Download More ebooks [PDF]. Format PDF ebook download PDF KINDLE.

Full download ebooks at ebookmass.com

Financial Reporting and Analysis 7th

Edition, (Ebook PDF)

For dowload this book click BUTTON or LINK below

https://ebookmass.com/product/financial-reporting-
and-analysis-7th-edition-ebook-pdf/

OR CLICK BUTTON

DOWLOAD NOW

Download More ebooks from https://ebookmass.com

More products digital (pdf, epub, mobi) instant
download maybe you interests ...

Financial Reporting and Analysis 13th Edition, (Ebook

PDF)

https://ebookmass.com/product/financial-reporting-and-
analysis-13th-edition-ebook-pdf/

(eBook PDF) International Financial Reporting &

Analysis 8th Edition

https://ebookmass.com/product/ebook-pdf-international-financial-
reporting-analysis-8th-edition/

Financial Reporting & Analysis 8th Edition Lawrence

Revsine

https://ebookmass.com/product/financial-reporting-analysis-8th-
edition-lawrence-revsine/

International Financial Reporting 7th edition Alan

Melville

https://ebookmass.com/product/international-financial-
reporting-7th-edition-alan-melville/
Financial reporting, financial statement analysis, and
valuation: a strategic perspective 9E Edition Baginski

https://ebookmass.com/product/financial-reporting-financial-
statement-analysis-and-valuation-a-strategic-
perspective-9e-edition-baginski/

Financial Reporting, Financial Statement Analysis and

Valuation, 10e 10th Edition James M. Wahlen

https://ebookmass.com/product/financial-reporting-financial-
statement-analysis-and-valuation-10e-10th-edition-james-m-wahlen/

Financial Statements: Analysis and Reporting 1st ed.

Edition Felix I. Lessambo

https://ebookmass.com/product/financial-statements-analysis-and-
reporting-1st-ed-edition-felix-i-lessambo/

Financial Statements: Analysis, Reporting and Valuation

2nd Edition Felix I. Lessambo

https://ebookmass.com/product/financial-statements-analysis-
reporting-and-valuation-2nd-edition-felix-i-lessambo/

Global Financial Accounting and Reporting: Principles

and Analysis 4th Edition Walter Aerts

https://ebookmass.com/product/global-financial-accounting-and-
reporting-principles-and-analysis-4th-edition-walter-aerts/
Preface

O
ne of our objectives in writing this book is to help students become skilled preparers
and informed consumers of financial statement information. The financial reporting
environment today is particularly challenging. Accountants, auditors, and financial
analysts must not only know the reporting practices that apply in the United States (U.S.
GAAP), they must also be aware of the practices allowed in other countries under
­International Financial Reporting Standards (IFRS). We believe it is essential for students to
comprehend the key similarities and differences between current U.S. GAAP and IFRS.
The challenge is compounded by two major changes in accounting standards—for leasing and
revenue recognition. The new leasing standard is a break from recent convergence efforts by the
Financial Accounting Standards Board (FASB) and the International Accounting Standards Board
(IASB). While the FASB preserved the notion of a dual model for leases, albeit with major
changes to one of the models, the IASB moved to a single model. As a result, for some companies,
financial statements will look substantially different under U.S. GAAP than they would under
IFRS. The new revenue recognition standard, in contrast, is substantially converged, but it will still
challenge students and faculty alike to consider the question of when to recognize revenue under a
completely different framework than they have in the past. We discuss both of these new standards
in depth in the Seventh edition.
Our other objective in writing this book is to change the way the second-level course in
financial accounting is taught, both to graduate and undergraduate students. Typically this
course—often called Intermediate Accounting or Corporate Financial Reporting—focuses on
the details of GAAP with little emphasis placed on understanding the economics of business
transactions or how financial statement readers use the resultant numbers for decision making.
Traditional accounting texts are encyclopedic in nature and approach, lack a unifying theme,
and emphasize the myriad of intricate accounting rules and procedures that could soon become
outdated by new standards.
In contrast, we wrote Financial Reporting & Analysis, Seventh Edition, to foster a “critical
thinking” approach to learning the subject matter. Our approach develops students’ understand-
ing of the environment in which financial reporting choices are made, what the options are,
how accounting information is used for various types of decisions, and how to avoid misusing
financial statement data. We convey the exciting nature of financial reporting in two stages.
First, we provide a framework for understanding management’s accounting choices, the effect
those choices have on the reported numbers, and how financial statement information is used in
valuation and contracting. Business contracts, such as loan agreements and management com-
pensation agreements, are often linked to accounting numbers. We show how this practice cre-
ates incentives for managers to exploit the flexibility in financial reporting standards to
“manage” the reported accounting numbers to benefit themselves or shareholders. Second, we
integrate current real-world financial statements and events into our discussions to illustrate
vividly how financial statements affect contracts and reveal the financial health of a firm. To
prepare students for future business and accounting challenges, we focus on fundamental mea-
surement and reporting issues surrounding business transactions.
An important feature of our approach is that it integrates the perspectives of accounting,
corporate finance, economics, and critical analysis to help students grasp how business transac-
tions get reported and understand the decision implications of financial statement numbers. We
cover all of the core topics of intermediate accounting as well as several topics often found in
vii
viii Preface

advanced accounting courses, such as consolidations, joint venture accounting, and foreign cur-
rency translation. For each topic, we describe the underlying business transaction, the GAAP
guidelines that apply, how the guidelines are implemented in practice, and how the financial
statements are affected. We then go a step further and ask: What do the reported numbers mean?
Does the accounting process yield numbers that faithfully present the underlying economic situ-
ation of a company? And, if not, what can financial statement users do to overcome this limita-
tion in order to make more informed decisions? A Global Vantage Point discussion then
summarizes the key similarities and differences between U.S. GAAP and IFRS, and previews
potential changes to both.
Our book is ideal for professionals who use financial statements for making decisions. Our
definition of financial statement “users” is broad and includes lenders, equity analysts, invest-
ment bankers, boards of directors, and others charged with monitoring corporate performance
and the behavior of management. As such, it includes auditors who establish audit scope and
conduct analytical review procedures to spot problem areas in external financial statements. To
be effective, auditors must understand the incentives of managers, how the flexibility of U.S.
GAAP and IFRS accounting guidance can be exploited to conceal rather than reveal underlying
economics, and the potential danger signals that should be investigated. Our intent is to help
financial statement readers learn how to perform better audits, improve cash flow forecasts,
undertake realistic valuations, conduct better comparative analyses, and make more informed
evaluations of management.
Financial Reporting & Analysis, Seventh Edition, provides instructors with a teaching/learning
approach for achieving goals stressed by professional accountants and analysts. Our book is
designed to instill capacities for thinking in an abstract, logical manner; solving unstructured prob-
lems; understanding the determining forces behind management accounting choices; and instilling
an integrated, cross-disciplinary view of financial reporting. Text discussions are written, and exer-
cises, problems, and cases are carefully chosen, to help achieve these objectives without sacrificing
technical underpinnings. Throughout the book, we explain in detail the source of the numbers, the
measurement methods used, and how transactions are recorded and presented. We have strived to
provide a comprehensive user-oriented focus while simultaneously helping students build a strong
technical foundation.

Key Changes in the Seventh Edition

The first six editions of our book have been widely adopted in business schools throughout the
United States, Canada, Europe, and the Pacific Rim. Our book has been used successfully at both
the graduate and undergraduate levels, and in investment banking, commercial lending, and other
corporate training programs. Many of our colleagues who used the first six editions have provided
us with valuable feedback. Based on their input, we have made a number of changes in this edition
of the book to achieve more effectively the objectives outlined above.
Key changes ­include the following:
∙ Complete rewrite of Chapter 3 for the new revenue recognition standard.
∙ Complete rewrite of Chapter 12 for the new leasing standard.
∙ Expanded coverage of analysis and income taxes throughout the text.
∙ New end-of-book appendix on Segment Reporting.
∙ New or updated company examples throughout the book.
∙ New and revised end-of-chapter materials including exercises, problems, and cases tied to
Global Vantage Point sections and new FASB and IASB standards.
∙ Updated Global Vantage Point sections
∙ Identify key differences between U.S. GAAP and IFRS.
∙ Discuss financial statement excerpts of companies that follow IFRS.
∙ Summarize proposed new accounting standards issued by the FASB and/or the IASB.
∙ Incorporation of all FASB and IASB standards, exposure drafts, and discussion papers
released through August 2016.
 Rev.Confirming Pages

Preface ix

Chapter Revision Highlights

Chapter 1: The Economic and Institutional Setting for Chapter 6: The Role of Financial Information in Valuation
­Financial Reporting and Credit Risk Assessment
∙ Streamlined discussion of Why Financial Statements Are ∙ Updated exhibits from company reports throughout the
Important and Incentive Conflicts and Financial Reporting. chapter.
∙ Updated the Conceptual Framework discussion for the 2015
Chapter 7: The Role of Financial Information in Contracting
Proposed ASU on materiality.
∙ Updated exhibits from company reports throughout the
∙ Updated the discussion on IFRS and differences between
chapter.
IFRS and U.S. GAAP.
∙ Updated the chapter appendix on U.S. GAAP for the Private Chapter 8: Receivables
Company Decision-Making Framework. ∙ Updated the Global Vantage Point section for recent work by
the IASB and FASB on Financial Instruments.
Chapter 2: Accrual Accounting and Income Determination
∙ Updated chapter for ASU 2014-09 (revenue recognition) and
∙ Restructured the chapter to include all material on the
ASU 2015-01 (extraordinary items).
income statement, except for revenue recognition.
∙ Streamlined receivable analysis discussion.
∙ Updated to reflect the elimination of extraordinary item
treatment of gains and losses under U.S. GAAP. ∙ Updated securitization and financial crisis discussion for
lawsuit settlements and provided additional reference
∙ Updated to reflect new requirements for discontinued opera-
materials.
tions treatment.
∙ Included Chesapeake Energy Corporation disclosures in the
∙ Updated exhibits from company reports throughout the
troubled debt restructuring section.
chapter.
Chapter 3: Revenue Recognition Chapter 9: Inventories
∙ Completely new chapter discusses in depth the new revenue ∙ Updated Lower of Cost or Market discussion for
recognition standard and its 5-step model for determining ASU 2015-11.
when to recognize revenue. ∙ New BlackBerry Limited illustration of inventory
∙ Discusses issues involved in the implementation of the new impairment.
standard. ∙ Revised primary LIFO example to be in an environment of
∙ Discusses expected financial statement effects of the new rising prices.
standard. ∙ Moved discussion of absorption and variable costing into an
∙ All new end-of-chapter material tailored to the new standard. appendix.
∙ Because the existing revenue recognition standards will ∙ Updated LIFO reserve and tax statistics.
remain in effect through 2017, the chapter continues to ∙ Updated illustrations throughout chapter.
include a discussion of existing revenue recognition standards. ∙ Updated Global Vantage Point section.
Chapter 4: Structure of the Balance Sheet and Statement of Chapter 10: Long-Lived Assets
Cash Flows ∙ Updated and expanded Global Vantage Point section on the
∙ Restructured chapters 4 and 17 to eliminate redundancies. differences between U.S. GAAP and IFRS.
∙ Chapter 4 covers the structure of the cash flow statement and ∙ New ExxonMobil interest capitalization illustration.
how it is derived. The cash flow effects of more complex ∙ Updated financial statement illustrations throughout chapter.
transactions are deferred to chapter 17, after those transac-
∙ New cases on capitalization of interest and asset impairment.
tions have been covered.
∙ New Disney purchase price allocation illustration.
∙ The appendix previously appearing in chapter 17 is now in
chapter 4. It describes how to use a spreadsheet to create a ∙ Added and updated new problems and cases.
cash flow statement in a more compact format than a tradi- Chapter 11: Financial Instruments and Liabilities
tional t-account analysis.
∙ Updated chapter for ASU 2015-01 (extraordinary items),
∙ Updated exhibits from company reports throughout the ASU 2015-03 (debt issue costs), ASU 2016-01 (fair
chapter. value option),and IFRS 9 (fair value option and
Chapter 5: Essentials of Financial Statement Analysis hedging).
∙ Updated the comprehensive Whole Foods financial analysis. ∙ Streamlined coverage of debt-for-debt transactions.
∙ Updated exhibits from company reports throughout the ∙ Removed discussion of off-balance-sheet issues addressed in
chapter. Chapter 16.

rev22651_fm_i-xxvi.indd ix 06/19/17 03:24 PM

 Rev.Confirming Pages

x Preface

∙ Replaced Dentsply with Chesapeake Energy for the debt ∙ Updated statistics related to total pension plan assets, dis-
note analysis. count and expected rate of return assumptions, and plan
∙ Revised figures, added figures, and revised discussion in the funded status.
hedging section. ∙ Revised analysis for GE by condensing discussion of
∙ Revised and added exercises, problems, and cases. changes in plan assets and plan liabilities and updating for
2014 information.
Chapter 12: Financial Reporting for Leases
∙ Revised exercises and problems and added new financial
∙ Provided more intuition on the economics of leasing at the ­statement based cases.
beginning of the chapter.
∙ Revised the main lessor example to match the discount rate Chapter 15: Financial Reporting for Owners’ Equity
in the main lessee example. ∙ Updated or replaced examples throughout chapter.
∙ Expanded discussion of uneven lease payments and rent ∙ Expanded section on interpreting shareholders’ equity on the
holidays. balance sheet and the statement of shareholders’ equity.
∙ Streamlined discussion of lessor accounting. ∙ Expanded discussion of stock option pricing models.
∙ Provided separate discussions of ASU 2016-02 (ASC 842) ∙ Added a new section on taxation of share-based
and IFRS 16 within the lessee and lessor sections. ­compensation that includes a discussion of ASU 2016-09.
∙ Updated comparison of operating and capital lease ∙ Added a new section on interpreting the share-based
­obligations by industry. ­compensation disclosures of Whole Foods.
∙ Updated Whole Foods example for illustrating disclosure ∙ Added exercises, problems, and cases on EPS and
and constructive capitalization. ­share-based compensation.
∙ Changed approach in appendix to estimate effects of Chapter 16: Intercorporate Investments
both ASU 2016-02 and IFRS 16. ∙ Added discussion of forthcoming change in accounting for
∙ Revised exercises, problems, and cases so that more than minority-passive equity investments.
half of them address ASU 2016-02 or IFRS 16. ∙ Streamlined the discussion of merger and acquisition
Chapter 13: Income Tax Reporting accounting under previously-permitted methods (purchase
accounting and pooling of interests).
∙ Added discussion of semantics commonly used in discus-
sions about income taxes. ∙ Updated exhibits from company reports throughout the
chapter.
∙ Added discussion of corporate inversions.
∙ Added explanation of forthcoming change in how deferred Chapter 17: Statement of Cash Flows
tax assets and liabilities are classified as current and noncur- ∙ Streamlined the chapter by eliminating much of the overlap
rent and how they are netted against each other. with chapter 4. Chapter 17 now focuses on more complex
∙ Revised the language in the text that relates to temporary dif- transactions and reasons why the cash flow statement may
ferences in revenue recognition to conform to the new reve- not seem to articulate with the balance sheet.
nue recognition standard. ∙ Added a discussion of how the new lease standard affects the
∙ Revised the end-of-chapter material to eliminate numerous cash flow statement.
examples with scheduled tax rate changes every year, which ∙ Updated exhibits from company reports throughout the
is no longer a likely scenario. chapter.
∙ Updated exhibits from company reports throughout the Appendix B: Segment Reporting
chapter.
∙ Moved from an appendix in Chapter 5 to a book appendix to
­facilitate individual instructor approach.
Chapter 14: Pensions and Postretirement Benefits ∙ Updated Harley-Davidson example.
∙ Updated Global Vantage Point section on differences ∙ Added a ROA decomposition analysis for Harley-Davidson
­between U.S. GAAP and IFRS and included excerpts from segments.
the pension note of Siemens. ∙ Added discussion of foreign currency exchange rates and
∙ Revised the initial discussion of actuarial gains and losses effects on segment results.
and enhanced the comprehensive example to show how bal- ∙ Enhanced discussion of quantitative thresholds.
ance sheet accounts change.
∙ Added exercises and a new case.
∙ Added a figure to summarize the balance sheet effects of
pension accounting.

