Standard Setting: “A Political Aspect” 32
Case 1-2 Politicization of Accounting Standards—A Necessary Act? 35
Case 1-3 Independence of Accounting Standard Setters 36
Case 1-4 Looking Out for Investors 39
ix
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Case 1-5 Flying High 41
Case 1-6 Centered in Hawaii 42
Case 1-7 Continue as a Going Concern 43
Case 1-8 Economics and Accounting: The Uncongenial Twins 44
Case 1-9 I Often Paint Fakes 45
Case 1-10 Oversight 45
Case 1-11 Regulation of Smaller Public Companies 49
Case 1-12 Stable Funding 50
Case 1-13 Rules or Feel? 50
Case 1-14 PCAOB Enforcement – IFRS Standards 51
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 51
TO THE NET CASE 51
Chapter 2 Introduction to Financial Statements and
Other Financial Reporting Topics 54
FORMS OF BUSINESS ENTITIES 54

THE FINANCIAL STATEMENTS 55
Balance Sheet (Statement of Financial Position) • Statement of Stockholders’
Equity (Reconciliation of Stockholders’ Equity Accounts) • Income Statement
(Statement of Earnings) • Statement of Cash Flows (Statement of Inflows
and Outflows of Cash) • Notes
THE ACCOUNTING CYCLE 58
Recording Transactions • Recording Adjusting Entries • Preparing the
Financial Statements • Treadway Commission
AUDITOR’S OPINION 60
Auditor’s Report on the Firm’s Internal Controls • Report of Management on
Internal Control over Financial Reporting
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS 65
THE SEC’s INTEGRATED DISCLOSURE SYSTEM 66
PROXY 68
SUMMARY ANNUAL REPORT 69
THE EFFICIENT MARKET HYPOTHESIS 69
ETHICS 69
SEC Requirements—Code of Ethics
CONSOLIDATED STATEMENTS 72
ACCOUNTING FOR BUSINESS COMBINATIONS 73
SEC – PAPER FILINGS – EDGAR – XBRL 73
SUMMARY 73 / QUESTIONS 74 / PROBLEMS 75 / CASES 80
Case 2-1 The CEO Retires 80
Case 2-2 The Dangerous Morality of Managing Earnings 83
Case 2-3 Firm Commitment? 87
Case 2-4 Multiple Country Enforcement 88
Case 2-5 Materiality: In Practice 89
Case 2-6 Management’s Responsibility 89
Case 2-7 Safe Harbor 90
Case 2-8 Enforcement 91

Case 2-9 Notify the SEC 92
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 93
TO THE NET CASE 93
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CONTENTS
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Chapter 3 Balance Sheet 95
BASIC ELEMENTS OF THE BALANCE SHEET 95
Assets • Liabilities • Shareholder’s or Stockholder’s Equity
QUASI-REORGANIZATION 122
ACCUMULATED OTHER COMPREHENSIVE INCOME 122
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPs) 123
TREASURY STOCK 124
STOCKHOLDERS’ EQUITY IN UNINCORPORATED FIRMS 124
INTERNATIONAL CONSOLIDATED BALANCE SHEET (IFRS) 126
SUMMARY 130 / QUESTIONS 130 / PROBLEMS 132 / CASES 139
Case 3-1 Convenience Foods 139
Case 3-2 World Wide Entertainment 142
Case 3-3 Health Care Products 145
Case 3-4 Best 146
Case 3-5 Our Principal Asset is Our People 149
Case 3-6 Brand Value 149
Case 3-7 Advertising—Asset? 150
Case 3-8 Telecommunications – Part 1 150
Case 3-9 Global Health Care 153
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 155
TO THE NET CASE 155
Chapter 4 Income Statement 157
BASIC ELEMENTS OF THE INCOME STATEMENT 157

