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Chapter 5

Analyzing Investing Activities:


Special Topics
REVIEW
Intercompany and international activities play an increasingly larger role in business
activities. Companies pursue intercompany activities for several reasons including
diversification, expansion, and competitive opportunities and returns. International
activities provide similar opportunities but offer unique and often riskier challenges. This
chapter considers our analysis and interpretation of these company activities as
reflected in financial statements. We consider current reporting requirements from our
analysis perspective--both for what they do and do not tell us. We describe how current
disclosures are relevant for our analysis, and how we might usefully apply analytical
adjustments to these disclosures to improve our analysis. We direct special attention to
the unrecorded assets and liabilities in intercompany investments, the interpretation of
international operations in financial statements, and the risks assumed in intercompany
and international activities.

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OUTLINE
Section 1: Intercompany Activities

Intercorporate Investments
Consolidated Financial Statements
Equity Method Accounting
Analysis Implications of Intercorporate Investments

Business Combinations
Accounting Mechanics of Business Combinations
Analysis Implications of Business Combinations
Comparison of Pooling versus Purchase Accounting for Business
Combinations
Section 2: International Activities

Reporting of International Activities


International Accounting and Auditing Practices
Translation of Foreign Currencies
Analysis Implications of Foreign Currency Translation

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ANALYSIS OBJECTIVES

Analyze financial reporting for intercorporate investments.

Interpret consolidated financial statements.

Analyze implications of both the purchase and pooling methods of accounting for
business combinations.

Interpret goodwill arising from business combinations.

Describe international accounting and auditing practices.

Analyze foreign currency translation disclosures.

Distinguish between foreign currency translation and transaction gains and losses.

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QUESTIONS
1. From a strict legal viewpoint, the statement is basically correct. Still, we must
remember that consolidated financial statements are not prepared as legal
documents. Consolidated financial statements disregard legal technicalities in favor
of economic substance to reflect the economic reality of a business entity under
centralized control. From the analysts' viewpoint, consolidated statements are often
more meaningful than separate financial statements in providing a fair presentation of
financial condition and the results of operations.
2. The consolidated balance sheet obscures rather than clarifies the margin of safety
enjoyed by specific creditors. To gain full comprehension of the financial position of
each part of the consolidated group, an analyst needs to examine the individual
financial statements of each subsidiary. Specifically, liabilities shown in the
consolidated financial statements do not operate as a lien upon a common pool of
assets. The creditors, secured and unsecured, have recourse in the event of default
only to assets owned by the individual corporation that incurred the liability. If, on the
other hand, a parent company guarantees a specific liability of a subsidiary, then the
creditor would have the guarantee as additional security.
3. Consolidated financial statements generally provide the most meaningful
presentation of the financial condition and the results of operations of the combined
entity. Still, they do have certain limitations, including:
The financial statements of the individual companies in the group may not be
prepared on a comparable basis. Accounting principles applied, valuation bases,
and amortization rates used can differ. This can impair homogeneity and the
validity of ratios, trends, and key relations.
Companies in relatively poor financial condition may be combined with sound
companies, obscuring information necessary for effective analysis.
The extent of intercompany transactions is unknown unless consolidating
financial statements (worksheets) are presented. The latter reveal the adjustments
involved in the consolidation process, but are rarely disclosed.
Unless disclosed, it is difficult to estimate how much of consolidated retained
earnings are actually available for payment of dividends.
The composition of the minority interest (such as between common and preferred
stock) cannot be determined because the minority interest is usually shown as a
combined amount in the consolidated balance sheet.
Consolidated financial statements do not reveal restrictions on use of cash for
individual companies nor the intercompany cash flows.
Consolidation of nonhomogeneous subsidiaries (such as finance or insurance
subsidiaries) can distort ratios and other relations.
4. a. This disclosure is necessaryit is a subsequent event required to be disclosed.
Also, the contingency conditions involving additional consideration are
adequately disclosed. Still, it would have been more informative had the note
disclosed the market value of net assets or stocks issued.
b. This must be accounted for by the purchase method. Since the more readily
determinable value in this case is the consideration given in the form of the Best
Company stock, the investment should be recorded at $1,057,386 (48,063 shares
x $22 market price at acquisition). In the consolidated statements, there may or

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Financial Statement Analysis, 8th Edition

may not be goodwill to be recognizedthis depends on a comparison of the


market value of its net assets to the$1,057,386 purchase price.
c. The contingency is based on the earnings performance of the acquired
companies over the next five yearsbut the total amount payable in stock is
limited to 151,500 shares, to a maximum of $2 million.
d. During the course of the next five years, if the acquired companies earn
cumulatively over $1 million, then the Best Company will record the additional
payment when the outcome of the contingency is determined beyond a
reasonable doubt. The payments are considered additional consideration in the
purchase and will either increase the carrying values of tangible assets or the
"excess of cost over net tangible assets" (goodwill) account.
5. a. The total cost of the assets is the present value of the amounts to be paid in the
future. If the liabilities are issued at an interest rate that is substantially above or
below the current effective rate for similar securities, the appropriate amount of
premium or discount should be recorded.
b. The general rule for determining the total cost of assets acquired for stock is to
value the assets acquired at the fair value of the stock given (as traded in the
market) or fair value of assets received, whichever is more clearly evident. If there
is no ready market for either the stock or the assets acquired, the valuation has to
be based on the best means of estimation, including a detailed review of the
negotiations leading up to the purchase and the use of independent appraisals.
6. a.
b.
c.
d.
e.
f.
g.

Consolidation NOT required.


Consolidation NOT required.
Consolidation NOT required.
Consolidation NOT required.
Consolidation required.
Consolidation NOT required.
Consolidation required.

7. Usually, the purchase method of accounting for a business combination is preferable


from an analyst's viewpoint. Since purchase accounting recognizes the acquisition
values on which the buyer and seller actually bargained, the balance sheet likely
reflects more realistic (economic) values for both assets and liabilities. Moreover, the
income statement likely better reflects the actual results of operations due to
accounting procedures such as cost allocation of more appropriate asset values.
8. a. Goodwill represents the excess of the total cost over the fair value assigned to the
identifiable tangible and intangible assets acquired less the liabilities assumed.
b. It is possible that the market values of identifiable assets acquired less liabilities
assumed exceed the cost (purchase price) of the acquired company. In this case,
the values otherwise assignable to noncurrent assets (except for marketable
securities) acquired should be reduced by a proportionate part of the excess.
Negative goodwill should not be recorded unless the value assigned to such
long-term assets is first reduced to zero. If negative goodwill must be recorded, it
is recorded as an extraordinary gain (net of tax) below income from continuing
operations

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c. Marketable Securities are recorded at current net realizable values.


d. Receivables are recorded at the present value of amounts to be received,
computed at proper current interest rates, less allowances for uncollectibility and
collection costs.
e. Finished Goods are recorded at selling prices less cost of disposal and
reasonable profit allowance.
f.

