【全英文教學(xué)大綱】Financial Statements Analysis

PAGEPAGE36CourseOutlineFinancialStatementsAnalysis

School: AccountingDept: Accounting

Chapter1OverviewofFinancialStatementAnalysisLEARNINGOBJECTIVESExplainbusinessanalysisanditsrelationtofinancialstatementanalysisIdentifyanddiscussdifferenttypesofbusinessanalysisDescribethecomponentanalysesthatconstitutebusinessanalysisExplainbusinessactivitiesandtheirrelationtofinancialstatementsDescribethepurposeofeachfinancialstatementandlinkagesbetweenthemIdentifyrelevantanalysisinformationbeyondfinancialstatementsAnalyzeandinterpretfinancialstatementsasapreviewtomoredetailedanalysesApplyseveralbasicfinancialstatementanalysistechniquesExplainthepurposeoffinancialstatementanalysisinanefficientmarketDefineandformulatesomefundamentalvaluationmodelsCHAPTEROVERVIEWFinancialstatementanalysisisoneimportantstepinbusinessanalysis.Businessanalysisistheprocessofevaluatingacompany’seconomicprospectsandrisks.Thisincludesanalyzingacompany’sbusinessenvironment,itsstrategies,anditsfinancialpositionandperformance.Businessanalysisisusefulinawiderangeofbusinessdecisionssuchasinvestinginequityordebtsecurities,extendingcreditthroughshortorlongtermloans,valuingabusinessinaninitialpublicoffering(IPO),andevaluatingrestructuringsincludingmergers,acquisitions,anddivestitures.Financialstatementanalysisistheapplicationofanalyticaltoolsandtechniquestogeneral-purposefinancialstatementsandrelateddatatoderiveestimatesandinferencesusefulinbusinessanalysis.Financialstatementanalysisreducesone’srelianceonhunches,guesses,andintuitionforbusinessdecisions.Thischapterdescribesbusinessanalysisandtheroleoffinancialstatementanalysis.Thechapteralsointroducesfinancialstatementsandexplainshowtheyreflectunderlyingbusinessactivities.Severaltoolsandtechniquesoffinancialstatementanalysisarealsointroduced.ApplicationofthesetoolsandtechniquesisillustratedinapreliminarybusinessanalysisofDell.CHAPTEROUTLINEIntroductiontoBusinessanalysisTypesofBusinessAnalysisCreditAnalysisEquityAnalysisOtherUsesofBusinessAnalysisManagersMergers,Acquisitions,andDivestituresFinancialManagementExternalAuditorsComponentsofBusinessAnalysisBusinessEnvironmentandStrategyAnalysisFinancialAnalysisAccountingAnalysisProspectiveAnalysisValuationFinancialStatementAnalysisandBusinessAnalysisFinancialStatements-BasisofAnalysisFinancialStatementsReflectBusinessActivitiesPlanningActivitiesFinancingActivitiesInvestingActivitiesOperatingActivitiesTheAnnualReportBalanceSheetIncomeStatementStatementofShareholders’EquityStatementofCashFlowsLinksBetweenFinancialStatementsAdditionalInformationManagementDiscussionandAnalysis(MD&A)ManagementReportAuditorReportExplanatoryNotesSupplementaryInformationSocialResponsibilityReportsProxyStatementsFinancialStatementAnalysisPreviewAnalysisToolsAreasofPreliminaryAnalysisComparativeFinancialStatementAnalysisYear-to-YearChangeAnalysisIndex-NumberTrendAnalysisCommon-SizeFinancialStatementAnalysisRatioAnalysisFactorsAffectingRatiosRatioInterpretationIllustrationofRatioAnalysisCashFlowAnalysisSpecializedAnalysisToolsValuationModelsDebtValuationEquityValuationAnalysisinanEfficientMarketMarketEfficiencyMarketEfficiencyImplicationsforAnalysisBookOrganizationReviewQuestionsListtendifferentitemsyouwouldexpecttofindinanaverageannualreporttoshareholders.