Net Sales (Revenues) • Cost of Goods Sold (Cost of Sales) • Other Operating
Revenue • Operating Expenses • Other Income or Expe nse
SPECIAL INCOME STATEMENT ITEMS 160
(A) Unusual or Infrequent Item Disclosed Separately • (B) Equity in Earnings
of Nonconsolidated Subsidiaries
INCOME TAXES RELATED TO OPERATIONS 163
(C) Discontinued Operations • (D) Extraordinary Items • (E) Change in
Accounting Principle • (F) Net Income—Noncontrolling Interest
(previously minority share of earnings)
EARNINGS PER SHARE 168
RETAINED EARNINGS 168
DIVIDENDS AND STOCK SPLITS 168
LEGALITY OF DISTRIBUTIONS TO STOCKHOLDERS 170
COMPREHENSIVE INCOME 171
INTERNATIONAL CONSOLIDATED INCOME STATEMENT (IFRS) 173
International GAAP Holdings Limited Financial statements for the year ended 31 December 2011
SUMMARY 179 / QUESTIONS 179 / PROBLEMS 180 / CASES 188
Case 4-1 Homebuilders 188
Case 4-2 Communication Products 190
Case 4-3 Apparel Companies 191
Case 4-4 The Big Order 193
Case 4-5 Celtics 193
Case 4-6 Homebuilding 194
Case 4-7 Telecommunications – Part 2 196
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 197
TO THE NET CASE 197
CONTENTS
xi
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Chapter 5 Basics of Analysis 199
RATIO ANALYSIS 199
COMMON-SIZE ANALYSIS (VERTICAL AND HORIZONTAL) 200
YEAR-TO-YEAR CHANGE ANALYSIS 201
FINANCIAL STATEMENT VARIATION BY TYPE OF INDUSTRY 202
REVIEW OF DESCRIPTIVE INFORMATION 208
COMPARISONS 208
Trend Analysis • Standard Industrial Classification (SIC) Manual • North
American Industry Classification System (NAICS) • Industry Averages and
Comparison with Competitors • Caution in Using Industry Averages
RELATIVE SIZE OF FIRM 213
OTHER LIBRARY SOURCES 213
Ward’s Business Directory • Standard & Poor’s Stock Reports • Standard &
Poor’s Register of Corporations, Directors, and Executives • Standard &
Poor’s Analyst’s Handbook • Standard & Poor’s Standard Corporation
Descriptions, Plus News (Corporation Records) • Standard & Poor’s Security Owner’s
Stock Guide • Standard & Poor ’s Statistical Service • Standard & Poor’s Net
Advantage • Mergent Dividend Record and Standard & Poor’s Annual Dividend
Record • D&B
®
Million Dollar Directory
®
• Directory of Corporate
Affiliations
™
• Thomas Register of American Manufacturers • Mergent
Industrial Manual and News Reports • D&B Reference Book of Corporate
Managements • Compact Disclosure • Lexis-Nexis
THE USERS OF FINANCIAL STATEMENTS 215
SUMMARY 216 / QUESTIONS 216 / PROBLEMS 217

WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 220
TO THE NET CASE 221
Chapter 6 Liquidity of Short-Term Assets; Related Debt-Paying Ability 223
CURRENT ASSETS, CURRENT LIABILITIES, AND THE
OPERATING CYCLE 223
Cash • Marketable Securities • Receivables • Inventories • Prepayments • Other
Current Assets • Current Liabilities
CURRENT ASSETS COMPARED WITH CURRENT LIABILITIES 242
Working Capital • Current Ratio • Acid-Test Ratio (Quick Ratio) • Cash Ratio
OTHER LIQUIDITY CONSIDERATIONS 246
Sales to Working Capital (Working Capital Turnover) • Liquidity Considerations
Not on the Face of the Statements
SUMMARY 248 / QUESTIONS 249 / PROBLEMS 250 / CASES 263
Case 6-1 Strength of Steel 263
Case 6-2 Rising Prices, A Time to Switch Off LIFO? 265
Case 6-3 Imaging 266
Case 6-4 Technology 268
Case 6-5 Booming Retail 271
Case 6-6 Greetings 271
Case 6-7 LIFO – Tax, U.S. GAAP and IFRS Implications 274
Case 6-8 Specialty Retailer – Liquidity Review 275
Case 6-9 Eat at My Restaurant – Liquidity Review 276
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 276
TO THE NET CASE 276
xii
CONTENTS
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Chapter 7 Long-Term Debt-Paying Ability 278
INCOME STATEMENT CONSIDERATION WHEN DETERMINING

