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Preface

O
ne of our objectives 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). We believe it is essential for students to
comprehend the key similarities and differences between current U.S. GAAP and IFRS.
The challenge is compounded by two major changes in accounting standards—for leasing and
revenue recognition. The new leasing standard is a break from recent convergence efforts by the
Financial Accounting Standards Board (FASB) and the International Accounting Standards Board
(IASB). While the FASB preserved the notion of a dual model for leases, albeit with major
changes to one of the models, the IASB moved to a single model. As a result, for some companies,
financial statements will look substantially different under U.S. GAAP than they would under
IFRS. The new revenue recognition standard, in contrast, is substantially converged, but it will still
challenge students and faculty alike to consider the question of when to recognize revenue under a
completely different framework than they have in the past. We discuss both of these new standards
in depth in the Seventh edition.
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 or Corporate Financial Reporting—focuses on
the details of GAAP with little emphasis placed on understanding the economics of business
transactions or how financial statement readers use the resultant numbers for decision making.
Traditional 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outdated by new standards.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 wrote Financial Reporting & Analysis, Seventh Edition, to foster a “critical
thinking” approach to learning the subject matter. Our approach develops students’ understand-
ing 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 com-
pensation agreements, are often linked to accounting numbers. We show how this practice cre-
ates 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 current real-world financial statements and events into our discussions to illustrate
vividly how financial statements affect contracts and reveal the financial health of a firm. To
prepare students for future business and accounting challenges, we focus on fundamental mea-
surement and reporting issues surrounding business transactions.
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 transac-
tions 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
vii
viii Preface

advanced accounting courses, such as consolidations, joint venture accounting, and foreign cur-
rency 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 faithfully present the underlying economic situ-
ation of a company? And, if not, what can financial statement users do to overcome this limita-
tion 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 ideal for professionals who use financial statements for making decisions. Our
definition of financial statement “users” is broad and includes lenders, equity analysts, invest-
ment 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
be effective, 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 underlying
economics, 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 more informed
evaluations of management.
Financial Reporting & Analysis, Seventh 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 prob-
lems; understanding the determining forces behind management accounting choices; and instilling
an integrated, cross-disciplinary view of financial reporting. Text discussions are written, and exer-
cises, problems, and cases are carefully chosen, to help achieve these objectives without sacrificing
technical underpinnings. Throughout the book, 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.

Key Changes in the Seventh Edition

The first six editions of our book have been widely adopted in business schools throughout the
United States, Canada, Europe, and the Pacific Rim. Our book has been used successfully at both
the graduate and undergraduate levels, and in investment banking, commercial lending, and other
corporate training programs. Many of our colleagues who used the first six editions have provided
us with valuable feedback. Based on their input, we have made a number of changes in this edition
of the book to achieve more effectively the objectives outlined above.
Key changes ­include the following:
∙ Complete rewrite of Chapter 3 for the new revenue recognition standard.
∙ Complete rewrite of Chapter 12 for the new leasing standard.
∙ Expanded coverage of analysis and income taxes throughout the text.
∙ New end-of-book appendix on Segment Reporting.
∙ New or updated company examples throughout the book.
∙ New and revised end-of-chapter materials including exercises, problems, and cases tied to
Global Vantage Point sections and new FASB and IASB standards.
∙ Updated Global Vantage Point sections
∙ Identify key differences between U.S. GAAP and IFRS.
∙ Discuss financial statement excerpts of companies that follow IFRS.
∙ Summarize proposed new accounting standards issued by the FASB and/or the IASB.
∙ Incorporation of all FASB and IASB standards, exposure drafts, and discussion papers
released through August 2016.

Chapter Revision Highlights
Chapter 1: The Economic and Institutional Setting for
­Financial Reporting
∙ Streamlined discussion of Why Financial Statements Are
Important and Incentive Conflicts and Financial Reporting.
∙ Updated the Conceptual Framework discussion for the 2015
Proposed ASU on materiality.
∙ Updated the discussion on IFRS and differences between
IFRS and U.S. GAAP.
∙ Updated the chapter appendix on U.S. GAAP for the Private
Company Decision-Making Framework.
Chapter 2: Accrual Accounting and Income Determination
∙ Restructured the chapter to include all material on the
income statement, except for revenue recognition.
∙ Updated to reflect the elimination of extraordinary item
treatment of gains and losses under U.S. GAAP.
∙ Updated to reflect new requirements for discontinued opera-
tions treatment.
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 3: Revenue Recognition
∙ Completely new chapter discusses in depth the new revenue
recognition standard and its 5-step model for determining
when to recognize revenue.
∙ Discusses issues involved in the implementation of the new
standard.
∙ Discusses expected financial statement effects of the new
standard.
∙ All new end-of-chapter material tailored to the new standard.
∙ Because the existing revenue recognition standards will
remain in effect through 2017, the chapter continues to
include a discussion of existing revenue recognition standards.
Chapter 4: Structure of the Balance Sheet and Statement of
Cash Flows
∙ Restructured chapters 4 and 17 to eliminate redundancies.
∙ Chapter 4 covers the structure of the cash flow statement and
how it is derived. The cash flow effects of more complex
transactions are deferred to chapter 17, after those transac-
tions have been covered.
∙ The appendix previously appearing in chapter 17 is now in
chapter 4. It describes how to use a spreadsheet to create a
cash flow statement in a more compact format than a tradi-
tional t-account analysis.
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 5: Essentials of Financial Statement Analysis
∙ Updated the comprehensive Whole Foods financial analysis.
∙ Updated exhibits from company reports throughout the
chapter.
Preface ix
Chapter 6: The Role of Financial Information in Valuation
and Credit Risk Assessment
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 7: The Role of Financial Information in Contracting
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 8: Receivables
∙ Updated the Global Vantage Point section for recent work by
the IASB and FASB on Financial Instruments.
∙ Updated chapter for ASU 2014-09 (revenue recognition) and
ASU 2015-01 (extraordinary items).
∙ Streamlined receivable analysis discussion.
∙ Updated securitization and financial crisis discussion for law-
suit settlements and provided additional reference materials.
∙ Included Chesapeake Energy Corporation disclosures in the
troubled debt restructuring section.
Chapter 9: Inventories
∙ Updated Lower of Cost or Market discussion for
ASU 2015-11.
∙ New BlackBerry Limited illustration of inventory
impairment.
∙ Revised primary LIFO example to be in an environment of
rising prices.
∙ Moved discussion of absorption and variable costing into an
appendix.
∙ Updated LIFO reserve and tax statistics.
∙ Updated illustrations throughout chapter.
∙ Updated Global Vantage Point section.
Chapter 10: Long-Lived Assets
∙ Updated and expanded Global Vantage Point section on the
differences between U.S. GAAP and IFRS.
∙ New ExxonMobil interest capitalization illustration.
∙ Updated financial statement illustrations throughout chapter.
∙ New cases on capitalization of interest and asset impairment.
∙ New Disney purchase price allocation illustration.
∙ Added and updated new problems and cases.
∙ Updated web appendix on current value accounting for IFRS
issues; available in Connect.
Chapter 11: Financial Instruments and Liabilities
∙ Updated chapter for ASU 2015-01 (extraordinary items),
ASU 2015-03 (debt issue costs), ASU 2016-01 (fair value
option),and IFRS 9 (fair value option and hedging).
∙ Streamlined coverage of debt-for-debt transactions.
∙ Removed discussion of off-balance-sheet issues addressed in
Chapter 16.
x Preface
∙ Replaced Dentsply with Chesapeake Energy for the debt
note analysis.
∙ Revised figures, added figures, and revised discussion in the
hedging section.
∙ Revised and added exercises, problems, and cases.
Chapter 12: Financial Reporting for Leases
∙ Provided more intuition on the economics of leasing at the
beginning of the chapter.
∙ Revised the main lessor example to match the discount rate
in the main lessee example.
∙ Expanded discussion of uneven lease payments and rent
holidays.
∙ Streamlined discussion of lessor accounting.
∙ Provided separate discussions of ASU 2016-02 (ASC 842)
and IFRS 16 within the lessee and lessor sections.
∙ Updated comparison of operating and capital lease
­obligations by industry.
∙ Updated Whole Foods example for illustrating disclosure
and constructive capitalization.
∙ Changed approach in appendix to estimate effects of
both ASU 2016-02 and IFRS 16.
∙ Revised exercises, problems, and cases so that more than
half of them address ASU 2016-02 or IFRS 16.
Chapter 13: Income Tax Reporting
∙ Added discussion of semantics commonly used in discus-
sions about income taxes.
∙ Added discussion of corporate inversions.
∙ Added explanation of forthcoming change in how deferred
tax assets and liabilities are classified as current and noncur-
rent and how they are netted against each other.
∙ Revised the language in the text that relates to temporary dif-
ferences in revenue recognition to conform to the new reve-
nue recognition standard.
∙ Revised the end-of-chapter material to eliminate numerous
examples with scheduled tax rate changes every year, which
is no longer a likely scenario.
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 14: Pensions and Postretirement Benefits
∙ Updated Global Vantage Point section on differences
­between U.S. GAAP and IFRS and included excerpts from
the pension note of Siemens.
∙ Revised the initial discussion of actuarial gains and losses
and enhanced the comprehensive example to show how bal-
ance sheet accounts change.
∙ Added a figure to summarize the balance sheet effects of
pension accounting.
∙ Updated statistics related to total pension plan assets, dis-
count and expected rate of return assumptions, and plan
funded status.
∙ Revised analysis for GE by condensing discussion of
changes in plan assets and plan liabilities and updating for
2014 information.
∙ Revised exercises and problems added new financial
­statement based cases.
Chapter 15: Financial Reporting for Owners’ Equity
∙ Updated or replaced examples throughout chapter.
∙ Expanded section on interpreting shareholders’ equity on the
balance sheet and the statement of shareholders’ equity.
∙ Expanded discussion of stock option pricing models.
∙ Added a new section on taxation of share-based
­compensation that includes a discussion of ASU 2016-09.
∙ Added a new section on interpreting the share-based
­compensation disclosures of Whole Foods.
∙ Added exercises, problems, and cases on EPS and
­share-based compensation.
Chapter 16: Intercorporate Investments
∙ Added discussion of forthcoming change in accounting for
minority-passive equity investments.
∙ Streamlined the discussion of merger and acquisition
accounting under previously-permitted methods (purchase
accounting and pooling of interests).
∙ Updated exhibits from company reports throughout the
chapter.
Chapter 17: Statement of Cash Flows
∙ Streamlined the chapter by eliminating much of the overlap
with chapter 4. Chapter 17 now focuses on more complex
transactions and reasons why the cash flow statement may
not seem to articulate with the balance sheet.
∙ Added a discussion of how the new lease standard affects the
cash flow statement.
∙ Updated exhibits from company reports throughout the
chapter.
Appendix B: Segment Reporting
∙ Moved from an appendix in Chapter 5 to a book appendix to
­facilitate individual instructor approach.
∙ Updated Harley-Davidson example.
∙ Added a ROA decomposition analysis for Harley-Davidson
segments.
∙ Added discussion of foreign currency exchange rates and
effects on segment results.
∙ Enhanced discussion of quantitative thresholds.
∙ Added exercises and a new case.
 Preface xi

