Financial Reporting for Managers: A Value-Creation Perspective / Edition 1

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This is the first and only book to combine the concept of shareholder value creation with the financial reporting process. Readers will discover the clear links between shareholder value creation, the financial accounting statements, and the market value of the firm. They'll also explore the steps leading from good decisions by management to strong financial statements, and higher shareholder value and stock prices. Throughout the pages, the authors strike an effective balance among the mechanics underlying the preparation of the statements, the measurement issues behind the mechanics, and the economic context in which the statements are prepared and used.

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Product Details

  • ISBN-13: 9780471457497
  • Publisher: Wiley
  • Publication date: 3/31/2008
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 440
  • Sales rank: 732,673
  • Product dimensions: 8.05 (w) x 10.02 (h) x 0.58 (d)

Meet the Author

Jamie Pratt is Professor of Accounting at Indiana University, and has taught both around the U.S. and internationally. In 1993, he was the program chair for the American Accounting Association. He has been on the Educational Advisory Committee since 1990, and has also been the secretary of the board for the Pratt Corporation for 17 years.  He has published extensively in research journals and has penned several texts.

D. Eric Hurst is Associate Dean and Professor in the Department of Accounting at the Red McCombs School of Business at The University of Texas at Austin. His research has been published in Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Auditing: A Journal of Practice & Theory, and Organizational Behavior and Human Decision Processes.

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Table of Contents

1. Value Creation, Financial Statements, And The Environment Of Financial Reporting.

Value Creation and Successful Management.

Value Creation Through Operating, Investing and Financial Activities.

Return on Equity (ROE).

A Caution about Measures of Value Creation.

Estimating the Cost of Equity – An Intuitive Approach.

The Financial Statements – An Introduction.

The Balance Sheet.

Statement of Cash Flows.

Income Statement.

Statement of Changes in Shareholders Equity.

Did Lowe's Create Value in 2007?

The Economic Context in which Financial Reports are Prepared and Used.

Reporting Entities and Industries.

Corporate Governance.

Financial Information Users and Capital Markets.

Contracts: Debt Covenants and Management Compensation.

Financial Reporting Regulations and Standards.

Generally Accepted Accounting Principles.

Independent Auditors.

Board of Directors and Audit Committee.

Legal Liability.

Professional Reputation and Ethics.

Sarbanes-Oxley Act and Internal Controls.

Global Perspective: Accounting Practices Outside the U.S.


Appendix 1A. Estimating the Cost of Equity.

Case and Review Questions.

2. The Financial Statements – A Closer Look.

Operating Activities, the Financial Statements, and Value Creation.

Operating Performance and the Income Statement.

Operating Performance and Cash Provided by Operating Activities.

Investing Activities, Asset Management, and Financial Statement and Value Creation.

Working Capital Management. 

Long-term (Producing) Assets.

Financing Activities, the Financial Statements, and Value Creation.

Transactions with Debt Holders.

Transactions with Equity Holders.

Financial Statement Differences Across Industries.

Global Perspective: Financial Statements and Analyses in Other Countries.


Case and Review Questions.

3. Measurement Framework And Mechanics Of Financial Accounting.

Part 1: Measurement Framework for the Financial Statements.

Objectives of Financial Reporting.

Elements and Their Qualitative Characteristics.

Assumptions, Valuation Principles, and Exceptions.

Assumptions of Financial Accounting.

Markets and Valuations Bases.

Valuation Principles of Financial Accounting.

Exceptions of Financial Accounting.

Part 2: Mechanics of Financial Accounting.

Basic Accounting Equation and Financial Statements.

Transactions, Accounts, and the Accounting Equation.

Mechanics of Financial Accounting: An Illustration.

Global Perspective: Measurement Fundamentals and International Reporting Standards.

Case and Review Questions.

Appendix 3A. Debits, Credits, and Journal Entries.

Journal Entries and the Accounting Equation.

Permanent, Temporary Accounts, and the Closing Process.