LONG-TERM DEBT-PAYING ABILITY 278
Times Interest Earned • Fixed Charge Coverage
BALANCE SHEET CONSIDERATION WHEN DETERMINING LONG-TERM
DEBT-PAYING ABILITY 282
Debt Ratio • Debt/Equity Ratio • Debt to Tangible Net Worth Ratio • Other
Long-Term Debt-Paying Ability Ratios
SPECIAL ITEMS THAT INFLUENCE A FIRM’S LONG-TERM
DEBT-PAYING ABILITY 288
Long-Term Assets versus Long-Term Debt • Long-Term Leasing • Pension Plans •
Postretirement Benefits Other Than Pensions
JOINT VENTURES 295
CONTINGENCIES 297
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS
OF CREDIT RISK 297
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS 298
SUMMARY 300 / QUESTIONS 300 / PROBLEMS 301 / CASES 309
Case 7-1 Outsourced Services 309
Case 7-2 Global Provider 311
Case 7-3 Committed to Saving People Money 313
Case 7-4 Lockout 314
Case 7-5 Safe – Many Employers 315
Case 7-6 Safe – Retirement Benefits 316
Case 7-7 Specialty Coffee 318
Case 7-8 Transaction Printers 318
Case 7-9 Ready-to-Eat 319
Case 7-10 Specialty Retailer – Debt View 319
Case 7-11 Eat at My Restaurant – Debt View 320
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 321
TO THE NET CASE 321

Chapter 8 Profitability 323
PROFITABILITY MEASURES 323
Net Profit Margin • Total Asset Turnover • Return on Assets • DuPont Return
on Assets • Interpretation Through DuPont Analysis • Variation in Computation
of DuPont Ratios Considering Only Operating Accounts • Operating Income Margin •
Operating Asset Turnover • Return on Operating Assets • Sale s to Fixed Assets •
Return on Investment (ROI) • Return on Total Equity • Return on Common Equity •
The Relationship Between Profitability Ratios • Gross Profit Margin
TRENDS IN PROFITABILITY 334
SEGMENT REPORTING 335
REVENUES BY MAJOR PRODUCT LINES 335
GAINS AND LOSSES FROM PRIOR PERIOD ADJUSTMENTS 335
COMPREHENSIVE INCOME 339
PRO-FORMA FINANCIAL INFORMATION 340
INTERIM REPORTS 341
SUMMARY 342 / QUESTIONS 342 / PROBLEMS 343 / CASES 353
Case 8-1 Jeff’s Self-Service Station 353
Case 8-2 Diversified Manufacturer 354
CONTENTS
xiii
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Case 8-3 Leading Roaster 354
Case 8-4 Certified Organic 355
Case 8-5 Digital Media 357
Case 8-6 Return on Assets – Industry Comparison 359
Case 8-7 Name the Industry 360
Case 8-8 Specialty Retailer – Profitability View 361
Case 8-9 Eat at My Restaurant – Profitability View 362
Case 8-10 Eat at My Restaurant – Profitability View – Comprehensive income included 362

WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 363
TO THE NET CASE 363
Chapter 9 For the Investor 365
LEVERAGE AND ITS EFFECTS ON EARNINGS 365
Definition of Financial Leverage and Magnification Effects • Computing the Degree
of Financial Leverage • Summary of Financial Leverage
EARNINGS PER COMMON SHARE 368
PRICE/EARNINGS RATIO 369
PERCENTAGE OF EARNINGS RETAINED 369
DIVIDEND PAYOUT 370
DIVIDEND YIELD 371
BOOK VALUE PER SHARE 372
STOCK OPTIONS (STOCK-BASED COMPENSATION) 372
RESTRICTED STOCK 375
STOCK APPRECIATION RIGHTS 375
SUMMARY 376 / QUESTIONS 376 / PROBLEMS 377 / CASES 383
Case 9-1 Forest Products 383
Case 9-2 Integrated Electronics 385
Case 9-3 Global Diversified Financial Services 387
Case 9-4 Family Style 387
Case 9-5 Delicious Apple 389
Case 9-6 Specialty Retailer—Investor View 390
Case 9-7 Eat at My Restaurant—Investor View 391
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 391
TO THE NET CASE 391
Chapter 10 Statement of Cash Flows 393
BASIC ELEMENTS OF THE STATEMENT OF CASH FLOWS 394
FINANCIAL RATIOS AND THE STATEMENT OF CASH FLOWS 401
Operating Cash Flow/Current Maturities of Long-Term Debt and Current
Notes Payable • Operating Cash Flow/Total Debt • Operating Cash Flow per