Work-in-Process is recorded at the estimated selling price of the finished goods


less the sum of the costs to complete, costs of disposal, and a reasonable profit
allowance.

g. Raw Materials are recorded at current replacement costs.


h. Plant and Equipment are recorded at current replacement costs unless the
expected future use of these assets indicates a lower value to the acquirer.
i.

Land and Mineral Reserves are recorded at appraised market values.

j.

Payables are recorded at present values of amounts to be paid, determined at


appropriate current interest rates.

k. The goodwill of the acquired company is not carried forward to the acquiring
company's accounting records.
9. A crude way of adjusting for omitted values in a pooling combination is to estimate
the difference between the market value and the recorded book value of the net
assets acquired, and then to amortize this difference on some reasonable basis. The
result would be approximately comparable to the net income reported using purchase
accounting. Admittedly, the information available for making such adjustments is
limited.
10. Analysis should be alert to the appropriateness of the valuation of the net assets
acquired in the combination. In periods of high stock market price levels, purchase
accounting can introduce inflated values when net assets (particularly the
intangibles) of acquired companies are valued on the basis of the high market price
of the stock issued. Such values, while determined on the basis of temporarily
inflated stock prices, remain on a company's balance sheet and may require future
write-downs if impaired. This concern also extends to temporarily depressed stock
prices and its related implications.
11. a. An acquisition program aimed at purchasing companies with lower PE ratios can,
in effect, "buy" earnings for the acquiring company. To illustrate, say that
Company X has earnings of $1 million, or $1 per share on 1 million shares
outstanding, and that its PE is 50. Now, lets assume it purchases Company Y at
10 times it earnings of $5,000,000 ($50 million price) by issuing an additional
1,000,000 shares of X valued at $50 per share. Then:
Earnings of Combined Entity are: X earnings.....$1,000,000
Y earnings..... 5,000,000
$6,000,000

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11

continued

The new number of shares outstanding is 2,000,000, providing an EPS of $3.00


(computed as $6 million divided by 2 million shares). Also, note that earnings per
share increases from $1 to $3 per share for Company X by means of this
acquisition.
We should recognize the synergistic effect in this case. That is, two companies
combined can sometimes show results that are better than the total effect of each
separately. This can occur through combination of vertical, horizontal, or other
basis of company integration. Consider the following example:
Company S:
PE = 10
EPS = $1.00
Earnings = $1,000,000
Number of shares = 1,000,000
Company T:
PE = 10
Earnings = $1,000,000
Assume Company S buys Company T at a bargain of 10 times earnings and it
assumes $1,000,000 after-tax savings from efficiencies. Then:
Combined entity:
S earnings....................................$1,000,000
T earnings.................................... 1,000,000
Savings from merger................... 1,000,000
New earnings...............................$3,000,000
New number of shares................ 2,000,000
New EPS.......................................
$1.50
The EPS of the combined entity increases 50 percent (relative to Company S) as a
result of this merger.
b. For adjustment purposes, the financial statements should be pooled as if the two
companies had been merged prior to the years under considerationwith any
intercompany sales eliminated. This would give the best indication of the earnings
potential. However, adjusting backwards to reflect merger savings subsequently
realized is a bit tenuous. It is probably better to use the actual combined figures,
with mental adjustments by the analyst. Too many "adjusted for merger
savings" statements bear little relation to the historical record. Also, the analyst
may want to compare the acquiring companys actual results with the new merged
company's record to get an idea of the success of the acquisition program. One
trick in the acquisition game is to look for companies with satisfactory
performance in two prior years (say, Year 1 and Year 2) and a good subsequent
year (Year 3). Such companies are prime acquisition candidates since the Year 3
pooled statements would look good in comparison with pooled years 1 and 2. An
analysis of the acquiring companys results alone versus the combined entity
would reveal this trick.
12. The amount of goodwill that is carried on the acquirer's statement too often bears
little relation to its real value based on the demonstrated superior earning power of
the acquired company. Should the goodwill become impaired, the resulting writedown could significantly impact earnings and the market value of the company.

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13. All factors supporting the estimates of the benefit periods should be reexamined in
the light of current economic conditions. Some circumstances that can affect such
estimates are:
A new invention that renders a patented device obsolete.
Significant shifts in customer preferences.
Regulatory sanctions against a segment of the business.
Reduced market potential because of an increased number of competitors.
14. The analyst should realize that there are differences in accounting principles across
countries and, hence, should be familiar with international accounting practices. The
analyst should also verify the reputation of the independent auditors before relying
on them. Also, the analyst should be familiar with the provisions governing the
translation of foreign financial statements into dollars.
15. Problems in the accounting for and the analysis of foreign operations can be grouped
into two broad classifications:
(a) Problems related to differences in accounting principles, auditing standards, and
other reporting or economic practices that are peculiar to the foreign country
where the operations are conducted.
(b) Problems that arise from the translation of foreign assets, liabilities, equities, and
results of operations into U.S. dollars.
16. The major provisions of accounting for foreign currency translation (SFAS 52) are:
The translation process requires that the functional currency of the entity be
identified first. Ordinarily it will be the currency of the country where the entity is
located (or the U.S. dollar). All financial statement elements of the foreign entity
must then be measured in terms of the functional currency in conformity with
GAAP.
Under the current rate method (most commonly used), translation from the
functional currency into the reporting currency, if they are different, is to be at the
current exchange rate, except that revenues and expenses are to be translated at
the average exchange rates prevailing during the period. The current method
generally considers the effect of exchange rate changes to be on the net
investment in a foreign entity rather than on its individual assets and liabilities
(which was the focus of SFAS 8).
Translation adjustments are not included in net income but are disclosed and
accumulated as a separate component of stockholders' equity (Other
Comprehensive Income or Loss) until such time that the net investment in the
foreign entity is sold or liquidated. To the extent that the sale or liquidation
represents realization, the relevant amounts should be removed from the separate
equity component and included as a gain or loss in the determination of the net
income of the period during which the sale or liquidation occurs.
17. The accounting standards for foreign currency translation have as its major
objectives: (1) to provide information that is generally compatible with the expected
economic effects of a change in exchange rate on an enterprise's cash flows and
equity, and (2) to reflect in consolidated statements the financial results and relations
as measured in the primary currency of the economic environment in which the entity
operates, which is referred to as its functional currency. Moreover, in adopting the
functional currency approach, the FASB had the following goals of foreign currency
translation in mind: (1) to present the consolidated financial statements of an
enterprise in conformity with U.S. GAAP, and (2) to reflect in consolidated financial