2.Belowareselectedratiosforthreecompanieswhichoperateinthreedifferentindustries:DiscountRetailStore,DrugandUtility.

IdentifywhichindustryeachofthecompaniesA,BandCoperatein.Givetworeasonsforeachofyourselections.

3.Assetsandliabilitiesattheendof2005forTripodInc.are$4,970Kand$2,220Krespectively.Netincomeanddividendsforfiscal2005were$500Kand$200K,respectively.Tripodhas100sharesoutstandingasof12/31/05.

Netincomeisexpectedtogrowat10%forthenextthreeyears(2006-2008).Thedividendpayoutratioisexpectedtoremainat2005levelfornextthreeyears.After2005abnormalearningsareexpectedtobezero.Costofdebtis8%andcostofequityis15%.

WhatwouldyoubepreparedtopaypershareforTripodstockattheendoffiscal2005,usingtheaccountingbasedequityvaluationformula?

Chapter2FinancialReportingandAnalysisLEARNINGOBJECTIVESExplainthefinancialreportingandanalysisenvironmentIdentifywhatconstitutesgenerallyacceptedaccountingprinciples(GAAP)Describetheobjectivesoffinancialaccounting,andidentifyprimaryandsecondaryqualitiesofaccountinginformationDefineprinciplesandconventionsthatdetermineaccountingrulesDescribetherelevanceofaccountinginformationtobusinessanalysisandvaluationIdentifylimitationsofaccountingdataandtheirimportanceforfinancialstatementanalysisUnderstandalternativeincomeconceptsanddistinguishthemfromcashflowsUnderstandfairvalueaccounting,itsadvantages,limitationsandanalysisimplicationsExplaintheimportanceofaccrualaccountinganditsadvantagesandlimitationsDescribetheneedforandtechniquesofaccountinganalysisExplaintherelevanceofauditingandtheauditreport(opinion)forfinancialstatementanalysis(Appendix2ACHAPTEROVERVIEWFinancialstatementsarethemostvisibleproductsofacompany’sfinancialreportingprocess.Thefinancialreportingprocessisgovernedbyaccountingrulesandstandards,managerialincentives,andenforcementandmonitoringmechanisms.Itisimportantforauseroffinancialinformationtounderstandthefinancialreportingenvironmentalongwiththeaccountinginformationpresentedinfinancialstatements.Inthischapter,theconceptsunderlyingfinancialreportingarediscussedwithspecialemphasisonaccountingrules.Nextthepurposeoffinancialreportingisdiscussed–itsobjectivesandhowtheseobjectivesdetermineboththequalityoftheaccountinginformationandtheprinciplesthatunderlietheaccountingrules.Therelevanceofaccountinginformationforbusinessanalysisandvaluationisalsodiscussedandlimitationsofaccountinginformationareidentified.Last,accrualaccountingisdiscussedincludingthestrengthsandlimitationofaccruals,andtheimplicationsofaccrualsforfinancialstatementanalysis.CHAPTEROUTLINEFinancialReportingEnvironmentStatutoryFinancialReports FinancialStatements EarningsAnnouncements OtherStatutoryReportsFactorsAffectingStatutoryFinancialReports GenerallyAcceptedAccountingPrinciples GAAPDefined SettingAccountingStandards RoleoftheSecuritiesandExchangeCommission InternationalAccountingStandards Managers MonitoringandEnforcementMechanisms SecuritiesandExchangeCommission Auditing CorporateGovernance Litigation AlternativeInformationSources Economic,Industry,andCompanyInformation VoluntaryDisclosure InformationIntermediariesNatureandPurposeofFinancialAccountingObjectivesofFinancialAccounting Stewardship InformationforDecisionsDesirableQualitiesofAccountingInformation PrimaryQualities:RelevanceandReliability SecondaryQualities:ComparabilityandConsistencyImportantPrinciplesofAccounting Double-Entry HistoricalCost AccrualAccounting FullDisclosure Materiality ConservatismRelevanceandLimitationsofAccounting RelevanceofFinancialAccountingInformation LimitationsofFinancialStatementInformation RelevanceandLimitationsofAccrualAccounting RelevanceofAccrualAccounting ConceptualRelevanceofAccrualAccounting EmpiricalRelevanceofAccrualAccounting AccrualsCanBeaDouble-EdgedSword AnalysisImplicationsofAccrualAccounting MythsandTruthsAboutAccrualsandCashFlows AccrualsandCashFlows–Myths