rev22651_fm_i-xxvi.indd x 06/19/17 03:24 PM

 Preface xi

Acknowledgments
Colleagues at Chicago, Iowa, Northwestern, and Notre Dame, as well other universities, have
served as sounding boards on a wide range of issues over the past years, shared insights, and pro-
vided many helpful comments. Their input helped us improve this book. In particular, we thank:
Jim Boatsman, Arizona State University; Brad Badertscher, Tom Frecka, Chao-Shin Liu, Bill
Nichols, and Tom Stober, University of Notre Dame; Cristi Gleason and Ryan Wilson, University
of Iowa; Tom Linsmeier, the Financial Accounting Standards Board; Larry Tomassini, The Ohio
State University; Robert Lipe, University of Oklahoma; Don Nichols, Texas Christian University;
Nicole Thibodeau, Willamette University; Paul Zarowin, New York University; and Stephen Zeff,
Rice University.
We wish to thank the following professors who assisted in the text’s development:
Lester Barenbaum, La Salle University J. William Kamas, University of Texas at
Gerhard Barone, Gonzaga University Austin
John Bildersee, New York University Frimette Kass-Schraibman, Brooklyn College
Stephen Brown, University of Maryland-­ Jocelyn Kauffunger, University of Pittsburgh
College Park Robert Kemp, University of Virginia
Sharon Borowicz, Benedictine University Adam Koch, University of Virginia
John Brennan, Georgia State University Michael Kubik, Johns Hopkins University
Philip Brown, Harding University Bradley Lail, NC State University-Raleigh
Shelly L. Canterbury, George Mason Steve C. Lim, Texas Christian University
University Chao-Shin Liu, University of Notre Dame
Jeffrey Decker, University of Don Loster, University of California—Santa
Illinois—Springfield Barbara
Doug De Vidal, University of Texas at Austin Troy Luh, Webster University
Ilia Dichev, Emory University David Marcinko, Skidmore College
Timothy P. Dimond, Northern Illinois Kathryn Maxwell (Cordova), University of
University Arizona
Joseph M. Donato, Thomas College P. Michael McLain, Hampton University
Michael T. Dugan, University of Alabama Kevin Melendrez, New Mexico State
Barbara Durham, University of Central University-Las Cruces
Florida-Orlando Krish Menon, Boston University
David O. Fricke, University of North Kyle S. Meyer, Florida State University
Carolina—Pembroke Stephen R. Moehrle, University of Missouri—
Michael J. Gallagher, Defiance College St. Louis
Lisa Gillespie, Loyola University—Chicago Brian Nagle, Duquesne University
Alan Glazer, Franklin and Marshall College Ramesh Narasimhan, Montclair State University
Cristi Gleason, University of Iowa—Iowa City Sia Nassiripour, William Paterson University
Patrick J. Griffin, Lewis University Bruce Oliver, Rochester Institute of
Paul Griffin, University of California—Davis Technology
Coby Harmon, University of California-Santa Keith Patterson, Brigham Young
Barbara University-Idaho
Donald Henschel, Benedictine University Erik Paulson, Dowling College
Richard Houston, University of Bonita Peterson-Kramer, Montana State
Alabama-Tuscaloosa University-Bozeman
James Irving, College of William & Mary Maryann Prater, Clemson University
Kurt Jesswein, Sam Houston State University Chris Prestigiacomo, University of
Gun Joh, San Diego State University—San Missouri—Columbia
Diego Richard Price, Rice University
xii Preface

Atul Rai, Wichita State University Kanaiyalal Sugandh, La Sierra University

Vernon Richardson, University of Eric Sussman, University of California—Los
Arkansas—Fayetteville Angeles
Tom Rosengarth, Bridgewater College Nicole Thibodeau, Willamette University
Eric Rothenburg, Kingsborough Community Robin Thomas, NC State University-Raleigh
College Terry Tranter, University of
Mike Sandretto, University of Minnesota-Minneapolis
Illinois—Champaign Robert Trezevant, University of Southern
Lynn Saubert, Radford University California
Paul Simko, University of Mark Trombley, University of Arizona
Virginia—Charlottesville Suneel Udpa, University of
Praveen Sinha, California State University at California—Berkeley
Long Beach Marcia R. Veit, University of Central
Mike Slaugbaugh, Indiana University/Purdue Florida-Orlando
University-Ft Wayne Kenton Walker, University of
Sheldon Smith, Utah Valley University Orem Wyoming—Laramie
Greg Sommers, Southern Methodist Clark Wheatley, Florida International
University University—Miami
Carolyn Spencer, Dowling College Mike Wilkins, Texas A & M University
Victor Stanton, University of Michael Wilson, Metropolitan State University
California—Berkeley Jennifer Winchel, University of South
Jack Stecher, Carnegie Mellon University Carolina
Thomas L. Stober, University of Colbrin Wright, Central Michigan University
Notre Dame Christian Wurst, Temple
Phillip Stocken, Dartmouth College University—Philadelphia
Ron Stunda, Birmingham Southern College Paul Zarowin, New York University

We are particularly grateful to Ilene Persoff, Long Island University/CW Post Campus, for her
careful technical and editorial review of the manuscript, Solutions Manual, and Test Bank for the
Seventh edition. Her insightful comments challenged our thinking and contributed to a much
improved new edition.
We are grateful to our supplements contributors for the seventh edition: Peter Theuri, Northern
Kentucky University, who prepared the Instructor’s Manual; and Jeannie Folk, College of DuPage,
who prepared the PowerPoints®.
We gratefully acknowledge the McGraw-Hill Higher Education editorial and marketing teams
for their encouragement and support throughout the development of the seventh edition of this
book.
Our goal in writing this book was to improve the way financial reporting is taught and mastered.
We would appreciate receiving your comments and suggestions.
—Daniel W. Collins
—W. Bruce Johnson
—H. Fred Mittelstaedt
—Leonard C. Soffer
Walkthrough

Rev.Confirming Pages

Chapter Objectives
Each chapter opens with a brief introduction and sum- Accrual Accounting and 2
mary of learning objectives to set the stage for the goal of Income Determination
each chapter and prepare students for the key concepts
and practices.

T
his chapter describes the key concepts and practices that govern the measure- LEARNING OBJECTIVES
ment of annual or quarterly income.1 The cornerstone of income measurement After studying this chapter, you will
is accrual accounting. Under accrual accounting, revenues are recorded (rec- understand:
ognized) when the seller has performed a service or conveyed an asset to a buyer,

Boxed Readings
LO 2-1 The distinction between cash-
which entitles the seller to the benefits represented by the revenues, and the value to be basis versus accrual income and
why accrual-basis income gener-
received for that service or asset is reasonably assured and can be measured with a high ally is a better measure of operat-
degree of reliability. Expenses are the expired costs or assets that are used up in pro- ing performance.
ducing those revenues. Expense recognition is tied to revenue recognition. That is, LO 2-2 The general concept behind rev-

Sidebar margin boxes call out key concepts in each

enue recognition under accrual
expenses are recorded in the same accounting period in which the related revenues accounting.
are recognized. The approach of tying expense recognition to revenue recognition is LO 2-3 The matching principle and how it

­chapter and provide additional information to reinforce

is applied to recognize expenses
commonly referred to as the “matching principle.” Revenues less expenses, together under accrual accounting.
with gains and losses, constitute income. LO 2-4 The difference between trace-
A natural consequence of accrual accounting is the decoupling of measured earnings able and period costs.

concepts. Rev.Confirming Pages

from operating cash inflows and outflows. Except in the case of cash sales, such as for a
meal at a restaurant, revenues under accrual accounting generally do not correspond to
LO 2-5 The format and classifications for
a multiple-step income statement
and how the statement format is
designed to differentiate earnings
cash received during thePages
Confirming period. Similarly, accrual-based expenses generally do not cor-
components that are more sus-
respond to cash outlays during the period. In fact, there are often large differences tainable from those that are more
between the firm’s reported profit performance and the amount of cash generated from transitory.
LO 2-6 The presentation of discontinued
operations. Frequently, however, accrual accounting earnings provide a more accurate operations and unusual or infre-
56 measure of the economic value added during the period than do operating cash flows.2

2
CHAPTER 2 Accrual Accounting and Income Determination quently occurring items.
The following section uses an example to illustrate the distinction between cash and LO 2-7 How to report a change in
890 CHAPTER 15 Financial Reporting for Owners’ Equity accounting principle, accounting
accrual accounting measures of performance. estimate, and accounting entity.
Mythical Corporation discontinued a component of its business in 2017 (Exhibit 2.2,
LO 2-8 How error corrections and
item 3). The operating results of this recently discontinued operation are excluded from con-
before a house committee, FASB chairman Robert Herz warned in June 2003 that the bill to restatements are reported.
tinuing operations in the current period (2017) when the decision to discontinue was made. In rules on stock options would set a “dangerous precedent”
delay new CASH FLOW VERSUS
of congressional interfer- ACCRUAL LO 2-9 The distinction between basic and
diluted earnings per share (EPS)
addition, they are excluded from continuing operations in any prior years (2016 and 2015
ence inforaccounting standards setting.33 INCOME MEASUREMENT

Chapter
and required EPS disclosures.
Mythical) for which comparative data are provided.7 This makes the Income from continuing What sparked renewed debate over stock option accounting?In Two factors brought the issue LO 2-10 What composes comprehensive
operations number of $843 million in 2017 comparable with the corresponding amounts of the political and regulatory arena: January 2017, Canterbury Publishing sells three-year subscriptions to its quarterly income and how it is displayed in
back into publication, Windy City Living, to 1,000 subscribers. The subscription plan requires financial statements.
$904 million and $812 million in 2016 and 2015, respectively. While restating the 2016 and LO 2-11 Other comprehensive income
2015 results makes continuing operations comparable to the 2017 results, it means that1. all
Thetheexplosive increase in stock option grants during the late prepayment
1990s. by the customers, so Canterbury receives the full subscription price of differences between IFRS and
numbers from the Net sales line through the Income from continuing operations line 2. Public outrage over the accounting abuses uncovered subsequently at many companies.
reported U.S. GAAP.
LO 2-12
How the flexibility in GAAP invites
in the 2016 and 2015 columns of the 2017 annual report will be different from the amounts 1
In this text, we use the terms profit, earnings, and income interchangeably. “earnings management.”
Stock option “overload” was widely regarded as one—perhaps2 the most important—factor
originally reported in the 2016 and 2015 financial statements. However, net income for 2016 Economic value added represents the increase in the value of a product or service as a consequence of operating LO 2-13
The procedures for preparing
contributing to the accounting fiascoes at companies such as Enron andToWorldCom.
activities. Theofpre-
illustrate, the value an assembled automobile far exceeds the value of its separate steel, glass, plastic,
financial statements and how to
and 2015 are the same as originally reported because the amounts removed from continuing
vailing view was that managers who were eager to cash in theirrubber, options resorted components.
and electronics to question- The difference between the aggregate cost of the various parts utilized in manu- analyze T-accounts.
operations are reclassified to discontinued operations for those years. facturing the automobile and the price at which the car is sold to the dealer represents economic value added (or lost)
able accounting practices designed to inflate revenues and earnings, by and boost share prices.
production. 47
How is a disposition evaluated to determine if it will receive discontinued
Rather than align the interests of shareholders and managers, options were thought to have
An asset group represents the lowest level for operations treatment? First, under U.S. GAAP, a component of an
done the opposite: transferring vast amounts of wealth to executives even as outside share-
which identifiable cash flows are largely inde- entity 8
comprises operations and cash flows that can be clearly distinguished,
holders suffered. These concerns spawned a reform movement aimed at curbing the use of
pendent of the cash flows of other groups of both operationally and for financial reporting purposes, from the rest of the
options by forcing companies to count them as an expense.
assets and liabilities within the entity. entity. It may be a reportable segment, an operating segment, a reporting unit,
But not everyone agreed! The battle between those who favored and those who opposed
a subsidiary, or an asset group.
stock options expensing involved familiar arguments:
If the component has been disposed of, it is treated as a discontinued operation if “. . . the
disposal represents a strategic shift that has (or willNEWS have) a majorCLIP effect on an entity’s opera-
rev22651_ch02_0047-0112.indd 47
News Clip boxes provide 12/19/16 03:09 PM

tions and financial results.”9 If the component has not yet been disposed of, it must first be
determined whether it is classified as held for sale. A
sale if the following six conditions are met:10
WHYdisposal
EXPENSED
groupSAID
CRITICS is considered
OPTIONSheld for BE
SHOULD WHY OPTIONS EXPENSING DEFENDERS DISAGREED engaging news articles
∙ Management has committed to a plan to sell the component.
∙ Some 75% to 80% of executive pay now comes in the form
∙ Unlike salaries or other perks, granting options requires no
cash outlay from companies. Because there is no real (cash) that capture real world
∙ The component is available for immediate sale in its present condition
of options. Because subject only
all other to of compensation must
forms cost to the company to deduct, doing so will unjustly penal-
terms that are usual and customary for such sales. be deducted from earnings, options should be treated
∙ An active program to locate a buyer has been initiated, theassame.
have all other necessary actions.
ize earnings.
∙ There are no universal standards for expensing options; all
financial reporting issues Rev.Confirming Pages

