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Analysis for
Financial Management
Eleventh Edition

Robert C. Higgins
Contents

Preface xi The Value Problem 58

ROE or Market Price? 59
Ratio Analysis 62
Using Ratios Effectively 62
PART ONE
Ratio Analysis of Stryker Corporation 63
ASSESSING THE FINANCIAL Summary 71
HEALTH OF THE FIRM 1 Additional Resources 72
Problems 73
Chapter 1
Interpreting Financial Statements 3
PART TWO
The Cash Flow Cycle 3
The Balance Sheet 6
PLANNING FUTURE FINANCIAL
Current Assets and Liabilities 11 PERFORMANCE 79
Shareholders’ Equity 12
The Income Statement 12 Chapter 3
Measuring Earnings 12 Financial Forecasting 81
Sources and Uses Statements 17 Pro Forma Statements 81
The Two-Finger Approach 18
Percent-of-Sales Forecasting 82
The Cash Flow Statement 19 Interest Expense 88
Financial Statements and the Seasonality 89
Value Problem 24 Pro Forma Statements and Financial
Market Value vs. Book Value 24
Planning 89
Economic Income vs. Accounting Income 27
Computer-Based Forecasting 90
Imputed Costs 28
Coping with Uncertainty 94
Summary 31 Sensitivity Analysis 94
Additional Resources 32 Scenario Analysis 95
Problems 33 Simulation 96
Cash Flow Forecasts 98
Chapter 2 Cash Budgets 99
Evaluating Financial Performance 39 The Techniques Compared 102
Planning in Large Companies 103
The Levers of Financial Performance 39 Summary 105
Return on Equity 40 Additional Resources 106
The Three Determinants of ROE 40
Problems 108
The Profit Margin 42
Asset Turnover 44
Chapter 4
Financial Leverage 49
Is ROE a Reliable Financial Yardstick? 55 Managing Growth 115
The Timing Problem 56 Sustainable Growth 116
The Risk Problem 56 The Sustainable Growth Equation 116
vii
viii Contents

Too Much Growth 119 Seasoned Issues 163

Balanced Growth 119 Issue Costs 168
Under Armour’s Sustainable Growth Rate 121 Efficient Markets 169
“What If” Questions 122 What Is an Efficient Market? 170
What to Do When Actual Growth Exceeds Implications of Efficiency 172
Sustainable Growth 122 Appendix
Sell New Equity 123 Using Financial Instruments to Manage
Increase Leverage 125 Risks 174
Reduce the Payout Ratio 125 Forward Markets 175
Profitable Pruning 126 Speculating in Forward Markets 176
Outsourcing 127 Hedging in Forward Markets 177
Pricing 127 Hedging in Money and Capital Markets 180
Is Merger the Answer? 127 Hedging with Options 180
Too Little Growth 128 Limitations of Financial Market Hedging 183
What to Do When Sustainable Growth Valuing Options 185
Exceeds Actual Growth 129 Summary 188
Ignore the Problem 130 Additional Resources 189
Return the Money to Shareholders 130 Problems 191
Buy Growth 131
Sustainable Growth and Pro Forma Chapter 6
Forecasts 132
New Equity Financing 132
The Financing Decision 195
Why Don’t U.S. Corporations Issue More Financial Leverage 197
Equity? 135 Measuring the Effects of Leverage on a
Summary 136 Business 201
Additional Resources 137 Leverage and Risk 203
Problems 138 Leverage and Earnings 206
How Much to Borrow 208
Irrelevance 208
PART THREE Tax Benefits 210
FINANCING OPERATIONS 141 Distress Costs 211
Flexibility 215
Chapter 5 Market Signaling 217
Management Incentives 220
Financial Instruments and
The Financing Decision and Growth 221
Markets 143
Selecting a Maturity Structure 224
Financial Instruments 144 Inflation and Financing Strategy 225
Bonds 145 Appendix
Common Stock 152 The Irrelevance Proposition 225
Preferred Stock 156 No Taxes 226
Financial Markets 158 Taxes 228
Venture Capital Financing 158 Summary 230
Private Equity 160 Additional Resources 231
Initial Public Offerings 162 Problems 232
 Contents ix