AccrualsandCashFlows–Truths ShouldWeForsakeAccrualsforCashFlows?ConceptofIncomeEconomicConceptofIncomeEconomicIncomePermanentIncomeOperatingIncomeAccountingConceptofIncomeRevenueRecognitionandMatchingAnalysisImplicationsFairValueAccountingUnderstandingFairValueAccountingConsiderationsinMeasuringFairValueHierarchyofInputsAnalysisImplicationsIntroductiontoAccountingAnalysisNeedforAccountingAnalysis AccountingDistortions AccountingStandards EstimationErrors ReliabilityversusRelevance EarningsManagement AnalysisObjectives ComparativeAnalysis IncomeMeasurement EarningsManagement EarningsManagementStrategies IncreasingIncome BigBath IncomeSmoothing MotivationsforEarningsManagement ContractingIncentives StockPriceEffects OtherIncentives MechanicsofEarningsManagement IncomeShifting ClassificatoryEarningsManagement AnalysisImplicationsofEarningsManagement ProcessofAccountingAnalysis EvaluatingEarningsQuality StepsinEvaluatingEarningsQuality AdjustingFinancialStatementsReviewQuestionsTherearemanywaysinwhichthemanagementofacompanycanmanagethereportedearnings.Givethreereasonswhymanagementmaywanttomanageearningsbeingsuretoexplainyouranswerinfull.

Earningsmanagementcanbedefinedasthe"purposefulinterventionbymanagementintheearningsprocess,usuallytosatisfyselfishobjectives"(Schipper,1989).

Earningsmanagementtechniquescanbeseparatedintothosethatare"cosmetic"(withoutcashflowconsequences)andthosethatare"real"(withcashflowconsequences).

Themanagementofacompanywishestoincreaseearningsthisperiod.

Listthree"cosmetic"andthree"real"techniquesthatcanbeusedtoachievethisobjectiveandexplainwhytheywillachievetheobjective.

\Onestepinassessingthequalityofearningsistolookforredflags.Anexampleofaredflagisasignificantincreaseinaccountsreceivablewithoutcommensurategrowthinsales(thatis,accountsreceivableturnoverdecreases).Listfiveotherredflagsanastuteanalystmightlookfor.Also,providethereasonforitbeingaredflag,andidentifywheretheanalystmightfindthisinformation.

Discretionaryexpendituresareoutlaysthatmanagementcanvaryacrossperiodstoconserveresourcesand/ormanageearnings.Givethreeexamplesandexplaintheirpotentialimpactonearningsqualitywhenanalyzingacompany.