Acknowledgments
Colleagues at Chicago, Iowa, Northwestern, and Notre Dame, as well other universities, have
served as sounding boards on a wide range of issues over the past years, shared insights, and pro-
vided many helpful comments. Their input helped us improve this book. In particular, we thank:
Jim Boatsman, Arizona State University; Brad Badertscher, Tom Frecka, Chao-Shin Liu, Bill
Nichols, and Tom Stober, University of Notre Dame; Cristi Gleason and Ryan Wilson, University
of Iowa; Tom Linsmeier, the Financial Accounting Standards Board; Larry Tomassini, The Ohio
State University; Robert Lipe, University of Oklahoma; Don Nichols, Texas Christian University;
Nicole Thibodeau, Willamette University; Paul Zarowin, New York University; and Stephen Zeff,
Rice University.
We wish to thank the following professors who assisted in the text’s development:
Lester Barenbaum, La Salle University J. William Kamas, University of Texas at
Gerhard Barone, Gonzaga University Austin
John Bildersee, New York University Frimette Kass-Schraibman, Brooklyn College
Stephen Brown, University of Maryland-­ Jocelyn Kauffunger, University of Pittsburgh
College Park Robert Kemp, University of Virginia
Sharon Borowicz, Benedictine University Adam Koch, University of Virginia
John Brennan, Georgia State University Michael Kubik, Johns Hopkins University
Philip Brown, Harding University Bradley Lail, NC State University-Raleigh
Shelly L. Canterbury, George Mason Steve C. Lim, Texas Christian University
University Chao-Shin Liu, University of Notre Dame
Jeffrey Decker, University of Don Loster, University of California—Santa
Illinois—Springfield Barbara
Doug De Vidal, University of Texas at Austin Troy Luh, Webster University
Ilia Dichev, Emory University David Marcinko, Skidmore College
Timothy P. Dimond, Northern Illinois Kathryn Maxwell (Cordova), University of
University Arizona
Joseph M. Donato, Thomas College P. Michael McLain, Hampton University
Michael T. Dugan, University of Alabama Kevin Melendrez, New Mexico State
Barbara Durham, University of Central University-Las Cruces
Florida-Orlando Krish Menon, Boston University
David O. Fricke, University of North Kyle S. Meyer, Florida State University
Carolina—Pembroke Stephen R. Moehrle, University of Missouri—
Michael J. Gallagher, Defiance College St. Louis
Lisa Gillespie, Loyola University—Chicago Brian Nagle, Duquesne University
Alan Glazer, Franklin and Marshall College Ramesh Narasimhan, Montclair State University
Cristi Gleason, University of Iowa—Iowa City Sia Nassiripour, William Paterson University
Patrick J. Griffin, Lewis University Bruce Oliver, Rochester Institute of
Paul Griffin, University of California—Davis Technology
Coby Harmon, University of California-Santa Keith Patterson, Brigham Young
Barbara University-Idaho
Donald Henschel, Benedictine University Erik Paulson, Dowling College
Richard Houston, University of Bonita Peterson-Kramer, Montana State
Alabama-Tuscaloosa University-Bozeman
James Irving, College of William & Mary Maryann Prater, Clemson University
Kurt Jesswein, Sam Houston State University Chris Prestigiacomo, University of
Gun Joh, San Diego State University—San Missouri—Columbia
Diego Richard Price, Rice University
xii Preface

Atul Rai, Wichita State University Kanaiyalal Sugandh, La Sierra University

Vernon Richardson, University of
Arkansas—Fayetteville
Tom Rosengarth, Bridgewater College
Eric Rothenburg, Kingsborough Community
College
Mike Sandretto, University of
Illinois—Champaign
Lynn Saubert, Radford University
Paul Simko, University of
Virginia—Charlottesville
Praveen Sinha, California State University at
Long Beach
Mike Slaugbaugh, Indiana University/Purdue
University-Ft Wayne
Sheldon Smith, Utah Valley University Orem
Greg Sommers, Southern Methodist
University
Carolyn Spencer, Dowling College
Victor Stanton, University of
California—Berkeley
Jack Stecher, Carnegie Mellon University
Thomas L. Stober, University of
Notre Dame
Phillip Stocken, Dartmouth College
Ron Stunda, Birmingham Southern College
Eric Sussman, University of California—Los
Angeles
Nicole Thibodeau, Willamette University
Robin Thomas, NC State University-Raleigh
Terry Tranter, University of
Minnesota-Minneapolis
Robert Trezevant, University of Southern
California
Mark Trombley, University of Arizona
Suneel Udpa, University of
California—Berkeley
Marcia R. Veit, University of Central
Florida-Orlando
Kenton Walker, University of
Wyoming—Laramie
Clark Wheatley, Florida International
University—Miami
Mike Wilkins, Texas A & M University
Michael Wilson, Metropolitan State University
Jennifer Winchel, University of South
Carolina
Colbrin Wright, Central Michigan University
Christian Wurst, Temple
University—Philadelphia
Paul Zarowin, New York University

We are particularly grateful to Ilene Persoff, Long Island University/CW Post Campus, for her
careful technical and editorial review of the manuscript, Solutions Manual, and Test Bank for the
Seventh edition. Her insightful comments challenged our thinking and contributed to a much
improved new edition.
We are grateful to our supplements contributors for the seventh edition: Peter Theuri, Northern
Kentucky University, who prepared the Instructor’s Manual; and Jeannie Folk, College of DuPage,
who prepared the PowerPoints®.
We gratefully acknowledge the McGraw-Hill Higher Education editorial and marketing teams
for their encouragement and support throughout the development of the seventh edition of this
book.
Our goal in writing this book was to improve the way financial reporting is taught and mastered.
We would appreciate receiving your comments and suggestions.
—Daniel W. Collins
—W. Bruce Johnson
—H. Fred Mittelstaedt
—Leonard C. Soffer
Walkthrough

Rev.Confirming Pages

Chapter Objectives
Each chapter opens with a brief introduction and sum- Accrual Accounting and 2
mary of learning objectives to set the stage for the goal of Income Determination
each chapter and prepare students for the key concepts
and practices.

T
his chapter describes the key concepts and practices that govern the measure- LEARNING OBJECTIVES
ment of annual or quarterly income.1 The cornerstone of income measurement After studying this chapter, you will
is accrual accounting. Under accrual accounting, revenues are recorded (rec- understand:
ognized) when the seller has performed a service or conveyed an asset to a buyer,

Boxed Readings
LO 2-1 The distinction between cash-
which entitles the seller to the benefits represented by the revenues, and the value to be basis versus accrual income and
why accrual-basis income gener-
received for that service or asset is reasonably assured and can be measured with a high ally is a better measure of operat-
degree of reliability. Expenses are the expired costs or assets that are used up in pro- ing performance.
ducing those revenues. Expense recognition is tied to revenue recognition. That is, LO 2-2 The general concept behind rev-

Sidebar margin boxes call out key concepts in each

enue recognition under accrual
expenses are recorded in the same accounting period in which the related revenues accounting.
are recognized. The approach of tying expense recognition to revenue recognition is LO 2-3 The matching principle and how it

­chapter and provide additional information to reinforce

is applied to recognize expenses
commonly referred to as the “matching principle.” Revenues less expenses, together under accrual accounting.
with gains and losses, constitute income. LO 2-4 The difference between trace-
A natural consequence of accrual accounting is the decoupling of measured earnings able and period costs.

concepts. Rev.Confirming Pages

from operating cash inflows and outflows. Except in the case of cash sales, such as for a
meal at a restaurant, revenues under accrual accounting generally do not correspond to
LO 2-5 The format and classifications for
a multiple-step income statement
and how the statement format is
designed to differentiate earnings
cash received during thePages
Confirming period. Similarly, accrual-based expenses generally do not cor-
components that are more sus-
respond to cash outlays during the period. In fact, there are often large differences tainable from those that are more
between the firm’s reported profit performance and the amount of cash generated from transitory.
LO 2-6 The presentation of discontinued
operations. Frequently, however, accrual accounting earnings provide a more accurate operations and unusual or infre-
56 measure of the economic value added during the period than do operating cash flows.2

2
CHAPTER 2 Accrual Accounting and Income Determination quently occurring items.
The following section uses an example to illustrate the distinction between cash and LO 2-7 How to report a change in
890 CHAPTER 15 Financial Reporting for Owners’ Equity accounting principle, accounting
accrual accounting measures of performance. estimate, and accounting entity.
Mythical Corporation discontinued a component of its business in 2017 (Exhibit 2.2,
LO 2-8 How error corrections and
item 3). The operating results of this recently discontinued operation are excluded from con-
before a house committee, FASB chairman Robert Herz warned in June 2003 that the bill to restatements are reported.
tinuing operations in the current period (2017) when the decision to discontinue was made. In rules on stock options would set a “dangerous precedent”
delay new CASH FLOW VERSUS
of congressional interfer- ACCRUAL LO 2-9 The distinction between basic and
diluted earnings per share (EPS)
addition, they are excluded from continuing operations in any prior years (2016 and 2015
ence inforaccounting standards setting.33 INCOME MEASUREMENT