∙ The sale is probable, and is expected to be completed

exceptions).
∙ Deducting
within onethe year cost of options
(subject will yield more accurate
to certain
earnings numbers, which should help restore investor
valuation methods require big assumptions and estimates.
So, expensing them will reduce the accuracy of income
and controversies.
confidence. statements and leave them open to manipulation.
∙ The component is being actively marketed at a reasonable price.
∙ Because options are now all but free to companies, exces- ∙ Deducting the cost of options will reduce earnings, which is
∙ It is unlikely that significant changes will be made to the disposal plan or that it will be likely to drive down share prices.
sive grants to top execs have been encouraged. But options Income Statement Format and Classification 53
withdrawn. do have costs: They dilute shareholders’ stakes and deprive ∙ Rather than take the hit to earnings, companies can issue
If the component is deemed to be held for sale, thencompanies it also mustof themeetfunds
thethey wouldshift
strategic otherwise get by selling far fewer options. That would hurt morale, limit a key tool
called product costs, and they often constitute a large portion of the traceable costs. Product
those shares in
criterion to be given discontinued operations treatment. The strategic shift criterion is a rela- the open market. Such costs should be used to lure talent, and inhibit companies from aligning
reflected in earnings. costs also include manufacturing overhead, such as factory maintenance, insurance, and
tively new requirement for discontinued operations treatment. In 2014, the FASB narrowed employee and shareholder interests.
depreciation. Although it is difficult to associate overhead costs with specific units of produc-
the definition of a discontinued operation by adding this ∙ Bringing
requirement.moreAs discipline
a result,to options
some grants will also reduce
dispo- ∙ Tech firms argue that generous option grants have spurred
the incentives top execs now have to pump their stocks tion, they are generally allocated to inventory costs (and thus expensed as part of cost of goods
sitions that previously would have been considered discontinued operations no longer are. The the risk taking and entrepreneurship so crucial to innova-
through short-term earnings maneuvers in the hope of cash- tion. Expensing options risks damaging sold) on some rational basis.
that benefit.
new guidelines became effective for calendar year firms in 2015. Canterbury’s distribution costs, the cost of delivering the magazines, are assumed also to
ing in big option gains.
Source: A. Borrus, P. Dwyer, D. Foust, andbeL. Lavelle,
traceable.“To Expense
That is, or Not
it istopossible to identify the delivery costs with the physical delivery of
Expense,” BusinessWeek, July 29, 2002.
7
Securities and Exchange Commission (SEC) rules (Regulation S-X, Article 3) require that comparative income statement the magazines, say through the U.S. mail. These are not product costs, but they are still recog-
data for at least three years and comparative balance sheet data for two years be provided in filings with the Commission. For
this reason, most publicly held corporations provide these comparative income statement and balance sheet data in their
nized as expense in the same period as the revenue to which they are traced.
annual report to shareholders.
8
FASB ASC Section 360-10-20 - Property, Plant, and Equipment - Overall - Glossary. Period Costs Canterbury Publishing also incurred interest expense. Although interest is
9
FASB ASC Paragraph 205-20-45-1B: Presentation of Financial Statements - Discontinued Operations—Other Presentation
33
A companion bill was introduced in the Senate in May 2003. A third bill, introduced ain necessary
November 2003 by Senator Michael
cost, it is not possible to associate interest with specific copies of the magazine.
Matters Enzi (Republican, Wyoming) would limit expensing to options granted to a company’s five highest paid executives. In
10 response to- this proposal, one financial commentator quipped: “While Congress is at it,Thus,
For the exact wording of these criteria, see FASB ASC Paragraph 205-20-45-1E: Presentation of Financial Statements why notitmake
is aonly
period cost ofand
the salaries the it is expensed in the period the benefit was derived. Note that
Discontinued Operations - Other Presentation Matters. period
top dogs expenses, while the lower rungs of employees get to be free for a company. Think howcosts are not expensed
many employees a company on a cash basis. The interest was all paid in 2019, but it was still
could hire if it didn’t cost them anything. Why, if Congress could outlaw all expenses, the economy would really boom.” See
expensed over the years the loan was outstanding, which is the period of time Canterbury
J. Eisinger, “Microsoft Can Count, Intel Can’t,” The Wall Street Journal, July 21, 2004.
benefited from the use of the borrowed funds.

Recap boxes provide students a summary of each section,

Revenue is recognized when an entity satisfies its contractual obligation to provide goods RECAP
reminding them of the key points of what they just covered and services to a customer. The matching principle associates expired costs (expenses) with
the revenues recognized in a period. Costs directly associated with specific revenues are

in small doses to reinforce what they just learned.

rev22651_ch02_0047-0112.indd 56 12/19/16 03:09 PM
called traceable costs, and these costs are expensed in the same period as the associated
rev22651_ch15_0863-0936.indd 890 revenue. Period 12/22/16
costs,10:50
those
AM costs that cannot be associated with specific units of produc-

tion, are expensed in the period benefited.

INCOME STATEMENT FORMAT AND CLASSIFICATION

Virtually all decision models in modern corporate finance are based on expected future cash
flows. Recognizing this, the FASB stated:
xiii
Thus, financial reporting should provide information to help investors, creditors, and others assess
the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.5

One way to provide users with information about prospective future cash flows would be to
present them with cash flow forecasts prepared by management. However, financial reporting
focuses on historical information, not forecasts, because forecasts of such numbers are consid-
ered to be too “soft”—that is, too speculative or manipulable.
Instead, financial reporting seeks to satisfy users’ needs for assessing future cash flows by
providing financial information based on past and current events in a format that gives finan-
cial statement users reliable and representative baseline numbers for generating their own fore-
xiv Walkthrough 408 CHAPTER 8 Receivables

must periodically assess the reasonableness of the uncollectibles balance by performing

an aging of accounts receivable.
Icons ∙ Analysts should scrutinize the allowance for uncollectibles balance over time. Significant
increases in the allowance could indicate collection problems while significant decreases
Special “Getting Behind the Numbers” icons appear throughout the text to highlight in the allowance could be a sign of earnings management.
∙ Receivables growth can exceed sales growth for several reasons, including a change in
and link discussions in chapters to the analysis, valuation, and contracting framework.
customer mix or credit terms. But a disparity in the growth rate of receivables and sales
Icons in the end-of-chapter materials signify a variety of exercises orthat
could also indicate direct students
aggressive to practices are being used.
revenue recognition
Connect for additional resources. ∙ In certain long-term credit sales transactions, interest must be imputed by determining the
note receivable’s present value.
∙ Firms may elect the fair value option for accounts and notes receivable. Changes in fair
Rev.Confirming Pages
value are recognized in net income.
∙ Firms sometimes transfer or dispose of receivables before their due date to accelerate cash
International
International Analysis collection. Sales ofValuation
Valuation Contracting
Contracting
receivables—also called factoring—can be with or without recourse.
∙ Receivables are also used as collateral for a loan.
∙ In analyzing receivables transactions, it is sometimes not obvious whether the transaction
Look for the International Summary 27
to accelerate cash collection represents a sale or a borrowing; however, authoritative
icon to read the new
S to IFRS
has expressed concern that (1) the transition
­coverage of IFRS inte-
T RmightEE beTTprohibitively
C
C H accounting literature provides guidelines in Topic 860 Transfers and Servicing of the
H expensive;
FASB
United States may not have sufficient influence over IASB standards setting; and (3)
(2)Accounting
the Collaborative
Standards Codification for distinguishing between sales (when the
that thesurrenders control over the receivables) and borrowings (when control is not
transferor
grated throughout the text.
U.S. legal environment relies heavily on contract language that refers to “U.S. GAAP.” As a Sales of receivables change ratios such as receivables turnover as well as
surrendered).
result, the SEC staff is exploring other (more time-consuming) approaches such aspotentially
standard- masking the underlying real growth in receivables.
by-standard GAAP revisions aimed toward convergence.31 The SEC and others also haveloans and securitizations were at the heart of the 2008 economic crisis.
∙ Subprime
expressed concerns about uneven enforcement and application of IFRS around Accounting the world. and regulatory reforms are under way to address some of the problems identi-
Consequently, the U.S. adoption of IFRS still would not achieve true comparability.fied32
during the crisis.
The SEC already permits foreign businesses to list their securities on a U.S. stock exchange
∙ Banks and other All companies
holders listed on the
of receivables frequently restructure the terms of the receivable
as long as certain procedures are followed. Foreign businesses not using U.S. GAAP or IFRS London Stock Exchange are
when a customer is unable to make required
Rev.Confirming Rev.Confirming
Pages payments because of financial Pages
difficulties.
End-of-Chapter Elements
must file a Form 20-F each year with the SEC. This form is designed for the convenience of required to use IFRS.
These troubled debt restructurings can take one of two forms: (1) settlement or (2) contin-
U.S. financial statement readers because it reconciles the company’s reported financial
uation with modification of debt terms.
results—specifically, earnings and shareholders’ equity—as shown in foreign GAAP or IFRS
The text provides a variety of end-of-chapter materials to reinforce concepts. Learning
to what those numbers would have been under U.S. GAAP. This presumably allows ∙ When terms are modified, the precise accounting treatment depends on whether the sum
investors
to evaluate the performance of foreign issuers relative to U.S. companies using aofcommonfuture cash flows under
Foreign the restructured
issuers are given six note is more or less than the note’s carrying
reporting basis—U.S. GAAP. However, the Form
­ asier than ever to tie
­objectives are included for each end-of-chapter item, making it e
25820-F CHAPTER 5 may
reconciliation Essentials value at the Statement
of Financial
not fully achieve restructuringto date.
monthsAnalysis
file The
the
Cases interest
Form 109rate used in troubled debt restructurings may
your ­assignment back to the chapter material. not reflect
this goal. The reason is that SEC rules do not require foreign firms to prepare complete
stantial delay after the issu-
20-F reconciliation, a sub-
finan- the real economic loss suffered by the lender.
cial statementsfacts
on a during
U.S. GAAP basis. of
It requires only that which
Form 20-F ∙ differences
identify the Both the FASB and IASB have finalized most of their rules on financial instrument
the following the course the engagement, was completed prior to any ance of current 2016 2017
between reporting.
adjustingthe company’s
or closing home-country
entries financial
being prepared statements and U.S. GAAP. When
for 2017. ($ inno “final-
millions) home-country financial
$ in millions % of sales $ in millions % of sales
ized” financial statements in U.S. GAAP are provided by the foreign firm, the burden of statements.
Exercises 1. A new digital imaging system was acquired on E X E
January R5,C I S
2016,E S
at
constructing financial statements comparable to those provided by U.S. companies a cost of Sales
$5,000.
falls on the
$5,500 $6,500
Cost of sales (2,475) 45% (3,055) 47%
Although
analyst. This this
taskasset wasnot
is often expected to be in use for the next four years, the purchase
straightforward. was
Other operating expenses (825) 15% (1,040) 16%
inadvertently charged to office expense. Per theEcompany’s accounting Foroffice
manual, the month of December 2017, Ranger Corporation’s records show the following
8-1 Operating income 2,200 2,405
equipment of this type should be depreciated using the straight-line method with information:
no sal-
Provision for income taxes (836) (962)
Thevage value in
diversity assumed.
Analyzing accounts
international accounting practices has narrowed in recent years
receivable (LO 8-2)
Netasincome
more $1,364
tax rate Cash received on accounts
Incometoward
RECAP
38% receivable
$1,443
$35,000
40%
countries
2. A used around the globeon
truck, purchased embrace
November IFRS.18,The FASB
2017, wasand IASB have
recorded beenentry:
with this working
Cash sales 30,000
eliminating differences between U.S. GAAP and IFRS, and the SEC has shown some (albeit Accounts receivable, December 1, 2017
To record truck expenditure:
cautious) interest in potentially adopting IFRS in the United States. Nonetheless, Hossa’s management
diversity was pleased that 2017 net income was up 5.8%80,000
in Accounts from the prior year.
receivable, December 31, 2017 74,000
accounting practice remains a fact of life. Readers of financial statements must Although you are
never lose also happy
Accounts with written
receivable the increase in net income, you are not
off as uncollectible so sure the news is
1,000
Vehicle
DRof this
sight Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
diversity. $18,000 all positive. You have modeled Hossa’s income as follows:
CR Required:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,000
NET INCOME = SALES × (1 − COGS % − OPEX %) × (1 − TAX RATE)
Determine the gross sales for the month of December 2017.
Management plans to use this truck for three years and then trade it in on a newUsing one. this model, net income in 2016 is computed as $5,500 × (1 − 45% − 15%) ×
Salvage is estimated at $3,000. Watsontown has always used straight-line depreciation
SUMMARY
(1 − 38%) = $1,364. Net income in 2017 is computed as $6,500 × (1 − 47% − 16%) ×
Summary
for fixed assets, recording a half-year of depreciation in the year the asset is (1 − 40%) = $1,443.
acquired.
Financial statements are an extremely important source of information about a company, its
3. On Julyhealth,
economic 1, 2017, theitscompany
and prospects.rented
Theyahelp
warehouse
improve fordecision
three years.
makingTheand
lease Required:
agreement
make it possible
specifiedmanagers’
to monitor that each activities.
year’s rent be paid in advance, so a check for the first year’s rent of a cause-of-change analysis to show the extent to which each of the following
1. Prepare
$18,000 was issued and recorded as an addition to the Buildings account. items contributed to the $79 million increase in Hossa’s net income from 2016 to 2017:
∙ Equity investors use financial statements to rev22651_ch08_0375-0424.indd
form opinions about 408 the value of a company 11/29/16 01:21 PM
4. Late in 2016, Watsontown collected $23,500 from a customer in full payment of∙ his Increase in sales (SALES)
and its stock.
account. The cash receipt was credited to revenue. In 2017, Watsontown’s bookkeeper ∙ Increase in cost of sales as a percent of sales (COGS%)
∙ Creditors use statement
was reviewing outstandinginformation to gauge
receivables a company’s
and noticed ability tobalance.
the outstanding repay itsKnowing
debt and the
to
check whether the company is complying ∙ Increase in other operating expenses as a percent of sales (OPEX%)
customer in question had recently died, shewith
wroteloan
offcovenants.
the account. Because Watsontown
∙ seldom
Stock analysts, ∙ Increase in income tax rate (TAX RATE)
has badbrokers,
debts, theand portfoliouses
company managers usewrite-off
the direct financialmethod
statements as theitbasis
whereby for
charges
theirdebts
Bad recommendations to investors
expense and credits and creditors.
Accounts receivable when an account is deemed 2. Interpret the results for Hossa’s management.
∙ uncollectible.
Auditors use financial statements to help design more effective audits by spotting areas of
Problems/Discussion
5. potential reporting
A three-year abuses.
property P R was
and casualty insurance policy O Bpurchased
L E M S in/ January
D I S C2016
U S for
SION QUESTIONS
Questions $30,000. The entire amount was recorded as an insurance expense at the time.
6.
31
OnStaff
Final October
Report:1, 2016,
Work Plan Watsontown borrowed
for the Consideration $100,000
of Incorporating - 1 from aFinancial
P 5International local bank. TheThe
Reporting loanfollowing
into the table presents ROA calculations for three companies in the retail grocery indus-
terms
Standards
Financial Reporting System for U.S. Issuers (Washington, DC: SEC, July 2012).
specified annual interest payments of $8,000 on the anniversary date of the try using
loan. The earnings before interest (EBI) and balance sheet data for each company. The Kroger
first
32
Comparing
See M. Barth, “Commentary on Prospects for Global Financial profit-
Reporting,” September 2015,
Accounting Perspectives,Company operates more than 2,600 supermarkets and multi-department stores. Publix Super
interest payment was made on October 1, 2017,
pp. 154–167. ablityand(LOexpensed
5-3) in its entirety. Markets operates about 1,100 supermarkets in the Southeastern United States. Weis Markets
Required: operates 163 retail food stores in Pennsylvania and surrounding states.
Prepare any journal entry necessary to correct each error as well as any year-end adjusting
entry for 2017 related to the described situation. Ignore income tax effects. The Kroger Co.
Year Ending 01/28/12 02/02/13 02/01/14 01/31/15