4. Using Financial Statements To Analyze Value Creation.

Determinants of Value Creation: Analyzing Return of Equity.

Return on Assets (ROA).

Measures of Effective Sales and Expense Management.

Measures of Effective Assets Management.

Asset Turnover Ratios.

Solvency Ratios.

Measures of Effective Capital Structure Management.

Using Financial Ratios to Analyze Value Creation Structure – Summary.

Analyzing the Statement of Cash Flows.

Financial Statement Analysis – A Wrap-Up and Industry Comparison.

Global Perspective: Working Capital Management.

Case and Review Questions.

5. Return On Equity, Value Creation, And Firm Value.

A Model of Firm Value Based on ROE and Value Creation.

Market-to-Book Ratios.

Using the ROE Valuation Model to Estimate Firm Market Value.

Predicting Future ROE.

Incorporating ROE Predictions into the Valuation Model.

Using the Valuation Model to Estimate Nordstrom's Market Value.

Implications of Differences Between Actual and Estimated Market Values.

Using Financial Statements to Assess the Value of Non-US Firms.


Case and Review Questions.

6. Earnings Management.

Incentives to Manage Earnings.

Common Forms of Earnings Management.

Overstating Operating Performance.

Understating Operating Performance.

Off-Balance Sheet Financing.

How Managers Use Accounting Judgments to Manage Earnings.

Materiality Judgments.

Recognition versus Disclosure Judgments.

Classification Judgments.

Measurement Judgments.

Measurement Judgments: Summary.

“Real” Earnings Management.

Earnings Management and Value Creation.

A Global Perspective on Earnings Management.

Case and Review Questions.

7. Operating Transactions – Revenues, Expenses And Working Capital.

Income Statement: Disclosure and Presentation.

Operating Revenues and Expenses.

Other Revenues and Expenses.

Interest Expense, net.

Disposal of a Business Segment – Discontinued Operations.

Extraordinary Items.

Changes in Accounting Methods.

Disclosure of Income Taxes.

Earnings-Per-Share Disclosure.

Working Capital.


Cash Restrictions.

Cash Management.

Cash Control.

Revenue Recognition.

Managing Receivables.

Valuing Receivables on the Balance Sheet.

Accounting for Bad Debts (Uncollectibles).

Accounts Receivable Control and Aging Schedules.


Accounting for Inventory: Four Important Issues.

Acquiring Inventory: What Costs to Capitalize.

Carry Inventory: Perpetual Method.

Balance Sheet.

Income Statement.

Which Cost Flow Assumption.

Inventory Cost Flow Assumptions: Effects on the Financial Statement.

Observations about LIFO: Liquidations and LIFO Reserves.

Inventory Cost Flow Assumptions: Tradeoffs.

Ending Inventory: Applying the Lower-of-Cost-or-Market Rule.

Current Liabilities.

Determinable Liabilities.

Contingent Liabilities.

Statement of Cash Flows: Operating Section.

Direct Method.

Indirect Method.


Cases and Review Questions.

8. Long-Term Producing Assets And Investments In Equity Securities.

Investments in Long-Term Producing Assets.

Accounting for Producing Assets: An Overview.

Acquisition: What Costs to Capitalize.

Post-acquisition Expenditures.

Cost Allocation.

Estimating Useful Life and Salvage Value.

Cost Allocation Methods

Disposal: Retirement, Sales, and Trade-In

Investments in Equity Securities.

Cost Method.

Mark-to-Market Method.

Equity Method.

Consolidated Financial Statements.

Investing Activities and Statement of Cash Flows.


Cases and Review Questions.

Appendix A. Time Value Of Money.

Interest: The Price of Money.

Time Value.

Size of Time Value.

Time Value Computations.

Future Value.

Present Value.

An Illustration.

Equivalent Value.

Computing Implicit Rates of Return.

Time Value of Money and Financial Reporting.

Cases and Review Questions.


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