Share • Operating Cash Flow/Cash Dividends
ALTERNATIVE CASH FLOW 403
PROCEDURES FOR DEVELOPMENT OF THE STATEMENT OF
CASH FLOWS 403
SUMMARY 409 / QUESTIONS 409 / PROBLEMS 410 / CASES 423
Case 10-1 Travel Company 423
Case 10-2 Cash Flow – The Direct Method 424
Case 10-3 Web Site 425
Case 10-4 The Retail Mover 426
xiv
CONTENTS
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Case 10-5 Noncash Charges 429
Case 10-6 Cash Movements and Periodic Income Determination 431
Case 10-7 The Big.Com 432
Case 10-8 Glass Containers 433
Case 10-9 Specialty Retailer 435
Case 10-10 Eat At My Restaurant – Cash Flow 435
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 436
TO THE NET CASE 436
Summary Analysis Nike, Inc. (Includes 2011 Financial Statements
of Form 10-K) 438
NIKE–BACKGROUND INFORMATION 438
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (See 10-K, Item 7, In Part) • Vertical Common-Size Statement
of Income (Exhibit 1) • Horizontal Common-Size Statement of Income
(Exhibit 2) • Three-Year Ratio Comparison (Exhibit 3) • Ratio Comparison
with Selected Competitor (Exhibit 4) • Selected Competitor • Ratio Comparison with Industry
(Exhibit 5) • Summary • Nike 2011 (Exhibit 12-1)

Chapter 11 Expanded Analysis 482
FINANCIAL RATIOS AS PERCEIVED BY COMMERCIAL LOAN
DEPARTMENTS 482
Most Significant Ratios and Their Primary Measure • Ratios Appearing Most
Frequently in Loan Agreements
FINANCIAL RATIOS AS PERCEIVED BY CORPORATE
CONTROLLERS 484
Most Significant Ratios and Their Primary Measure • Key Financ ial Ratios
Included as Corporate Objectives
FINANCIAL RATIOS AS PERCEIVED BY CERTIFIED PUBLIC
ACCOUNTANTS 486
FINANCIAL RATIOS AS PERCEIVED BY CHARTERED FINANCIAL
ANALYSTS 486
FINANCIAL RATIOS USED IN ANNUAL REPORTS 487
DEGREE OF CONSERVATISM AND QUALITY OF EARNINGS 488
Inventory • Fixed Assets • Intangible Assets • Pensions
FORECASTING FINANCIAL FAILURE 489
Univariate Model • Multivariate Model • Nike Z Score
ANALYTICAL REVIEW PROCEDURES 492
MANAGEMENT’S USE OF ANALYSIS 492
USE OF LIFO RESERVES 493
Note 4—Inventories
GRAPHING FINANCIAL INFORMATION 494
MANAGEMENT OF EARNINGS 496
THE HOUSING BUST 499
VALUATION 500
Multiples • Multiperiod Discounted Valuation Models • What They Use • International
Aspects • Valuation as Seen by Management Consultants • From Page V • Dot.coms
SUMMARY 504 / QUESTIONS 505 / PROBLEMS 506 / CASES 522
Case 11-1 Smoke and Smokeless 522