Chapter3AnalyzingFinancingActivitiesLEARNINGOBJECTIVESIdentifyandassesstheprincipalcharacteristicsofliabilitiesandequity.Analyzeandinterpretleasedisclosuresandexplaintheirimplicationsandtheadjustmentstofinancialstatements.Analyzepostretirementdisclosuresandassesstheirconsequencesforfirmvaluationandrisk.Analyzecontingentliabilitydisclosuresanddescriberisks.Identifyoff-balance-sheetfinancinganditsconsequencestoriskanalysis.Analyzeandinterpretliabilitiesattheedgeofequity.Explaincapitalstockandanalyzeandinterpretitsdistinguishingfeatures.Describeretainedearningsandtheirdistributionthroughdividends.CHAPTEROVERVIEWBusinessactivitiesarefinancedthrougheitherliabilitiesorequity.Liabilitiesareobligationsrequiringpaymentofmoney,renderingoffutureservices,ordispensingofspecificassets.Theyareclaimsagainstacompany'spresentandfutureassetsandresources.Suchclaimsareusuallyseniortoholdersofequitysecurities.Liabilitiesincludecurrentobligations,longtermdebt,capitalleases,anddeferredcredits.Thischapteralsoconsiderssecuritiesstraddlingthelineseparatingliabilitiesfromequity.Equityreferstoclaimsofownerstothenetassetsofacompany.Whileclaimsofownersarejuniortocreditors,theyareresidualclaimstoallassetsonceclaimsofcreditorsaresatisfied.Equityinvestorsareexposedtothemaximumriskassociatedwithabusiness,butareentitledtoallresidualrewardsassociatedwithit.Ouranalysismustrecognizetheclaimsofbothcreditorsandequityinvestors,andtheirrelationship,whenanalyzingfinancingactivities.Thischapterdescribesbusinessfinancingandhowthisisreportedtoexternalusers.Wedescribetwomajorsourcesoffinancing—creditandequity—andtheaccountingunderlyingreportsoftheseactivities.Wealsoconsideroff-balance-sheetfinancing,includingSpecialPurposeEntities(SPEs),therelevanceofbookvalues,andliabilities"attheedge"ofequity.Techniquesofanalysisexploitingouraccountingknowledgearedescribed.CHAPTEROUTLINELiabilitiesCurrentLiabilitiesNoncurrentLiabilitiesAnalyzingLiabilitiesLeasesLeaseAccountingandReporting–LesseeAnalyzingLeasesPostretirementbenefitsPensionAccountingOtherPostretirementBenefits(OPEBs)AnalyzingPostretirementBenefitsContingenciesandCommitmentsContingenciesCommitmentsOffBalanceSheetFinancingThrough-putandTake-or-payagreementsProductfinancingarrangementsSpecialPurposeEntities(SPEs)Shareholders’EquityCapitalStockRetainedEarningsComputationofBookValuePerShareLiabilitiesatthe“Edge”ofEquityRedeemablePreferredStockMinorityInterestAppendix3A:LeaseAccounting–LessorAppendix3B:AccountingSpecificsforPostretirementBenefitsReviewQuestions1.Comparetheeffectsofoperatingleasesascomparedtocapitalizedleases,inthefirstyearofalease,onthefollowingitemslisted.Explainyouranswer.

(1)EBIT

(2)NetIncome

(3)ReturnonAssets(levered)

