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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outdated by new standards.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.
 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 law-
suit settlements and provided additional reference materials.
∙ Updated to reflect new requirements for discontinued opera-
tions treatment. ∙ Included Chesapeake Energy Corporation disclosures in the
troubled debt restructuring section.
∙ Updated exhibits from company reports throughout the
chapter. Chapter 9: Inventories
Chapter 3: Revenue Recognition ∙ Updated Lower of Cost or Market discussion for
∙ Completely new chapter discusses in depth the new revenue ASU 2015-11.
recognition standard and its 5-step model for determining ∙ New BlackBerry Limited illustration of inventory
when to recognize revenue. impairment.
∙ Discusses issues involved in the implementation of the new ∙ Revised primary LIFO example to be in an environment of
standard. rising prices.
∙ Discusses expected financial statement effects of the new ∙ Moved discussion of absorption and variable costing into an
standard. appendix.
∙ All new end-of-chapter material tailored to the new standard. ∙ Updated LIFO reserve and tax statistics.
∙ Because the existing revenue recognition standards will ∙ Updated illustrations throughout chapter.
remain in effect through 2017, the chapter continues to ∙ Updated Global Vantage Point section.
include a discussion of existing revenue recognition standards.
Chapter 10: Long-Lived Assets
Chapter 4: Structure of the Balance Sheet and Statement of ∙ Updated and expanded Global Vantage Point section on the
Cash Flows differences between U.S. GAAP and IFRS.
∙ Restructured chapters 4 and 17 to eliminate redundancies. ∙ New ExxonMobil interest capitalization illustration.
∙ Chapter 4 covers the structure of the cash flow statement and ∙ Updated financial statement illustrations throughout chapter.
how it is derived. The cash flow effects of more complex
∙ New cases on capitalization of interest and asset impairment.
transactions are deferred to chapter 17, after those transac-
tions have been covered. ∙ New Disney purchase price allocation illustration.
∙ The appendix previously appearing in chapter 17 is now in ∙ Added and updated new problems and cases.
chapter 4. It describes how to use a spreadsheet to create a ∙ Updated web appendix on current value accounting for IFRS
cash flow statement in a more compact format than a tradi- issues; available in Connect.
tional t-account analysis.
Chapter 11: Financial Instruments and Liabilities
∙ Updated exhibits from company reports throughout the
∙ Updated chapter for ASU 2015-01 (extraordinary items),
chapter.
ASU 2015-03 (debt issue costs), ASU 2016-01 (fair value
Chapter 5: Essentials of Financial Statement Analysis option),and IFRS 9 (fair value option and 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.
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 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.
 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
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 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
Another Random Scribd Document
with Unrelated Content
 Over which a tribe once sped.

Upper Catawba Falls, Esmeralda, N. C.

Occoneechee Falls, Jackson County, N. C.
 In the Cherokee Country. Whitewater Falls.

“Falls and foams and seethes forever.” “Pours its deluge down the ravine
Unobstructed in its rage.”

Then she wandered down the river,

On and on, as on it flows,
Wades the river, wades its branches,
Follows it where’er it goes
Through the laurel brush and ivy,
Over spreading beds of fern,
Over rock moss-covered ledges,
Follows every winding turn,

Till it flows into the river,

Called the Little Tennessee,
Here she lingers long and tarries,
And she strains her eyes to see
If her vision will reveal him,
And abates her breath to hear
The voice of Whippoorwill, her lover,
One of all to her most dear.

Yet no sound came to relieve her,

And no vision came to please,
And it never dawned upon her,
Here among the virgin trees,
That her lover was transported,
With the brave and chief and child
To the land of Oklahoma,
Land so lonely, weird and wild.

Up the stream she then ascended,

Slowly, surely did she march,
‘Neath the spreading oak and hemlock,
Resting oft beneath their arch.
Walls of solid spar and granite
Roared their heads up toward the blue,
But no wall or hill or river
Could impede the maiden true.