Chapter
and required EPS disclosures.
Mythical) for which comparative data are provided.7 This makes the Income from continuing What sparked renewed debate over stock option accounting?In Two factors brought the issue LO 2-10 What composes comprehensive
operations number of $843 million in 2017 comparable with the corresponding amounts of the political and regulatory arena: January 2017, Canterbury Publishing sells three-year subscriptions to its quarterly income and how it is displayed in
back into publication, Windy City Living, to 1,000 subscribers. The subscription plan requires financial statements.
$904 million and $812 million in 2016 and 2015, respectively. While restating the 2016 and LO 2-11 Other comprehensive income
2015 results makes continuing operations comparable to the 2017 results, it means that1. all
Thetheexplosive increase in stock option grants during the late prepayment
1990s. by the customers, so Canterbury receives the full subscription price of differences between IFRS and
numbers from the Net sales line through the Income from continuing operations line 2. Public outrage over the accounting abuses uncovered subsequently at many companies.
reported U.S. GAAP.
LO 2-12
How the flexibility in GAAP invites
in the 2016 and 2015 columns of the 2017 annual report will be different from the amounts 1
In this text, we use the terms profit, earnings, and income interchangeably. “earnings management.”
Stock option “overload” was widely regarded as one—perhaps2 the most important—factor
originally reported in the 2016 and 2015 financial statements. However, net income for 2016 Economic value added represents the increase in the value of a product or service as a consequence of operating LO 2-13
The procedures for preparing
contributing to the accounting fiascoes at companies such as Enron andToWorldCom.
activities. Theofpre-
illustrate, the value an assembled automobile far exceeds the value of its separate steel, glass, plastic,
financial statements and how to
and 2015 are the same as originally reported because the amounts removed from continuing
vailing view was that managers who were eager to cash in theirrubber, options resorted components.
and electronics to question- The difference between the aggregate cost of the various parts utilized in manu- analyze T-accounts.
operations are reclassified to discontinued operations for those years. facturing the automobile and the price at which the car is sold to the dealer represents economic value added (or lost)
able accounting practices designed to inflate revenues and earnings, by and boost share prices.
production. 47
How is a disposition evaluated to determine if it will receive discontinued
Rather than align the interests of shareholders and managers, options were thought to have
An asset group represents the lowest level for operations treatment? First, under U.S. GAAP, a component of an
done the opposite: transferring vast amounts of wealth to executives even as outside share-
which identifiable cash flows are largely inde- entity 8
comprises operations and cash flows that can be clearly distinguished,
holders suffered. These concerns spawned a reform movement aimed at curbing the use of
pendent of the cash flows of other groups of both operationally and for financial reporting purposes, from the rest of the
options by forcing companies to count them as an expense.
assets and liabilities within the entity. entity. It may be a reportable segment, an operating segment, a reporting unit,
But not everyone agreed! The battle between those who favored and those who opposed
a subsidiary, or an asset group.
stock options expensing involved familiar arguments:
If the component has been disposed of, it is treated as a discontinued operation if “. . . the
disposal represents a strategic shift that has (or willNEWS have) a majorCLIP effect on an entity’s opera-
rev22651_ch02_0047-0112.indd 47
News Clip boxes provide 12/19/16 03:09 PM

tions and financial results.”9 If the component has not yet been disposed of, it must first be
determined whether it is classified as held for sale. A
sale if the following six conditions are met:10
WHYdisposal
EXPENSED
groupSAID
CRITICS is considered
OPTIONSheld for BE
SHOULD WHY OPTIONS EXPENSING DEFENDERS DISAGREED engaging news articles
∙ Management has committed to a plan to sell the component.
∙ Some 75% to 80% of executive pay now comes in the form
∙ Unlike salaries or other perks, granting options requires no
cash outlay from companies. Because there is no real (cash) that capture real world
∙ The component is available for immediate sale in its present condition
of options. Because subject only
all other to of compensation must
forms cost to the company to deduct, doing so will unjustly penal-
terms that are usual and customary for such sales. be deducted from earnings, options should be treated
∙ An active program to locate a buyer has been initiated, theassame.
have all other necessary actions.
ize earnings.
∙ There are no universal standards for expensing options; all
financial reporting issues Rev.Confirming Pages

∙ The sale is probable, and is expected to be completed

exceptions).
∙ Deducting
within onethe year cost of options
(subject will yield more accurate
to certain
earnings numbers, which should help restore investor
valuation methods require big assumptions and estimates.
So, expensing them will reduce the accuracy of income
and controversies.
confidence. statements and leave them open to manipulation.
∙ The component is being actively marketed at a reasonable price.
∙ Because options are now all but free to companies, exces- ∙ Deducting the cost of options will reduce earnings, which is
∙ It is unlikely that significant changes will be made to the disposal plan or that it will be likely to drive down share prices.
sive grants to top execs have been encouraged. But options Income Statement Format and Classification 53
withdrawn. do have costs: They dilute shareholders’ stakes and deprive ∙ Rather than take the hit to earnings, companies can issue
If the component is deemed to be held for sale, thencompanies it also mustof themeetfunds
thethey wouldshift
strategic otherwise get by selling far fewer options. That would hurt morale, limit a key tool
called product costs, and they often constitute a large portion of the traceable costs. Product
those shares in
criterion to be given discontinued operations treatment. The strategic shift criterion is a rela- the open market. Such costs should be used to lure talent, and inhibit companies from aligning
reflected in earnings. costs also include manufacturing overhead, such as factory maintenance, insurance, and
tively new requirement for discontinued operations treatment. In 2014, the FASB narrowed employee and shareholder interests.
depreciation. Although it is difficult to associate overhead costs with specific units of produc-
the definition of a discontinued operation by adding this ∙ Bringing
requirement.moreAs discipline
a result,to options
some grants will also reduce
dispo- ∙ Tech firms argue that generous option grants have spurred
the incentives top execs now have to pump their stocks tion, they are generally allocated to inventory costs (and thus expensed as part of cost of goods
sitions that previously would have been considered discontinued operations no longer are. The the risk taking and entrepreneurship so crucial to innova-
through short-term earnings maneuvers in the hope of cash- tion. Expensing options risks damaging sold) on some rational basis.
that benefit.
new guidelines became effective for calendar year firms in 2015. Canterbury’s distribution costs, the cost of delivering the magazines, are assumed also to
ing in big option gains.
Source: A. Borrus, P. Dwyer, D. Foust, andbeL. Lavelle,
traceable.“To Expense
That is, or Not
it istopossible to identify the delivery costs with the physical delivery of
Expense,” BusinessWeek, July 29, 2002.
7
Securities and Exchange Commission (SEC) rules (Regulation S-X, Article 3) require that comparative income statement the magazines, say through the U.S. mail. These are not product costs, but they are still recog-
data for at least three years and comparative balance sheet data for two years be provided in filings with the Commission. For
this reason, most publicly held corporations provide these comparative income statement and balance sheet data in their
nized as expense in the same period as the revenue to which they are traced.
annual report to shareholders.
8
FASB ASC Section 360-10-20 - Property, Plant, and Equipment - Overall - Glossary. Period Costs Canterbury Publishing also incurred interest expense. Although interest is
9
FASB ASC Paragraph 205-20-45-1B: Presentation of Financial Statements - Discontinued Operations—Other Presentation
33
A companion bill was introduced in the Senate in May 2003. A third bill, introduced ain necessary
November 2003 by Senator Michael
cost, it is not possible to associate interest with specific copies of the magazine.
Matters Enzi (Republican, Wyoming) would limit expensing to options granted to a company’s five highest paid executives. In
10 response to- this proposal, one financial commentator quipped: “While Congress is at it,Thus,
For the exact wording of these criteria, see FASB ASC Paragraph 205-20-45-1E: Presentation of Financial Statements why notitmake
is aonly
period cost ofand
the salaries the it is expensed in the period the benefit was derived. Note that
Discontinued Operations - Other Presentation Matters. period
top dogs expenses, while the lower rungs of employees get to be free for a company. Think howcosts are not expensed
many employees a company on a cash basis. The interest was all paid in 2019, but it was still
could hire if it didn’t cost them anything. Why, if Congress could outlaw all expenses, the economy would really boom.” See
expensed over the years the loan was outstanding, which is the period of time Canterbury
J. Eisinger, “Microsoft Can Count, Intel Can’t,” The Wall Street Journal, July 21, 2004.
benefited from the use of the borrowed funds.

Recap boxes provide students a summary of each section,

Revenue is recognized when an entity satisfies its contractual obligation to provide goods RECAP
reminding them of the key points of what they just covered and services to a customer. The matching principle associates expired costs (expenses) with
the revenues recognized in a period. Costs directly associated with specific revenues are

in small doses to reinforce what they just learned.

rev22651_ch02_0047-0112.indd
56 12/19/16 03:09 PM
called traceable costs, and these costs are expensed in the same period as the associated
rev22651_ch15_0863-0936.indd 890 revenue. Period 12/22/16
costs,10:50
those
AM costs that cannot be associated with specific units of produc-

tion, are expensed in the period benefited.