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Financial Statement Analysis, 8th Edition

statements the financial results and relations of the individual consolidated entities as
measured in their functional currencies. The Board's approach is to report the
adjustment resulting from translation of foreign financial statements not as a gain or
loss in the net income of the period but as a separate accumulation as part of equity
(in comprehensive income).
18. Following are some analysis implications of the accounting for foreign currency
translation:
(a) The accounting insulates net income from balance sheet translation gains and
losses, but not transaction gains and losses and income statement translation
effects.
(b) Under current GAAP, all balance sheet items, except equity, are translated at the
current rate; thus, the translation exposure is measured by the size of equity or
the net investment.
(c) While net income is not affected by balance sheet translation, the equity capital is.
This affects the debt-to-equity ratio (the level of which may be specified by certain
debt covenants) and book value per share of the translated balance sheet, but not
of the foreign currency balance sheet. Since the entire equity capital is the
measure of exposure to balance sheet translation gain or loss, that exposure may
be even more substantial, particularly with regard to a subsidiary financed with
low debt and high equity. The analyst can estimate the translation adjustment
impact by multiplying year-end equity by the estimated change in the period to
period rate of exchange.
(d) Under current GAAP, translated reported earnings will vary directly with changes
in exchange rates, and this makes estimation by the analyst of the "income
statement translation effect" less difficult.
(e) In addition to the above, income will also include the results of completed foreign
exchange transactions. Also, any gain or loss on the translation of a current
payable by the subsidiary to parent (which is not of a long-term capital nature) will
pass through consolidated net income.
19. The following two circumstances require use of the temporal method of translation.
(a) When by its nature, the foreign operation is merely an extension of the parent and
consequently the dollar is its functional currency.
(b) When hyperinflation (as defined) causes the translation of nonmonetary assets at
the current rate to result in unrealistically low carrying values. In such cases, in
effect, the foreign currency has lost its usefulness as a measure of performance
and a more stable unit (such as the dollar) is used.

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EXERCISES
Exercise 5-1 (30 minutes)
a. Under purchase accounting, goodwill is reported if the purchase price
exceeds fair value of the acquired tangible and intangible net assets.
b. All identifiable tangible and intangible assets acquired, either individually or
by type, and liabilities assumed in a business combination, whether or not
shown in the financial statements of Moore, should be assigned a portion of
the cost of Moore, normally equal to the fair values at date of acquisition.
Then, the excess of the cost of Moore over the sum of the amounts assigned
to identifiable tangible and intangible assets acquired less the liabilities
assumed is recorded as goodwill.
c. Consolidated financial statements should be prepared to present financial
position and operating results in a manner more meaningful than in separate
statements. Such statements often are more useful for analysis purposes.
d. The first necessary condition for consolidation is control, as typically
evidenced by ownership of a majority voting interest. As a general rule,
ownership by one company, directly or indirectly, of over fifty percent of the
outstanding voting shares of another company is a condition necessary for
consolidation.

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Financial Statement Analysis, 8th Edition

Exercise 5-2 (35 minutes)


a. Each of the four corporations will maintain separate accounting records
based on its own operations (for example, C1's accounting records are not
affected by the fact it has only one stockholder).
b. For SEC filing purposes, consolidated statements would be presented for Co.
X and Co. C1 and Co. C2 as if these three separate legal entities were one
combined entity. C1 or C2 would probably not be consolidated if controlled
only temporarily. C3 would be shown as a one- line consolidation (both
balance sheet and income statement) under the equity method.
c. The analyst likely would request the following types of information (only
consolidated statements normally are available):
(1) Consolidated Co. X with subsidiaries C1 and C2 (C3 would be a one-line
consolidation).
(2) Co. X statements only (all three investee companies, C1, C2, and C3 would
be one-line consolidations).
(3) Separate statements for one or more of the investee companies (C1, C2,
and C3).
(4) Consolidating statements (which would provide everything in (1)-(3) except
separate statements for C3, and would also show the elimination entries).
(5) Sometimes partial consolidations (such as Co. X plus C2) or combining
statements (such as only C1 and C2) also are useful. For example, if C1 is a
foreign subsidiary, the analyst may ask for a partial consolidation
excluding C1, with separate statements for C1. Also, loan covenants (or
loan collateral) frequently cover only selected companies, and a partial
consolidation or combined statements are necessary to assess safety
margins.
d. Co. X will show an asset "investment in common stock of subsidiary" valued
at either cost or equity. (The equity method would be required only if no
consolidated statements were presented.) Note: Co. X owns shares of
common stock of Co. C1that is, Co. X does not own any of C1's assets or
liabilities.
e. Instead of an "investment in common stock of subsidiary," Co. X's balance
sheet would now include all of the assets and liabilities of C1.
f. No change. Consolidated financial statements present two or more legal
entities as if they are one.

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Exercise 5-2continued
g. 100 percent of C2's assets and liabilities are included in the consolidated
balance sheet. However, the stockholders' equity of C2 is split into two parts:
80 percent is added to the stockholders' equity of Co. X and 20 percent is
shown on a separate line (above Co. X's stockholders' equity) as "minority
ownership of C2" (frequently just simply called "minority interest"). The
portion of the 80 percent representing the past purchase by Co. X would be
eliminated (in consolidation) against the "investment in subsidiary."
h. Co. X must purchase enough additional common stock from the other
stockholders in C3 or purchase enough new shares issued by C3 to increase
its ownership to more than 50 percent of C3's common stock. (Alternatively,
C1 or C2 could purchase the additional shares.)
i. There would be no intercompany investment or intercompany dividends. But
any other intercompany transactions must be eliminated (such as
intercompany sales and intercompany receivables and payables).
j. No change. Instead, there would be a two-step consolidation (first C1 plus C2,
then Co. X plus C1 consolidated). Any gain or loss on the transaction would
be eliminated in consolidation.
k. No change. The additional investment by Co. X would be eliminated against
the additional invested capital for C1 in the consolidation.