PART FOUR Chapter 8

EVALUATING INVESTMENT Risk Analysis in Investment
OPPORTUNITIES 237 Decisions 289
Risk Defined 291
Chapter 7 Risk and Diversification 293
Estimating Investment Risk 295
Discounted Cash Flow Techniques Three Techniques for Estimating Investment
239 Risk 296
Figures of Merit 240 Including Risk in Investment Evaluation 297
The Payback Period and the Accounting Risk-Adjusted Discount Rates 297
Rate of Return 241 The Cost of Capital 298
The Time Value of Money 242 The Cost of Capital Defined 299
Equivalence 247 Cost of Capital for Stryker Corporation 301
The Net Present Value 248 The Cost of Capital in Investment Appraisal 308
The Benefit-Cost Ratio 250 Multiple Hurdle Rates 309
The Internal Rate of Return 250 Four Pitfalls in the Use of Discounted Cash
Uneven Cash Flows 254 Flow Techniques 311
A Few Applications and Extensions 255 The Enterprise Perspective versus the Equity
Mutually Exclusive Alternatives and Capital Perspective 312
Rationing 259 Inflation 314
The IRR in Perspective 260 Real Options 315
Determining the Relevant Excessive Risk Adjustment 321
Cash Flows 260 Economic Value Added 322
Depreciation 262 EVA and Investment Analysis 323
Working Capital and Spontaneous EVA’s Appeal 325
Sources 264 A Cautionary Note 326
Sunk Costs 265 Appendix
Allocated Costs 266 Asset Beta and Adjusted Present
Cannibalization 267 Value 326
Excess Capacity 268 Beta and Financial Leverage 327
Financing Costs 270 Using Asset Beta to Estimate Equity
Appendix Beta 328
Mutually Exclusive Alternatives and Asset Beta and Adjusted Present Value 329
Capital Rationing 272 Summary 332
What Happened to the Other Additional Resources 333
$578,000? 273 Problems 335
Unequal Lives 274
Capital Rationing 277 Chapter 9
The Problem of Future Opportunities 278
Business Valuation and Corporate
A Decision Tree 279
Restructuring 343
Summary 280
Additional Resources 281 Valuing a Business 345
Problems 282 Assets or Equity? 346
x Contents

Dead or Alive? 346 The Venture Capital Method—Multiple

Minority Interest or Control? 348 Financing Rounds 380
Discounted Cash Flow Valuation 349 Why Do Venture Capitalists Demand
Free Cash Flow 350 Such High Returns? 382
The Terminal Value 351 Summary 384
A Numerical Example 354 Additional Resources 385
Problems with Present Value Approaches to Problems 386
Valuation 357
Valuation Based on Comparable Trades 357 Glossary 393
Lack of Marketability 361
The Market for Control 362
Suggested Answers to
The Premium for Control 362 Odd-Numbered Problems 405
Financial Reasons for Restructuring 364 Index 437
The Empirical Evidence 372
The Cadbury Buyout 374
Appendix
The Venture Capital Method of
Valuation 376
The Venture Capital Method—One
Financing Round 377
Preface

Like its predecessors, the eleventh edition of Analysis for Financial Man-
agement is for nonfinancial executives and business students interested in
the practice of financial management. It introduces standard techniques
and recent advances in a practical, intuitive way. The book assumes no
prior background beyond a rudimentary, and perhaps rusty, familiarity
with financial statements—although a healthy curiosity about what makes
business tick is also useful. Emphasis throughout is on the managerial im-
plications of financial analysis.
Analysis for Financial Management should prove valuable to individuals
interested in sharpening their managerial skills and to executive program
participants. The book has also found a home in university classrooms as
the sole text in Executive MBA and applied finance courses, as a compan-
ion text in case-oriented courses, and as a supplementary reading in more
theoretical finance courses.
Analysis for Financial Management is my attempt to translate into another
medium the enjoyment and stimulation I have received over the past four
decades working with executives and college students. This experience has
convinced me that financial techniques and concepts need not be abstract or
obtuse; that recent advances in the field such as agency theory, market sig-
naling, market efficiency, capital asset pricing, and real options analysis are
important to practitioners; and that finance has much to say about the
broader aspects of company management. I also believe that any activity in
which so much money changes hands so quickly cannot fail to be interesting.
Part One looks at the management of existing resources, including the
use of financial statements and ratio analysis to assess a company’s finan-
cial health, its strengths, weaknesses, recent performance, and future
prospects. Emphasis throughout is on the ties between a company’s oper-
ating activities and its financial performance. A recurring theme is that a
business must be viewed as an integrated whole and that effective financial
management is possible only within the context of a company’s broader
operating characteristics and strategies.
The rest of the book deals with the acquisition and management of new
resources. Part Two examines financial forecasting and planning with par-
ticular emphasis on managing growth and decline. Part Three considers
the financing of company operations, including a review of the principal
security types, the markets in which they trade, and the proper choice of
security type by the issuing company. The latter requires a close look at fi-
nancial leverage and its effects on the firm and its shareholders. xi
xii Preface