(4)CashflowfromOperations

(5)CurrentRatio

2.Youareconsideringpurchasingacompany-assets,liabilities,wartsandall.Youareawarethatsometimesliabilitiesdonotalwaysshowuponthebalancesheet.Givefiveexamplesofliabilitiesthatmaynotbeexplicitlyrecognizedonthebalancesheet,beingsuretoexplainwhytheyareliabilities.Chapter4AnalyzingInvestingActivitiesLEARNINGOBJECTIVESDefinecurrentassetsandtheirrelevanceforanalysis.Explaincashmanagementanditsimplicationsforanalysis.Analyzereceivables,allowancesforbaddebts,andsecuritization.Interprettheeffectsofalternativeinventorymethodsundervaryingbusinessconditions.Explaintheconceptoflong-livedassetsanditsimplicationsforanalysis.Interpretvaluationandcostallocationofplantassetsandnaturalresources.Describeandanalyzeintangibleassetsandtheirdisclosures.Analyzefinancialstatementsforunrecordedandcontingentassets.CHAPTEROVERVIEWAssetsarethedrivingforcesofprofitabilityforacompany.Assetsproducerevenuesthatcompensateworkers,repaylenders,rewardowners,andfundgrowth.Currentassetsareresourcesorclaimstoresourcesreadilyconvertibletocash.Majorcurrentassetsincludecashandcashequivalents,marketablesecurities,receivables,derivativefinancialinstruments,inventories,andprepaidexpenses.Ouranalysisofcurrentassetsprovidesusinsightsintoacompany'sliquidity.Liquidityisthelengthoftimeuntilassetsareconvertedtocash.Itisanindicatorofacompany'sabilitytomeetfinancialobligations.Thelessliquidacompany,thelowerisitsfinancialflexibilitytopursuepromisinginvestmentopportunitiesandthegreateritsriskoffailure.Noncurrentassetsareresourcesorclaimstoresourcesexpectedtobenefitmorethanthecurrentperiod.Majornoncurrentassetsincludeproperty,plant,equipment,intangibles,investments,anddeferredcharges.Ouranalysisofnoncurrentassetsprovidesusinsightsintoacompany'ssolvencyandoperationalcapacity.Solvencyreferstotheabilityofacompanytomeetsitslong-term(andcurrent)obligations.Operationalcapacityistheabilityofacompanytogeneratefutureprofits.Thischaptershowshowweusefinancialstatementstobetterassessliquidity,solvency,andoperationalcapacityusingassetvalues,andtocriticallyevaluateacompany'sfinancialperformanceandprospects.Theaccountingpracticesunderlyingthemeasurementandreportingofcurrentandnoncurrentassetsaredescribed.Wediscusstheaccountingfortheseassetsanditsimplicationsforanalysisoffinancialstatements.Specialattentionisgiventovariousanalyticaladjustmentshelpingusbetterunderstandcurrentandfutureprospects.CHAPTEROUTLINESection1:CurrentAssetsCashandCashEquivalentsAnalyzingCashandCashEquivalentsReceivablesValuationofReceivablesAnalyzingReceivablesPrepaidExpensesInventoriesInventoryAccountingandValuationAnalyzingInventoriesSection2:NoncurrentAssetsIntroductiontoLong-LivedAssetsAccountingforLong-LivedAssetsCapitalizingversusExpensing:FinancialStatementandRatioEffectsPlantAssetsandNaturalResourcesValuingPlantAssetsandNaturalResourcesDepreciationandDepletionIntangibleAssetsAccountingforIntangiblesAnalyzingIntangiblesGoodwillUnrecordedIntangiblesandContingenciesReviewQuestions1.AnalystsmaintainthattwoofthemostimportantratiosareInventoryturnoverandAccountsreceivableturnover.

a.YouareanalyzingABCCompany,acomputermanufacturer.Younoticethatinventoryturnoverthisyearissignificantlylowerthanprioryears.Providethreeexplanationsthatwouldbeconsistentwiththisobservation.Explainwhetherthesewouldbeofconcerntoyouandwhattheeffectmightbeonnextperiod'sfinancialresults.

b.YouareanalyzingABCCompany,acomputermanufacturer.Younoticethataccountsreceivableturnoverthisyearissignificantlylowerthanprioryears.Providethreeexplanationsthatwouldbeconsistentwiththisobservation.Explainwhetherthesewouldbeofconcerntoyou.

2.ouareanalyzingtwocompaniesthatoperateinthesameindustry.Theyarebothgrowingcapital-intensivemanufacturingcompanies,GuerrCorp.andFilkCorp.Adiligentreadingoftheirannualreportsrevealsthefollowing:

Youknowthattheseaccountingdifferenceswillaffectthecomparabilityofthetwocompany'sfinancialresults.

Considereachoftheaboveitems(depreciationmethod,averagedepreciablelivesandleases)separatelyanddetermineallotherthingsbeingequal,whetherthefollowingratioswillbehigher,lowerorthesameforGuerrwhencomparedtoFilk.Explainyouranswers.