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Financial Statement Analysis, 8th Edition

Exercise 5-3 (40 minutes)


a. There are several approaches for comparing financial statements of
companies using different international accounting principles. They include:
Adopt the Foreign Corporation's Financial Statements: Here an attempt is
made to analyze the foreign corporation's financial statements from the
perspective of a local investor and apply local valuation methods. This may
include a comparison with local enterprises since their financial
statements are assumed to be prepared on a similar and comparable basis.
Comparable Approach: This approach attempts to restate the earnings
figures on a comparable basis using U.S. GAAP, IASC standards, or
another set of accounting practices in an appropriate manner acceptable
by the analyst.
Assessment of the Quality of Earnings: In assessing the quality of
earnings, a scale or standard is developed by the analyst. This scale or
standard may incorporate considerations for such accounting choices as
inventory valuation, depreciation methods, accounting for pensions, as
well as the treatment of accounting for research and development.
Cash Flow Basis: Applied on a worldwide basis, an attempt is made to
analyze the cash flows of investments. Consideration of cash flow
definitions may include cash from operations, earnings before interest and
taxes (EBIT), or changes in the financial position. The overriding rule is to
analyze the investment from a cash flow perspective.
Asset Valuation Model: An analyst can attempt to mark the assets to
market values and then subtract the indebtedness to arrive at a value for
the enterprise. Alternatively, an analyst can employ a model such as the
residual income equity valuation model to obtain company value.
Dividend Valuation Model: Using a dividend valuation approach, the
investor can focus on dividends (or free cash flows) to arrive at an
estimated value of the investment.
b. (1) An upward revaluation of fixed assets would increase depreciation
expense on the income statement and reduce net income. A downward
revaluation of fixed assets would reduce depreciation expense on the
income statement and increase net income. Under U.S. GAAP, except in
rare cases, only downward revaluation of fixed assets is permitted. In some
foreign countries, upward revaluation is also permitted as well as current
expensing of a fixed asset which can greatly distort net income for an
accounting period.
(2) Under U.S. GAAP, goodwill is only recorded if purchased and then it must
be carried on the balance sheet at net book value, unless impaired. In some
countries, purchased goodwill can be immediately written off against
shareholders' equity. Immediate write off of goodwill against shareholders'
equity avoids potential future write-downs. In countries where goodwill is
recorded and amortized, the longer (shorter) the amortization period, the
higher (lower) reported earnings will be. The IASC encourages a maximum
of 20 years, but a longer period can be used if justified.
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Exercise 5-3continued
(3) Discretionary reserves highly depend on the convictions of management.
The usual impact of discretionary reserves on net income is to smooth the
net income, allowing management to "look better" in bad years (and not
as great in good years). The creation of a discretionary reserve, when
charged to income, lowers net income in that year. Absence of the charge
in a later year, or use of the reserve to cover expenses of that year,
increases net income in the later year. Discretionary reserves against fixed
assets (revaluation or impairment) will affect future depreciation charges
and, therefore, net income. "Excess" depreciation charges can also be
used to lower net income in a good year.

Exercise 5-4 (20 minutes)


a. The choice of the functional currency would make no difference for the
reported sales numbers. This is because sales are translated at rates on the
transaction date, or average rates, regardless of the choice of the functional
currency.
b. When the U.S. dollar is the functional currency (Bethel Company), some
assets and liabilities (mainly inventory and fixed assets) are translated at
historic rates. The monetary assets and liabilities are translated at current
exchange rates. This means the translation gain or loss is based only on
those assets and liabilities that are translated at current rates. When the
functional currency is the local currency (Home Brite Company), all assets and
liabilities are translated at current exchange rates, and common and preferred
stock are translated at historic rates. The translation gain or loss is based on
the net investment in each local currency.
c. When the U.S. dollar is the functional currency, all translation gains or losses
are included in reported net income. When the functional currency is the local
currency, the translation gain or loss appears on the balance sheet as a
separate component of shareholders' equity (in comprehensive income or
loss), thus bypassing the net income statement.
(CFA Adapted)

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Financial Statement Analysis, 8th Edition

Exercise 5-5 (30 minute)


a. (1) Functional currency: The functional currency approach presumes an
enterprise can operate and generate cash flows in a number of separate
economic environments. The currency in that primary economic
environment is the functional currency for those operations. It is also
presumed that the company can commit to a long-term position in a
specific economic environment and does not currently intend to liquidate
that position. Most companies likely will consider each foreign country in
which they do business as a primary economic environment for operations
in that country and, therefore, the functional currency for the company's
operation will probably be the local currency.
(2) Translation: This is when a company converts a financial statement in
foreign currency to dollar-based financial statements. As exchange rates
change, translation adjustments are produced because assets and
liabilities are translated in current exchange rates while equity accounts
are translated in historical rates. Specifically, the translation process
expresses the functional currency net assets, at their dollar equivalent-using the current rate--and creates an adjusting entry to balance the dollarbased equity. The translation adjustment does not affect net income until a
specific investment is wholly or substantially liquidated. At that time, the
component of the translation adjustment account related to that specific
investment is removed from the translation adjustment account and
included in the determination of gain or loss on sale of that specific
investment component. Because the translation process is performed only
for the purpose of preparing financial statements and it does not anticipate
that the foreign currency accounts will be liquidated and exchanged into
dollars, translation adjustments are not included in net income but are
deferred as adjustments to the equity section in the balance sheet (as part
of comprehensive income).
b. A fundamental problem arises in the translation of foreign currency financial
statements when nonmonetary assets are translated in current exchange rates
and the functional currency is highly inflationary. This situation is referred to
as the "disappearing plant." SFAS 52 has tried to address itself to this
problem. A special provision of SFAS 52 requires that the dollar be the
presumptive functional currency when the economic environment is highly
inflationary. The prescribed test for a highly inflationary economy is the
accumulative inflation of approximately 100% over a three-year period.
Therefore, by requiring companies in highly inflationary economies to be
remeasured to a dollar basis, SFAS 52 avoids the erosion of nonmonetary
accounts (such as plant and equipment) that otherwise would arise from
translation and use of current exchange rates.

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PROBLEMS
Problem 5-1 (40 minutes)
a.

Computation of Burrys Investment in Bowman Co.


($ in thousands)
Cost of Acquisition.................................

Investment
$40,000

Net income for Year 6.............................

1,600 [1]

Dividends for Year 6 ..............................

(800) [2]

Net loss for Year 7...................................

(480) [3]

Dividends for Year 7...............................

(640) [4]

Investment at Dec. 31, Year 7.................