Sales (in millions of dollars) $90,374 $96,619 $98,375 $108,465

rev22651_ch01_0001-0046.indd 27 Profit margin (EBI/sales) C A S E S11/24/16 08:26
0.95%
AM 1.85% 1.83% 1.88%
Cases
Asset turnover (Sales/Average assets) 3.85 3.92 3.36 3.55
Corrpro Companies, Inc., founded in 1984, provides corrosion control-related ROA
services, sys- × Asset turnover
= Margin 3.65% 7.24% 6.14% 6.68%
C2-1
tems, equipment, and materials to the infrastructure, environmental, and energy markets.
Publix
Corrpro’s products and services include (a) corrosion control engineering services, Super Conducting
systems, Markets financial
and equipment, (b) coatings services, and (c) pipeline integrity and risk assessment services. reporting research: 12/31/11
Year Ending 12/29/12 12/28/13 12/27/14
Discontinued opera-
The following information was abridged from the company’s March 31, Year 3, Form 10-K.
dollars)(LO 2-6)
Sales (in millions oftions $26,967 $27,485 $28,917 $30,560
Profit margin (EBI/sales) 5.53% 5.65% 5.72% 5.68%
Assets and Liabilities Held for Sale Asset turnover (Sales/Average assets) 2.39 2.24 2.13 2.03
In July Year 2, the Company’s Board of Directors approved a formal businessROArestructuring
= Margin × Asset turnover 13.24% 12.64% 12.21% 11.50%
plan. The multiyear plan includes a series of initiatives to improve operating income and (continued)
 Walkthrough xv

INSTRUCTOR LIBRARY
The Connect Instructor Library is a repository for additional resources to improve student
engagement in and out of class. You can select and use any asset that enhances your lecture.
The Connect Instructor Library includes
∙ Presentation slides
∙ Solutions manual
∙ Test bank available in Connect and TestGen
∙ TestGen is a complete, state-of-the-art test generator and editing application software
that allows instructors to quickly and easily select test items from McGraw Hill’s test
bank content. The instructors can then organize, edit, and customize questions and
answers to rapidly generate tests for paper or online administration. Questions can
include stylized text, symbols, graphics, and equations that are inserted directly into
questions using built-in mathematical templates. TestGen’s random generator provides
the option to display different text or calculated number values each time questions are
used. With both quick-and-simple test creation and flexible and robust editing tools,
TestGen is a complete test generator system for today’s educators.
∙ Instructor’s resource manual

AACSB Statement
McGraw-Hill Education is a proud corporate member of AACSB International. Understanding
the importance and value of AACSB accreditation, Financial Reporting & Analysis recog-
nizes the curricula guidelines detailed in the AACSB standards for business accreditation by
connecting selected questions in the Test Bank to the eight general knowledge and skill guide-
lines in the AACSB standards.
The statements contained in Financial Reporting & Analysis are provided only as a guide
for the users of this textbook. The AACSB leaves content coverage and assessment within the
purview of individual schools, the mission of the school, and the faculty. While Financial
Reporting & Analysis and the teaching package make no claim of any specific AACSB
­qualification or evaluation, we have within Financial Reporting & Analysis labeled selected
questions according to the eight general knowledge and skills areas.

Assurance of Learning Ready

Many educational institutions today are focused on the notion of assurance of learning, an
important element of some accreditation standards. Financial Reporting & Analysis is
designed specifically to support your assurance of learning initiatives with a simple, yet pow-
erful solution. Each test bank question for Financial Reporting & Analysis maps to a specific
chapter learning objective listed in the text. You can use Connect to easily query for learning
objectives that directly relate to the learning objectives for your course. You can then use the
reporting features of Connect to aggregate student results in similar fashion, making the col-
lection and presentation of assurance of learning data simple and easy.
 Required=Results
©Getty Images/iStockphoto

McGraw-Hill Connect®
Learn Without Limits
Connect is a teaching and learning platform
that is proven to deliver better results for
students and instructors.
Connect empowers students by continually
adapting to deliver precisely what they
need, when they need it, and how they need
it, so your class time is more engaging and
effective.

73% of instructors who use

Connect require it; instructor
Using Connect improves retention
satisfaction increases by 28% when rates by 19.8%, passing rates by
Connect is required. 12.7%, and exam scores by 9.1%.

Analytics
Connect Insight®
Connect Insight is Connect’s new one-
of-a-kind visual analytics dashboard that
provides at-a-glance information regarding
student performance, which is immediately
actionable. By presenting assignment,
assessment, and topical performance results
together with a time metric that is easily
visible for aggregate or individual results,
Connect Insight gives the user the ability to
take a just-in-time approach to teaching and
learning, which was never before available.
Connect Insight presents data that helps
instructors improve class performance in a
way that is efficient and effective.
Adaptive
THE ADAPTIVE
READING EXPERIENCE
DESIGNED TO TRANSFORM
THE WAY STUDENTS READ

More students earn A’s and

B’s when they use McGraw-Hill
Education Adaptive products.

SmartBook®
Proven to help students improve grades and
study more efficiently, SmartBook contains the
same content within the print book, but actively
tailors that content to the needs of the individual.
SmartBook’s adaptive technology provides precise,
personalized instruction on what the student
should do next, guiding the student to master
and remember key concepts, targeting gaps in
knowledge and offering customized feedback,
and driving the student toward comprehension
and retention of the subject matter. Available on
tablets, SmartBook puts learning at the student’s
fingertips—anywhere, anytime.

Over 8 billion questions have been

answered, making McGraw-Hill
Education products more intelligent,
reliable, and precise.
www.mheducation.com
 Brief Contents

Chapter 1 The Economic and Institutional Setting for Financial

Reporting 1
Chapter 2 Accrual Accounting and Income Determination 47
Chapter 3 Revenue Recognition 113
Chapter 4 Structure of the Balance Sheet and Statement of Cash
Flows 163
Chapter 5 Essentials of Financial Statement Analysis 213
Chapter 6 The Role of Financial Information in Valuation and Credit Risk
Assessment 273
Chapter 7 The Role of Financial Information in Contracting 335
Chapter 8 Receivables 375
Chapter 9 Inventories 425
Chapter 10 Long-Lived Assets 501
Chapter 11 Financial Instruments and Liabilities 561
Chapter 12 Financial Reporting for Leases 645
Chapter 13 Income Tax Reporting 715
Chapter 14 Pensions and Postretirement Benefits 797
Chapter 15 Financial Reporting for Owners’ Equity 863
Chapter 16 Intercorporate Investments 937
Chapter 17 Statement of Cash Flows 1005
Appendix A Time Value of Money 1061
Appendix B Segment Reporting 1071
Index 1089

xviii
Contents

Preface vii

Discontinued Operations 55
Chapter 1 The Economic and Institutional Setting
for Financial Reporting 1 Frequency and Magnitude of Various Categories
of Transitory Income Statement Items 59
Why Financial Statements Are Important 1 Reporting Accounting Changes 60
Economics of Accounting Information 3 Change in Accounting Principle 60
Demand for Financial Statements 4 Change in Accounting Estimate 63
Disclosure Incentives and the Supply of Financial Change in Reporting Entity 65
Information 7 Earnings Management 66
A Closer Look at Professional Analysts 10 Popular Earnings Management Devices 68
Analysts’ Decisions 10 Accounting Errors, Earnings Restatements,
Fundamental Concepts of Financial Reporting 12 and Prior Period Adjustments 72
Generally Accepted Accounting Principles 13 Earnings per Share 78
Who Determines the Standards? 16 Comprehensive Income and Other
The Politics of Accounting Standards 17 Comprehensive Income 78
FASB Accounting Standards CodificationTM 18 Global Vantage Point 82
Incentive Conflicts and Financial Reporting 19 APPENDIX 2A: Review of Accounting Procedures
An International Perspective 20 and T-Account Analysis 84
International Financial Reporting 22 Understanding Debits and Credits 86
APPENDIX 1A: GAAP in the United States 28 Adjusting Entries 88
Early Developments 29 Posting Journal Entries to Accounts and
Preparing Financial Statements 90
Emergence of GAAP 30
Closing Entries 92
Current Institutional Structure in the
United States 33 T-Accounts Analysis as an Analytical
Technique 93

Chapter 2 Accrual Accounting and Income

Chapter 3 Revenue Recognition 113
Determination 47
The Five-Step Revenue Recognition Model 114
Cash Flow Versus Accrual Income Measurement 47
Step 1: Identify the Contract(s) with a Customer 114
Articulation of Income Statement and
Balance Sheet 51 Step 2: Identify the Performance Obligations
in the Contract 116
Revenue Recognition—General Concepts 52
Step 3: Determine the Transaction Price 118
Expense Recognition 52
Step 4: Allocate the Transaction Price to the
Income Statement Format and Classification 53
Performance Obligations in the
Income from Continuing Operations 54 Contract 121 xix
xx Contents

Step 5: Recognize Revenue When (or as) the Entity Example of Indirect Method Cash Flow
Satisfies a Performance Obligation 123 Statement 175
Practical Expedients in Applying the Model 128 Example of Direct Method Cash Flow
Applying the Model to Contract Statement 175
Modifications 128 Cash Flow Statement and Financial Statement
Contract Acquisition and Fulfillment Costs 129 Articulation 178
Amortization and Impairment 129 Deriving Cash Flow Information 179
Comparison of Cash Flow from Operations
Disclosure Requirements 130
under Direct and Indirect Methods 184
Disaggregated Revenue 130
Global Vantage Point 185
Contract Balances 130
Performance Obligations and Significant Notes to Financial Statements 186
Judgments 130 Summary of Significant Accounting Policies 186
Effective Dates and Transition 130 Subsequent Events 186
Retrospecitve Approach 131 Related-Party Transactions 187
Cumulative Effect Approach 131 APPENDIX 4A: Worksheet Approach to Indirect
Method Cash Flow Statement 189
Financial Statement Effects of New Standard 132
Global Vantage Point 133
Chapter 5 Essentials of Financial
The Meaning of Collectibility 133 Statement Analysis 213
Reversals of Impairments 133
Disclosure Requirements 133 Basic Approaches 213
Revenue Recognition Prior to the Effective Date Financial Statement Analysis and Accounting
of ASC Topic 606 134 Quality 214
Long-Term Construction Contracts 134 A Case In Point: Getting Behind the Numbers
Installment Sales Method 140 at Whole Foods Market 216
Franchise Sales 142 Examining Whole Foods Market’s Financial
Sales with Right of Return 145 Statements 217
Bundled (Multiple-Element) Sales 145 Profitability, Competition, and Business Strategy 229
Financial Ratios and Profitability Analysis 229
Chapter 4 Structure of the Balance Sheet and ROA and Competitive Advantage 232
Statement of Cash Flows 163 Return on Common Equity and Financial
Leverage 236
Balance Sheet 163
Global Vantage Point 238
Current Assets 165
Liquidity, Solvency, and Credit Analysis 238
Noncurrent Assets 166
Cash Flow Analysis 246
Current Liabilities 167
Financial Ratios and Default Risk 251
Noncurrent Liabilities 167
Stockholders’ Equity 167
Chapter 6 The Role of Financial Information in
Analytical Insights: Understanding the
Valuation and Credit Risk
Nature of a Firm’s Business 169
Assessment 273
International Differences in Balance Sheet
Presentation 171 Business Valuation 274
Statement of Cash Flows 173 The Discounted Cash Flow Valuation
Structure of Cash Flow Statement 174 Approach 274
 Contents xxi

The Role of Earnings in Valuation 277 Fair Value Accounting and the Financial Crisis 359
The Abnormal Earnings Approach to The Meltdown 359
Valuation 280 The Controversy 360
Fair Value Accounting 284 Analytical Insights: Incentives to “Manage”
Valuation Application: Goodwill Impairment 286 Earnings 362
Global Vantage Point 287
Research on Earnings and Equity Valuation 287 Chapter 8 Receivables 375
Sources of Variation in P/E Multiples 289
Earnings Surprises 294 Assessing the Net Realizable Value of Accounts
Receivable 375
Credit Risk Assessment 296
Estimating Uncollectibles 375
Traditional Lending Products 296
Assessing the Adequacy of the Allowance
Credit Analysis 298 for Uncollectibles Account Balance 378
Credit-Rating Agencies 299 Estimating Sales Returns and Allowances 380
APPENDIX 6A: Discounted Cash Flow and Analytical Insight: Do Existing Receivables
Abnormal Earnings Valuation Applications 304 Represent Real Sales? 380
Valuing a Business Opportunity 304
Imputing Interest on Trade Notes Receivable 382
Valuing Whole Foods Market’s Shares 307
The Fair Value Option 385
APPENDIX 6B: Financial Statement Forecasts 310
Accelerating Cash Collection: Sale of Receivables
Illustration of Comprehensive Financial
and Collateralized Borrowings 387
Statement Forecasts 311
Sale of Receivables (Factoring) 388
Borrowing Using Receivables as Collateral 389
Chapter 7 The Role of Financial Information in Ambiguities Abound: Is It a Sale or a
Contracting 335 Borrowing? 390
Conflicts of Interest in Business Relationships 336 A Closer Look at Securitizations 391
Securitization and the 2008 Financial Crisis 396
Debt Covenants in Lending Agreements 336
Some Cautions for Financial Statement
Affirmative Covenants, Negative Covenants,
Readers 397
and Default Provisions 338
Mandated Accounting Changes May Trigger Debt Troubled Debt Restructuring 398
Covenant Violation 340 Settlement 400
Managers’ Responses to Potential Debt Covenant Continuation with Modification of Debt
Violations 341 Terms 400
Management Compensation 343 Evaluating Troubled Debt Restructuring Rules 405
How Executives Are Paid 344 Global Vantage Point 406
Proxy Statements and Executive Comparison of IFRS and GAAP Receivable
Compensation 348 Accounting 406
Incentives Tied to Accounting Numbers 349 Recent FASB and IASB Actions 407
Catering to Wall Street 353
Regulatory Agencies 355 Chapter 9 Inventories 425
Capital Requirements in the Banking Industry 355
An Overview of Inventory Accounting Issues 425
Rate Regulation in the Electric Utilities
Industry 357 Determination of Inventory Quantities 428
Taxation 358 Items Included In Inventory 431
xxii Contents