She now reached the Nantahala,

Picturesque in every way,
And she rested ‘neath the shadow
Of the mountain tall and gray;
High the mountain, clear the water,
That comes rushing down the side
Of the mountain from the forest
With its unpolluted tide.

Speckled beauties swam the water,

Swam as only they can do;
Deer in herds roamed all the forest,
Only Cherokees were few.
Eagles, swift upon their pinions,
Soared aloft upon the air,
They would turn their eyes to heaven,
Then down on the maiden fair,

As to guard her in her roaming,

For she had no other guide,
Save one squaw and constellation,
And the racing river tide.
Birds had ceased their long migration,
Not a cloud disturbed the blue
Of the canopy of heaven,
And the country they passed through.

Nightingale and thrush and robin

Mated, sang and dwelt serene,
In the forest, by the river,
With its banks so fresh and green,
And each spoke to Occoneechee,
In the language Nature gives,
Of the flora and the fauna,
Where the child of Nature lives.

Then she rambled through the mountains,

To the summit, grand and high,
Where Tusquittee’s bald and forest
Penetrates the cloudless sky.
Unobstructed vision reaches
‘Cross the Valley River, wide,
To the Hiawassee river,
Flowing in its lordly pride.

Here the panorama rises

In its beauty grand and gay,
As you linger on the summit,
As you hesitating stay;
Visions long out in the distance;
Haunt you with enchanted smile,
And the reverie of Nature
Doth the wanderer beguile.

Valleytown, the Indian village,

And Aquone, the camping ground,
Cheoas vale within the distance,
Once where Cherokee were found,
Came within the easy focus
Of the trained observant eye
Of the maiden on the mountain,
Near the clearest vaulted sky.

Occoneechee looked and wondered,

Scanned the mountain, scanned the vale,
And she lifted up her voice there,
And began to weep and wail;
For her lover, long departed,
For her lover brave and true,
And she wondered if he tarried
In the reaches of her view.

Still no sight or sound revealed him,

Beauty smiled and smiled again,
As she sighed and prayed to Nature,
Yet her anxious thoughts were vain.
For the valley and the mountain,
And the river and the rill,
Separated Occoneechee
From her lover Whippoorwill.

Then she to the Hiawassee,

Wound the mountain-side and vale,
And she made a boat of hemlock,
And she left the mountain trail,
And she launched the boat of hemlock
On the Hiawassee tide,
Launched the boat and went within it,
Down the silver stream to glide.
Down the river set with forest,
Nottely joins the quickened pace
Of the river and the maiden,
In their onward rapid race,
And she passes through the narrows,
Through the narrows quick she flew,
Through the spray and foaming current,
With her long hemlock canoe.

Faster sped the boat of hemlock,

Past the mountains and the shoal,
Past the inlet Conasauga,
Where Okoee waters roll;
Here she stopped to make inquiry
Of a relegated brave.
If he’d seen her wandering lover,
In the forest, by the wave.

Then she left the boat of hemlock,

Roamed the forest far and wide,
Crossed the mountain streams and fountains,
With their cliff and foaming tide,
Followed far Okoee river,
Toccoa laves her weary feet,
Ellijay and Coogawattee
Do the pretty maiden greet.

Not a word in all her wanderings

Did she hear of Whippoorwill,
Though she roamed through leagues of forest,
And by many a rippling rill.
Candy creek and Oostanula,
Both were followed to their source,
With their winding current flowing
In their ever onward course.

Where the brave had traveled with her,

And had told her many tales
Of the wars he’d been engaged in,
And the windings of the trails,
Over which the tribe had traveled
In the years that long had flown,
And the land now held by strangers,
Which his tribe once called their own.

And at evening in the autumn,

When the leaves turn brown and red,
And the hickory and the maple
Gild with yellow as they shed,
And the poplar and the chestnut,
And the beech and chinquapin,
Hide the squirrel and the pheasant
From the sight of selfish men;

Where the grapevine climbs the alder,

Clings with tendril to the pine,
And the air is sweetly laden
With rich odors from the vine;
And the walnut and the dogwood
Furnish dainties rich and rare,
For the chipmunk and the partridge,
Which perchance do wander there.