$39,680

Notes ($000s):
[1] 80% of $2,000 net income
[2] 80% of $1,000 dividends
[3] 80% of $(600) net loss
[4] 80% of $800 dividends

b. The strengths associated with use of the equity method in this case include:
It reduces the balance in the investment account in Year 7 due to the net
loss. Note: Just recording dividend income would obscure the loss.
It recognizes goodwill on the balance sheet (via inclusion in the investment
balance) and, therefore, it reflects the full cost of the investment in
Bowman Co.
The possible weaknesses with use of the equity method in this case include:
Lack of detailed information (one-line consolidation).
Dollar earned by Bowman may not be equivalent to dollar earned by Burry.

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Problem 5-2 (40 minutes)


a. For Year 6:
No effect on sales.
Net income effect equals the dividend income of $10 (1% of $1,000, or $1 per
share) since the investment is accounted for under the market method. Also,
assuming the shares are classified as available-for-sale (a reasonable
assumption given subsequent purchases), the price appreciation of $1 per
share will bypass the income statement.
Cash flow effect equals the dividend income of $10. If the outflow due to the
stock purchase is included: Net cash flow = dividend income less purchase
price = $10 - $100 = $(90).
For Year 7 (the equity method applies):
No effect on sales.
Net income effect equals the percentage share of Francisco earnings for Year
7, or 30% of $2,200 = $660.
Cash flow effect equals the dividend income of $360 (computed as 30% of
$1,200). If the outflow due to the stock purchase is included: Net cash flow =
dividend income less purchase price = $360 - $3,190 = $(2,830).
b. As of December 31, Year 6:
At December 31, Year 6, the carrying value of the investment in Francisco is $110
(computed as 10 shares x $11 per share). The $11 per share figure is the fair value
at Jan. 1, Year 7.
As of December 31, Year 7 (the equity method applies):
Step onethe equity method is applied retroactively to the prior years of
ownership (that is, Year 6).
Original cost (10 shares x $10)...........................................................
$100
Add: Percentage share of Year 6 earnings (1% x $2,000)................
20
Less: Dividends received in Year 6.....................................................
(10)
Net carrying value at Jan. 1, Year 7.....................................................
$110
Step twothe equity method is applied throughout Year 7.
Net carrying value, Jan. 1, Year 7........................................................
$ 110
Add: Original cost of additional shares (290 shares x $11) ............
3,190
Add: Percentage share of Year 7 earnings (30% x $2,200) .............
660
Less: Dividends received in Year 7.....................................................
(360)
Net carrying value at Dec. 31, Year 7.................................................. $3,600
c. For Year 8, with ownership in excess of 50% (indeed, 100%), Franciscos financial
statements would be consolidated with those of Potter. The purchase method is
the only available choice under current GAAP. Under this method, all assets and
liabilities for Francisco are restated to fair market value. To do this, one must
know fair market values. Also, information about off-balance sheet items (such as
identifiable intangibles) that may need to be recognized must be obtained. Due to
these implications to asset and liability values in applying purchase accounting,
knowing that the initial purchase price is in excess of the book value of the
acquired companys net assets does not necessarily indicate that goodwill is
recorded.

Instructor's Solutions Manual

5-17

Problem 5-3 (35 minutes)


a. Pierson, Inc., Pro Forma Combined Balance Sheet
ASSETS
Current assets................................................................................ $135
Land.................................................................................................
70
Buildings, net................................................................................. 130
Equipment, net............................................................................... 130
Goodwill.......................................................................................... 35 *
Total assets.................................................................................... $500
LIABILITIES AND EQUITY
Current liabilities....................................................................
Long-term liabilities...............................................................
Shareholders' equity..............................................................
Total liabilities and equity.....................................................

$140
180
180
$500

*Goodwill computation:
Cash payment..........................................................................................................................
$180
Fair value of net assets acquired ($165 - $20)......................................................................
145
$ 35

b. The basic difference between pooling and purchase accounting for business
combinations is that in the pooling case there is a high likelihood of not
recording all assets acquired and paid for by the acquiring company. This
results in an understatement of assets and, consequently, an overstatement of
current and future net income. This is because pooling accounting is limited
to recording only book values of the acquired companys net assets, which do
not necessarily reflect current fair values of net assets. Given the inflationary
tendencies of most economies, pooling tends to understate asset values. The
understatement of assets under pooling leads to an understatement of
expenses (from lack of cost allocations) and to an overstatement of gains
realized on the disposition of these assets.

5-18

Financial Statement Analysis, 8th Edition

Problem 5-4 (35 minutes)


a. They are reported in "other assets" [166] at an amount of $155.8 million under
investments in affiliates, which also includes $28.3 million as goodwill.
b. No, disclosure is limited to this note.
c. These acquisitions indicate that of the $180.1 million paid, $132.3 million is for
intangibles, principally goodwill [107]. This implies that most of the purchase
price was in effect for some form of superior earning power (residual income)
assumed to be enjoyed by the acquired companies.
d. Analytical entry to reflect the Year 11 acquisitions:
Working capital items......................................
5.1
Fixed assets net...............................................
4.7
Intangibles, principally goodwill.....................
132.3
Other assets......................................................
1.5
Minority interest................................................
36.5
Cash (or other consideration)...................

180.1

e. (1) The change in the cumulative translation adjustment accounts [101] for
Europe is most likely due to significant translation losses in Year 11.
(2) In the case of Australia, the decrease in the credit balance of the account
may be due to sales of businesses by Arnotts Ltd. [169A], which may have
involved the removal of a proportionate part of the account as well as
gains or losses on translation in Year 11. This is corroborated by item [93]
that shows a reduction in the cumulative translation account due to sales
of foreign operations.

Instructor's Solutions Manual

5-19

Problem 5-5 (25 minutes)


a. The assets and liabilities related to Fisher Price are aggregated and then
segregated in the following separate accounts:
[61] Net current assets of discontinued operations
[68] Net non-current assets of discontinued operations
[76] Payable to Fisher-Price
b. The intangible account [67], which consists primarily of goodwill, shows only
a small decline for Years 10 and 11. Moreover, these declines are less than the
amortization reported [143]. Given the information disclosed, there are no
obvious reasons that would explain Quakers increasing level of goodwill
amortization (Year 9=$55.6, Year 10=$71.2, Year 11=$86.5 million). [One
possibility is that transactions occurred in these accounts, but Quaker
deemed them immaterial for full-disclosure purposes.]
c. Gains and losses on these foreign currency forward contracts [160] are
reflected in the cumulative exchange adjustment account [88].
d. Because of the hyper-inflationary conditions confronting the Brazilian
subsidiaries, the functional currency of these subsidiaries will be deemed to
be the U.S. dollar. Consequently, the temporal method of translation will apply.
This means that translation gains and losses are reflected in net income.