Costs Included in Inventory 431 Asset Impairment 515

Manufacturing Costs 432 Tangible and Amortizable Intangible Assets 515
Vendor Allowances 432 Indefinite-Lived Intangible Assets 517
Cost Flow Assumptions: The Concepts 434 Case Study of Impairment Recognition and
First-In, First-Out (FIFO) Cost Flow 435 Disclosure—Krispy Kreme Doughnuts 518
Last-In, First-Out (LIFO) Cost Flow 436 Management Judgments and Impairments 519
FIFO, LIFO, and Inventory Holding Gains 437 Obligations Arising from Retiring
Long-Lived Assets 519
Analyzing LIFO Companies 441
The LIFO Reserve Disclosure 441 Assets Held for Sale 521
Inflation and LIFO Reserves 445 Depreciation 522
Disposition of Long-Lived Assets 526
LIFO Liquidations 445
Financial Analysis and Depreciation
Reconciliation of Changes in LIFO
Differences 526
Reserve 449
Improved Trend Analysis 449 Exchanges of Nonmonetary Assets 528
Exchanges Recorded at Book Value 530
LIFO and Earnings Management 451
Global Vantage Point 532
Eliminating LIFO Ratio Distortions 452
Comparison of IFRS and GAAP Long-Lived Asset
Tax Implications of LIFO 454 Accounting 532
Eliminating Realized Holding Gains for FIFO
Firms 455
Empirical Evidence on Inventory Policy Chapter 11 Financial Instruments and
Choice 457 Liabilities 561
Inventory Impairment 459 Balance Sheet Presentation 561
Impact of Inventory Impairment 461
Debt or Equity? 563
Old-Lower of Cost or Market Method
(Old-LCM) 461 Bonds Payable 564
Characteristics of Bond Cash Flows 564
Global Vantage Point 464
Bonds Issued at Par 565
Comparison of IFRS and GAAP Inventory
Accounting 464 Bonds Issued at a Discount 566
Future Directions 465 Bonds Issued at a Premium 569
Graphic Look at Bonds 571
APPENDIX 9A: Variable Costing Versus
Absorption Costing 469 Book Value versus Fair Value after Issuance 573
APPENDIX 9B: Dollar-Value LIFO 472 Option to Use Fair Value Accounting 576
APPENDIX 9C: Inventory Errors 477 Global Vantage Point 580
Managerial Incentives and Financial
Reporting for Debt 580
Chapter 10 Long-Lived Assets 501
Debt Carried at Amortized Historical Cost 580
Measurement of the Carrying Amount of Imputed Interest on Notes Payable 583
Long-Lived Assets 502 Analytical Insights: How to Analyze
The Approach Used by GAAP 503 Debt Disclosures 585
Long-Lived Asset Measurement Rules Derivatives 587
Illustrated 506 Typical Derivative Instruments and the Benefits
Intangible Assets 511 of Hedging 588
 Contents xxiii

Financial Reporting for Derivative Sale and Leaseback 676

Instruments 594 Presentation and Disclosure—Lessee 676
Hedge Accounting 595 Differences between ASC 842 and IFRS 16 678
Fair Value Hedge Accounting 598 Evaluation of ASC 842 678
Cash Flow Hedge for an Existing Asset or Lessor Accounting Under ASC 840 679
Liability 601
Sales-Type and Direct Financing Leases 679
Cash Flow Hedge for an Anticipated
Lessors’ Operating Leases 680
Transaction 604
Distinction between Capital and Operating
Hedge Effectiveness 604
Leases 680
Global Vantage Point 606 Direct Financing Lease Treatment
Contingent Liabilities 607 Illustrated 681
Measuring and Recognizing Loss Financial Statement Effects of Direct Financing
Contingencies 607 versus Operating Leases 684
Recording Gain Contingencies 609 Sales-Type Lease Treatment Illustrated 686
Loan Guarantees 609 Lessors’ Disclosures 687
Global Vantage Point 611 Leveraged Leases 688
Global Vantage Point 688
Lessor Accounting Under ASU 2016-02
Chapter 12 Financial Reporting for Leases 645
(ASC 842) 689
Evolution of Lease Accounting 646 Overview 689
Why Lessees Like the Operating Lease Collectibility 689
Method 647 Presentation and Disclosure—Lessor 691
The Securities and Exchange Commission’s Differences between ASC 842 and IFRS 16 691
Initiative 648 Financial Reporting Versus Tax Accounting 692
Lessee Accounting Under ASC 840 649 APPENDIX 12A: Constructive Capitalization and
Criteria for Capital Lease Treatment 650 Projecting ASU 2016-02 Effects 693
Lease Economics and Capital Lease Determining the Discount Rate 694
Accounting 651 Estimating Payments beyond Five Years 695
Guaranteed Residual Values 655
Executory Costs 657
Payments in Advance 657 Chapter 13 Income Tax Reporting 715
Sale and Leaseback 660 Understanding Income Tax Reporting 716
Interpeting Lessee Financial Statement Information A Note on Semantics 716
Under ASC 840 661 Temporary and Permanent Differences between
Capital Lease versus Operating Lease Book Income and Taxable Income 716
Effects 661 Problems Caused by Temporary Differences 719
Lessees’ Financial Statement Disclosures 666 Deferred Income Tax Accounting: Interperiod
Uneven Lease Payments 667 Tax Allocation 722
Global Vantage Point 668 Deferred Tax Liabilities 723
Lessee Accounting Under ASU 2016-02 Deferred Tax Assets 726
(ASC 842) 671 Net Operating Losses: Carrybacks and
Overview of ASC 842 671 Carryforwards 728
Beginning-of-Period and Uneven Payments 674 Deferred Tax Asset Valuation Allowances 730
xxiv Contents

Classification of Deferred Tax Assets and Uncertain Tax Positions 765

Deferred Tax Liabilities 734 Other Current IASB Activities 766
Deferred Income Tax Accounting When Tax Rates APPENDIX 13A: Comprehensive Interperiod Tax
Change 735 Allocation Problem 767
Permanent Differences 741 Computation of Taxable Income 768
Understanding Income Tax Note Calculation of Taxes Due 770
Disclosures 741 Calculation of Change in Deferred Tax Asset
Current versus Deferred Portion of Current and Liability Accounts 770
Period’s Tax Provision 741 Calculation of Income Tax Expense 772
Reconciliation of Statutory and Effective Tax Hawkeye’s Tax Note 773
Rates 742
Details on the Sources of Deferred Tax Assets
and Liabilities 747 Chapter 14 Pensions and Postretirement
Why Don’t a Company’s Deferred Tax Assets Benefits 797
and Liabilities Seem to Reverse? 749
Rights and Obligations in Pension
Deferred Taxes and Cash Flow 751
Contracts 797
Measuring And Reporting Uncertain Tax
Accounting Issues Related to Defined Benefit
Positions 752
Pension Plans 800
Assessing an Uncertain Tax Position Related
to a Permanent Difference 753 Financial Reporting for Defined Benefit
Pension Plans 802
Assessing an Uncertain Tax Position Related to
Timing of Deductibility 754 A Simple Example: A World of Complete
Certainty 802
Making Changes to or Resolving Uncertain Tax
Positions 755 The Real World: Uncertainty Introduces Gains
and Losses 807
Assessing Disclosures on Uncertain Tax
Positions 756 Comprehensive Example 815
Determinants of Pension Funding 819
Extracting Analytical Insights from Note
Disclosures 756 Case Study of Pension Recognition
Using Deferred Tax Notes to Assess Earnings and Disclosure—General Electric 821
Quality 757 Accumulated Other Comprehensive Income
Using Tax Notes to Improve Interfirm Disclosure and Deferred Income
Comparability 760 Taxes 827
Additional Issues in Computing Expected
Global Vantage Point 763
Return 829
Enacted Tax Law Changes vs. Substantively
Extraction of Additional Analytic Insights from
Enacted Tax Law Changes 763
Note Disclosures 831
Approach to Reporting Deferred Tax Assets When
Realizability Is Uncertain 763 Postretirement Benefits Other Than
Pensions 834
Reconciliation of Statutory and Effective Tax
Rates 764 Analytical Insights: Assessing OPEB
Liability 838
Classification and Offsetting of Deferred
Tax Assets and Deferred Tax Evaluation of Pension and Postretirement Benefit
Liabilities 764 Financial Reporting 838
Disclosure of Income Tax Amounts Recognized Global Vantage Point 839
Directly in Equity (Other Comprehensive Comparison of IFRS and GAAP Retirement
Income) 765 Benefit Accounting 839
 Contents xxv

Chapter 15 Financial Reporting Chapter 16 Intercorporate Investments 937

for Owners’ Equity 863
Minority Passive Investments: Fair Value
Accounting for Transactions With Accounting 939
Shareholders 863 Minority Passive Investments through 2017 939
What Constitutes the “Firm”? 864 Minority Passive Equity Investments Beginning in
Why Companies Repurchase Their Stock 867 2018 946
Equity-Based Covenants and Preferred Stock 870 Minority Active Investments: Equity
Legality of Corporate Dividend Distributions 874 Method 947
When Cost and Book Value Differ 949
Shareholders’ Equity: Financial Statement
Presentation 876 Fair Value Option for Equity Method
Investments 951
Global Vantage Point 877
Controlling (Majority) Interest: Consolidation 952
Earnings per Share 878
Acquisition Method and Preparation of
Simple Capital Structure 879
Consolidated Statements (100%
Complex Capital Structure 880 Acquisition) 953
Analytical Insights 882 Acquisition Method with Noncontrolling
Is Earnings per Share a Meaningful Interests (Less Than 100%
Number? 883 Acquisition) 956
Global Vantage Point 884 Income Statement Consolidation 958
Accounting for Share-Based Compensation 884 Accounting for Goodwill 962
Historical Perspective 885 Previous Approaches to Consolidated
Opposition to the FASB 886 Statements 964
The Initial Compromise—SFAS No. 123 888 Poolings of Interests and Purchases 965
Stock Options Debate Rekindled 889 Presentation of Noncontrolling Interests 966
Current GAAP Requirements 891 Financial Analysis Issues—Acquisition Method
EPS Effect of Stock Options 894 and Purchase Method 967
Accounting at Date of Exercise 894 Financial Analysis Issues—Acquisition Method
Epilogue 895 vs. Pooling of Interests 969
Taxation of Share-Based Compensation 895 Variable Interest Entities 971
Incentive Stock Options (ISOs) 896 Accounting for Foreign Subsidiaries
Nonqualified Stock Option Plans 896 and Foreign Currency Transactions 972
How Does Tax Accounting Interact with Foreign Currency Transactions 972
Financial Reporting? 897 Foreign Subsidiaries 973
Share-Based Compensation Case Study—Whole Accounting for Investments in Debt
Foods Market 898 Securities 979
Convertible Debt 903 Held-to-Maturity Securities 980
Background 903 Available-for-Sale Securities 981
Financial Reporting Issues 904 Trading Securities 982
Analytical Insights 905 Other-Than-Temporary Impairments 982
Convertible Debt That May Be Settled in Global Vantage Point 983
Cash 906 Accounting for Financial Assets (Marketable
Global Vantage Point 908 Securities and Investments) 983
xxvi Contents

Consolidated Financial Statements and Accounts Receivable Sale (Securitization)

Accounting for Business versus Collateralized Borrowing 1024
Combinations 985 Capitalizing versus Expensing 1025
Accounting for Special Purpose Entities (SPEs) Software Development Costs 1026
or Variable Interest Entities (VIEs) 985 Capital versus Operating Leases 1026
Cash Flow Effect of Stock Options 1028
Chapter 17 Statement of Cash Flows 1005 Global Vantage Point 1031

Review of Cash Flow Statement Formats and

Content 1006 Appendix A Time Value of Money 1061
The Direct Method 1007
Future Value 1061
The Indirect Method 1010
Present Value 1062
Preparing the Cash Flow Statement 1014 Present Value of an Ordinary Annuity 1064
Reconciliation between Statements: Some Present Value of an Annuity Due 1065
Complexities 1019
Asset Write-Offs and Impairments 1019
Appendix B Segment Reporting 1071
Asset Retirements and Reclassifications to Assets
Held for Sale 1021 Definition of a Reportable Segment 1071
Foreign Currency Translation Adjustments 1021 Required Disclosures 1073
Acquisitions of Other Companies 1022 Case Study: Harley-Davidson, Inc. 1074
Simultaneous Noncash Financing and Investing
Activities 1022
Index 1089
Analytical Insights: Ways Operating Cash Flows
Can Be Distorted or Manipulated 1024
Changes in Working Capital Accounts 1024
The Economic and Institutional Setting 1
for Financial Reporting

“Accounting is at the basis of building businesses, states, and empires.”1 LEARNING OBJECTIVES
After studying this chapter, you will

A
understand:
ccounting is the key to understanding the economics of a business.2 What
LO 1-1 Why financial statements
activities generate sales and how much does it cost to generate them? How are valuable sources of
much does the company owe creditors and will it have enough cash flow in the information about
future to pay the creditors? Did the company’s wealth increase during the year? To companies.
answer these questions, we need a system that provides valid and useful information. LO 1-2 How financial reporting
This book helps you understand this system and how to use it to evaluate your business addresses the information
demands of current or
and other businesses. potential stakeholders allo-
cating resources and moni-
toring manager activities.
WHY FINANCIAL STATEMENTS ARE IMPORTANT LO 1-3 How the supply of financial
Without adequate information, investors cannot properly judge the opportunities and information is influenced by
the costs of producing and
risks of investment alternatives. To make informed decisions, investors use information
disseminating it and by the
about the economy, various industries, specific companies, and the products or services benefits it provides.
those companies sell. Complete information provided by reliable sources enhances the LO 1-4 How accounting rules are
probability that the best decisions will be made. Of course, only later will you be able to established, and why man-
tell whether your investment decision was a good one. What we can tell you now is that agement can shape the
financial information com-
if you want to know more about a company, its past performance, current health, and
municated to outsiders and
prospects for the future, the best source of information is the company’s own finan- still be within those rules.
cial statements. LO 1-5 Why financial reporting phi-
Why? Because the economic events and activities that affect a company and that can losophies and detailed
Chapter
be translated into accounting numbers are reflected in the company’s financial state- accounting practices some-
times differ across
ments. Financial statements and accompanying disclosures provide information about a
countries.
company’s economic wealth and changes in that wealth. Some financial statements pro-
LO 1-6 Why International Financial
vide a picture of the company at a moment in time; others describe changes that took Reporting Standards (IFRS)
place over a period of time. Both provide a basis for evaluating what happened in the influence the accounting
practices of U.S.
companies.
1
J. Soll (2014), The Reckoning (New York, NY: Basic Books), p. xi.
2
This publication is designed to provide accurate and authoritative information in regard to the subject matter. It is
sold with the understanding that the publishers and the authors are not engaged in rendering legal, accounting, invest-
ment, or other professional services. If legal advice or other expert assistance is required, the services of a competent
professional person should be sought. 1
2 CHAPTER 1 The Economic and Institutional Setting for Financial Reporting

past and for projecting what might occur in the future. For example, what is the annual rate of
sales growth? Are accounts receivable increasing at an even greater rate than sales? How do
sales and receivable growth rates compare to those of competitors? Are expenses holding
steady? What rates of growth can be expected next year? These trends and relationships pro-
vide insights into a company’s economic opportunities and risks including market acceptance,
costs, productivity, profitability, and liquidity. Consequently, a company’s financial state-
ments can be used for various purposes:

∙ As an analytical tool.
∙ As a management report card.
∙ As an early warning signal.
∙ As a basis for prediction.
∙ As a measure of accountability.