Where the otter slide is slickened,

And the weasel and the mink
Do come creeping down the river,
There to bathe and fish and drink,
And the red fox roams the forest,
And defies the fleetest hound,
And the panther in the forest
Makes a hideous screaming sound.

Here the brave would sit and tell them

Tales and myths told oft before,
Tales of war and of adventure,
By great chiefs now known no more;
And one night they heard the shrieking
Of a wildcat near the stream,
That awakened them from slumber
And disturbed their peaceful dream;

For a panther, fierce and fearless,

Had come creeping down the side
Of the cliffs far up the mountain,
Near the Hiawassee tide,
And they met down near the river,
And they fought down near the stream,
And they made the night grow hideous
With their awful shrieks and scream.

The Balsam Mountains.

In Jackson Co., N. C.
 North from Sunset Rock, Tryon Mt.

Then she took her boat of hemlock,

And they launched it on the wave,
And they sat upon its gunnels,
Occoneechee squaw and brave,
And they pushed out in the current,
Where the waves were rolling high,
And the boat sped through the rapids,
Fast as flocks of pigeons fly.

Pushed they down and ever onward

Toward the placid Tennessee,
To the island and the inlet
Of the rolling Hiawassee.
Here they camped o’er night and rested,
Told they tales of long ago,
With their memories and sorrows
Breathed they out their care and woe.

Then they floated down the river,

On its smooth, unrippled tide.
To the creek of Chicamauga,
Where so many braves had died.
And they tented near the river,
Tied their boat up to the bank,
Where John Ross had crossed the river,
Where his ferryboat once sank.

Wandered through the vale of dryness,

Chattanooga’s pretty flow,
Clear as crystal, pure as sunbeams,
Winding hither too and fro.
Drank the waters, bathed they in it,
Fished and hunted stream and plain,
Where the buffalo once wandered,
But where none now doth remain.

Like a serpent that is crawling,

Wriggling, writhing, resting not,
Fleeing from a strange invader
To some lone secluded spot,
Winds and curves and turns forever,
In its course that has no end,
Swings to starboard and to larboard,
Round the Moccasin’s great bend.

Flows the river on forever,

By the nodding flowering tree,
Shedding fragrance like a censer,
Flows the pretty Tennessee;
On her bosom’s crest is carried
Precious burdens, rich and rare,
From the fertile fields about her,
And the ozone-laden air.
Occoneechee squaw and warrior
Rode the silver-flowing tide,
in the boat made out of hemlock,
Which so long had been their pride;
But the time now came for parting,
As must come in every life,
That is heir to human nature,
With its toil and woe and strife.

Here Sequatchie’s fertile valley,

They approached and must ascend,
Like the cloud before the sunbeam,
Driven by the fiercest wind;
Then they hid the boat of hemlock,
Sure and safe, then bade adieu,
To the boat upon the river,
Which had been their friend so true.

Then they mounted little ponies,

Fresh and sleek and fat and fast,
And they sped along the valley,
Like the birds upon the blast,
Looking for the handsome warrior,
Looking hither, glancing there,
And quite often on the journey,
They would stop to offer prayer;

But the valley held the secret;

Not a living man could wrest,
From the valley rich and fertile,
Secrets buried in its breast;
Though the tribe had ceased to own it,
Though the tribe had passed away,
From the valley of Sequatchie,
Like the fading of the day,

Still the signs and many tokens

Told a tale of war and strife,
Where the whites had used the rifle,
And the braves had used the knife,
For the bleaching bones of warriors
Were discovered everywhere,
And the hideous sight brought sorrow,
To this maiden now so fair,

Birds were singing in the forest,

Merrily and full of glee,
And a symphony unrivaled
Flooded forestland and lea;
With the mellow tones from singers,
Varied, versatile and sweet,
Came from forest and from meadow,
Came the attuned ear to greet.

