Our goal in writing this book is to help students become skilled preparers and informed consumers of financial statement information. The financial reporting environment today is particularly challenging. Accountants, auditors, and financial analysts must not only know the reporting practices that apply in the United States (U.S. GAAP), they must also be aware of the practices allowed in other countries under International Financial Reporting Standards (IFRS). Adding to this challenge is the fact that the Financial Accounting Standards Board (FASB) and its global counterpart—the International Accounting Standards Board (IASB)—have issued in the past 18 months an unprecedented number of proposed new standards intended to improve financial reporting practices worldwide and to achieve convergence of U.S. GAAP and IFRS. These proposed new standards, which may become effective in 2011 or 2012, will change in fundamental ways when revenue is recognized, how certain assets and liabilities are measured, and how information is presented in financial statements. We believe that it is essential for students to not only comprehend the key similarities and difference between current U.S. GAAP and IFRS, but also to grasp the significant changes to those standards that are on the horizon.
Our other objective in writing this book is to change the way the second-level course in financial accounting is taught, both to graduate and undergraduate students. Typically this course—often called Intermediate Accounting—focuses on the details of GAAP with little emphasis placed on understanding the economics of business transactions or how statement readers use the resultant numbers for decision making. Traditional intermediate accounting texts are encyclopedic in nature and approach, lack a unifying theme, and emphasize the myriad of intricate accounting rules and procedures that could soon become outdated by new standards.
In contrast, we deliberately wrote Financial Reporting & Analysis, Fifth Edition, to foster a “critical thinking” approach to learning the subject matter. Our approach develops students' understanding of the environment in which financial reporting choices are made, what the options are, how accounting information is used for various types of decisions, and how to avoid misusing financial statement data. We convey the exciting nature of financial reporting in two stages. First, we provide a framework for understanding management's accounting choices, the effect those choices have on the reported numbers, and how financial statement information is used in valuation and contracting. Business contracts, such as loan agreements and management compensation agreements, are often linked to accounting numbers. We show how this practice creates incentives for managers to exploit the flexibility in financial reporting standards to “manage” the reported accounting numbers to benefit themselves or shareholders. Second, we integrate real-world financial statements and events into our discussions to illustrate vividly how financial reporting alternatives and subjective accounting estimates give managers discretion in the timing of earnings and in reporting the components of financial position. We believe this approach—which focuses on the fundamental measurement and reporting issues that arise from both simple and complex business transactions, and how financial statements are used for decision making—better prepares students to adapt as business transactions and accounting standards continue to evolve.
An important feature of our approach is that it integrates the perspectives of accounting, corporate finance, economics, and critical analysis to help students grasp how business transactions get reported and understand the decision implications of financial statement numbers. We cover all of the core topics of intermediate accounting as well as several topics often found in advanced accounting courses, such as consolidations, joint venture accounting and foreign currency translation. For each topic, we describe the underlying business transaction, the GAAP guidelines that apply, how the guidelines are implemented in practice, and how the financial statements are affected. We then go a step further and ask: What do the reported numbers mean? Does the accounting process yield numbers that accurately reflect the underlying economic situation of a company? And, if not, what can statement users do to overcome this limitation in order to make more informed decisions? A Global Vantage Point discussion then summarizes the key similarities and differences between U.S. GAAP and IFRS, and previews potential changes to both.
Our book is aimed not only at those charged with the responsibility for preparing financial statements, but also those who will use financial statements for making decisions. Our definition of financial statement “users” is broad and includes lenders, equity analysts, investment bankers, boards of directors, and others charged with monitoring corporate performance and the behavior of management. As such, it includes auditors who establish audit scope and conduct analytical review procedures to spot problem areas in external financial statements. To do this effectively, auditors must understand the incentives of managers, how the flexibility of U.S. GAAP and IFRS accounting guidance can be exploited to conceal rather than reveal financial truth, and the potential danger signals that should be investigated. Our intent is to help financial statement readers learn how to perform better audits, improve cash flow forecasts, undertake realistic valuations, conduct better comparative analyses, and make informed evaluations of management.
Financial Reporting & Analysis, Fifth Edition, provides instructors with a teaching/learning approach for achieving goals stressed by professional accountants and analysts. Our book is designed to instill capacities for: thinking in an abstract, logical manner; solving unstructured problems; understanding the determining forces behind management accounting choices; and instilling an integrated, cross-disciplinary view of financial reporting. Text discussions are written, and exercises, problems, and cases are carefully chosen, to help achieve these objectives without sacrificing technical underpinnings. Throughout, we explain in detail the source of the numbers, the measurement methods used, and how transactions are recorded and presented. We have strived to provide a comprehensive user-oriented focus while simultaneously helping students build a strong technical foundation.