Financial statements contain information that investors need to know to decide whether to
invest in the company. Others need financial statement information to decide whether to
extend credit, negotiate contract terms, or do business with the company. Financial statements
serve a crucial role in allocating capital to the most productive and deserving firms. Doing so
promotes the efficient use of resources, encourages innovation, and provides a liquid market
for buying and selling securities and for obtaining and granting credit. Periodic financial
statements provide an economic history that is comprehensive and quantitative and, therefore,
can be used to gauge company performance.3 For this reason, financial statements are indis-
pensable for developing an accurate profile of ongoing performance and prospects.
Management has some latitude in deciding what financial information will be made avail-
Accounting scandals are not able and when it will be released. For example, although financial statements must conform to
unique to U.S. firms. accepted standards, management has discretion over the particular accounting procedures
Prominent foreign firms used in the statements and the details contained in supplemental notes and related disclosures.
where accounting irregulari- To further complicate matters, accounting is not an exact science. Some financial statement
ties have been uncovered
items, such as the amount of cash on deposit in a company bank account, are measured with a
include Livedoor (Japan),
Royal Ahold (the
high degree of precision and reliability. Other items are more judgmental and uncertain in
Netherlands), Parmalat their measurement because they are derived from estimates of future events, such as product
(Italy), and Satyam warranty liabilities.
Computer Systems (India). Financial statement fraud is rare.4 Most managers are honest and responsible, and their
financial statements are free from the type of intentional distortions that occurred at WorldCom,
Health South, and Enron in the 2000s. However, these examples underscore the fact that inves-
tors and others should not simply accept the numbers in financial statements at face value.
Instead, they must analyze the numbers in sufficient detail to assess the degree to which the
financial statements faithfully represent the economic events and activities of the company.
Statement readers must:

∙ Understand current financial reporting standards.

∙ Recognize that management can shape the financial information communicated to outside
parties.

3
Published financial statements do not always contain the most up-to-date information about a company’s changing economic
fortunes. To ensure that important financial news reaches interested parties as soon as possible, companies send out press
releases or hold meetings with analysts. Always check the company’s investor relations website for any late-breaking news.
4
See 2012 Report to the Nation on Occupational Fraud & Abuse (Austin, TX: Association of Certified Fraud Examiners
Inc., 2012). To learn more about the wave of financial statement errors and irregularities uncovered at U.S. companies during
the past two decades, see S. Scholz, The Changing Nature and Consequences of Public Company Financial Restatements:
1997–2006 (Washington, DC: The Department of the Treasury, April 2008).
 Economics of Accounting Information 3

∙ Distinguish between financial statement information that is highly reliable and informa-
tion that is judgmental.

All three considerations weigh heavily in determining the quality of financial statement
information—and thus the extent to which it should be relied on for decision-making pur-
poses. By quality of information, we mean the degree to which the financial statements are
grounded in facts and sound judgments and thus are free from distortion. The analytical tools
and perspectives in this and later chapters will enable you to understand and better interpret
the information in financial statements and accompanying disclosures as well as to appreciate
fully the limitations of that information.

ECONOMICS OF ACCOUNTING INFORMATION

In the United States and other developed economies, the financial statements of business
enterprises serve two key functions. First, they provide a way for company management to
transfer information about business activities to people outside the company, which helps
solve an important problem known as information asymmetry. Second, financial statement
information is often included in contracts between the company and other parties (such as
lenders or managers) because doing so improves contract efficiency.
Information asymmetry just means that management has access to more and better infor-
mation about the business than do people outside the company. The details vary from one
Managers have a steward-
business to another, but the idea is that information initially available only to management can ship responsibility to inves-
help people outside the company form more accurate assessments of past economic perfor- tors and creditors. The
mance, resource availability, future prospects, and risks. Financial statements are the primary company’s resources belong
formal mechanism for management to communicate some of this private information to out- to investors and creditors,
side parties. but managers are “stewards”
of those resources and are
Business enterprises enter into many different types of contracts. Examples include com-
thus responsible for ensur-
pensation contracts with managers who work for the company, debt contracts with bankers ing their efficient use and
who loan money to the company, and royalty contracts with inventors who license products to protecting them from adver-
the company for sale to consumers. Often these contracts contain language that refers to veri- sity. To learn more about
fiable financial statement numbers such as “operating profit” for calculating managers’ the stewardship role of
accounting, see V.
bonuses, “free cash flow” for determining loan compliance, and product “sales” for comput-
O’Connell, “Reflections on
ing royalty payments. Contracts tied to financial statement numbers can restrict the range of Stewardship Reporting,”
decisions made by management and thereby align management’s incentives with those of the Accounting Horizons (June
other contracting parties (Chapter 7 explains how). 2007): pp. 215–227.
Financial statements are demanded because of their value as a source of information
about the company’s performance, financial condition, and resource stewardship. People
demand financial statements because the data reported in them improve decision making.
The supply of financial statement information is guided by the costs of producing and
disseminating it and the benefits it will provide to the company. Firms weigh the benefits they
may gain from financial disclosures against the costs they incur in making those disclosures.
To see financial statement demand and supply at work, consider a company that seeks to
raise money by issuing common stock or debt securities. Here financial statements provide
information that can reduce investor uncertainty about the company’s opportunities and risks.
Reduced uncertainty translates into a lower cost of capital (the price the company must pay
for new money). Investors demand information about the company’s past performance, oppor-
tunities, and risks so that the stock or debt securities can be properly priced at issuance.
Because companies need to raise capital at the lowest possible cost, they have an economic
incentive to supply the information investors want. In this section, you will see that the amount
4 CHAPTER 1 The Economic and Institutional Setting for Financial Reporting

and type of financial accounting information provided by companies depend on demand and
supply forces much like the demand and supply forces affecting any economic good. Of
course, regulatory groups such as the SEC, the Financial Accounting Standards Board
(FASB), and the International Accounting Standards Board (IASB) influence the amount and
type of financial information companies disclose as well as when and how it is disclosed.

Demand for Financial Statements

The benefits of financial statement information stem from its usefulness to decision makers.
People outside the company whose decisions demand financial statement information as a key
input include:

1. Shareholders and investors.

2. Managers and employees.
The efficient markets 3. Lenders and suppliers.
hypothesis says a stock’s
current market price reflects
4. Customers.
the knowledge and expecta- 5. Government and regulatory agencies.
tions of all investors. Those
who adhere to this theory
Shareholders and Investors Shareholders and investors, including investment
consider it futile to search
for undervalued or overval-
advisors and securities analysts, use financial information to help decide on a portfolio of
ued stocks or to forecast securities that meets their preferences for risk, return, dividend yield, and liquidity.
stock price movements Financial statements are crucial in investment decisions that use fundamental analysis to
using financial statements identify mispriced securities: stocks or bonds selling for substantially more or less than they
or other public data because seem to be worth. Investors who use this approach consider past sales, earnings, cash flow,
any new development is
product acceptance, and management performance to predict future trends in these financial
quickly and correctly
reflected in a firm’s drivers of a company’s economic success or failure. Then they assess whether a particular
stock price. stock or group of stocks is undervalued or overvalued at the current market price. Fundamental
investors buy undervalued stocks and avoid overvalued stocks.
Investors who believe in the efficient markets hypothesis—and who thus presume they
have no insights about company value beyond the current security price—also find financial
statement data useful. To efficient markets investors, financial statement data provide a basis
for assessing risk, dividend yield, or other firm attributes that are important to portfolio selec-
tion decisions.
Of course, shareholders and investors themselves can perform investment analysis as can
professional securities analysts who may possess specialized expertise or some comparative
advantage in acquiring, interpreting, and analyzing financial statements.
Shareholders and investors also use financial statement information when evaluating the
performance of the company’s top executives. This use is referred to as the stewardship
function of financial reports. When earnings and share price performance fall below accept-
able levels, disgruntled shareholders voice their complaints in letters and phone calls to
management and outside directors. If this approach doesn’t work, dissident shareholders
may launch a campaign, referred to as a proxy contest, to elect their own slate of directors
at the next annual meeting. New investors often see this as a buying opportunity. By pur-
chasing shares of the underperforming company at a bargain price, these investors hope to
gain by joining forces with existing shareholders, replacing top management, and “turning
the company around.”
The focal point of the proxy contest often becomes the company performance as described
in its recent financial statements. Management defends its record of past accomplishments
while perhaps acknowledging a need for improvement in some areas of the business. Dissident
 Economics of Accounting Information 5

shareholders point to management’s past failures and the need to hire a new executive team.
Of course, both sides are pointing to the same financial statements. Where one side sees suc-
cess, the other sees only failure, and undecided shareholders must be capable of forming their
own opinion on the matter.

Managers and Employees Although managers regularly make operating and

financing decisions based on information that is much more detailed and timely than the
information found in financial statements, they also need—and therefore demand—financial
statement data. Their demand arises from contracts (such as executive compensation agree-
ments) that are linked to financial statement variables.
Executive compensation contracts usually contain annual bonus and longer term pay com-
ponents tied to financial statement results. Using accounting data in this manner increases the
efficiency of executive compensation contracts. Rather than trying to determine firsthand
whether a manager has performed capably during the year (and whether the manager deserves
a bonus), the board of directors’ compensation committee needs to look only at reported prof-
itability or some other accounting measure that functions as a summary of the company’s (and
thus the manager’s) performance.
Employees demand financial statement information for several reasons:
∙ To learn about the company’s performance and its impact on employee profit sharing and
employee stock ownership plans.
∙ To monitor the health of company-sponsored pension plans and to gauge the likelihood
that promised benefits will be provided on retirement.
∙ To know about union contracts that may link negotiated wage increases to the company’s
financial performance.
∙ More generally, to help employees assess their company’s current and potential future
profitability and solvency.

Lenders and Suppliers Financial statements play several roles in the relationship
between the company and those who supply financial capital. Commercial lenders (banks,
insurance companies, and pension funds) use financial statement information to help decide
the loan amount, the interest rate, and the security (called collateral) needed for a business
loan. Loan agreements contain contractual provisions (called covenants) that require the bor-
rower to maintain minimum levels of working capital, debt to assets, or other key accounting
variables that provide the lender a safety net. Violation of these loan provisions can result in
technical default and allow the lender to accelerate repayment, request additional security, or
raise interest rates. So, lenders monitor financial statement data to ascertain whether the cov-
enants are being adhered to or violated.
Suppliers demand financial statements for many reasons. A steel company may sell mil-
lions of dollars of rolled steel to an appliance manufacturer on credit. Before extending credit,
careful suppliers scrutinize the buyer’s financial position in much the same way that a com-
mercial bank does—and for essentially the same reason. That is, suppliers assess the financial
strength of their customers to determine whether they will pay for goods shipped. Suppliers
continuously monitor the financial health of companies with which they have a significant
business relationship.

Customers Repeat purchases and product guarantees or warranties create continuing

relationships between a company and its customers. A customer needs to know whether the
seller has the financial strength to deliver a high-quality product on an agreed-upon schedule
6 CHAPTER 1 The Economic and Institutional Setting for Financial Reporting

and whether the seller will be able to provide replacement parts and technical support after the
sale. You wouldn’t buy a personal computer from a door-to-door vendor without first check-
In the United States and ing out the product and the company that stands behind it. Financial statement information
most other industrialized can help current and potential customers monitor a supplier’s financial health and thus decide
countries, the accounting whether to purchase that supplier’s goods and services.
rules that businesses use for
external financial reporting
purposes differ from those Government and Regulatory Agencies Government and regulatory agencies
required for income taxation demand financial statement information for various reasons. For example, the SEC requires
purposes. As a conse- publicly traded companies to compile annual financial reports (called 10-Ks) and
quence, corporate financial quarterly financial reports (called 10-Qs). These periodic financial reports are filed with
reporting choices in the
the SEC and then made available to investors and other interested parties. This process of
United States are seldom
influenced by the U.S. mandatory reporting allows the SEC to monitor compliance with the securities laws and
Internal Revenue Code. See to ensure that investors have a “level playing field” with timely access to financial state-
Chapter 13 for details. ment information.
Taxing authorities sometimes use financial statement information as a basis for establish-
ing tax policies designed to enhance social welfare. For example, the U.S. Congress could
point to widespread financial statement losses as justification for instituting a corporate
income tax reduction during economic downturns.
Government agencies are often customers of businesses. For example, the U.S. Army pur-
chases weapons from suppliers whose contracts guarantee that they are reimbursed for costs
and that they get an agreed-upon profit margin. So, financial statement information is essen-
tial to resolving contractual disputes between the Army and its suppliers and for monitoring
whether companies engaged in government business are earning profits beyond what the con-
tracts allow.
Financial statement information is used to regulate businesses—especially banks, insur-
ance companies, and public utilities such as gas and electric companies. To achieve econo-
mies of scale in the production and distribution of natural gas and electricity, local
governments have historically granted exclusive franchises to individual gas and electric
companies serving a specified geographical area. In exchange for this monopoly privilege,
the rates these companies are permitted to charge consumers are closely regulated.
Accounting measures of profit and of asset value are essential because the accounting rate
of return—reported profit divided by asset book value—is a key factor that regulators use in
setting allowable charges.5 If a utility company earns a rate of return that seems too high,
regulators can decrease the allowable charge to consumers and thereby reduce the
company’s profitability.
Banks, insurance companies, and savings and loan associations are subject to regulation
aimed at protecting individual customers and society from insolvency losses—for example,
a bank’s inability to honor deposit withdrawal requests or an insurance company’s failure to
provide compensation for covered damages as promised. Financial statements aid regulators
in monitoring the health of these companies so that corrective action can be taken
when needed.
Regulatory intervention (in the form of antitrust litigation, protection from foreign imports,
government loan guarantees, price controls, etc.) by government agencies and legislators con-
stitutes another source of demand for financial statement information.