And when evening shade would settle,

And the moon full rose to view,
And the zephyrs filled the valley,
And the flowers suffused with dew,
Then the nightingale would lure them
Or the mockingbird hold sway,
From the advent of Orion,
Till the dawning of the day.

Stretching meadows lay before them,

Rich with fragrance, rare with flowers,
Variegated blending colors
Lent a rapture to its bowers,
That outstripped the fields elysian,
Decked with Nature’s rarest guise,
Pleasure-house for wisest sages,
Such as only fools despise.

Such the scenes within the valley,

As they joyous sped along,
Filled with rapture, filled with pleasure,
At the scenery and the song.
Nature clapped her hands exultant,
In the sylvan groves so green,
Where the Goddess Proserpina
Was enthroned majestic queen.

Mighty warriors red with passion,

Once had trod this virgin soil,
And had rested in the valley,
When o’ercome by heat and toil;
Sportive maidens once delighted
To engage in dance and song,
With the warriors in the valley,
With the chieftains brave and strong.

But the mighty men and maidens

Long since ceased this land to roam,
Since the pale face armed with power,
Killed the braves and burned the home,
Took the land and burned the wigwam,
Bound the chief and drove away,
All the warriors, squaws and maidens,
Toward the golden close of day.

Happy children, wild with rapture,

Laughed with ecstasy and glee,
Once had filled the vale with echoes,
And had sported lithe and free,
All along the hill-locked valley,
Played lacrosse and strung the bow,
Ran the races, caught the squirrel,
In the distant long ago.

Sped they like the rolling torrent,

Thru the Appalachian chain,
With its towering peaks and gorges,
‘Mid its sunshine and its rain,
Sped along the flowing Chuckey,
With its reddened banks of clay,
Were delighted by its beauty,
Were enticed with it to stay;

Saw the rushing, rolling waters

Fall and foam and seeth below,
Saw the cascade of Watauga
Surging hither to and fro;
Looked with tireless vision upward,
Viewed from summits high and proud,
Landscapes grander than Olympus,
With their crags above the cloud.

“Occoneechee,” said the warrior,

In a gentle tone, and mild,
“I remember all this grandeur,
Since I was a little child,
I have traveled trail and mountain,
Chased Showono, deer and bear,
Crossed Kentucky in the chases,
Seen the blue-grass state so fair.

Once while hotly, I pursuing,

Buck with antlers fierce and strong,
Came upon a band of white men,
With their rifles black and long,
Came a flash of rifle powder,
Quick as lightning came the sounds,
From reverberating rifles,
And the bark of baying hounds.

They had slain the buck with antlers,

And would be upon me soon,
If discovered by their captain,
By their captain, Daniel Boone;
He the hunter, Indian hater,
Chief and captain, pioneer,
Known to every tribe and tribesman,
To be destitute of fear.
Quick I back into the forest,
Without noise or slightest sound,
Lest perchance I draw attention,
From the hunter or his hound.
’Twas a wilderness of wildness,
Transylvania was its name,
Home of coon and hare and turkey,
And all sorts of kindred game.

Once the noble chiefs and warriors

Roamed Kentucky far and wide,
Far along the broad Ohio,
Strode the Indians by her tide;
And they camped and roamed the forest,
Dense and dark, supremely grand,
Dominated vale and forest,
Dominated all the land;

Chased the scouting bands of warriors,

Who would dare to camp and die,
On the soil of old Kentucky,
Where the meadow grass grew high;
Hiding ‘neath the waving grasses,
Where the muskrat and the snake,
And the hedge hog and the weasel,
Lurked in shade of vine and brake.

I was with good Junaluska,

In the battles and the raids,
Where the Creek and the Showano
Lent each other all their aids,
When upon the Tallapoosa
River, at the Horseshoe bend,
We joined hands with General Jackson,
And by death we made an end,

Of the Creeks and all their allies,

Who assembled, one and all.
To resist our mighty forces,
They had built their mighty wall,
Built it strong and reinforced it,
Not a single spot was weak,
For ’twas built by master workmen,
By the tribesmen of the Creek.