Case 11-2 Accounting Hocus-Pocus 525
CONTENTS
xv
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Case 11-3 Turn a Cheek 527
Case 11-4 Books Unlimited—Part 1 528
Case 11-5 Books Unlimited—Part 2 531
Case 11-6 Value—Nike, Inc. 535
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 537
TO THE NET CASE 537
Chapter 12 Special Industries: Banks, Utilities, Oil and Gas, Transportation,
Insurance, and Real Estate Companies 540
BANKS 540
Balance Sheet • Liabilities • Shareholders’ Equity •
Income Statement • Ratios for Banks
REGULATED UTILITIES 551
Financial Statements • Ratios for Regulated Utilities
OIL AND GAS 558
Successful-Efforts versus Full-Costing Methods • Supplementary Information
on Oil and Gas Exploration, Development, and Production Activities • Cash Flow
TRANSPORTATION 560
Financial Statements • Ratios
INSURANCE 564
Balance Sheet Under GAAP • Assets • Assets—Other than Investments •
Income Statement Under GAAP • Ratios
REAL ESTATE COMPANIES 570
SUMMARY 570 / QUESTIONS 571 / PROBLEMS 572 / CASES 577
Case 12-1 AFUDC Equity and Debt 577
Case 12-2 Results of Operations for Oil and Gas Producing Activities 581

Case 12-3 Financial Services Provider 582
Case 12-4 Attracting Deposits 582
Case 12-5 Covered 585
WEB CASE: THOMSON ONE BUSINESS SCHOOL EDITION 586
TO THE NET CASE 586
Chapter 13 Personal Financial Statements and Accounting for Governments
and Not-for-Profit Organizations 588
PERSONAL FINANCIAL STATEMENTS 588
Form of the Statements • Suggestions for Reviewing the Statement of Financial
Condition • Suggestions for Reviewing the Statement of Changes in Net Worth •
Illustration of Preparation of the Statement of Financial Condition • Illustration of
Preparation of the Statement of Changes in Net Worth
ACCOUNTING FOR GOVERNMENTS 592
ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS OTHER THAN
GOVERNMENTS 597
1. SFAS No. 93, “Recognition of Depreciation By Not-for-Profit Organizations”•2. SFAS
No. 116, “Accounting for Contributions Received and Contributions Made”•3. SFAS
No. 117, “Financial Statements of Not-for-Profit Organizations”•4. SFAS No. 124,
“Accounting for Certain Investments Held By Not-for-Profit Organizations”•Applicability of
GAAP to Not-for-Profit Organizations • Budgeting by Objectives and/or Measures of
Productivity
xvi
CONTENTS
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deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
SUMMARY 602 / QUESTIONS 602 / PROBLEMS 603 / CASES 609
Case 13-1 Deficit Budget? 609
Case 13-2 My Mud Hens 609
Case 13-3 Jeep 611
Case 13-4 Governor Lucas—This Is Your County 612

Case 13-5 County-Wide 612
TO THE NET CASE 613
Appendix Thomson ONE Basics and Tutorial 615
Glossary 621
Bibliography 641
Index 653
CONTENTS
xvii
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deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface
T
his book teaches financial accounting from both the user’s and the preparer’s perspec-
tives. It includes the language and the preparation of financial statements. Reliance is
placed on actual annual reports, 10-Ks, and proxy statements. Sufficient background
material is included, facilitating its use for students who do not have prior courses in
accounting or finance.
Tell me, I’ll forget.
Show me, I may remember.
Involve me, I’ll understand.
This proverb describes the approach of this book —involving students in actual financial
statements and their analysis and interpretation. Its premise is that students are better pre-
pared to understand and analyze real financial reports when learning is not based on over-
simplified financial statements.
From this basic premise come the many changes to this edition. Those changes, sup-
ported by our technology tools, focus on the goal of this text, which is to involve students in
actively learning how to read, understand, and analyze the financial statements of actual
companies. These changes are discussed in this preface.

Significant Items
The following notable items are available in this edition to increase its relevance to students
and its flexibility for instructors:
1. Coverage of ethics has been expanded.
2. International accounting has been updated to reflect the substantial changes that have
taken place. This includes model financial statements.
3. Internet exercises have been updated and new exercises added.
4. Questions have been updated and new questions added.
5. Problems have been updated and new problems added.
6. Where appropriate, cases have been updated and new cases added. This includes more
than 70 revised and new cases.
7. Exhibits and cases are extensively based on real companies to which students would
relate.
xix
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deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
• Access to Thomson ONE—Business School Edition
™
This high-tech feature is available
with every new book. This access to a version of the professional research tool allows
students to become familiar with the software that is used in practice. Chapter cases on
the text Web site, for every chapter with the exception of Chapter 13, walk users step-
by-step through those databases as they learn how to access financial information cov-
ered in the text. Thomson ONE—Business School Edition provides information on 500
companies, combining a full range of fundamental financials, earnings estimates, market
data, and source documents with powerful functionality.
Market index information is available for a variety of indexes. The database gives
you the ability to compare firms against their peers in a portfolio context. There are
detailed historical and current financial statements from several different sources. Also
available as summary information is financial ratio analysis. Historical stock price infor-