5-20

Financial Statement Analysis, 8th Edition

CASES
Case 5-1 (45 minutes)
a. (1) Pooling Accounting:
Investment in Wheal ...........................................
Capital StockAxel ......................................

110,000
110,000

(2) Purchase Accounting:


Investment in Wheal............................................
Capital StockAxel ......................................
Other Contributed CapitalAxel ................
b. (1) Pooling Worksheet Entries:
Capital StockWheal ........................................
Other Contributed CapitalWheal ...................
Investment in Wheal......................................
(2) Purchase Worksheet Entries:
Inventory .............................................................
Property, Plant, and Equipment.........................
Secret Formula (Patent)......................................
Goodwill...............................................................
Long-Term Debt...................................................
Accounts Receivable.....................................
Accrued Employee Pensions.......................
Investment in Wheal......................................
Capital StockWheal ........................................
Other Contributed CapitalWheal ...................
Retained EarningsWheal ...............................
Investment in Wheal......................................

350,000
110,000
240,000
100,000
10,000
110,000
25,000
100,000
30,000
40,000
2,000
5,000
2,000
190,000
100,000
25,000
35,000
160,000

c. Consolidated Retained Earnings at Dec. 31, Year 4


Pooling
Purchase
Retained Earnings, Axel..............................................
Retained Earnings, Wheal...........................................
Consolidated Retained Earnings................................

Instructor's Solutions Manual

$150,000
35,000
$185,000

$150,000

$150,000

5-21

Case 5-2 (65 minutes)


a. Trial Balance in U.S. Dollars:
SWISSCO
Trial Balance
December 31, Year 8
Trial
Exchange
Trial
Balance
Rate
Balance
(in )
Code
$/
(in $)
Cash........................................................
50,000
C
.38
19,000
Accounts Receivable............................
100,000
C
.38
38,000
Property, Plant, and Equipment, net....
800,000
C
.38
304,000
Depreciation Expense...........................
100,000
A
.37
37,000
Other Expenses (including taxes).......
200,000
A
.37
74,000
Inventory 1/1/Year 8...............................
150,000
A
[1]
56,700
Purchases...............................................
1,000,000A .37
370,000
Total debits.............................................
2,400,000
898,700
Sales.......................................................
Allowance for Doubtful Accounts........
Accounts Payable..................................
Note Payable..........................................
Capital Stock..........................................
Retained Earnings 1/1/Year 8...............
Translation Adjustment.........................
Total credits...........................................

2,000,000A
10,000
80,000
20,000
100,000
190,000
________
2,400,000

.37
C
C.
C
H
[3]

740,000
.38
3,800
.38
30,400
.38
7,600
.30
30,000
[2]
61,000
25,900
898,700

Notes: C = Current rate; A = Average rate; H = Historical rate


[1] Dollar amount needed to state cost of goods sold at average rate:

Rate
$
Inventory, 1/1/Year 8
150,000
56,700 To Balance
Purchases
1,000,000
A
.37
370,000
Goods available for sale
1,150,000
426,700
Inventory, 12/31/Year 8
120,000
C
.38
45,600
Cost of goods sold
1,030,000
A
.37
381,100
[2] Dollar balance at Dec. 31, Year 7
[3] Amount to balance.

5-22

Financial Statement Analysis, 8th Edition

Case 5-2continued
b.
SWISSCO
Income Statement (In Dollars)
For the Year Ended Dec. 31, Year 8
Sales..................................................................
Beginning inventory......................................... $ 56,700 [1]
Purchases..........................................................
370,000
Goods available................................................
426,700
Ending inventory ( 120,000 = $0.36).............
(45,600) [1]
Cost of goods sold...........................................
Gross profit.......................................................
Depreciation expense......................................
37,000
Other expenses (including taxes)..................
74,000
Net income........................................................

$740,000

381,100
358,900
111,000
$247,900

[1] See Note 1 to translated trial balance.

SWISSCO
Balance Sheet (In Dollars)
At December 31, Year 8
ASSETS
Cash..........................................................................
Accounts receivable...............................................
Less: Allowances for doubtful accounts..............
Inventory...................................................................
Property, plant, and equipment, net......................
Total assets..............................................................
LIABILITIES AND EQUITY
Accounts payable....................................................
Note payable............................................................
Total liabilities.........................................................
Capital stock............................................................
Retained earnings: 1/1/Year 8................................
Add: Income for Year 8...........................................
Equity Adjustment from translation of
foreign currency statements.................................
Stockholders' equity...............................................
Total liabilities and equity......................................

$ 19,000
$38,000
3,800

34,200
45,600 [A]
304,000
$402,800
$30,400
7,600
38,000
30,000

61,000
247,900

308,900
25,900 [B]
364,800
$402,800

Notes: [A] Ending Inventory 120,000 x 0.38


[B] First time this account appears in the financial statements.

Instructor's Solutions Manual

5-23

Case 5-2continued
c. Unisco Corp. Entry to Record its Share in SwissCo Year 8 Earnings:
Investment in SwissCo Corporation...........................
Equity in Subsidiary's Income...............................

185,925
185,925

To record 75% equity in SwissCo's earnings of $247,900.

Note: While not specifically required by the problem, the parent would also
pick up the translation adjustment as follows:
Investment in SwissCo Corporation...........................
Equity adjustment from translation of
foreign currency statements (75% x $25,900)....