When the work was strong and finished,

All the warriors came to dwell
In the fortress, by the river,
Came they tales of war to tell;
Came a thousand of the warriors,
With their weapons and their wives,
Came and lodged within the fortress,
Like the swarming bees in hives;

Brought their children and their chattels,

Brought they gun, and club and spear,
For they thought once in the fortress,
That they’d have no harm to fear,
But the Cherokee and Jackson
Brought out cannon great and small,
And they raised the siege of Horseshoe,
Throwing many a shell and ball;

Into fortress, into village,

Flew the missiles thick and fast,
Like the rain, among the rigging,
Of the sailor’s spar and mast,
Crushing, crashing stone of fortress,
Making splinters of the wall,
Of the fortress by the river,
With the heavy cannon ball.

But it fell not in the fury

Of the battle’s hottest fray,
Stood the test like old Gibraltar,
All the night and all the day,
And the progress was so slowly,
That the battle must be lost,
To the Cherokee and Jackson,
And so great would be the cost,

If some means were not discovered,

To dislodge the valiant Creek,
Now entrenched within the fortress,
Growing strong instead of weak.
Junaluska said to Jackson,
‘Choose ye this day man or men,
Who can breast the tide before you,
Who will try to enter in;

Who can swim the Tallapoosa,

Who can stem the flowing tide,
Who are noble, strong and fearless,
And have God upon their side.
If you have such men among you,
Let them come forth one and all,
Let them dare to do their duty,
Let them dare to stand or fall.’

Not one man of all the white men

Could be found who dared to try
To o’ercome the Tallapoosa,
Or would risk his life to die.
So your guide whom God has given,
Volunteered to risk the wave,
With your father, Junaluska,
Volunteered, his tribe to save.

Then we sought our God in silence,

And became resigned to death,
That lay out upon the current
Of the river’s silent breath.
Under cover of the darkness,
And the solitude of night,
We betook the awful peril,
With a tremor of delight.

Silently we now descended

To the deathlike river tide,
Following a star’s reflection,
For a signboard and a guide;
To point out the right direction,
And to bring us into port,
Where the canoes lay at anchor,
Near the stolid silent fort.

Quick we loosed them from their moorings

Each man lashed beside his boat—
Quite a dozen, swift as arrows,
And we set them all afloat;
Shot them straight across the river,
Like a flash at lightning speed,
Faster than the fleetest greyhound,
Bounding like a blooded steed.

When we reached the army’s landing,

Quick the boats were filled with men;
Like a thunderbolt from heaven,
Did the deadly work begin.
Transports glided o’er the current,
Like a shuttle to and fro,
Moving Cherokee and white men,
To confront a worthy foe.

Scaled the ramparts of the fortress,

Stormed the inner citadel,
And we massacred the inmates!
How? No human tongue can tell.
Not a woman, child or human
Made escape, but all were slain
In the fort or in the river,
Or upon the gory plain.

When the massacre and slaughter

Had abated, all the slain
Numbered more than a thousand,
In the fort or on the plain.
Many floated in the river,
Many died out in the woods,
And were buried in the forest,
By erosion or the floods.

Sad and silent stood the fortress,

All deserted and alone;
Not a man or child or matron,
Now was left to claim their own.
All the warriors and the chieftains
Died in conflict true and brave;
None were left to tell the story,
Or to mark some lonely grave.

Cruel man! O God, forgive them!

Pity such a cruel race.
In their stead, O God of nations,
Send some one to take their place,
Who is humane, who is human,
Who is honest, kind and true,
Who when given strength and power,
Destroys not, but spares a few.