Part Four addresses the use of discounted cash flow techniques, such as
the net present value and the internal rate of return, to evaluate invest-
ment opportunities. It also deals with the difficult task of incorporating
risk into investment appraisal. The book concludes with an examination
of business valuation and company restructuring within the context of the
ongoing debate over the proper roles of shareholders, boards of directors,
and incumbent managers in governing America’s public corporations.
An extensive glossary of financial terms and suggested answers to odd-
numbered, end-of-chapter problems follow the last chapter.

Changes in the Eleventh Edition

Readers familiar with earlier editions of Analysis for Financial Management
will notice a number of changes here. Most important, two talented young
teachers and scholars have joined me in preparing the eleventh edition.
Jennifer Koski, a colleague at the University of Washington, and Todd
Mitton, at Brigham Young University, have done yeomen’s work ushering
the book into the digital era. I much appreciate their many contributions.
You should expect their responsibilities to grow in any future editions.
A second noteworthy change is the book’s partnership with McGraw-
Hill’s Connect. As the following section explains in more detail, Connect
is the lynchpin of the publisher’s digital initiative. Combining elements of
computerized instruction and electronic publishing, it promises signifi-
cant benefits to readers and instructors alike. I am anxious to watch
McGraw-Hill turn this promise into reality. There will undoubtedly be
bumps along the way, but I am confident we are on the right path.
Other more conventional changes and refinements in the eleventh edi-
tion include:
• An introductory discussion of crowdfunding and its possible future.
• A new treatment of present value calculations, gracefully introducing
computer spreadsheets as the principal means for solving present value
problems, while eliminating reference to present value tables.
• Explicit discussion of present value problems involving uneven cash flows.
• Enhanced ‘recommended resources’ at the end of each chapter,
including two-dimensional bar codes (QR codes) and recommended
mobile apps for Android and iOS devices.
• Added discussion of payout policy, illustrated by Apple Inc.’s recent
experience.
• Updated details on the impact of U.S. regulation on financial manage-
ment, including the Dodd-Frank Act and the JOBS Act of 2012.
• Better integration of T-accounts and financial statements.
• Use of Stryker Corporation, a leading medical technology company, as
an extended example throughout the book.
 Preface xiii

McGraw-Hill’s Connect
connect.mheducation.com
McGraw-Hill’s Connect® is an online assess-
ment solution that connects students with the
tools and resources they’ll need to achieve success. Connect allows faculty
to create and deliver exams easily with selectable test bank items. Instruc-
tors can also build their own questions into the system for homework or
practice. Readers have access to the student resources that accompany this
text, as well as McGraw-Hill’s adaptive self-study technology in Learn-
Smart and Smartbook.
Connect supports this book in several important ways. The student re-
sources include:
• Excel spreadsheets referenced in end-of-chapter problems.
• Supplementary chapter problems and suggested answers.
• Complimentary software programs described in Additional Resources
at the end of several chapters.
If you are not enrolled in a course using Connect, you can access these stu-
dent resources with a free trial by following the instructions accompanying
the access code acquired with the book. I encourage you to download these
items now for later use. If you are enrolled in a Connect course, ask your
instructor for your Connect course URL to access the course resources.
Intended primarily for instructor use, the Connect Instructor Library
houses, among other things:
• A test bank.
• PowerPoint presentations.
• An annotated list of suggested cases to accompany the book.
• Suggested answers to even-numbered problems.
To access the Instructor Library, log in to your Connect course, select the
“Library” tab, and then select “Instructor Resources.”
Connect’s adaptive learning resources, LearnSmart and Smartbook,
promise to speed and enrich your mastery of the book by creating a per-
sonalized, flexible program of study.
For more information about Connect, LearnSmart, or Smartbook, go to
connect.mheducation.com, or contact a McGraw-Hill sales representative.
For 24-hour support you can e-mail a Product Specialist or search Frequently
Asked Questions at mhhe.com/support. Or for a human, call 800-331-5094.
A word of caution: Analysis for Financial Management emphasizes the ap-
plication and interpretation of analytic techniques in decision making.
These techniques have proved useful for putting financial problems into
perspective and for helping managers anticipate the consequences of their
xiv Preface