19,425
19,425

Case 5-3 (60 minutes)


a. With the dollar as the functional currency, FI originally translated its
statements using the "temporal method." Now that the pont is the functional
currency, FI must use the "current method" as follows:
FUNI, INC.
Balance Sheet
December 31, Year 9
Ponts
(millions)

ASSETS
Cash
...................................................................
Accounts receivable
...................................................................
Inventory
...................................................................
Fixed assets (net)
...................................................................
Total assets
...................................................................
LIABILITIES AND EQUITY
Accounts payable
...................................................................
Capital stock
...................................................................
Retained earnings
...................................................................
Translation adjustment

5-24

Exchange Rate
Ponts/$

Dollars
(millions)

82

4.0

20.50

700

4.0

175.00

455

4.0

113.75

360

4.0

90.00

1,597

399.25

532

4.0

133.00

600

3.0

200.00

465

132.86
(66.61)*

Financial Statement Analysis, 8th Edition

...................................................................
Total liabilities and equity

1,597

399.25

*Translation adjustment = 600 (1/3.0 - 1/4.0) = 600 (1/12) = (50.00)


+465 (1/3.5 -1/4.0) = 465 (1/28) = (16.61)
(66.61)

Instructor's Solutions Manual

5-25

Case 5-3continued
FUNI, INC.
Income Statement
For Year Ended Dec. 31, Year 9
Ponts
(millions)

Sales
...................................................................
Cost of sales
...................................................................
Depreciation expense
...................................................................
Selling expense
...................................................................
Net income

b. (1) Dollar:
Pont:
(2) Dollar:

Pont:

(3) Dollar:
Pont:

5-26

Exchange Rate
Ponts/$

Dollars
(millions)

3,500

3.5

1,000.00

(2,345)

3.5

(60)

3.5

(670.00
)
(17.14)

(630)

3.5

465

(180.00
)
132.86

Inventory and fixed assets translated at historical rates.


Translation gain (loss) computed based on net monetary assets.
All assets and liabilities translated at current exchange rates.
Translation gain (loss) computed based on net investment (all
assets and liabilities).
Cost of sales and depreciation expenses translated at historical
rates. Translation gain (loss) included in net income (volatility
increased).
All revenues and expenses translated at average rates for period.
Translation gain (loss) in separate component of stockholder
equity (in comprehensive income). Net income less volatile.
Financial statement ratios skewed.
Most ratios in dollars are the same as ratios in ponts.

Financial Statement Analysis, 8th Edition

Case 5-4 (50 minutes)


a. IPR&D represents costs related to research and development projects where
technological feasibility has not yet been achieved. Specifically, a valuable
technology has not yet been developed from the research and development
work. The cost amounts associated with IPR&D are expensed in the period of
the acquisition.
b. Sapient first identified significant research projects for which technological
feasibility had not been established. The value assigned to purchased inprocess technology was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products,
estimating the resulting cash flows from the projects, and then discounting
the cash flows to their present value. The rates used to discount the net cash
flows are based on venture capital rates of return. Venture capital rates of
return are high to compensate venture capitalists for the higher risk that they
assume. The company selects a high discount rate to value the IPR&D
projects because the ultimate success of these projects is very uncertain.
c. Expenditures on these projects have been approximately $2.5 million. An
estimated $625,000 is necessary to complete these projects. The additional
costs will be expensed in the period that they are incurred.
d. Research and development costs are expensed as incurred. However, in an
acquisition, R&D efforts may be expensed or capitalized based on whether the
related efforts have resulted in a usable technology. The value being
capitalized by acquiring firms have already been expensed in the financial
statements of the developing company. Likewise, the costs necessary to
bring non-technically feasible work to technical feasibility will be expensed.
This is construed by some as a logical inconsistency. More importantly, the
designation of having or not having reached technological feasibility is highly
arbitrary and has substantial financial statement consequences. This is why
the FASB believes a new and comprehensive review of accounting for R&D is
necessary. Accordingly, analysts should be careful to assess the impact of
IPR&D during a business acquisition.
Kasus 5-4 (50 menit)
a. IPR & D merupakan biaya yang berkaitan dengan proyek penelitian dan pengembangan di mana
kelayakan teknologi belum tercapai. Secara khusus, teknologi yang berharga belum dikembangkan
dari penelitian dan pengembangan. Jumlah biaya yang terkait dengan HKI & D dibebankan pada
periode akuisisi.
b. Sapient pertama kali diidentifikasi proyek-proyek penelitian yang signifikan yang kelayakan
teknologi belum didirikan. Nilai yang diberikan untuk membeli teknologi dalam proses ditentukan
dengan memperkirakan biaya untuk mengembangkan teknologi yang dibeli dalam proses menjadi
produk komersial, memperkirakan arus kas yang dihasilkan dari proyek, dan kemudian
mendiskontokan arus kas ke nilai kini. Harga yang digunakan untuk mendiskonto arus kas bersih
Instructor's Solutions Manual

5-27

didasarkan pada tingkat modal ventura pengembalian. Tarif modal ventura pengembalian yang
tinggi untuk mengkompensasi pemodal ventura untuk risiko yang lebih tinggi bahwa mereka
menganggap. Perusahaan memilih tingkat diskonto tinggi untuk menilai proyek IPR & D karena
keberhasilan akhir dari proyek ini adalah sangat tidak pasti.
c. Pengeluaran pada proyek-proyek ini telah sekitar $ 2,5 juta. Diperkirakan 625.000 $ diperlukan
untuk menyelesaikan proyek tersebut. Biaya tambahan akan dibebankan pada periode yang
terjadinya.
d. Biaya penelitian dan pengembangan dibebankan pada saat terjadinya. Namun, dalam akuisisi,
upaya R & D dapat dibebankan sebagai biaya atau dikapitalisasi berdasarkan apakah upaya terkait
telah menghasilkan teknologi yang dapat digunakan. Nilai yang dikapitalisasi dengan mengakuisisi
perusahaan telah dibebankan dalam laporan keuangan perusahaan berkembang. Demikian juga,
biaya yang diperlukan untuk membawa non-teknis pekerjaan layak untuk kelayakan teknis akan
dibebankan. Hal ini ditafsirkan oleh sebagian orang sebagai inkonsistensi logis. Lebih penting lagi,
penunjukan memiliki atau tidak telah mencapai kelayakan teknologi sangat sewenang-wenang dan
memiliki konsekuensi laporan keuangan yang cukup besar. Inilah sebabnya mengapa FASB
percaya review baru dan komprehensif akuntansi untuk R & D diperlukan. Oleh karena itu, analis
harus berhati-hati untuk menilai dampak HKI & D