In the lore of ancient nations,

In the tales of modern times,
In the prose that now remaineth,
Nor the poet’s splendid rhymes,
Is a story told more cruel
Than the slaughter of the Creeks,
By the Persians, Jews or Romans,
Macedonians or Greeks;

Where a nation, like a shadow,

Vanished quickly and was not,
Like a vapor in the valley
Passes and is soon forgot.
Passes like a fleeing phantom,
Like a mist before the sun,
Came and tarried for a moment,
And forever was undone.

Occoneechee, come and travel,

To the distant mountains high,
Where the summit of the mountains,
Tower upward toward the sky.
Delectable the splendid mountains,
Rich in ferns forever green,
And the galaxy of the mountains
Are the rarest ever seen.

Mortal eyes have never witnessed,

Mortal tongue can never tell
Of the grandeur and the beauty
Of the ravine and the dell.
Strange declivities confront you,
Then a sudden upright wall
Rises like a mystic figure,
With a splendid waterfall.

I will take you to the summit

Of the mountains white with age,
And will show you where the tempests
Rush and roar with ceaseless rage,
Where phenomena electric
Makes mysterious display
Of their power and their beauty
In the distance far away;
 Balsam Mountains.

“I will take you to the summit

Of the mountains white with age.”
 From Bald Rock.

“At the juncture of the river

Where the Indians used to dwell.”

You can see the flash of lightning,

And can hear the thunders roll,
With reverberating echoes,
That o’erwhelm your very soul,
Make you sigh and shake and shudder,
Make you tremble like a leaf,
Make you crouch in soul and body,
Like the life o’ercome with grief.

Yet you stand and gaze in wonder,

Watch the elements grown dark;
Adoration turns to terror,
At the least electric spark;
Vivid flashes light the heavens,
Keep them in perpetual glow,
Like aurora borealis
From beyond eternal snow.

God eternal sends the sunshine,

Melts the vapor, chains the cloud,
Cages up the lightning flashes,
Stops the peels of thunder loud.
Changes discord into music,
And the soul with it He thrills,
From the music on the mountains,
Made by leaping, laughing rills.

Look! behold the ray that cometh,

Fills the earth with hope again,
Dissipates the clouds and vapor,
With their shadows and their rain.
See the sunburst full of glory,
Shoot forth rays of gilt and gold,
Sung by bards, portrayed by artists
Yet its glory ne’er was told.

Painters fail to give description,

Fail on canvas to portray,
Rising sun within the mountains,
And the glorious dawn of day;
Sages, bards and humble poets,
All are pigmies in the eyes
Of the one who stands and watches
Sunshine from its sleep arise.

Picturesque! O scenes eternal!

From the dizzy, dizzy heights
Of Grandfather, Rone and Linville,
From which rivers take their flights.
Yadkin, Broad and the Catawbas,
Where the Indians used to roam,
Are the habitation only
Of the white man and his home.

High upon the Linville mountains

Creeps a silent silver stream,
From the shadows of the forest,
Like the splendor of a dream,
Then it runs amid the boulders,
Joins with many sparkling rills,
That comes rushing from the forest,
Of those high eternal hills,

Till its speed becomes augmented,

Till you hear the rushing sounds,
Of the Linville river raging,
As it leaps and falls and bounds,
As it dashes through the granite,
Falls into the natural pool,
Built by nature in the chasm,
With its water clear and cool.

In the Blue Ridge range of mountains

Stand a thousand spires and domes,
Built of adamant eternal,
From whose base the river roams,
Like the maiden Occoneechee,
Wanders out replete with tears,
Into strange lands, unto strangers,
Thru the lapse of passing years,

Longing to be reunited,
With her fiance forever,
From his presence and his wooing,
To be separated never.
Thus the river and the maiden
Rambled through the mountains wild,
Seeking for a long lost lover,
As a mother seeks her child.

Climbs the black dome of the mountain,

Richest pinnacle e’er seen;
And the landscape lay before her,
With its mounds and vales between.
Lends enchantment grand and gorgeous,
Gives a new lease unto life,
And you soon forget you’re living
In a world of care and strife.