5
This regulation process is intended to enhance economic efficiency by precluding the construction of duplicate facilities
that might otherwise occur in a competitive environment. Eliminating redundancies presumably lowers the ultimate service
cost to consumers. Regulatory agencies specify the accounting practices and disclosure policies that must be followed by
companies under their jurisdiction. As a result, the accounting practices that utility companies use in preparing financial
statements for regulatory agencies sometimes differ from those used in their shareholder reports.
 Economics of Accounting Information 7

Financial statement information has value either because it reduces uncertainty about a RECAP
company’s future profitability or economic health or because it provides evidence about the
quality of its management, about its ability to fulfill its obligations under supply agreements
or labor contracts, or about other facets of the company’s business activities. Financial state-
ments are demanded because they provide information that helps improve decision making
or makes it possible to monitor managers’ activities.

Disclosure Incentives and the Supply of Financial

Information
Commercial lenders sometimes possess enough bargaining power to allow them to compel
companies to deliver the financial information they need for analysis. For example, a cash-
starved company applying for a bank loan has a strong incentive to provide all of the data the
lender requests. Most financial statement users are less fortunate, however. They must rely on
mandated reporting (for example, SEC 10-K filings), voluntary company disclosures that go
beyond the minimum required reporting (for example, corporate “fact” books), and sources
outside the company (for example, analysts and reporters) for the financial information needed
to make decisions.
What forces induce managers to supply information? Browse through several corporate
financial reports and you will notice substantial differences across companies—and perhaps
over time—in the quality and quantity of the information provided. Some companies rou-
tinely disclose operating profits, production levels, and order backlogs by major product cat-
egory so analysts and investors can quickly spot changes in product costs and market
acceptance. Other companies provide detailed descriptions of their outstanding debt and their
efforts to hedge interest rate risk or foreign currency risk. Still other companies seem to dis-
The SEC passed Regulation
close only the bare minimum required. What explains this diversity in the quality and quantity
Fair Disclosure, known as
of financial information? “Reg FD,” to prevent selec-
If the financial reporting environment were unregulated, disclosure would occur volun- tive disclosure by compa-
tarily as long as the incremental benefits to the company and its management from supplying nies to market professionals
financial information exceeded the incremental costs of providing that information. In other and certain shareholders.
words, management’s decisions about the scope, timing, and content of the company’s finan- Reg FD helps to level the
playing field between indi-
cial statements and notes would be guided solely by the same cost and benefit considerations
vidual investors and institu-
that influence the supply of any commodity. Managers would assess the benefits created by tional investors by limiting
voluntary disclosures and weigh those benefits against the costs of making the information what management can say
available. Any differences in financial disclosures across companies and over time would then in private conversations
be due to differences in the benefits or costs of voluntarily supplying financial information. with an analyst or investor,
or in meetings and confer-
In fact, however, financial reporting in the United States and other developed countries is
ence calls where public
regulated by public agencies such as the SEC and by private agencies such as the FASB. The access is restricted.
various public and private sector regulatory agencies establish and enforce financial reporting
requirements designed to ensure that companies meet certain minimum levels of financial
disclosure. Nevertheless, companies frequently communicate financial information that
exceeds these minimum levels. They apparently believe that the benefits of the “extra” disclo-
sures outweigh the costs. What are the potential benefits from voluntary disclosures that
exceed minimum requirements?

Disclosure Benefits Companies compete with one another in capital, labor, and prod-
uct markets. This competition creates incentives for management to reveal “good news” finan-
cial information about the firm. The news itself may be about a successful new product
8 CHAPTER 1 The Economic and Institutional Setting for Financial Reporting

introduction, increased consumer demand for an existing product, an effective quality

improvement, or other matters favorable to the financial perception of the company. By volun-
tarily disclosing otherwise unknown good news, the company may be able to obtain capital
more cheaply or get better terms from suppliers.
To see how these incentives work, consider the market for raising financial capital.
Companies seek capital at the lowest possible cost. They compete with one another in terms
of both the return they promise to capital suppliers and the characteristics of the financial
instrument they offer. The capital market has two important features:

1. Investors are uncertain about the quality (that is, the riskiness) of each debt or equity
instrument offered for sale because the ultimate return from the security depends on
future events.
2. It is costly for a company to be mistakenly perceived as offering investors a low-quality
(“high-risk”) stock or debt instrument—a “lemon.”6

This lemon cost has various forms. It could be lower proceeds received from issuing stock,
a higher interest rate that will have to be paid on a commercial loan, or more stringent condi-
tions, such as borrowing restrictions, placed on that loan.
These market forces mean that owners and managers have an economic incentive to
supply the amount and type of financial information that will enable them to raise capital
at the lowest cost. A company offering attractive, low-risk securities can avoid the lemon
penalty by voluntarily supplying financial information that enables investors and lenders to
gauge the risk and expected return of each instrument accurately. Of course, companies offer-
ing higher risk securities have incentives to mask their true condition by supplying overly
optimistic financial information. However, other forces partially offset this tendency.
Examples include requirements for audited financial statements and legal penalties associated
with issuing false or misleading financial statements. Managers also want to maintain access
to capital markets and establish a reputation for supplying credible financial information to
investors and analysts.
Financial statement disclosures can convey economic benefits to firms—and thus to
their owners and managers. However, firms often cannot obtain these benefits at zero cost.

Disclosure Costs Four costs can arise from informative financial disclosures:
1. Information collection, processing, and dissemination costs.
2. Competitive disadvantage costs.
3. Litigation costs.
4. Political costs.

The costs associated with financial information collection, processing, and dissemina-
tion can be high. Determining the company’s obligation for postretirement employee health
Many firms promise to pay
some of the health care
care benefits provides an example. This disclosure requires numerous complicated actuarial
costs of retired employees. computations as well as future health care cost projections for existing or anticipated medical
See Chapter 14 for details. treatments. Whether companies compile the data themselves or hire outside consultants to do
it, the cost of generating a reasonable estimate of the company’s postretirement obligation can
be considerable. The costs of developing and presenting financial information also include the
cost incurred to audit the accounting statement item (if the information is audited).

6
“Lemon,” when describing an automobile, refers to an auto with hidden defects. In financial capital markets, “lemon” refers
to a financial instrument (for example, stock or debt securities) with hidden risks. See G. Akerlof, “The Market for ‘Lemons’:
Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, August 1970, pp. 488–500.
Another random document with
no related content on Scribd:
 + N Y Evening Post p12 N 27 ’20 130w

“‘Romance’ is possibly a strong word for this book, and is

applicable only where some story connected with a character in the
collection is told. Sometimes this takes Mr Tussaud far afield. But as
a collection of anecdotes it ranks almost with Siboutie’s ‘Souvenirs of
a Parisian.’”

+ − N Y Times p2 O 31 ’20 1700w

“Mr Tussaud has appreciated the value of his materials both from
the historic point of view and from the viewpoint of human interest.
His narrative, like his wax figures, simply presents facts of
undeniable interest. But it is the pictures that make the book
unique.”

+ No Am 213:287 F ’21 520w

+ Outlook 126:654 D 8 ’20 80w

“The book is often pleasantly gruesome.” E. L. Pearson

+ Review 3:531 D 1 ’20 120w

The Times [London] Lit Sup p16 Ja 8
’20 780w

TUTTLE, W. C. Reddy Brant: his adventures. il

*$1.75 (5c) Century
 20–18257

A series of short stories reprinted from Boy’s Life. The hero is

fourteen-year-old Reddy Brant, a young vagrant who wanders into
the cattle country of the far West. His adventures are many and
exciting and aided by his native wit and courage, with the occasional
help of coincidence, he acts as both agent of justice and angel of
mercy. The titles are: A rooting tooter; The go-getters; The clean-up
kid; A sage-brush Santa Claus; The jump of a forty-five; Reddy’s
muzzle-loader; A bunkie of the buckaroos; Reddy Brant—thinker;
When Reddy wondered why; Good-night, knight; Three wise men
and a star.

“There is a genuine flavor of old-time American humor in the

telling, and an unusual spirit of good fellowship.” M. H. B. Mussey

+ Nation 111:sup674 D 8 ’20 80w

“There are more adventures to the square inch in this book than
any other that has come to hand since ‘The three musketeers.’ The
manner of telling is swift, humorous, breezy. Reddy is a find.”
Hildegarde Hawthorne

+ N Y Times p8 D 12 ’20 90w

Springf’d Republican p9a O 24 ’20 40w

TWEEDALE, CHARLES L. Man’s survival after

death: or, The other side of life in the light of
Scripture, human experience, and modern research.
*$6 Dutton 218

“The researches made of late years to determine some proof of

existence, especially bodily existence after death, have been mainly
based upon science applied to psychical intuition and evidence. This
method is one elimination, discarding all the agents and influences
that might spring from irrational and abnormal factors in human
experience, and tracking what remained of evidence as proof of
communication with identities translated to a life beyond the grave.
Mr Tweedale in this work seeks to prove a similar fact but his
evidence has its origin in faith, and faith receives its confirmation in
the doctrines of Scripture. Mankind in general, he believes, holds the
germ of this faith but fails to make it an active conviction by reason
of insufficient knowledge of the realities supporting that faith. On his
part Mr Tweedale rejects psychic phenomena as the theory whereby
to command the knowledge of survival, though he does not hesitate
to refine upon its evidence to prove his own convictions of faith.”—
Boston Transcript

Boston Transcript p6 S 8 ’20 310w

“No such vast array of evidence, consisting of well-authenticated

occurrences, has ever before been brought together in one volume.
Not only this vast survey of the entire field of psychic phenomena,
with admirable presentation in its relation to man’s religious nature
and spiritual development, but there is added the clear explanations
and lofty thought of Mr Tweedale.” Lilian Whiting

+ Springf’d Republican p9a O 17 ’20 600w

 TWEEDALE, MRS VIOLET (CHAMBERS).
Beautiful Mrs Davenant. *$1.75 (1½c) Stokes

20–15067

There are two mysteries in this story, that concerning the past of
the beautiful Mrs Davenant and the mystery of Lake House, which
Letty Thorne senses on first coming there to stay with her uncle. In
the solution of the second the secret of the first is also revealed. It is
revealed to the reader and to one other person in the story, but Mrs
Davenant, feeling that there is that in her life which forbids
remarriage says no to the man who loves her and keeps her own
confidence. A minor love story develops between the vicar and Mrs
Davenant’s friend Agnes Howard, and to this affair as well as to the
love story of Letty there is a happy ending.

“The story is not very probable, but it is entertaining and cleverly

handled. It belongs to a rather old-fashioned type of romance, but it
is treated in a modern way.”

+ N Y Times p25 D 26 ’20 300w

“A very good mystery story.”

+ Sat R 129:545 Je 12 ’20 60w

“If this ‘novel of love and mystery’ is somewhat crudely

melodramatic and makes considerable demands on the improbable,
Mrs Tweedale at least gives her readers plenty of incident.”
 + − The Times [London] Lit Sup p202 Mr
25 ’20 70w

TWEEDALE, MRS VIOLET (CHAMBERS).

Ghosts I have seen, and other psychic experiences.
*$2 (2c) Stokes 133

19–19376

Supernatural experiences of a lifetime are recorded here. The

author has the convictions of the theosophist, and in these pages
there are occasionally brief essays on reincarnation, spiritualism, the
“other side.” Unlike most current spiritualistic books, there is here
no argument on alleged “irrefutable evidence.” The author is a
psychic, has seen these things, we may believe or not. At any rate,
reading at midnight, in a dimly lit house alone, we cannot remain
indifferent. Some of the titles are: “Silk dress” and “rumpus”; The
ghost of Prince Charlie; The invisible hands; Peacock’s feathers—the
skeleton hand at Monte Carlo; I commit murder; The angel of
Lourdes; “The new Jeanne d’Arc”; Auras. An interesting picture of
Madame Blavatsky (in the flesh) is presented in this book.

Ath p1136 O 31 ’19 120w

Reviewed by Preserved Smith

+ Nation 110:sup483 Ap 10 ’20 120w

 “This book introduces the reader not only to many interesting
visitors from the world beyond mortal ken but to a very interesting
human being as well. For the author’s own sake, it is well worth
reading.” Cornelia Van Pelt

+ Pub W 97:611 F 21 ’20 360w

Review 2:183 F 21 ’20 400w
The Times [London] Lit Sup p643 N 13
’19 700w

TYRRELL, GEORGE. Letters *$7 Dutton

(Eng ed 21–197)

“‘George Tyrrell’s letters,’ selected and edited by Miss M. D. Petre,

author of the ‘Life of George Tyrrell,’ will bring the opportunity of a
more familiar acquaintance to the many Americans who have been
interested in the well-known Irishman’s life and work. Modernism
claimed great sacrifices and the labor of some years; but it was not all
his life. And in this selection of letters it has been the intention to
show him in his dealings with widely moral and undenominationally
spiritual issues, to show him also in his lighter moments, when he
spoke true words in jest, or hid his meaning under a veil of
persiflage.”—Springf’d Republican

“So long as there are Christians of even a simple type, Tyrrell will
be read, because of his instinct for the things of Christ. His cruel
ironies and his flaming resentments, his rash speculations and his
tottering syntheses may all be buried in his grave.”
 + − Ath p15 Ja 7 ’21 840w
Boston Transcript p7 N 6 ’20 500w

“These highly interesting letters have been published, as we are

told, with the view of showing Tyrrell in ‘his lighter and brighter, as
in his sadder and graver moods.’ We must confess to finding him
sometimes equally depressing in both. His humour has a tinge of
that professional flippancy (as lay-people esteem it) which seems
common to clergymen of every denomination. The ‘letters of advice’
included in this collection show us Father Tyrrell at the best, wise,
comforting, sympathetic, with no thought but the welfare of his
correspondents.”

+ − Sat R 129:519 Je 5 ’20 1000w

“Miss Petre has done well to publish this selection from his
correspondence. He was a many-sided man, and his letters reflect his
many-sidedness.”