5-28

Financial Statement Analysis, 8th Edition

Case 5-5 (50 minutes)


a. When mergers occur, the resulting company is different than either of the two
former, separate companies. Consequently, it is often difficult to assess the
performance of the combined entity relative to that of the two former
companies. While this problem extends to both purchase and pooling
methods, it is especially apparent when the pooling method is used. Under
pooling accounting, the book values of the two companies are combined. Lost
is the fair value of the consideration exchanged and the fair value of the
acquired assets and liabilities. As a result, the assets of the combined
company are usually understated.
Since the assets are understated,
combined equity is understated and expenses also are understated. This
means that return on assets and return on equity ratios are overstated.
b. Tycos high price-to-earnings ratio was primarily driven by its relatively high
stock price. Its high stock price meant that poolings could be completed with
relatively fewer of its shares being given in consideration. Accordingly, a high
price is crucial to Tycos ability to execute, and continue to execute,
acquisitions at a favorable price.
c. When large charges are recorded in conjunction with acquisitions,
subsequent periods are relieved of these charges. This means that future net
income is increased because the items currently written off will not have to be
written off in future periods. As a result, the reported net income in future
periods may be misleadingly high. It is important that analysts assess the
nature and amount of write-offs related to acquisitions to see if such charges
are actually related to past/current events or more appropriately should be
carried to future periods. If such misstatements are identified, net income in
the period of the acquisition should be adjusted upward to compensate for
the over-charge, and the reported net income of future periods should be
commensurately reduced.
d. Cost-cutting can be valuable when the costs that are cut relate to redundant
processes or other non-value added processes. However, cost-cutting can
have adverse consequences for the future of the company if the costs that are
cut relate to activities that bring future valuesuch potential costs include
research and development or management training.
e. When the market perceives a company to have low quality financial reporting,
the stock price of the company can fall precipitously for at least two important
reasons. First, the market will assign a higher discount rate to the company to
price protect itself against accounting risk or the risk of misleading financial
information. Second, the integrity of management is called into question. As a
result, the market will not be willing to pay as much for the stock of the
company given the commensurate increase in risk.

Instructor's Solutions Manual

5-29

Case 5-5continued
f. Focusing on earnings before special items can be a useful tool when
attempting to measure earnings that is more reflective of the permanent
earnings stream and, consequently, more reflective of future earnings.
However, several companies record repeated special item charges. These
companies are essentially overstating earnings for several periods (not
including those with special charges) and then catching up by recording the
huge charge. Analysts must be careful to identify such companies so that they
are not relying on overstated earnings of the company in predicting future
performance. For such companies, it is prudent to assign a portion of the
charges to several periods to develop an approximation of the ongoing
earnings of the company.
jawab
a. Ketika merger terjadi, perusahaan yang dihasilkan berbeda dari salah satu dari dua mantan,
perusahaan terpisah. Akibatnya, seringkali sulit untuk menilai kinerja entitas relatif
dikombinasikan untuk bahwa dari dua mantan perusahaan. Sementara masalah ini meluas ke
kedua metode pembelian dan penyatuan, hal ini terutama terlihat ketika metode pooling
digunakan. Di bawah pooling akuntansi, nilai buku kedua perusahaan digabungkan. Kehilangan
adalah nilai wajar pertimbangan dipertukarkan dan nilai wajar aktiva dan kewajiban yang
diakuisisi. Akibatnya, aset perusahaan gabungan biasanya bersahaja. Karena aset yang bersahaja,
ekuitas gabungan bersahaja dan biaya juga yang bersahaja. Ini berarti bahwa pengembalian aset
dan
kembali
pada
rasio
ekuitas
dibesar-besarkan.
b. Tinggi price to earning ratio Tyco terutama didorong oleh harga saham yang relatif tinggi.
Harga saham tinggi Its berarti bahwa poolings dapat diselesaikan dengan relatif lebih sedikit
sahamnya diberikan dalam pertimbangan. Dengan demikian, harga tinggi sangat penting untuk
kemampuan Tyco untuk mengeksekusi, dan terus mengeksekusi, akuisisi dengan harga yang
menguntungkan.
c. Ketika biaya besar dicatat dalam hubungannya dengan akuisisi, periode berikutnya adalah lega
dari tuduhan ini. Ini berarti bahwa laba bersih masa depan meningkat karena barang-barang saat
ini dihapuskan tidak perlu dihapuskan pada periode mendatang. Akibatnya, laba bersih dilaporkan
di masa mendatang mungkin menyesatkan tinggi. Adalah penting bahwa analis menilai sifat dan
jumlah write-off terkait dengan akuisisi untuk melihat apakah biaya tersebut sebenarnya terkait
dengan peristiwa masa lalu / saat ini atau lebih tepat harus dilakukan untuk periode yang akan
datang. Jika salah saji tersebut diidentifikasi, laba bersih pada periode akuisisi harus disesuaikan ke
atas untuk mengimbangi over-charge, dan laba bersih dilaporkan periode yang akan datang harus
commensurately
berkurang.
d. Pemotongan biaya dapat berharga ketika biaya yang dipotong berhubungan untuk berlebihan
proses atau non-nilai tambah proses lainnya. Namun, pemotongan biaya dapat memiliki
konsekuensi yang merugikan bagi masa depan perusahaan jika biaya yang dipotong berhubungan
dengan kegiatan yang membawa potensi biaya-nilai seperti masa depan mencakup penelitian dan
pengembangan
atau
pelatihan
manajemen.
e. Ketika pasar merasakan sebuah perusahaan untuk memiliki laporan keuangan yang berkualitas
rendah, harga saham perusahaan dapat jatuh drastis selama sedikitnya dua alasan penting.

5-30

Financial Statement Analysis, 8th Edition

Pertama, pasar akan menetapkan tingkat diskonto yang lebih tinggi untuk perusahaan untuk harga
melindungi diri terhadap risiko akuntansi atau risiko informasi keuangan yang menyesatkan.
Kedua, integritas manajemen dipertanyakan. Akibatnya, pasar tidak akan bersedia membayar lebih
banyak untuk saham perusahaan mengingat peningkatan yang sepadan dalam risiko.
Kasus

5-5-terus

f. Berfokus pada laba sebelum item khusus dapat menjadi alat yang berguna ketika mencoba untuk
mengukur laba yang lebih mencerminkan aliran pendapatan permanen dan, akibatnya, lebih
mencerminkan laba masa depan. Namun, catatan beberapa perusahaan mengulangi tuduhan barang
khusus. Perusahaan-perusahaan ini pada dasarnya melebih-lebihkan pendapatan selama beberapa
periode (tidak termasuk dengan biaya khusus) dan kemudian mengejar dengan mencatat biaya
besar. Analis harus berhati-hati untuk mengidentifikasi perusahaan-perusahaan tersebut sehingga
mereka tidak bergantung pada pendapatan berlebihan dari perusahaan dalam memprediksi kinerja
masa depan. Untuk perusahaan seperti, adalah bijaksana untuk menetapkan sebagian dari biaya
untuk beberapa periode untuk mengembangkan perkiraan pendapatan berkelanjutan perusahaan.

Instructor's Solutions Manual

5-31

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