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Financial Statement Analysis and Valuation
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Financial Statement Analysis and Valuation

Seventh Edition
January 2025 | 880 pages | Cambridge Business Publishers
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Financial Statement Analysis & Valuation, Seventh Edition was developed to meet the needs of today’s instructors and students seeking a contemporary, engaging, and user-oriented approach to financial analysis and valuation. Grounded in extensive market research and informed by feedback from faculty, students, and practicing credit and equity analysts, this edition emphasizes real-world relevance and practical decision-making.

The text is application-oriented and data-driven, teaching students how to read, analyze, and interpret financial statement information to make informed business and valuation decisions. Real company data is integrated throughout the narrative and assignment materials to ensure concepts are both relevant and engaging. Designed to accommodate a wide range of course formats, the book’s modular structure allows instructors to tailor content for short courses, mini-courses, or full-semester offerings while maintaining a cohesive learning experience.

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About the Authors
 
Preface
 
Brief Contents
 
Contents
 
Module 1: Framework for Analysis and Valuation
Step 1 Business Environment and Accounting

 
Financial Statements: Demand and Supply

 
Review of Financial Statements

 
Analyzing the Business Environment

 
Step 2 Adjusting and Analyzing Financial Data

 
Step 3 Forecasting Financial Numbers

 
Step 4 Business Valuation

 
Analyzing Global Reports

 
Appendix 1A: Financial Statement Data and Analytics

 
Guidance Answer

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Decision Points

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 2: Review of Business Activities and Financial Statements
Interpreting a Balance Sheet

 
Interpreting an Income Statement

 
Interpreting a Statement of Stockholders’ Equity

 
Interpreting a Statement of Cash Flows

 
Articulation of Financial Statements

 
Analyzing Transactions and Adjustments

 
Additional Information Sources

 
Analyzing Global Reports

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 3: Profitability Analysis and Interpretation
Return on Equity (ROE)

 
ROE Disaggregation: DuPont Analysis

 
Return on Assets and Its Disaggregation

 
Analysis of Financial Leverage

 
Balance Sheet Analysis with an Operating Focus

 
Income Statement Analysis with an Operating Focus

 
Return on Net Operating Assets (RNOA)

 
RNOA Disaggregation into Margin and Turnover

 
Analyzing Global Reports

 
Appendix 3A: Operating versus Nonoperating Classification

 
Appendix 3B: Nonoperating Return Component of ROE

 
Appendix 3C: Vertical and Horizontal Analysis

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 4 Credit Risk Analysis and Interpretation
Market for Credit

 
Credit Risk Analysis Process

 
Measuring Credit Risk

 
Credit Ratings

 
Predicting Bankruptcy Risk

 
Appendix 4A: Verizon Financial Statements and Debt and Lease Notes

 
Appendix 4B: Approaches of Other Credit Raters

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Point

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 5: Revenue Recognition and Operating Income
Analyzing Revenue

 
Analyzing Sales Allowances

 
Analyzing Unearned (Deferred) Revenue

 
Foreign Currency Effects on Revenue, Expenses, and Cash Flow

 
Analyzing Accounts Receivable

 
Analyzing Expenses and Losses

 
Pro Forma and Non-GAAP Disclosures

 
Analyzing Global Reports

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 6: Asset Recognition and Operating Assets
Analyzing Inventory-Costing Methods

 
Analyzing Inventory-Reporting

 
Analyzing Inventory-Tools

 
Analyzing PP&E Assets-Capitalization and Depreciation

 
Analyzing PP&E Assets-Sales, Impairments, and Restructuring

 
Analyzing PP&E Assets-Tools

 
Analyzing Intangible Assets

 
Analyzing Global Reports

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 7: Liability Recognition and Nonowner Financing
Analyzing Accrued Liabilities

 
Analyzing Short-Term Debt

 
Analyzing Long-Term Debt-Pricing

 
Analyzing Long-Term Debt-Reporting

 
Analyzing Global Reports

 
Appendix 7A: Time Value of Money

 
Appendix 7B: Amortization of Debt

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 8: Equity Recognition and Owner Financing
Analyzing Stockholders’ Equity and Classes of Stock

 
Analyzing Stock Transactions

 
Analyzing Stock-Based Compensation

 
Analyzing Dividends and Stock Splits

 
Analyzing Accumulated Other Comprehensive Income (AOCI)

 
Analyzing Earnings per Share (EPS)

 
Analyzing Global Reports

 
Appendix 8A: Stock-Based Compensation: Reporting and Analyzing

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 9: Intercorporate Investments
Analyzing Intercorporate Investments

 
Analyzing Equity Investments with Significant Influence

 
Analyzing Equity Investments with Control

 
Analyzing Global Reports

 
Appendix 9A: Analyzing Derivatives

 
Appendix 9B: Analyzing Equity Carve-Outs

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Point

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 10: Analyzing Leases, Pensions, and Taxes
Analyzing Leases