i.ObservedP/Eratio

ii.PricetoFreeCashflow

iii.PricetoBookValue

Chapter5AnalyzingInvestingActivities:IntercorporateInvestmentsLEARNINGOBJECTIVESAnalyzefinancialreportingforintercorporateinvestments.Interpretconsolidatedfinancialstatements.Analyzeimplicationsofboththepurchaseandpoolingmethodsofaccountingforbusinesscombinations.Interpretgoodwillarisingfrombusinesscombinations.Describederivativesecuritiesandtheirimplicationsforanalysis.Analyzeforeigncurrencytranslationdisclosures.Analyzeinvestmentreturns.CHAPTEROVERVIEWIntercompanyinvestmentsplayanincreasinglylargerroleinbusinessactivities.Companiespursueintercompanyactivitiesforseveralreasonsincludingdiversification,expansion,andcompetitiveopportunitiesandreturns.Thischapterconsidersouranalysisandinterpretationoftheseintercompanyactivitiesasreflectedinfinancialstatements.Weconsidercurrentreportingrequirementsfromouranalysisperspective--bothforwhattheydoanddonottellus.Wedescribehowcurrentdisclosuresarerelevantforouranalysis,andhowwemightusefullyapplyanalyticaladjustmentstothesedisclosurestoimproveouranalysis.Wedirectspecialattentiontotheunrecordedassetsandliabilitiesinintercompanyinvestments.CHAPTEROUTLINEPassiveinvestmentsAccountingforInvestmentSecuritiesDisclosureofInvestmentSecuritiesAnalyzingInvestmentSecuritiesInvestmentswithSignificantInfluenceEquityMethodAccountingAnalysisImplicationsofEquityInvestmentsBusinessCombinationsAccountingMechanicsofBusinessCombinationsAnalysisImplicationsofBusinessCombinationsComparisonofPoolingversusPurchaseAccountingforBusinessCombinationsDerivativeSecuritiesDefiningaDerivativeClassificationandAccountingforDerivativesDisclosureofDerivativesAnalysisofDerivativesAppendix5A:InternationalActivitiesAppendix5B:InvestmentReturnAnalysisReviewQuestionsWildeCorporationowns30%oftheoutstandingstockofBernieInc.Bernierecordednetincomeof$10Mandpaiddividendsof$3Min2006.Foreachofthefollowingratios,statetheeffect(higher,lowerornoeffect)thattheuseoftheequitymethodwouldhaveonWilde'sfinancialratioscomparedtotheuseofthecostmethodin2006.ExplainyouransweYouareanalyzingthefinancialstatementsofABCCorp.attheendoffiscal2006.Younoticethatduringtheyear,theymadeamajoracquisition.NowhereintheannualreportdoesitstatewhetherABCusedpurchaseorpooling-of-interestsaccountingforthisacquisition.Itmadenootheracquisitionsduringtheyear,andtherewerenodisposalsofanylinesofbusiness.

Howwouldyoudeterminewhetherpurchaseaccountingorpooling-of-interestsaccountinghadbeenused.Givethreeways.Explainfully.