INCOME STATEMENT FORMAT AND CLASSIFICATION

Virtually all decision models in modern corporate finance are based on expected future cash
flows. Recognizing this, the FASB stated:
xiii
Thus, financial reporting should provide information to help investors, creditors, and others assess
the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.5

One way to provide users with information about prospective future cash flows would be to
present them with cash flow forecasts prepared by management. However, financial reporting
focuses on historical information, not forecasts, because forecasts of such numbers are consid-
ered to be too “soft”—that is, too speculative or manipulable.
Instead, financial reporting seeks to satisfy users’ needs for assessing future cash flows by
providing financial information based on past and current events in a format that gives finan-
cial statement users reliable and representative baseline numbers for generating their own fore-
xiv Walkthrough 408 CHAPTER 8 Receivables

must periodically assess the reasonableness of the uncollectibles balance by performing

an aging of accounts receivable.
Icons ∙ Analysts should scrutinize the allowance for uncollectibles balance over time. Significant
increases in the allowance could indicate collection problems while significant decreases
Special “Getting Behind the Numbers” icons appear throughout the text to highlight in the allowance could be a sign of earnings management.
∙ Receivables growth can exceed sales growth for several reasons, including a change in
and link discussions in chapters to the analysis, valuation, and contracting framework.
customer mix or credit terms. But a disparity in the growth rate of receivables and sales
Icons in the end-of-chapter materials signify a variety of exercises orthat
could also indicate direct students
aggressive to practices are being used.
revenue recognition
Connect for additional resources. ∙ In certain long-term credit sales transactions, interest must be imputed by determining the
note receivable’s present value.
∙ Firms may elect the fair value option for accounts and notes receivable. Changes in fair
Rev.Confirming Pages
value are recognized in net income.
∙ Firms sometimes transfer or dispose of receivables before their due date to accelerate cash
International
International Analysis collection. Sales ofValuation
Valuation Contracting
Contracting
receivables—also called factoring—can be with or without recourse.
∙ Receivables are also used as collateral for a loan.
∙ In analyzing receivables transactions, it is sometimes not obvious whether the transaction
Look for the International Summary 27
to accelerate cash collection represents a sale or a borrowing; however, authoritative
icon to read the new
S to IFRS
has expressed concern that (1) the transition
­coverage of IFRS inte-
T RmightEE beTTprohibitively
C
C H accounting literature provides guidelines in Topic 860 Transfers and Servicing of the
H expensive;
FASB
United States may not have sufficient influence over IASB standards setting; and (3)
(2)Accounting
the Collaborative
Standards Codification for distinguishing between sales (when the
that thesurrenders control over the receivables) and borrowings (when control is not
transferor
grated throughout the text.
U.S. legal environment relies heavily on contract language that refers to “U.S. GAAP.” As a Sales of receivables change ratios such as receivables turnover as well as
surrendered).
result, the SEC staff is exploring other (more time-consuming) approaches such aspotentially
standard- masking the underlying real growth in receivables.
by-standard GAAP revisions aimed toward convergence.31 The SEC and others also haveloans and securitizations were at the heart of the 2008 economic crisis.
∙ Subprime
expressed concerns about uneven enforcement and application of IFRS around Accounting the world. and regulatory reforms are under way to address some of the problems identi-
Consequently, the U.S. adoption of IFRS still would not achieve true comparability.fied32
during the crisis.
The SEC already permits foreign businesses to list their securities on a U.S. stock exchange
∙ Banks and other All companies
holders listed on the
of receivables frequently restructure the terms of the receivable
as long as certain procedures are followed. Foreign businesses not using U.S. GAAP or IFRS London Stock Exchange are
when a customer is unable to make required
Rev.Confirming Rev.Confirming
Pages payments because of financial Pages
difficulties.
End-of-Chapter Elements
must file a Form 20-F each year with the SEC. This form is designed for the convenience of required to use IFRS.
These troubled debt restructurings can take one of two forms: (1) settlement or (2) contin-
U.S. financial statement readers because it reconciles the company’s reported financial
uation with modification of debt terms.
results—specifically, earnings and shareholders’ equity—as shown in foreign GAAP or IFRS
The text provides a variety of end-of-chapter materials to reinforce concepts. Learning
to what those numbers would have been under U.S. GAAP. This presumably allows ∙ When terms are modified, the precise accounting treatment depends on whether the sum
investors
to evaluate the performance of foreign issuers relative to U.S. companies using aofcommonfuture cash flows under
Foreign the restructured
issuers are given six note is more or less than the note’s carrying
reporting basis—U.S. GAAP. However, the Form
­ asier than ever to tie
­objectives are included for each end-of-chapter item, making it e
25820-F CHAPTER 5 may
reconciliation Essentials value at the Statement
of Financial
not fully achieve restructuringto date.
monthsAnalysis
file The
the
Cases interest
Form 109rate used in troubled debt restructurings may
your ­assignment back to the chapter material. not reflect
this goal. The reason is that SEC rules do not require foreign firms to prepare complete
stantial delay after the issu-
20-F reconciliation, a sub-
finan- the real economic loss suffered by the lender.
cial statementsfacts
on a during
U.S. GAAP basis. of
It requires only that which
Form 20-F ∙ differences
identify the Both the FASB and IASB have finalized most of their rules on financial instrument
the following the course the engagement, was completed prior to any ance of current 2016 2017
between reporting.
adjustingthe company’s
or closing home-country
entries financial
being prepared statements and U.S. GAAP. When
for 2017. ($ inno “final-
millions) home-country financial
$ in millions % of sales $ in millions % of sales
ized” financial statements in U.S. GAAP are provided by the foreign firm, the burden of statements.
Exercises 1. A new digital imaging system was acquired on E X E
January R5,C I S
2016,E S
at
constructing financial statements comparable to those provided by U.S. companies a cost of Sales
$5,000.
falls on the
$5,500 $6,500
Cost of sales (2,475) 45% (3,055) 47%
Although
analyst. This this
taskasset wasnot
is often expected to be in use for the next four years, the purchase
straightforward. was
Other operating expenses (825) 15% (1,040) 16%
inadvertently charged to office expense. Per theEcompany’s accounting Foroffice
manual, the month of December 2017, Ranger Corporation’s records show the following
8-1 Operating income 2,200 2,405
equipment of this type should be depreciated using the straight-line method with information:
no sal-
Provision for income taxes (836) (962)
Thevage value in
diversity assumed.
Analyzing accounts
international accounting practices has narrowed in recent years
receivable (LO 8-2)
Netasincome
more $1,364
tax rate Cash received on accounts
Incometoward
RECAP
38% receivable
$1,443
$35,000
40%
countries
2. A used around the globeon
truck, purchased embrace
November IFRS.18,The FASB
2017, wasand IASB have
recorded beenentry:
with this working
Cash sales 30,000
eliminating differences between U.S. GAAP and IFRS, and the SEC has shown some (albeit Accounts receivable, December 1, 2017
To record truck expenditure:
cautious) interest in potentially adopting IFRS in the United States. Nonetheless, Hossa’s management
diversity was pleased that 2017 net income was up 5.8%80,000
in Accounts from the prior year.
receivable, December 31, 2017 74,000
accounting practice remains a fact of life. Readers of financial statements must Although you are
never lose also happy
Accounts with written
receivable the increase in net income, you are not
off as uncollectible so sure the news is
1,000
Vehicle
DRof this
sight Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
diversity. $18,000 all positive. You have modeled Hossa’s income as follows:
CR Required:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,000
NET INCOME = SALES × (1 − COGS % − OPEX %) × (1 − TAX RATE)
Determine the gross sales for the month of December 2017.
Management plans to use this truck for three years and then trade it in on a newUsing one. this model, net income in 2016 is computed as $5,500 × (1 − 45% − 15%) ×
Salvage is estimated at $3,000. Watsontown has always used straight-line depreciation
SUMMARY
(1 − 38%) = $1,364. Net income in 2017 is computed as $6,500 × (1 − 47% − 16%) ×
Summary
for fixed assets, recording a half-year of depreciation in the year the asset is (1 − 40%) = $1,443.
acquired.
Financial statements are an extremely important source of information about a company, its
3. On Julyhealth,
economic 1, 2017, theitscompany
and prospects.rented
Theyahelp
warehouse
improve fordecision
three years.
makingTheand
lease Required:
agreement
make it possible
specifiedmanagers’
to monitor that each activities.
year’s rent be paid in advance, so a check for the first year’s rent of a cause-of-change analysis to show the extent to which each of the following
1. Prepare
$18,000 was issued and recorded as an addition to the Buildings account. items contributed to the $79 million increase in Hossa’s net income from 2016 to 2017:
∙ Equity investors use financial statements to rev22651_ch08_0375-0424.indd
form opinions about 408 the value of a company 11/29/16 01:21 PM
4. Late in 2016, Watsontown collected $23,500 from a customer in full payment of∙ his Increase in sales (SALES)
and its stock.
account. The cash receipt was credited to revenue. In 2017, Watsontown’s bookkeeper ∙ Increase in cost of sales as a percent of sales (COGS%)
∙ Creditors use statement
was reviewing outstandinginformation to gauge
receivables a company’s
and noticed ability tobalance.
the outstanding repay itsKnowing
debt and the
to
check whether the company is complying ∙ Increase in other operating expenses as a percent of sales (OPEX%)
customer in question had recently died, shewith
wroteloan
offcovenants.
the account. Because Watsontown
∙ seldom
Stock analysts, ∙ Increase in income tax rate (TAX RATE)
has badbrokers,
debts, theand portfoliouses
company managers usewrite-off
the direct financialmethod
statements as theitbasis
whereby for
charges
theirdebts
Bad recommendations to investors
expense and credits and creditors.
Accounts receivable when an account is deemed 2. Interpret the results for Hossa’s management.
∙ uncollectible.
Auditors use financial statements to help design more effective audits by spotting areas of
Problems/Discussion
5. potential reporting
A three-year abuses.
property P R was
and casualty insurance policy O Bpurchased
L E M S in/ January
D I S C2016
U S for
SION QUESTIONS
Questions $30,000. The entire amount was recorded as an insurance expense at the time.
6.
31
OnStaff
Final October
Report:1, 2016,
Work Plan Watsontown borrowed
for the Consideration $100,000
of Incorporating - 1 from aFinancial
P 5International local bank. TheThe
Reporting loanfollowing
into the table presents ROA calculations for three companies in the retail grocery indus-
terms
Standards
Financial Reporting System for U.S. Issuers (Washington, DC: SEC, July 2012).
specified annual interest payments of $8,000 on the anniversary date of the try using
loan. The earnings before interest (EBI) and balance sheet data for each company. The Kroger
first
32
Comparing
See M. Barth, “Commentary on Prospects for Global Financial profit-
Reporting,” September 2015,
Accounting Perspectives,Company operates more than 2,600 supermarkets and multi-department stores. Publix Super
interest payment was made on October 1, 2017,
pp. 154–167. ablityand(LOexpensed
5-3) in its entirety. Markets operates about 1,100 supermarkets in the Southeastern United States. Weis Markets
Required: operates 163 retail food stores in Pennsylvania and surrounding states.
Prepare any journal entry necessary to correct each error as well as any year-end adjusting
entry for 2017 related to the described situation. Ignore income tax effects. The Kroger Co.
Year Ending 01/28/12 02/02/13 02/01/14 01/31/15