 
Analyzing Pensions

 
Analyzing Income Taxes

 
Analyzing Global Reports

 
Appendix 10A: Lease Accounting Example- Finance and Operating Leases

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 11: Financial Statement Forecasting
Forecasting Process

 
Forecasting the Income Statement

 
Forecasting the Balance Sheet

 
Building Forecasts from Segment Disclosures

 
Appendix 11A: Forecasting the Statement of Cash Flows

 
Appendix 11B: Multiyear Forecasting with Target Cash and Debt Financing

 
Appendix 11C: Parsimonious Method for Forecasting NOPAT and NOA

 
Appendix 11D: Morgan Stanley’s Forecast Report on Procter & Gamble

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 12: Cost of Capital and Valuation Basics
Basics of Valuation

 
Estimating Cost of Capital

 
Dividend Discount Model

 
Appendix 12A: Estimating Cost of Equity Capital

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 13: Cash-Flow-Based Valuation
Equity Valuation Models

 
Discounted Cash Flow (DCF) Model

 
Analyzing Global Reports

 
Appendix 13A: P&G Financial Statements

 
Appendix 13B: Derivation of Free Cash Flow Formula

 
Appendix 13C: Deutsche Bank Valuation of P&G

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Point

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 14: Operating-Income-Based Valuation
Equity Valuation Models

 
Residual Operating Income (ROPI) Model

 
Steady State in Valuation

 
Managerial Insights from the ROPI Model

 
Assessment of Valuation Models

 
Analyzing Global Reports

 
Appendix 14A: P&G Financial Statements

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Point

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Module 15: Market-Based Valuation
Valuation Model Using Market Multiples

 
Application of Market Multiples

 
Valuation Using Balance Sheet Multiples

 
Valuation Using Income Statement Multiples

 
Selecting Comparables for Market Multiples

 
Interpreting and Reverse Engineering Market Multiples

 
Guidance Answer

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Analysis Discussion Points

 
Data Analytics

 
Ongoing Analysis Project

 
Solutions to Reviews

 
 
Appendix A: Compound Interest Tables
 
Appendix B: Computing and Analyzing Cash Flows
Framework for Statement of Cash Flows

 
Relation Among Financial Statements

 
Statement of Cash Flows Format

 
Cash Flow from Operating Activities

 
Cash Flows from Investing Activities

 
Cash Flows from Financing Activities

 
Interpreting and Analyzing CASH FLOWS

 
Appendix BB: Direct Method Reporting for Statement of Cash Flows

 
Guidance Answers

 
Multiple Choice

 
Questions

 
Mini Exercises

 
Exercises

 
Problems

 
Data Analytics

 
Solutions to Reviews

 
 
Appendix C: Comprehensive Case
 
Appendix D: Data Analytics and Blockchain Technology
Data Analytics

 
Blockchain Technology

 
 
Appendix E: Chart of Accounts with Acronyms
 
Index
Key features

NEW TO THIS EDITION:

  • Updated content informed by extensive market research, faculty input, and practitioner feedback to ensure relevance and usability.
  • Expanded emphasis on data-driven financial analysis and valuation techniques throughout all modules.
  • Continued integration of real company financial data to support applied learning and decision-making.
  • Refined modular structure to better support courses of varying lengths and instructional priorities.
KEY FEATURES:
  • Targeted Audience Focus: Designed for financial statement analysis and valuation courses with emphasis on profitability analysis, credit risk assessment, and security valuation.
  • Innovative, Applications-Oriented Approach: Concentrates on the most salient aspects of accounting, analysis, and valuation, teaching students how to interpret financial statement data for real business decisions.
  • Flexible Modular Structure: Fifteen largely independent modules allow instructors to customize course coverage based on learning objectives and course duration.
  • Focus Companies: Each module centers on real companies to demonstrate concepts, engage students, and reinforce interpretation and analysis skills.
  • Real Company Data Throughout: Contemporary financial statement data is embedded across modules and assignments to maintain relevance and student engagement.
  • Analyst Adjustments: Boxed features illustrate how analysts adjust accounting information to improve assessments of firm performance and value.
  • Business Insights and Analysis Insights: Integrated features highlight real-world business scenarios and the importance of professional judgment in financial analysis.
    Research Insights: Select discussions connect academic research to modern business practice, reinforcing the link between theory and application.
  • Decision Orientation: Analysis Decision features encourage students to apply concepts to realistic business and valuation scenarios.
  • Financial Statement Effects Template: A structured analytical tool helps students understand the economic impact of transactions across financial statements while supporting both accounting and non-accounting majors.
  • Mid-Module and Module-End Reviews: Frequent reviews reinforce key concepts, support skill development, and build confidence through application and comparison.
  • Experiential Learning: An ongoing, Excel-based financial statement analysis and valuation project enables students to synthesize and integrate learning across modules.
  • Excellent, Class-Tested Assignment Materials: A comprehensive set of questions, exercises, problems, IFRS applications, and analysis discussion points emphasize interpretation, analysis, and decision-making over mechanical tasks.