Chapter6AnalyzingOperatingActivitiesLEARNINGOBJECTIVESExplaintheconceptsofincomemeasurementandtheirimplicationsforanalysisofoperatingactivities.Describeandanalyzetheimpactofnon-recurringitems-includingextraordinaryitems,discontinuedsegments,accountingchanges,andrestructuringchargesandwrite-offs.Analyzerevenueandexpenserecognitionanditsrisksforfinancialanalysis.Analyzedeferredcharges,includingexpendituresforresearch,development,andexploration.Explainsupplementaryemployeebenefitsandanalyzedisclosuresforemployeestockoptions(ESOs)Describeandinterpretinterestcostsandtheaccountingforincometaxes.Analyzeandinterpretearningspersharedata(Appendix6A).Understandtheeconomicsofemployeestockoptions(appendix6B).CHAPTEROVERVIEWIncomeistheresidualofrevenuesandgainslessexpensesandlosses.Netincomeismeasuredusingtheaccrualbasisofaccounting.Accrualaccountingrecognizesrevenuesandgainswhenearned,andrecognizesexpensesandlosseswhenincurred.Theincomestatement(alsoreferredtoasstatementofoperationsorearnings)reportsnetincomeduringaperiodoftime.Thisstatementalsoreportsincomecomponents--revenues,expenses,gains,andlosses.Weanalyzeincomeanditscomponentstoevaluatecompanyperformance,assessriskexposures,andpredictamounts,timing,anduncertaintyoffuturecashflows.While"bottomline"netincomeframesouranalysis,incomecomponentsprovidepiecesofamosaicrevealingtheeconomicportraitofacompany.Thischapterexaminestheanalysisandinterpretationofincomecomponents.Weconsidercurrentreportingrequirementsandtheirimplicationsforouranalysisofincomecomponents.Wedescribehowwemightusefullyapplyanalyticaladjustmentstoincomecomponentsandrelateddisclosurestobetterouranalysis.Wedirectspecialattentiontorevenuerecognitionandtherecordingofmajorexpensesandcosts.FurtheruseandanalysisismadeofincomecomponentsinPartThreeofthebook.CHAPTEROUTLINEIncomeMeasurementConceptofIncomeMeasuringAccountingIncomeAlternativeClassificationandIncomeMeasuresNon-recurringitemsExtraordinaryItemsDiscontinuedOperationsAccountingChangesSpecialItemsRevenueandGainRecognition GuidelinesforRevenueRecognitionUncertaintyinRevenueCollectionRevenueWhenRightofReturnExistsFranchiseRevenuesProductFinancingArrangementsRevenueunderContractsAnalysisImplicationsofRevenueRecognitionDeferredChargesResearchandDevelopmentComputerSoftwareExpensesExplorationandDevelopmentCostsinExtractiveIndustriesSupplementaryEmployeeBenefitsEmployeeStockOptionsInterestCostsIncomeTaxesAppendix6AEarningsperShare:ComputationandAnalysisReviewQuestions1.HousingConstructionCompany(HCC)hasagreedtobuildahousingprojectforthecityofNewYork.OnJanuary1st,2006thecompanyandthecityagreedonthefollowingterms,theconstructionshouldtakenomorethan3years,HCCwouldbepaidatotalof$150millionfortheproject;the$150millionwouldbepaid:3paymentsof$50millioneachattheendofyear2006,2007and2008.HCCexpectscontractionscoststobe$50millioninyear2006,$50millioninyear2007,and$10millioninyear2008.

a.IfHCCusesthecompletedcontractmethod,whatrevenuesandexpenseswouldHCCrecognizeinyear2006,2007,and2008?

b.IfHCCusesthepercentageofcompletionmethod,whatrevenuesandexpenseswouldHCCrecognizeinyear2006,2007,and2008?

c.Showthebalanceontheconstruction-in-processaccountattheendof2006,2007,and2008(priortothecompletionoftheproject)usingboththecompletedcontractandthepercentageofcompletionmethods?

2.Thetablebelowshowsthedifferencesinaccountingtreatmentsforgoodwillinthreeselectedcountries.

*GoodwillistaxdeductibleintheUnitedStatesunderlimitedcircumstances,forthepurposesofthisquestion,assumeitisnot.

Givenacompanythathasrecognizedsignificantacquisitiongoodwill,identifythecountrywhoseaccountingandtaxrulesforgoodwillwouldlikelyresultinthehighestvaluationofthecompany.Justifyandexplainyouranswer.

Chapter7CashFlowBasisLEARNINGOBJECTIVESExplaintherelevanceofcashflowsinanalyzingbusinessactivities.Describereportingofcashflowsbybusinessactivities.Describethepreparationandanalysisofthestatementofcashflows.Interpretcashflowsfromoperatingactivities.Analyzecashflowsunderalternativecompanyandbusinessconditions.Describealternativemeasuresofcashflowsandtheirusefulness.CHAPTEROVERVIEWCashistheresidualofcashinflowslesscashoutflowsforallpriorperiodsofacompany.Netcashflows,orsimplycashflows,refertothecurrentperiod'scashinflowslesscashoutflows.Cashflowsaredifferentfromaccrualmeasuresofperformance.Cashflowmeasuresrecognizeinflowswhencashisreceivednotnecessarilyearned,andoutflowswhencashispaidnotnecessarilyincurred.Thestatementofcashflowsreportscashflowmeasuresforthreeprimarybusinessactivities:operating,investing,andfinancing.Operatingcashflows,orcashflowsfromoperations,isthecashbasiscounterparttoaccrualnetincome.Informationoncashflowshelpsusassessacompany'sabilitytomeetobligations,paydividends,increasecapacity,andraisefinancing.Italsohelpsusassesstheq