Thus Mount Mitchell in the Blue Ridge,

Zenith hill among the hills,
Sends forth life anew forever,
And a thousand rippling rills.
In the distance the Savannah’s
Flows a stream of pure delight,
Flows she on, and on forever,
Never stopping day or night.

For her mission is a true one,

And the river ever true,
Rolls along the grandest valley,
That a river e’er rolled through;
Peopled by a population
Rich in soul and thought divine,
From her source up in the mountains,
Till her soul the sea entwines.

Turning to the sun that’s setting,

Setting far beyond the rim,
Of the horizon of vision,
Where the eyes grow weak and dim,
You behold the Swannanoa,
Naiad, pure and fresh and sweet,
Crystalline, and cool and limpid,
Strays some other stream to greet.

From the cliffside in the mountains

Roll a thousand little streams,
Laughing as they greet each other,
Where the sunshine never beams;
Rippling, idling, swirling slowly,
Leaping down a waterfall,
You can hear the drops of water,
Sweetly to their compeers call.

Down the valley glides the river,

Murmuring a sad farewell,
To the birds and bees and people,
Who along its highway dwell;
Wishing them a happy future,
Wishing them prosperity,
While it fills its many missions
‘Twixt the mountains and the sea.

Bathing rocks, refreshing people,

Casting up its silver spray,
As it glides along the valley,
Flows forever and for aye.
Men may move their tents and chattels,
Others die or go astray,
Still the stream flows fresh forever,
Never resting night or day.

Giving life unto the flowers,

Blooming on its verdant side,
As it travels, as it journeys,
As its ripples make their stride.
In the gloaming of the twilight,
When the birds had ceased to fly,
And the dazzling dome of heaven
Gave resplendence to the sky.
 Lower Cullasaja Falls.

“From the cliffside in the mountains

Roll a thousand little streams.”

Occoneechee, squaw and warrior,

Watched the stream, as on it sped,
Rippling o’er the pebbly bottom,
Lying on its rocky bed;
Grasses waving green around them,
Nodding boughs bid them adieu,
And it wafted them caresses,
Like the sunbeams sparkling dew.

Precious fragrance filled the valley,

From the sweet shrub and the pine,
Luscious fruits and ripening melons
Lade the apple tree and vine.
All along the pretty valley,
Harvest fields and curing hay
Make the white man rich and happy,
Where the warriors used to stray.

At the juncture of the river,

Where the Indians used to dwell,
Where they made their pots of red clay,
Made them crude but made them well,
Here they tented long and hunted,
Fished the Tah-kee-os-tee stream,
Strolled along the racing river,
Where its rippling waters gleam.

Moons passed on, and yet no greetings

Came to cheer the wandering maid,
Who so long had sought her lover,
Till her hopes began to fade,
And she felt that she must hasten,
Quickly hasten thru the wild,
By the rapid river racing,
She the nature-loving child.

Then they took their little ponies,

Girt them with a roebuck hide,
Seated on the nimble ponies,
Started swiftly on the ride,
On to Toxaway the river,
On to Toxaway the lake,
Where the leaf of vine and alder,
Hide the muskrat and the snake.

All along the racing river,

Gorgeous forest trees are seen,
And the wild deer in the forest
Dwells beneath the coat of green.
Here the beaver, hare and turkey
Share their food and come to drink,
In the splendid spreading forest,
Near the Tah-kee-os-tee’s brink.

Here they fished and caught the rainbow,

Caught the little mountain trout,
In the lake and in the river,
With their poles both crude and stout;
Caught the squirrel and the pheasant,
Chased the turkey, deer and bear,
Caught a-plenty, all they needed,
Yet they had not one to spare.

In the sapphire land they lingered

Many days and many nights,
On the mountains, ‘mid the laurel,
Looking at the wondrous sights,
That will greet you in the mountains,
That you see in vales below,
As you tread the paths untrodden,
As you wander to and fro.