Sales (in millions of dollars) $90,374 $96,619 $98,375 $108,465

rev22651_ch01_0001-0046.indd 27 Profit margin (EBI/sales) C A S E S11/24/16 08:26
0.95%
AM 1.85% 1.83% 1.88%
Cases
Asset turnover (Sales/Average assets) 3.85 3.92 3.36 3.55
Corrpro Companies, Inc., founded in 1984, provides corrosion control-related ROA
services, sys- × Asset turnover
= Margin 3.65% 7.24% 6.14% 6.68%
C2-1
tems, equipment, and materials to the infrastructure, environmental, and energy markets.
Publix
Corrpro’s products and services include (a) corrosion control engineering services, Super Conducting
systems, Markets financial
and equipment, (b) coatings services, and (c) pipeline integrity and risk assessment services. reporting research: 12/31/11
Year Ending 12/29/12 12/28/13 12/27/14
Discontinued opera-
The following information was abridged from the company’s March 31, Year 3, Form 10-K.
dollars)(LO 2-6)
Sales (in millions oftions $26,967 $27,485 $28,917 $30,560
Profit margin (EBI/sales) 5.53% 5.65% 5.72% 5.68%
Assets and Liabilities Held for Sale Asset turnover (Sales/Average assets) 2.39 2.24 2.13 2.03
In July Year 2, the Company’s Board of Directors approved a formal businessROArestructuring
= Margin × Asset turnover 13.24% 12.64% 12.21% 11.50%
plan. The multiyear plan includes a series of initiatives to improve operating income and (continued)
 Walkthrough xv

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 Brief Contents

Chapter 1 The Economic and Institutional Setting for Financial

Reporting 1
Chapter 2 Accrual Accounting and Income Determination 47
Chapter 3 Revenue Recognition 113
Chapter 4 Structure of the Balance Sheet and Statement of Cash
Flows 163
Chapter 5 Essentials of Financial Statement Analysis 213
Chapter 6 The Role of Financial Information in Valuation and Credit Risk
Assessment 273
Chapter 7 The Role of Financial Information in Contracting 335
Chapter 8 Receivables 375
Chapter 9 Inventories 425
Chapter 10 Long-Lived Assets 501
Chapter 11 Financial Instruments and Liabilities 561
Chapter 12 Financial Reporting for Leases 645
Chapter 13 Income Tax Reporting 715
Chapter 14 Pensions and Postretirement Benefits 797
Chapter 15 Financial Reporting for Owners’ Equity 863
Chapter 16 Intercorporate Investments 937
Chapter 17 Statement of Cash Flows 1005
Appendix A Time Value of Money 1061
Appendix B Segment Reporting 1071
Index 1089

xviii
Contents
Preface vii
Chapter 1 The Economic and Institutional Setting
for Financial Reporting 1
Why Financial Statements Are Important 1
Economics of Accounting Information 3
Demand for Financial Statements 4
Disclosure Incentives and the Supply of Financial
Information 7
A Closer Look at Professional Analysts 10
Analysts’ Decisions 10
Fundamental Concepts of Financial Reporting 12
Generally Accepted Accounting Principles 13
Who Determines the Standards? 16
The Politics of Accounting Standards 17
FASB Accounting Standards CodificationTM 18
Incentive Conflicts and Financial Reporting 19
An International Perspective 20
International Financial Reporting 22
APPENDIX 1A: GAAP in the United States 28
Early Developments 29
Emergence of GAAP 30
Current Institutional Structure in the
United States 33
Chapter 2 Accrual Accounting and Income
Determination 47
Cash Flow Versus Accrual Income Measurement 47
Articulation of Income Statement and
Balance Sheet 51
Revenue Recognition—General Concepts 52
Expense Recognition 52
Income Statement Format and Classification 53
Income from Continuing Operations 54
Discontinued Operations 55
Frequency and Magnitude of Various Categories
of Transitory Income Statement Items 59
Reporting Accounting Changes 60
Change in Accounting Principle 60
Change in Accounting Estimate 63
Change in Reporting Entity 65
Earnings Management 66
Popular Earnings Management Devices 68
Accounting Errors, Earnings Restatements,
and Prior Period Adjustments 72
Earnings per Share 78
Comprehensive Income and Other
Comprehensive Income 78
Global Vantage Point 82
APPENDIX 2A: Review of Accounting Procedures
and T-Account Analysis 84
Understanding Debits and Credits 86
Adjusting Entries 88
Posting Journal Entries to Accounts and
Preparing Financial Statements 90
Closing Entries 92
T-Accounts Analysis as an Analytical
Technique 93
Chapter 3 Revenue Recognition 113
The Five-Step Revenue Recognition Model 114
Step 1: Identify the Contract(s) with a Customer 114
Step 2: Identify the Performance Obligations
in the Contract 116
Step 3: Determine the Transaction Price 118
Step 4: Allocate the Transaction Price to the
Performance Obligations in the
Contract 121 xix
xx Contents
Step 5: Recognize Revenue When (or as) the Entity
Satisfies a Performance Obligation 123
Practical Expedients in Applying the Model 128
Applying the Model to Contract
Modifications 128
Contract Acquisition and Fulfillment Costs 129
Amortization and Impairment 129
Disclosure Requirements 130
Disaggregated Revenue 130
Contract Balances 130
Performance Obligations and Significant
Judgments 130
Effective Dates and Transition 130
Retrospecitve Approach 131
Cumulative Effect Approach 131
Financial Statement Effects of New Standard 132
Global Vantage Point 133
The Meaning of Collectibility 133
Reversals of Impairments 133
Disclosure Requirements 133
Revenue Recognition Prior to the Effective Date
of ASC Topic 606 134
Long-Term Construction Contracts 134
Installment Sales Method 140
Franchise Sales 142
Sales with Right of Return 145
Bundled (Multiple-Element) Sales 145
Chapter 4 Structure of the Balance Sheet and
Statement of Cash Flows 163
Balance Sheet 163
Current Assets 165
Noncurrent Assets 166
Current Liabilities 167
Noncurrent Liabilities 167
Stockholders’ Equity 167
Analytical Insights: Understanding the
Nature of a Firm’s Business 169
International Differences in Balance Sheet
Presentation 171
Statement of Cash Flows 173
Structure of Cash Flow Statement 174
Example of Indirect Method Cash Flow
Statement 175
Example of Direct Method Cash Flow
Statement 175
Cash Flow Statement and Financial Statement
Articulation 178
Deriving Cash Flow Information 179
Comparison of Cash Flow from Operations
under Direct and Indirect Methods 184
Global Vantage Point 185
Notes to Financial Statements 186
Summary of Significant Accounting Policies 186
Subsequent Events 186
Related-Party Transactions 187
APPENDIX 4A: Worksheet Approach to Indirect
Method Cash Flow Statement 189
Chapter 5 Essentials of Financial
Statement Analysis 213
Basic Approaches 213
Financial Statement Analysis and Accounting
Quality 214
A Case In Point: Getting Behind the Numbers
at Whole Foods Market 216
Examining Whole Foods Market’s Financial
Statements 217
Profitability, Competition, and Business Strategy 229
Financial Ratios and Profitability Analysis 229
ROA and Competitive Advantage 232
Return on Common Equity and Financial
Leverage 236
Global Vantage Point 238
Liquidity, Solvency, and Credit Analysis 238
Cash Flow Analysis 246
Financial Ratios and Default Risk 251
Chapter 6 The Role of Financial Information in
Valuation and Credit Risk
Assessment 273
Business Valuation 274
The Discounted Cash Flow Valuation
Approach 274

The Role of Earnings in Valuation 277
The Abnormal Earnings Approach to
Valuation 280
Fair Value Accounting 284
Valuation Application: Goodwill Impairment 286
Global Vantage Point 287
Research on Earnings and Equity Valuation 287
Sources of Variation in P/E Multiples 289
Earnings Surprises 294
Credit Risk Assessment 296
Traditional Lending Products 296
Credit Analysis 298
Credit-Rating Agencies 299
APPENDIX 6A: Discounted Cash Flow and
Abnormal Earnings Valuation Applications 304
Valuing a Business Opportunity 304
Valuing Whole Foods Market’s Shares 307
APPENDIX 6B: Financial Statement Forecasts 310
Illustration of Comprehensive Financial
Statement Forecasts 311
Chapter 7 The Role of Financial Information in
Contracting 335
Conflicts of Interest in Business Relationships 336
Debt Covenants in Lending Agreements 336
Affirmative Covenants, Negative Covenants,
and Default Provisions 338
Mandated Accounting Changes May Trigger Debt
Covenant Violation 340
Managers’ Responses to Potential Debt Covenant
Violations 341
Management Compensation 343
How Executives Are Paid 344
Proxy Statements and Executive
Compensation 348
Incentives Tied to Accounting Numbers 349
Catering to Wall Street 353
Regulatory Agencies 355
Capital Requirements in the Banking Industry 355
Rate Regulation in the Electric Utilities
Industry 357
Taxation 358
Contents xxi
Fair Value Accounting and the Financial Crisis 359
The Meltdown 359
The Controversy 360
Analytical Insights: Incentives to “Manage”
Earnings 362
Chapter 8 Receivables 375
Assessing the Net Realizable Value of Accounts
Receivable 375
Estimating Uncollectibles 375
Assessing the Adequacy of the Allowance
for Uncollectibles Account Balance 378
Estimating Sales Returns and Allowances 380
Analytical Insight: Do Existing Receivables
Represent Real Sales? 380
Imputing Interest on Trade Notes Receivable 382
The Fair Value Option 385
Accelerating Cash Collection: Sale of Receivables
and Collateralized Borrowings 387
Sale of Receivables (Factoring) 388
Borrowing Using Receivables as Collateral 389
Ambiguities Abound: Is It a Sale or a
Borrowing? 390
A Closer Look at Securitizations 391
Securitization and the 2008 Financial Crisis 396
Some Cautions for Financial Statement
Readers 397
Troubled Debt Restructuring 398
Settlement 400
Continuation with Modification of Debt
Terms 400
Evaluating Troubled Debt Restructuring Rules 405
Global Vantage Point 406
Comparison of IFRS and GAAP Receivable
Accounting 406
Recent FASB and IASB Actions 407
Chapter 9 Inventories 425
An Overview of Inventory Accounting Issues 425
Determination of Inventory Quantities 428
Items Included In Inventory 431
xxii Contents
Costs Included in Inventory 431
Manufacturing Costs 432
Vendor Allowances 432
Cost Flow Assumptions: The Concepts 434
First-In, First-Out (FIFO) Cost Flow 435
Last-In, First-Out (LIFO) Cost Flow 436
FIFO, LIFO, and Inventory Holding Gains 437
Analyzing LIFO Companies 441
The LIFO Reserve Disclosure 441
Inflation and LIFO Reserves 445
LIFO Liquidations 445
Reconciliation of Changes in LIFO
Reserve 449
Improved Trend Analysis 449
LIFO and Earnings Management 451
Eliminating LIFO Ratio Distortions 452
Tax Implications of LIFO 454
Eliminating Realized Holding Gains for FIFO
Firms 455
Empirical Evidence on Inventory Policy
Choice 457
Inventory Impairment 459
Impact of Inventory Impairment 461
Old-Lower of Cost or Market Method
(Old-LCM) 461
Global Vantage Point 464
Comparison of IFRS and GAAP Inventory
Accounting 464
Future Directions 465
APPENDIX 9A: Variable Costing Versus
Absorption Costing 469
APPENDIX 9B: Dollar-Value LIFO 472
APPENDIX 9C: Inventory Errors 477
Chapter 10 Long-Lived Assets 501
Measurement of the Carrying Amount of
Long-Lived Assets 502
The Approach Used by GAAP 503
Long-Lived Asset Measurement Rules
Illustrated 506
Intangible Assets 511
Asset Impairment 515
Tangible and Amortizable Intangible Assets 515
Indefinite-Lived Intangible Assets 517
Case Study of Impairment Recognition and
Disclosure—Krispy Kreme Doughnuts 518
Management Judgments and Impairments 519
Obligations Arising from Retiring
Long-Lived Assets 519
Assets Held for Sale 521
Depreciation 522
Disposition of Long-Lived Assets 526
Financial Analysis and Depreciation
Differences 526
Exchanges of Nonmonetary Assets 528
Exchanges Recorded at Book Value 530
Global Vantage Point 532
Comparison of IFRS and GAAP Long-Lived Asset
Accounting 532
Chapter 11 Financial Instruments and
Liabilities 561
Balance Sheet Presentation 561
Debt or Equity? 563
Bonds Payable 564
Characteristics of Bond Cash Flows 564
Bonds Issued at Par 565
Bonds Issued at a Discount 566
Bonds Issued at a Premium 569
Graphic Look at Bonds 571
Book Value versus Fair Value after Issuance 573
Option to Use Fair Value Accounting 576
Global Vantage Point 580
Managerial Incentives and Financial
Reporting for Debt 580
Debt Carried at Amortized Historical Cost 580
Imputed Interest on Notes Payable 583
Analytical Insights: How to Analyze
Debt Disclosures 585
Derivatives 587
Typical Derivative Instruments and the Benefits
of Hedging 588