+ Spec 124:695 My 22 ’20 1350w

+ Springf’d Republican p8 O 16 ’20 450w

“Miss Maud Petre has shown good judgment in issuing this

collection of George Tyrrell’s letters as a supplement to his
‘Autobiography and life.’ It is plain that Tyrrell was a born
correspondent. He expresses himself with more ease in a letter than
in a volume. And he would, we think, have spared both himself and
his church much trouble had he written more letters and published
fewer books.”
 + The Times [London] Lit Sup p253 Ap
22 ’20 900w

TYRRELL, ROSS. Pathway of adventure. *$1.90

(2c) Knopf

20–8517

Stuart Wayne, writer of detective stories, finds himself involved in

a genuine plot. He picks up a note dropped by a girl in a passing taxi
and it starts him on the road of adventure and mystery. It is an
appeal for help from a girl held imprisoned in an abandoned house
in the Chicago suburbs. Through a lucky chance he gains entrance to
the house and talks to the girl, Zaida Grayson, but his presence is
discovered, with all but fatal consequences to himself, and the gang
of crooks, with their fair prisoner, eludes him. But he has learned
enough of her story to gain a clue and to connect it with the sudden
death of Patrick Cullom, the iron king, whose young granddaughter
is to inherit his wealth. With the aid of the secret service the band of
kidnappers and murderers are brought to justice and by his own
devotion and daring he wins the girl.

“Any lover of this type of tale must have discovered here [in the
Borzoi books] a number of excellent examples, of which ‘The
pathway of adventure’ is by no means the least successful.”

+ Boston Transcript p3 N 27 ’20 170w

N Y Times p26 Ag 1 ’20 260w
 “Events follow familiar lines, but with just enough variation to
sustain the interest as incident follows incident.”

+ Springf’d Republican p11a Jl 25 ’20

160w
 U

ULLMAN, ALBERT EDWARD. “Line’s busy.” il

*$1 (4½c) Stokes 817

Goldie is the telephone operator in a large hotel and she tells her
story in slangy letters to her pal Myrtle. Events in which she takes a
share from her switchboard reveal her as a girl “always there with the
helping hand, no matter how much it’s been lacerated in the past.” In
particular the love affairs of her patrons and co-workers interest her,
and she straightens out several tangles, and finally, her own love
story develops happily.

“A love story that is both clever and jolly is so rare nowadays that
one seizes with avidity upon the romance of little Goldie.”

+ Boston Transcript p5 O 6 ’20 200w

“Mr Ullman deserves full credit for a lot of ‘good lines.’ The wit of
Goldie’s letters is catchy and largely original—not current vaudeville
wheezes warmed over. We wish there was more of it and less of the
‘good-old-ham-and-eggs,’ ‘man-from-home’ brand of philosophy.”

+ − N Y Times 25:27 Je 27 ’20 500w

UNCENSORED letters of a canteen girl. *$2 (3c)

Holt 940.48
 20–14006

These letters were “scratched down on odds and ends of writing

paper, in a rare spare moment at the canteen; at night, at my billet,
by candle-light, in the mornings, perched in front of Madame’s fire-
place.... Why were they never sent? Simply because all letters mailed
from France in those days, must of course pass under the eyes of the
censor.” (Foreword) They contain everything that happened
generously interspersed with the conversations of the doughboys.
Contents: Company A; The doughboys; The front; The artillery; The
engineers; The ordnance; The French; Pioneers, M. P.’s and others.

“Rather more tempting to the jaded war appetite than most

personal narratives because of the fresh frankness which anonymity
permits. Will be liked better later on.”

+ Booklist 17:150 Ja ’21

+ Boston Transcript p4 O 23 ’20 220w

“So piquant and fine-humored are the observations and

revelations that one regrets that the book is anonymous. The
publishers’ claim, that this ‘gives the human side of soldiering as no
book yet published has done,’ does not seem extravagant.”

+ Springf’d Republican p8 Ag 27 ’20 270w

UNDERHILL, EVELYN (MRS STUART

MOORE). Jacopone da Todi; poet and mystic—
1228–1306; a spiritual biography. *$6 Dutton
 20–4482

“Jacopone da Todi, that remarkable Italian mystical poet, was

born soon after the death of St Francis of Assisi, about 1228 or 1230,
while Dante was yet in the prime of his manhood. Living in the world
until he was forty, a shrewd lawyer, a man of vivid temperament, of
wide culture and refined tastes, he received at that age his first
religious call. For the next ten years he wandered about as a
missionary hermit and in 1278, being then about fifty, he became a
Franciscan lay brother. Miss Underhill’s book is divided into two
parts of about equal length. The first is devoted to Jacopone’s life, set
in its proper historical environment. In the remaining part of the
book Miss Underhill gives us a chronological selection from his
mystical poems, so well known as the Laude, accompanied in the
fellow page by an English translation (also into poetry) by Mrs
Theodore Beck.”—Cath World

“Miss Underhill has a fine flow of language, a nice choice of

adjectives, and a thorough, if somewhat undiscriminating,
knowledge of the literature of her subject. Altogether her book is well
done in its way, and it is not the slightest use wishing, as we do, that
it had been done in another.” R. S.

+ − Ath p636 My 14 ’20 760w

+ Boston Transcript p7 Mr 13 ’20 1500w
+ Cath World 111:819 S ’20 620w

“The biographer’s comprehension of the worldly accomplishments

of her subject and her equal insight into his spiritual attainments, is
strikingly the counterpart of that two-sidedness which she
emphasizes in the man himself. The bibliography apart from its
immediate value as indicating the sources of the present work, will
be of service to those interested in the whole subject of Christian
mysticism.” Marianne Moore

+ Dial 70:82 Ja ’21 1650w

“When the romantic personality falls into the hands of the scholar
there is necessarily something of glamour and delight lost. This is
what has happened in this austerely spiritual biography of Evelyn
Underhill.” L. C. Willcox

+ − N Y Times 25:169 Ap 11 ’20 1200w

“Friar Jacopone was a poet of extraordinary power, and the fire,

ease, and accomplishment of his rather erotic mystic poems are
astonishing.”

+ Spec 124:426 Mr 27 ’20 1450w

“The materials are rather flimsy for the construction of a

biography. We cannot agree with Miss Underhill that Jacopone was a
great poet. Intense religious feeling, vividly and forcibly expressed,
does not of itself constitute poetry, and beyond such expression
Jacopone does not often rise.”

+ − The Times [London] Lit Sup p229 Ap

15 ’20 4100w

UNDERHILL, RUTH MURRAY. White moth.

*$2 Moffat
 20–20002

“Miss Underhill has converted the old fable of the ant and the
grasshopper into a very modern romance which she calls ‘The white
moth.’ Hilda Plaistead is the earnest plodder, Guy Nearing the gay
and irresponsible hero, and the setting is the town of Cato. The two
have a childhood engagement, become widely separated, and in the
final chapter again discover that they were always meant for each
other, but it is only after Guy has learned the folly of being jack of all
trades and master of none.”—N Y Evening Post

“We can scarcely claim for Miss Underhill’s story either originality
of substance or of treatment. What she does accomplish is an
exceedingly readable and very human story, which possesses certain
scenes of quiet and insistent realism.”

+ − Boston Transcript p6 F 5 ’21 250w

“High school days are described as well as in Booth Tarkington’s

‘Seventeen.’ The characters are all well drawn. However, the true
merit of the book is in taking some new aspects of life, such as the
business rivalry between man and woman or the problems of factory
management and using them to construct a good old-fashioned
romance which holds the attention from start to finish.”

+ N Y Evening Post p10 O 30 ’20 140w

“It is a real romance and has a charming atmosphere.” Hildegarde

Hawthorne

+ N Y Times p9 D 12 ’20 70w

 UNSEEN doctor. *$1.75 (5c) Holt 134

20–15457

The book is one of the Psychic series and describes the cure of a
case of illness of fifteen years’ standing in the course of a year and
eight months by an invisible spirit doctor. It contains a preface by J.
Arthur Hill, testimonials by several personal friends of the patient
and a report by the physician long in charge of the case in the flesh.
The contents are: A chance paragraph; A chain of coincidences; The
first interview; A further surprise; The invisible hand; Experiences
and experiments; Fellow-lodgers; Royal progress; Learning to walk;
“My little girl”; Six months later; Comments and criticisms;
Appendix and index. The book was published in England as “One
thing I know, or, The power of the unseen.”

“‘The unseen doctor’ is as respectable a book of psychic

experiences as has come to the public. There is no doubt that it is a
record of real experiences. But, respectable as the book is, it still
leaves open the eternal question, ‘Why should spirit doctors cling to
the earth, and why have they no concerns of their own?’”

+ − N Y Times p16 N 14 ’20 320w

“As a ‘psychic’ tale the book is futile and foolish, indeed, rather
fertile in folly.”

− Review 3:393 O 27 ’20 230w

“There is nothing fantastic in the story, and it is told with such

convincing truth that the reader seems to have no choice save to
accept it on its face value.” Lilian Whiting

+ Springf’d Republican p5a Ja 23 ’21

330w

UNTERMEYER, LOUIS, ed. Modern American

poetry. *$1.40 Harcourt 811.08

20–1516

“In his anthology, ‘Modern American poetry’ Louis Untermeyer

has selected 132 poems by 80 authors, arranged them effectively,
with brief notices for each writer and handy indices. Old favorites are
here; ‘Little boy blue’ rubs shoulders with ‘The purple cow,’ and
‘When the frost is on the punkin’ with ‘A stein song.’ Franklin P.
Adams, Oliver Herford, and Carolyn Wells are represented.”—
Springf’d Republican

“All the best recent things are here.” H: A. Lappin

+ Bookm 51:212 Ap ’20 70w

“This verse is remarkable for vigor and energy, form being

sacrificed for content. An interesting feature is the group of seven
poems on Lincoln by seven different poets.”

+ Cleveland p41 Ap ’20 60w

 “Though it too often misses the authentic current, is too often led
away into stagnant marshes, it is perhaps as good a map as we yet
possess. The editor is a better conversationalist than guide.”

+ − Dial 68:667 My ’20 60w

Dial 69:664 D ’20 60w

“It is a comprehensive and unusually satisfying collection.”

+ Ind 104:64 O 9 ’20 130w

Reviewed by R. P. Utter

Nation 110:237 F 21 ’20 420w

“The present reviewer’s quarrel with Louis Untermeyer’s ‘Modern

American poetry’ is not so much because of its selections and
omissions—both often very wise ones—as because of Untermeyer’s
attitude of mind in his introduction. It is the typical attitude of the
poets of our present little ‘renaissance,’ and perhaps one should
hardly quarrel with it, but smile at it. You would suppose poetry that
was honest, fresh, contemporary, had never been written before.” W.
P. Eaton

− + N Y Call p10 Ja 18 ’20 1000w

“If there be any critic in the country who ought not to make a
schoolbook, that critic is Louis Untermeyer. He is much too
brilliantly individual and his likes and dislikes are too pronounced. It
is a book of verse that young people probably will like, if they like
verse at all. Many of the selections included are humorous.... A good
professor would make a better anthology for use in schools.”
Marguerite Wilkinson

− + N Y Times 25:140 Mr 28 ’20 480w

+ School R 28:630 O ’20 160w

“The criticism may be raised that Mr Untermeyer has been too

generous to the ultra-moderns. But the selections of Carl Sandburg,
John Gould Fletcher and Alfred Kreymborg are chosen with
discrimination, and serve to accomplish the editor’s purpose.”

+ − Springf’d Republican p6 Ja 26 ’20 300w

+ Survey 43:554 F 7 ’20 150w

“This book is a delightful one to read; it has a distinct individuality,

and if Mr Untermeyer, in avoiding the beaten track, does not always
publish the finest work of his poets, he recovers many a line that has
been undeservedly forgotten.” E: B. Reed

+ Yale R n s 10:199 O ’20 390w

UNTERMEYER, LOUIS, ed. Modern British

poetry. *$2 Harcourt 821.08

20–13991

A companion volume to Mr Untermeyer’s ‘Modern American

poetry.’ Over seventy-five poets are represented, ranging from
Thomas Hardy, born in 1840, to Robert Graves, born in 1895. Among
the others are Alice Meynell, William Watson, Francis Thompson, A.
E. Housman, Ernest Dowson, Hilaire Belloc, Walter de la Mare, G. K.
Chesterton, W. W. Gibson, John Masefield, Ralph Hodgson, Harold
Monro, John Drinkwater, Siegfried Sassoon, Francis Ledwidge, Irene
Rutherford McLeod, Richard Aldington, Robert Nichols and Charles
H. Sorley. In an introduction the editor discusses the new influences
and tendencies.

Booklist 17:23 O ’20

Dial 69:664 D ’20 60w

“A few months ago saw the birth of Mr Untermeyer’s book of

‘Modern American poetry,’ a work remarkable as showing the wide
variety of theme and treatment which is at least one characteristic
trait of American poetry today. Now Mr Untermeyer, for some
obscure reason, essays the same feat with ‘Modern British poetry.’
And the result is conspicuously a failure.” J: G. Fletcher

− Freeman 2:116 O 13 ’20 1100w

+ Nation 111:278 S 4 ’20 50w

“The disproportionate amount of space allotted to the various

poets gives a false emphasis: Mr Hardy, Mr Bridges and Mr Russell
have each less than three pages, while Mr Chesterton has nine and
Mr Kipling and Mr Noyes (Mr Noyes!) twelve each. The anthologist
is tolerant of many schools; but his eye is more on the present than
on the immediate past.” S. C. C.

− + New Repub 24:49 S 8 ’20 800w

 “Aside from the small flecks the book presents itself as an
admirable attempt and one that, through its delightful snapshots of
the poets prefixed to each writer’s work, should inveigle readers into
a closer scrutiny of British verse.”

+ − N Y Times p16 N 7 ’20 490w

“The editor’s taste is sensitive, and his curious bitterness towards

the Victorians, which is the main drawback to his liberality, does not
greatly affect the catholicity of the work.”

+ Review 3:321 O 13 ’20 280w

+ School R 28:630 O ’20 160w

UNTERMEYER, LOUIS. New Adam. *$1.75

Harcourt 811

20–16871

As an introduction to this book of poems Mr Untermeyer reprints

“A note on the poetry of love” from the New Republic. He comments
on the artificiality of the love poetry of the preceding age and notes
that in our day there is a tendency to return “to the upright vigor, the
wide and healthy curiosity” of our earlier ancestors, the Elizabethans.
Among the poems of the book are: The new Adam, Hands, Asleep,
Summer storm, A marriage, Wrangle, Equals, Supplication, The
eternal masculine, Windy days, The embarrassed amorist, Words for
a jig, Disillusion, The prodigal.