In the forest land primeval

Where the fountains form their heads,
Lies the famous vale of flowers,
Splendid valley of pink beds.
Every tribe and every hunter
Knows this lone secluded spot,
From the other vales so famous;
When once seen is ne’er forgot.
In this vale of flowers and sunshine,
Lies the Aidenn, most tranquil,
Where the sore and heavy-laden,
Gambol peacefully at will;
Hear the trill of distant music,
Played on Nature’s vibrant chime,
Resonant with sweetest concord
All attuned to perfect time.

Here the weary, heavy-laden

Soul, may lose his load of care,
And the body, sick and wounded,
Find an answer to his prayer.
Precious incense here arises,
From the brasier of the vale
That ascends the lofty mountains,
By an unseen, trackless trail.

Pisgah stands, the peer and rival

Of Olympus, famed of old,
Where the gods met in their councils,
And their consultations held.
Looking far across the valleys,
They behold on either side,
Rivers, vales and gushing fountains,
Which forever shall abide.
 Mount Pisgah.

“Pisgah stands the peer and rival

of Olympus, famed of old.”
 Indian Mound, Franklin, N. C.

“Where the mound stands in the meadow

There the tribe was wont to gather.”

In the distance stands eternal,

Junaluska’s pretty mound,
Which in beauty of the landscape
Is the grandest ever found.
Rushing streams of purest water,
Giving off their silver spray,
Add a beauty to the forest,
In a new and novel way.

And the balsam peaks of fir tree

Looks like midnight in the day,
Looks like shadows in the sunshine,
In the fading far away.
Dense and dark and much foreboding
Apprehensions do declare,
To the one who sleeps beneath them
With its flood of balmy air.

“Occoneechee, forest dweller,

We have traveled many miles,
Through the mountains, o’er the valleys,
Where the face of Nature smiled;
We have tasted of the fountains,
Whence breaks forth the Keowee,
Nymph of beauty, joy and pleasure,
Once the home of Cherokee.

We have rested near the water,

Seen the fleck and shimmering flow,
Of the waters kissed by Nature,
Lovely river Tugaloo,
Where the Cherokee once rambled,
Spoiled ‘mid the scenes so wild,
Where the forest and the river
Have the wood-gods oft beguiled.

Wandered o’er the sapphire country,

Land which doth the soul delight,
With its mounds and vales and rivers;
God ne’er made a holier site
For the human race to dwell in,
Where the human soul can rise,
Higher in its aspirations
Toward the rich Utopian skies”

Here the lyrics sung by Nature,

Played upon its strings of gold,
Float out on the evening breezes,
And its music ne’er grows old,
To the soul and life and spirit,
Which is bent and bowed with care.
This the sweetest land Elysian,
To the one who wanders there.

Convolutions of the lilies,

Tranquil bloom and curve and die,
Near the river, ‘neath the shadows
Of the white pine, smooth and high.
Sparkling, gleaming in the sunlight
Bursts the water, pure and free,
From the rocks high on the mountains,
Once the home of Cherokee.

Dancing, rippling, roaring, rushing,

Comes Tallulah in its rage,
Like an eagle bounding forward,
From an exit in a cage.
In the distance, you behold it
Rise and babble, laugh and smile;
Then amid the reeds and rushes,
Turns and loiters for awhile.

Then it curves among the eddies,

Hastens on to meet the bend,
In the meadows, like the fragrance
Borne aloft upon the wind;
Silently reflecting sunbeams
To the distant verdant hill
From its surface calm and placid,
Smooth, untarnished little rill;

Gleams and glides accelerated,

As it gathers, as it grows,
As the brook becomes a river,
As it ever onward flows;
Swirls and turns and dashes downward,
Heaves and moans and dashes wild,
For a chasm down the canyon,
Like a lost, demented child;

Furious, frantic, leaps and lashes

Down into the great abyss,
Falls and foams and seethes forever
Where the rocks and river kiss.
Tallulah Falls, the work and wonder
Of the cycles and the age,
Pours its deluge down the ravine,
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