Financial Reporting for Derivative
Instruments 594
Hedge Accounting 595
Fair Value Hedge Accounting 598
Cash Flow Hedge for an Existing Asset or
Liability 601
Cash Flow Hedge for an Anticipated
Transaction 604
Hedge Effectiveness 604
Global Vantage Point 606
Contingent Liabilities 607
Measuring and Recognizing Loss
Contingencies 607
Recording Gain Contingencies 609
Loan Guarantees 609
Global Vantage Point 611
Chapter 12 Financial Reporting for Leases 645
Evolution of Lease Accounting 646
Why Lessees Like the Operating Lease
Method 647
The Securities and Exchange Commission’s
Initiative 648
Lessee Accounting Under ASC 840 649
Criteria for Capital Lease Treatment 650
Lease Economics and Capital Lease
Accounting 651
Guaranteed Residual Values 655
Executory Costs 657
Payments in Advance 657
Sale and Leaseback 660
Interpeting Lessee Financial Statement Information
Under ASC 840 661
Capital Lease versus Operating Lease
Effects 661
Lessees’ Financial Statement Disclosures 666
Uneven Lease Payments 667
Global Vantage Point 668
Lessee Accounting Under ASU 2016-02
(ASC 842) 671
Overview of ASC 842 671
Beginning-of-Period and Uneven Payments 674
Contents xxiii
Sale and Leaseback 676
Presentation and Disclosure—Lessee 676
Differences between ASC 842 and IFRS 16 678
Evaluation of ASC 842 678
Lessor Accounting Under ASC 840 679
Sales-Type and Direct Financing Leases 679
Lessors’ Operating Leases 680
Distinction between Capital and Operating
Leases 680
Direct Financing Lease Treatment
Illustrated 681
Financial Statement Effects of Direct Financing
versus Operating Leases 684
Sales-Type Lease Treatment Illustrated 686
Lessors’ Disclosures 687
Leveraged Leases 688
Global Vantage Point 688
Lessor Accounting Under ASU 2016-02
(ASC 842) 689
Overview 689
Collectibility 689
Presentation and Disclosure—Lessor 691
Differences between ASC 842 and IFRS 16 691
Financial Reporting Versus Tax Accounting 692
APPENDIX 12A: Constructive Capitalization and
Projecting ASU 2016-02 Effects 693
Determining the Discount Rate 694
Estimating Payments beyond Five Years 695
Chapter 13 Income Tax Reporting 715
Understanding Income Tax Reporting 716
A Note on Semantics 716
Temporary and Permanent Differences between
Book Income and Taxable Income 716
Problems Caused by Temporary Differences 719
Deferred Income Tax Accounting: Interperiod
Tax Allocation 722
Deferred Tax Liabilities 723
Deferred Tax Assets 726
Net Operating Losses: Carrybacks and
Carryforwards 728
Deferred Tax Asset Valuation Allowances 730
xxiv Contents
Classification of Deferred Tax Assets and
Deferred Tax Liabilities 734
Deferred Income Tax Accounting When Tax Rates
Change 735
Permanent Differences 741
Understanding Income Tax Note
Disclosures 741
Current versus Deferred Portion of Current
Period’s Tax Provision 741
Reconciliation of Statutory and Effective Tax
Rates 742
Details on the Sources of Deferred Tax Assets
and Liabilities 747
Why Don’t a Company’s Deferred Tax Assets
and Liabilities Seem to Reverse? 749
Deferred Taxes and Cash Flow 751
Measuring And Reporting Uncertain Tax
Positions 752
Assessing an Uncertain Tax Position Related
to a Permanent Difference 753
Assessing an Uncertain Tax Position Related to
Timing of Deductibility 754
Making Changes to or Resolving Uncertain Tax
Positions 755
Assessing Disclosures on Uncertain Tax
Positions 756
Extracting Analytical Insights from Note
Disclosures 756
Using Deferred Tax Notes to Assess Earnings
Quality 757
Using Tax Notes to Improve Interfirm
Comparability 760
Global Vantage Point 763
Enacted Tax Law Changes vs. Substantively
Enacted Tax Law Changes 763
Approach to Reporting Deferred Tax Assets When
Realizability Is Uncertain 763
Reconciliation of Statutory and Effective Tax
Rates 764
Classification and Offsetting of Deferred
Tax Assets and Deferred Tax
Liabilities 764
Disclosure of Income Tax Amounts Recognized
Directly in Equity (Other Comprehensive
Income) 765
Uncertain Tax Positions 765
Other Current IASB Activities 766
APPENDIX 13A: Comprehensive Interperiod Tax
Allocation Problem 767
Computation of Taxable Income 768
Calculation of Taxes Due 770
Calculation of Change in Deferred Tax Asset
and Liability Accounts 770
Calculation of Income Tax Expense 772
Hawkeye’s Tax Note 773
Chapter 14 Pensions and Postretirement
Benefits 797
Rights and Obligations in Pension
Contracts 797
Accounting Issues Related to Defined Benefit
Pension Plans 800
Financial Reporting for Defined Benefit
Pension Plans 802
A Simple Example: A World of Complete
Certainty 802
The Real World: Uncertainty Introduces Gains
and Losses 807
Comprehensive Example 815
Determinants of Pension Funding 819
Case Study of Pension Recognition
and Disclosure—General Electric 821
Accumulated Other Comprehensive Income
Disclosure and Deferred Income
Taxes 827
Additional Issues in Computing Expected
Return 829
Extraction of Additional Analytic Insights from
Note Disclosures 831
Postretirement Benefits Other Than
Pensions 834
Analytical Insights: Assessing OPEB
Liability 838
Evaluation of Pension and Postretirement Benefit
Financial Reporting 838
Global Vantage Point 839
Comparison of IFRS and GAAP Retirement
Benefit Accounting 839
Another random document with
no related content on Scribd:
with swelling heart. He hesitated. Was it his imagination? He gazed a
moment. The bush bent again, and the head of the little wanderer
was seen! He rushed forward, and found the little girl seated upon a
log, and breaking the twigs she had plucked from the bush which so
providentially led to her discovery. She did not appear to be
frightened; said she had lain in the woods three nights, and had not
seen or heard any wild beasts, and that she thought she should get
to Mr. Howard’s for the flour before night! At first she did not appear
hungry or weak, but after eating a piece of bread her cries for more
were very piteous. She was found about three miles from where she
entered the woods. Her clothing was very thin, and the large shawl
she had on when she left home she had carefully folded and placed
in the pillowcase, not even putting it over her during the night, as she
innocently said, ‘to keep from dirtying it, or her mother would whip
her.’ Our informant states that she is now as well and happy as the
other children.”

The Sun.—If the sun were inhabited as thickly as some parts of

our earth, with human beings, it would contain 850,000 times as
many as the earth.
 AUTUMN.
words and music written for merry’s museum; the latter by
geo. j. webb.
Andante.

The summer departed,

So gentle and brief—
Pale autumn is come,
With its sere yellow leaf.
Its breath in the vale,
Its voice in the breeze,
A many hued garment
Is over the trees.

In red and in purple

The leaves seem to bloom,—
The stern slayer comes—
It hath spoken their doom;
And those that may seem
With rubies to vie,—
They tell us that beauty
Blooms only to die.

Yet sad as the whispers

Of sorrow its breath,
And touching its hues
As the garment of death,—
Still autumn, though sad
And mournful it be,
Is sweetest and dearest
Of seasons to me.
THE HYÆNA.
MERRY’S MUSEUM.
VOLUME II.—No. 3.
 Merry’s Life and Adventures.

CHAPTER XI.

Raymond’s story of the school of misfortune.