mation and analysis, along with earnings estimates, is presented. Both fundamental and
technical financial analysis is provided. Recent news reports are available. Filings the
company has made with the SEC, such as 10-K and 10-Q, are also available.
The Thomson ONE—Business School Edition provides information on market
indexes such as the Dow Jones Industrial Average and the Standard and Poor’s 500.
It also provides a powerful and customizable report-writing function that enables you
to develop custom financial reports for the firm.
• FinSAS Financial Statement Analysis Spreadsheets (by Donald V. Saftner, University of
Toledo) allow students to perform analysis on any set of financial statements using the
ratios covered in the text. Users enter income statement, balance sheet, and other data
for two to five years. The result is a 2- to 5-year ratio comparison by liquidity, long-term
debt-paying ability, profitability, and investor analysis. The result also includes
common-size analysis of the income statement (horizontal and vertical) and common-
size analysis of the balance sheet (horizontal and vertical). Downloadable in Excel
®
from
the product Web site through CengageBrain.com, FinSAS can save users hours of num-
ber crunching, allowing them to concentrate on analysis and interpretation.
• Flexible (by Donald V. Saftner, University of Toledo) is designed to accompany and
complement FinSAS. Flexible allows for common-size analysis (horizontal and vertical)
of any financial schedule as well as statements. Flexible can be used to analyze financial
statements (common-size) in a different format (user-defined) from the format of Fin-
SAS. Downloadable in Excel
®
from the product Web site through CengageBrain.com,
like FinSAS, Flexible can save users hours of number crunching, allowing them to con-
centrate on analysis and interpretation.
Actual Companies
The text explains financial reporting differences among industries, including manufacturing,
retailing, service firms, and regulated and nonregulated industries. The text also covers

personal financial reports and financial reporting for governments and other not-for-profit
institutions.
Statements of actual companies are used in illustrations, cases, and “To the Net” cases.
The actual financial statements highlight current financial reporting problems, including
guidelines for consolidated statements, stock-based compensation, postretirement benefits,
and the harmonization of international accounting standards.
Extensive Use of One Firm
An important feature of this text is the extensive use of one firm, Nike, Inc., as an illustra-
tion. By using Nike’s 2011 financial report and industry data, readers become familiar with
a typical competitive market and a meaningful example for reviewing financial statement
analysis as a whole. (See Chapters 6 through 10 and Summary Analysis—Nike, Inc.)
xx
PREFACE
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Flexible Organization
This text is used in a variety of courses with a variety of approaches. It provides the flexibil-
ity necessary to meet the needs of accounting and finance courses varying in content and
length. Sufficient text, questions, “To the Net” Web site cases, problem materials and cases
are presented to allow the instructor latitude in the depth of coverage. Ac cess to Thomson
ONE—Business School Edition
™
is also included with every new book. Accounting princi-
ples are the basis for all discussion so that students can understand the methods used as well
as the implication for analysis. The following is an outline of our chapter coverage:
Chapter 1 develops the basic principles of accounting on which financial reports are based.
A review of the evolution of GAAP and the traditional assumptions of the accounting model
helps the reader understand the statement and thus allows for a better analysis. An extensive
review of harmonization of international accounting standards in included. Also included is
financial reporting for small and medium sized entities (SMEs).