I shall now proceed to repeat, as accurately as I am able,

Raymond’s story promised in the last chapter. It was as follows.
“There once lived in a village near London, a youth whom we will
call R. His parents died when he was young, leaving him an ample
estate. He was educated at one of the universities, travelled for two
years on the continent, and, at the age of twenty-four, returned to the
paternal mansion, and established himself there. Being the richest
person in the village, and the descendant and representative of a
family of some antiquity, he became the chief personage of the
place. Beside all this, he was esteemed remarkably handsome,
possessed various accomplishments, and had powers of pleasing
almost amounting to fascination. He was, therefore, courted and
flattered by the whole neighborhood, and even lords and ladies of
rank and fashion did not disdain to visit him. The common people
around, of course, looked up to him; for in England, where
distinctions in society are established by government, and where all
are taught to consider such distinctions as right and best, the great,
as they are called, are usually almost worshipped by the little.
“Surrounded by luxuries, and flattered by everybody, it would
seem that R. might have been happy; but he was of a discontented
turn, and though, for a time, these things pleased him, he grew tired
of them at last, and wished for some other sources of pleasure and
excitement. At the university he had imbibed a taste for reading; but
he could not now sit down to its quiet and gentle pleasures. He had
been in the gay society of London and Paris, and had drank the cup
of pleasure so deeply, that nothing but its dregs remained.
“R. was therefore restless, discontented and miserable, while in
the possession of all that usually excites the envy of mankind. He
was rich beyond his utmost wishes; he was endowed with manly
beauty and the most perfect health; he was admired, flattered,
cherished and sought after; yet he was unhappy. The reason of this
he did not know; indeed, he did not look very deeply into the matter,
but went on from one scene to another, seeking enjoyment, but
turning with distaste and disappointment from everything. He was,
however, too proud to let the world see his real condition; he kept up
a fair outside, sustained his establishment with magnificence, and
dressed himself, when he went abroad, with elegance and care; he
affected gayety in company, often led in the dance, was ever
foremost in the chase, and was usually the life of the circle wherever
he went.
“There were few, perhaps none, who imagined that, under this
aspect of prosperity, the canker of discontent was gnawing at the
heart. Yet such was the fact: of all the people of the village, R. was
esteemed the most happy and fortunate; but he was in truth the
veriest wretch in the place. And though this may doubtless seem a
rare instance, yet we have good reason to believe that often, very
often, there is deep misery, untold and unsuspected, in the great
house, where only elegance and luxury are seen by the world at
large; very often the beggar at the door would not exchange
conditions with the lord of the lofty hall, if he could know his real
condition.
“R. had now reached the age of thirty years, and instead of finding
his condition or the state of his feelings to grow better, they seemed
rather to grow worse. He became more and more unhappy. Every
morning when he rose, it was with a kind of dread as to how he
should contrive to kill time, to get through the day, to endure his own
listlessness, or dissatisfaction, or disgust. The idea of setting about
some useful or honorable employment, that would occupy his
thoughts, give excitement to his faculties, and bring satisfaction to
his conscience, never entered his head. He had never been taught
that no one has a right to lead an idle or useless life, and that no
man can be happy who attempts to live only for himself.
“It is indeed a common opinion among rich people that they are
under no obligation to engage in the active duties of life; that they
are not bound to labor, or toil, or make sacrifices for society; that
they are in fact privileged classes, and may spend their time and
money with an exclusive regard to themselves. R. was educated in
this foolish and narrow-minded opinion; and here was the real
foundation of all his misery. Could he only have discovered that
happiness is to be found in exercising our faculties; in using the
means, and employing the power, that Providence has placed in our
hands, in some useful pursuit, and in this way alone, he might have
been saved from a gulf of misery, into which he was soon plunged.
“At this period, which was soon after the revolutionary war,
America was attracting great attention, and R. having met with one
of his college mates who had been there, and who gave him glowing
accounts of it, he suddenly took the determination to sell his estates
and set out for America, with the view of spending the remainder of
his days there. He knew little of the country, but supposed it to be the
contrast in everything to that in which he had lived, and thinking that
any change must bring enjoyment, he sold his property, and taking
the amount in gold and silver, set out with it in a ship bound for New
York.
“The vessel had a prosperous voyage till she arrived in sight of
the highlands near the entrance of the harbor of New York. It was
then that, just at evening, smart gusts began to blow off the land,
and the captain showed signs of anxiety, lest he should not be able
to get in before the storm, which he feared was coming, should arise.
The passengers had dressed themselves to go on shore, and most
of them, anxious to see friends, or tired of the sea, were anticipating
their arrival with delight. R., however, was an exception to all this. He
went upon the deck, looked a few moments gloomily at the land that
was visible low down in the horizon, and then retired to the cabin,
where he gave himself up to his accustomed train of discontented
and bitter thoughts.
 “‘I alone,’ said he to himself, ‘of all this company, seem to be
miserable; all are looking forward with pleasant anticipations of some
happiness, some enjoyment in store for them. But for me—what
have I to hope? I have no friends here; this is a land of strangers to
me. It is true, I have wealth; but how worthless is it! I have tried its
virtues in England, and found that it could not give me pleasure.
Wealth cannot bestow happiness upon me; and I should not mourn if
every farthing of it were lost in the sea. Life is indeed to me a
burthen. Why is it that everything is happy but myself? Why do I see
all these people rejoicing at the sight of land, while I am distressed at
the idea of once more mingling with mankind? Alas! life is to me a
burthen, and the sooner I part with it the better.’
“While R. was pursuing this train of reflections in the cabin, the
heaving of the vessel increased; the creaking of the timbers grew
louder, and there was a good deal of noise on the deck, occasioned
by running to and fro, the rattling of cordage, and the clanking of
heavy irons. The commands of the captain became rapid and stern,
and the thumping of the billows against the sides of the ship made
her shiver from the rudder to the bowsprit.
“R. was so buried in his own gloomy reflections that he did not for
some time notice these events; but at last the din became so
tremendous, that he started to his feet and ran upon deck. The
scene that now met his eyes was indeed fearful. It was dark, but not
so much so as to prevent the land from being visible at a little
distance; the wind was blowing with the force of a hurricane, and
urging the vessel, now perfectly at its mercy, into the boiling waves
that fretted and foamed along its edge. The captain had given up all
hope of saving the ship, and the passengers were kneeling and
throwing up their hands in wildness and despair.
“R. was perfectly calm. The thought of losing his wealth crossed
his mind, but it cost him not a struggle to be reconciled to its
destruction. He then thought of sinking down in the waves to rise no
more. To this, too, he yielded, saying briefly to himself, ‘It is best it
should be so.’ Having thus made up his mind and prepared himself
for the worst, as he fancied, he stood surveying the scene. The force
of the gale was fearful; as it marched along the waters, it lashed their
surface into foam, and burst upon the ship with a fury that seemed
every moment on the point of carrying away her masts. At last, the
vessel struck; a moment after, her masts fell, with their whole
burthen of spars, sails, and rigging; the waves then rose over the
stern of the helpless hulk, and swept the whole length of it. Several
of the passengers were hurried into the tide, there to find a watery
grave; some clung to the bulwarks, and others saved themselves in
various ways.
“R. was himself plunged into the waves. His first idea was to yield
himself to his fate without an effort; but the love of life revived, as he
saw it placed in danger. He was an expert swimmer, and exerting
himself, he soon approached the masts, which were still floating,
though entangled with the wreck. It was in vain, however, to reach
them, owing to the rolling of the surf. Several times he nearly laid his
hand upon them, when he was beaten back by the dashing waves.
His strength gradually gave way, and he was floating farther and
farther from the wreck, when he chanced to see a spar near him;
with a desperate effort, he swam to this, and was thus able to
sustain himself upon the water.
“The night now grew dark apace, and R., being driven out to sea,
was parted from the wreck, and could distinguish nothing but the
flashing waves around him. His limbs began to grow cold, and he
feared that his strength would be insufficient to enable him to keep
upon the spar. His anxiety increased; an awe of death which he had
never felt before sprung up in his bosom, and an intense desire of
life, that thing which he had so recently spurned as worthless,
burned in his bosom. So little do we know ourselves until adversity
has taught us reflection, that R., a few hours before fancying that he
was willing and prepared to die, now yearned for safety, for
deliverance, for life, with an agony he could not control. His feelings,
however, did not overpower him. Using every effort of strength and
skill, and rubbing his chilled limbs from time to time, he was able to
sustain himself till morning. He could then perceive that the vessel
had become a complete wreck, and that the fragments were floating
on the waves; he could not discern a single human being, and was
left to infer that all beside himself had perished.
 “In this situation, benumbed with the cold, faint and exhausted
with exertion, he was on the point of yielding himself a prey to the
waves, when a pilot-boat came into view. It gradually approached the
place where he was, and at last seemed so near him as almost to be
within the reach of his voice. At this critical moment she made
preparations to tack, and thus change her direction. R. noticed these
movements with indescribable anxiety: if she were to advance a few
rods more, he should be discovered and saved; if she were to
change her route ever so little, she would pass by, and he,
unobserved and helpless, would perish. The experience of years
seemed now crowded into one moment of agony. Weary, cold,
exhausted, the poor sufferer wished not now to die, but to live. ‘Help,
help!’ cried he with all his strength. ‘O God, send me deliverance
from these waves!’ This earnest and agonizing petition was the first
prayer he had uttered for years, and it was in behalf of that existence
which, in the days of luxury and splendor, he had thought a burden
and a curse.
“Watching the pilot-boat with the keenest interest, poor R. now sat
upon the spar, almost incapable of moving, on account of his
sufferings and his weakness. He saw at last the helm put down; he
saw the vessel obey the impulse; he saw her swing round, the sail
flapping in the wind, and then filling again; he then saw her shoot off
in another direction, thus leaving him destitute of hope. His heart
sank within him, a sickness came over his bosom, his senses
departed, and he fell forward into the waves. It was at this moment
that he was discovered by the pilot. The vessel immediately steered
towards him, and he was taken on board. In a few hours, he was at
New York, and put under the care of persons who rendered him
every assistance which he needed for his immediate comfort.”

Do as you would be done unto.—The horse of a pious man

living in Massachusetts, happening to stray into the road, a neighbor
of the man who owned the horse put him into the pound. Meeting the
owner soon after, he told him what he had done; “and if I catch him
in the road again,” said he, “I’ll do it again.” “Neighbor,” replied the
other, “not long since I looked out of my window in the night and saw
your cattle in my meadow, and I drove them out and shut them in
your yard, and I’ll do it again.” Struck with the reply, the man
liberated the horse from the pound, and paid the charges himself. “A
soft answer turneth away wrath.”
Money.—He who expends money properly, is its master; he who
lays it up, its keeper; he who loves it, a fool; he who fears it, a slave;
and he who adores it, an idolater.
Country of the Samoides.—​Aurora Borealis.
 The Siberian Sable-Hunter.