Chapter 2 describes the forms of business entities and introduces financial reports. This
chapter also reviews the sequ ence of accounting procedures compl eted during each account-
ing period. It includes other financial reporting topics that contribute to the understanding
of financial reporting, such as the auditor’s repo rt, management’s discussion, management’s
responsibility for financial statements, and summary annual report. The efficient market
hypotheses, ethics, consolidated statements, accounting for business combinations, and the
SEC-paper filings-Edgar-XBRL are also covered.
Chapter 3 presents an in-depth review of the balance sheet, statement of stockholders’ eq-
uity, and problems in balance sheet presentation. This chapter gives special emphasis to
inventories and tangible assets. A model IFRS balance sheet has been included. Also included
are subsequent events.
Chapter 4 presents an in-depth review of the income statement, including special income
statement items. Other topics included are earnings per share, retained earnings, dividends
and stock splits, legality of distribution to stockholders, and comprehensive income. A model
IFRS balance sheet has been included.
Chapter 5 is an introduction to analysis and comparative statistics. Techniques include ratio
analysis, common-size analysis, year-to-year change analysis, financial statement variations
by type of industry, review of descriptive information, comparisons including Standard
Industrial Classification (SIC) Manual, and North American Industry Classification System
(NAICS), relative size of firm, and many library sources of industry data.
Chapter 6 covers short-term liquidity. This chapter includes suggested procedures for analyzing
short-term assets and the short-term debt-paying ability for an entity. This chapter discusses, in
detail, four very important assets: cash, marketable securities, accounts receivable, and inven-
tory. It is the first to extensively use Nike as an illustration.
Chapter 7 covers long-term debt-paying ability. This includes the income statement considera-
tion and the balance sheet consideration. Topics include long-term leasing, pension plans, joint
ventures, contingences, financial instruments with off-balance sheet risk, financial instruments
with concentrations of credit risk, and disclosures about fair value of financial instruments.
Chapter 8 covers the analysis of profitability, which is a vital concern to stockholders, cred-
itors, and management. Besides profitability ratios, this chapter covers trends in profitability,

segment reporting, gains and losses from prior period adjustments, comprehensive income,
pro forma financial information, and interim reports.
Chapter 9, though not intended as a comprehensive guide to investment analysis, introduces
analyses useful to investors. Besides ratios, this chapter covers leverage and its effect on earn-
ings, earnings per share, stock-based compensations, and stock appreciation rights.
Chapter 10 reviews the statement of cash flows, including ratios that relate to this statement.
This chapter also covers procedures for developing the statement of cash flows.
PREFACE
xxi
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
A summary analysis of Nike is presented after Chapter 10, along with the Ni ke 2011 finan-
cial statements. The summary analysis includes Nike background information.
Chapter 11 covers an expanded utility of financial ratios. This includes the perception of fi-
nancial ratios, the degree of conservatism and quality of earnings, forecasting financial fail-
ure, and analytical review procedures, management’s use of analysis, use of LIFO reserves,
graphing financial information, management of earnings, and valuation.
Chapter 12 covers problems in analyzing six specialized industries: banks, utilities, oil and
gas, transportation, insurance, and real estate. The chapter notes the differences in state-
ments and suggests changes or additions to their analysis.
Chapter 13 covers personal financial statements and financial reporting for governments
and other not-for-profit institutions.
A very extensive glossary defines terms explained in the text and terms frequently found in
annual reports and the financial literature. The text also includes a bibliography of referen-
ces that can be used in exploring further topics in the text.
Student Resources via CengageBrain.com
Students and instructors have immediate access to financial statement analysis and class-
room tools needed for the course at CengageBrain.com. Through this Web site, you will find
the following supplementary materials available to both instructors and students:
• FinSAS—financial statement analysis spreadsheets (both blank and sample Nike ver-