CHAPTER III.

For several days the adventurers continued their journey, without

encountering anything worthy of being recorded. It is true that an
hour seldom passed in which thoughts, feelings, or incidents, did not
occur to Alexis, of some interest; and if we could transfer them here
with the same vividness that they touched his mind and heart, it
would be well to put them down. But, after all, the pen can give but a
poor idea of what is going on in the brain and bosom of a lively and
sanguine youth, separated from home and going forth to hunt sables
in the wilds of Siberia.
In about three weeks after their departure, the travellers reached
Yeniseisk, a considerable place, situated on the Yenisei. The town is
built chiefly of wood, the houses being low. Leaving this place, they
proceeded in a northeasterly direction, usually travelling about
twenty-five miles a day.
It was now the month of September, and already the weather
began to grow severe, and the snow to fall. The country also
became more and more desolate, and the inhabitants were more
scattered. They met with no villages, and frequently travelled a
whole day without seeing a single human habitation. There were
extensive marshy plains, upon which a few groups of stunted willows
were to be seen; but this was almost the only vegetation that the soil
produced.
The journey was not only uninteresting and depressing, but it
was, in some
respects, laborious and severe. Old Linsk, however, kept up the
spirits of the party by his incessant prattle; and, as he had seen a
good deal of life and possessed a retentive memory, he not only
enlivened his companions, but he communicated a large amount of
useful information. It is true that all his opinions were not just or wise,
but among some chaff there was a good deal of wheat.
After crossing the river Yenisei, and leaving the town of Yeniseisk,
he had a good deal to say about these things, particularly the former.
“I once went down that river,” said he, “entered the Arctic Ocean,
passed into the sea of Obi, and up the river Obi to Tobolsk. The
whole distance was more than twenty-five hundred miles, and we
were gone four months.
“The purpose of our trip was to get elephants’ teeth, which are
found on the banks of the rivers, and along the shores of the Arctic
sea. There are no elephants living in these regions now, nor are
there any in all Siberia; the country is so cold that these creatures
cannot dwell there. It appears that Siberia must have had a warmer
climate once than it has now, for not only do we find elephants’
bones, but those of the buffalo, and other animals, which can only
subsist in warm countries. It was interesting to see the bones of
buffaloes and elephants along the shore of the ocean; but teeth were
scarce; for, cold and desolate as the country is, many people had
been there before us, and gathered up most of them. We made out
pretty well, however; for we entered the forests as winter
approached, and shot some bears, and sables, and ermines; and
what we lacked in elephants’ teeth we made up in furs. Beside what
we gained in the way of trade, I got a good deal of information and
enjoyed some fun; my plan being to make the best of everything.
“Along the banks of the Yenisei, the inhabitants are Ostiacks, and
are chiefly fishermen; and a sad set they are. I don’t know how it
happens, but it seems to me that those who live on fish have the
most thirsty throats of any persons in the world. All the people were
addicted to drinking brandy, and never did I see so much
drunkenness and riot. It is bad enough all over Siberia; the people
generally believe in evil spirits, but brandy is the worst of them all.
The man that invented brandy has done more mischief to the human
race than it is possible to conceive; and those who contrive to sell it
and diffuse it, are only aiding in brutifying the human species. But it
is a thrifty trade, and many rich men are engaged in it. They flourish
in this world; and so did the rich man we read of in Scripture; but he
did not fare very well in another world. I can’t say how it was, but I
have always thought that Dives was a brandy dealer, and that was
the reason he was so tormented.”
“This is very strange,” said Alexis, “for you drink brandy yourself,
Linsk.”
“That’s all true,” was the reply. “I can’t help it. I’ve got into the
habit of it, and I can’t get out of it. It’s one of the worst parts of the
story, that when brandy has got its clutches upon you, you can’t pull
them off. It’s with brandy as with the evil spirit—when you’ve once
made a bargain with him, you must go through with it. So it is with
those Ostiacks along the Yenisei; they whip their wooden gods
because they don’t send them good luck in hunting and fishing; but
they should whip their own backs, for if they fail in anything, it is
generally because they get drunk, and are incapable of using their
skill and strength to advantage. They know that brandy is at the
bottom of all the mischief, but still they drink, and lay all to the gods
that they do not like to impute to themselves.
“To the north of the Ostiacks are the Samoides, who live along the
shore of the Arctic Ocean the whole extent of Siberia. They are few
in number, for the country is so cold and barren, that it is impossible
they should greatly increase. They are very short, and I believe are
the smallest people in the world. They eat a great deal of fish, and,
what is very odd, they seem to like it best when it is a little tainted.
They have many reindeer, and in the autumn hunt white foxes, with
the skins of which they buy brandy.
“The country inhabited by the Samoides is the most cold and
dreary that can be imagined. The snow lasts for nine months of the
year; the storms are almost incessant for a great part of the time,
and in winter the cold is so intense as to freeze brandy, though the
people contrive to thaw it again. But the most wonderful thing is this:
the sun sets in November, and does not rise again till the next May;
so the night is six months long! The moon, however, shines a great
part of the time, and it is never dark during that period. The northern
lights, sometimes called aurora borealis, are very brilliant, and it is
easy to read by them. The Samoides, however, have no books; they
spend most of their time in winter in sitting in their huts and telling
long stories. I will tell you one, which an old fisherman said he had
heard repeated in one of their dwellings while he was staying with
them.
“There was once upon a time an old Samoide fisherman that had
the most beautiful daughter that ever was seen. She was very short
and very fat, and her skin shone like blubber oil; her eyes were small
and black; her teeth were large, and of a beautiful yellow hue. Her
hair, also, was yellow, and being matted together, hung down in a
thick mass upon her shoulders.
“This fair girl was of an olive color, and such were her charms that
all the young men who saw her fell desperately in love with her, save
one. This latter was a fisherman, and famous for his skill in every
species of adventurous sport. He was very dexterous in spearing the
seal and sea otter, in managing the seal-skin boat, and in driving the
reindeer sledge over the snow.
“Now, although the beautiful lady, whose name was Lis, enslaved
all others, this hero of the fishhook and spear set her charms at
nought; and, as the fates are very whimsical, the beautiful girl,
disdaining the addresses of all besides, became desperately
enamored of him. She took every opportunity in her power to please
and fascinate him, but all to no purpose. Loord, for that was the
name of the fisherman, resisted her advances, and in fact treated
her with marked neglect, if not disdain.
“This appeared very wonderful to everybody, and especially to Lis,
who made up her mind that some evil-minded spirit had bewitched
Loord, and thus enabled and disposed him to resist her charms. She
therefore determined to go to an island at some distance in the
ocean, where she had an uncle living, and, under pretence of visiting
him, to consult a famous sorcerer, or magician, who dwelt there, and,
if possible, to obtain his counsel in the matter.
“Now Lis was well skilled in the arts of managing a boat; so she
determined to go alone. She got into a boat made of seal-skins, and
set forth upon the sea, having bade her friends farewell, who were at
the landing to take leave of her. It was expected that she would
return the next day—but she came not; the second day, the third,
and the fourth, passed away, but the beautiful Lis did not return. At
length some anxiety existed among her friends as to her welfare,
and even the interest of Loord was roused. He determined to set
forth in search of her; and that very day, entering his seal-skin boat,
he departed for the magician’s island.
“It is important to observe that, previous to starting, Loord, who
generally avoided brandy, took a large draught, by the advice of an
aged fisherman, not so much to exclude the cold as to keep out
witchcraft.
“Things went pretty well with Loord in the first part of his voyage,
but after a while, according to his account of the matter on his return,
as he began to approach the magician’s island, he caught a glimpse
of it, but it was bobbing up and down like a porpoise before a squall.
He kept his eye upon it steadily for some time, when at last it sunk,
and did not rise again. Loord used all his strength to reach the place,
and finally came to it, and the water was whirling and boiling round;
but not a bit of an island was to be seen. Loord sailed over and over
the place, and waited a long time to see if he could not pick up
somebody, and particularly the beautiful Lis, but he found no one.
“Loord at last returned; he had been gone all day, and it was late
at night when he reached his home. He was in a bewildered state,
but told his story as I have related it. It was intimated to him that
perhaps the brandy got into his head, and that the island’s being
sunk was all a mistake; but he laughed at the idea. In a few days,
however, a boat came from the magician’s isle, and behold the
beautiful Lis was in it, as well and as charming as ever. Her friends
came to see her, and her lovers returned, and all congratulated her
upon her good looks, and upon her escape from being carried to the
bottom of the sea with the magician’s island. This made her stare,
upon which they told her the adventure of Loord.
“It being now ascertained that the island of the magician was still
standing in its place, Loord became an object of general ridicule; and
as he was no longer a hero in the estimation of the people, Lis
began to think she could live without him. Accordingly, when she met
him she tossed up her head, and passed him by with disdain. This
brought Loord to his senses, and he began to see that Lis was very
beautiful, and pretty soon he found out that he could not live without
her. So he wooed her, but at first she would not listen to him; after a
great deal of teazing, however, she consented, and they were
married; but ever after, if anything went wrong, Lis would jeer him
about the magician’s island, that bobbed up and down like a
porpoise before a storm, and at last went down to the bottom! This
would always bring Loord to terms; and, in short, by means of this
affair, Lis not only got her husband, but she used the story ever after
to manage him; for it gave her a power over him like that of a strong
bit in the mouth of a headstrong horse.
“Nor was this all. The people in those parts found out that Lis
went to the island to consult the magician, and they imputed Loord’s
conduct entirely to his interference in behalf of the beautiful girl. But
the only real magician in the case was the brandy, for Lis did not find
the magician at home; and, though she waited some days, she did
not see him. However, when people are superstitious common things
always grow mighty wonderful in their eyes. Superstition is like a pair
of spectacles that I heard of once; they happened to have a
musquito on one of the glasses when the owner put them on; so he
thought he saw a flying bear skipping over the distant hills, when it
was only the musquito upon his spectacles!”