sions) designed to perform analysis using ratios covered in the text.
• Flexible—allows for common-size analysis (horizontal and vertical) of any financial
schedule as well as statements.
• Thomson ONE—Business School Edition
™
—provides online cases tied to the book’ s
chapter content for users of new books, utilizing its powerful suite of research tools for
500 companies.
• Study Tools—such as an interactive quiz, flashcards and crossword puzzle.
Instructor Resources via
Instructors should login through to access the following,
password-protected resources:
• Solutions Manual—prepared by the author and includes a suggested solution for each
question, problem, case.
• PowerPoint
®
Slides—available to enrich classroom teaching of concepts and practice.
• Test Bank—prepared by the author and includes problems, multiple-choice, true/false, and
other objective material for each chapter. The Test Bank is available in Microsoft
®
Word.
All Test Bank questions are now tagged by level of difficulty, topic, Bloom’sTaxonomy,
AICPA, ACBSP and other business program standards to allow greater guidance in devel-
oping assessments and evaluating student progress.
• Thomson ONE—Business School Edition
™
—suggested solutions to the online cases.
• Instructor’s Resource CD-ROM—The IRCD includes the entire instructor resource pack-
age on one convenient disc. Included are the Solutions Manual (including the To The Net
case solutions as well as solutions to the Thomson ONE online cases), the PowerPoint

®
Slides, ExamView
®
testing software, a computerized version of the Test Bank, as well as the
Test Bank in Microsoft
®
Word files. FinSAS and Flexible will also accompany the IRCD.
Acknowledgments
I am grateful to many people for their help and encouragement during the writing of this
book. I want to extend my appreciation to the numerous firms and organizations that granted
xxii
PREFACE
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
permission to reproduce their material. Special thanks go to the American Institute of Certified
Public Accountants, the Institute of Certified Management Accountants, and the Financial
Accounting Standards Board. Permission has been received from the Institute of Management
Accountants to use questions and/or unofficial answers from past CMA examinations.
I am grateful to the following individuals for their useful and perceptive comments dur-
ing the making of the thirteenth edition:
• Pamela Benner, Stark State College
• Charles Pendola, St. Joseph’s College
• Michael Flores, Wichita State University
• Timothy Dimond, Northern Illinois University
• William Mesa, Colorado Christian University
• Lawrence Gamble, Mountainstate University
• Frank DeGeorge, West Virginia University
• Deborah Leitsch, Goldey-Beacom College
• William Hahn, Southeastern University
• Antoinette Clegg, Northwood University and Delta College

• Hongxia Wang, Ashland University
• Richard Dumont, Post University
• Maryln Fisher, Regis University
I am very grateful to Donald Safner (University of Toledo) for his careful, timely, and
effective revision of the FinSAS spreadsheet tool and Flexible for this edition, and to Timothy
Dimond (Northern Illinois University) for his careful textbook review.
Charles H. Gibson
Actual Companies and Organizations
Real-world business examples are used extensively in the text, illustrations, and cases.
AAII
Abbott Laboratories
Abercrombie & Fitch Co.
Advanced Micro Devices, Inc.
Air Products and Chemicals, Inc.
AK Steel Holding Corporation
Alexander & Baldwin, Inc.
Alliant Energy Corp.
Amazon.com, Inc.
American Accounting Association
American Greetings
American Institute of Certified Public
Accountants (AICPA)
Ann Taylor Stores Corp.
Apple, Inc.
Arden Group, Inc.
AT&T, Inc.
BancFirst Corporation
Belden
Best Buy, Inc.
Boeing

Borders Group
Boston Celtics
Briggs & Stratton
Bristol-Myers Squibb Company
CA, Inc., and Subsidiaries
Camden National Corporation
Carlisle Companies Incorporated
CenturyLink, Inc.
China Unicome (Hong Kong)
Limited
Chubb Corporation
Citigroup, Inc.
City of Toledo, Ohio
Columbia Bancorp
Conoro Phillips
Convergys Corporation
Cooper Tire & Rubber Company
Costco Wholesale Corporation
Crane Co.
Cummins, Inc.
Dell, Inc.
Deloitte Touche Tohmatsu Limited
D.R. Horton
Dynatronics
Eastman Kodak Company
Emerging Issues Task Force (EITF)
Exxon Mobil
FASB Accounting Standards
Codification
™

(Codification)
FedEx Corporation
Financial Accounting Foundation
(FAF)
Financial Accounting Standards
Advisory Council (FASAC)
Financial Accounting Standards
Board (FASB)
Flowers Food Inc.
Freeport-McMoran Cooper & Gold,
Inc.
Frisch’s Restaurants, Inc.
Ford Motor Co.
Gap, Inc.
Gentex Corporation
PREFACE
xxiii
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.