actions. But techniques can never substitute for thought. Even with the
best technique, it is still necessary to define and prioritize issues, to mod-
ify analysis to fit specific circumstances, to strike the proper balance be-
tween quantitative analysis and more qualitative considerations, and to
evaluate alternatives insightfully and creatively. Mastery of technique is
only the necessary first step toward effective management.
I am indebted to Andy Halula of Standard & Poor’s for providing timely
updates to Research Insight. The ability to access current Compustat data
on CD continues to be a great help in providing timely examples of current
practice. I also owe a large thank you to the following people for their in-
sightful reviews of the 10th edition and their constructive advice. They did
an excellent job; any remaining shortcomings are mine not theirs.
Bruce Campbell John Strong
Franklin University College of William & Mary
Charles Evans Andy Terry
Florida Atlantic University, Boca Raton University of Arkansas, Little Rock
Jaemin Kim Marilyn Wiley
San Diego State University, San Diego University of North Texas
Inayat Ullah Mangla Jaime Zender
Western Michigan University, Kalamazoo University of Colorado, Boulder

I appreciate the exceptional direction provided by Chuck Synovec,

Noelle Bathurst, Melissa Caughlin, Dheeraj Chahal, and Mary Jane Lampe
of McGraw-Hill on the development, design, and editing of the book. Bill
Alberts, David Beim, Dave Dubofsky, Bob Keeley, Jack McDonald, George
Parker, Megan Partch, Larry Schall, and Alan Shapiro have my continuing
gratitude for their insightful help and support throughout the book’s evolu-
tion. Thanks go as well to my daughter, Sara Higgins, for writing and
editing the accompanying software. Finally, I want to express my
appreciation to students and colleagues at the University of Washington,
Stanford University, IMD, The Pacific Coast Banking School, The
Koblenz Graduate School of Management, The Gordon Institute of
Business Science, The Swiss International Business School Zf U AG,
Boeing, and Microsoft, among others, for stimulating my continuing
interest in the practice and teaching of financial management.
I envy you learning this material for the first time. It’s a stimulating
intellectual adventure.
Robert C. (Rocky) Higgins
Marguerite Reimers Emeritus Professor of Finance
Foster School of Business
University of Washington
rhiggins@uw.edu
P A R T O N E

Assessing the Financial

Health of the Firm
C H A P T E R O N E

Interpreting Financial
Statements

Financial statements are like fine perfume; to be sniffed but not

swallowed.
Abraham Brilloff

Accounting is the scorecard of business. It translates a company’s diverse

activities into a set of objective numbers that provide information about
the firm’s performance, problems, and prospects. Finance involves the in-
terpretation of these accounting numbers for assessing performance and
planning future actions.
The skills of financial analysis are important to a wide range of people,
including investors, creditors, and regulators. But nowhere are they more
important than within the company. Regardless of functional specialty or
company size, managers who possess these skills are able to diagnose their
firm’s ills, prescribe useful remedies, and anticipate the financial conse-
quences of their actions. Like a ballplayer who cannot keep score, an op-
erating manager who does not fully understand accounting and finance
works under an unnecessary handicap.
This and the following chapter look at the use of accounting information
to assess financial health. We begin with an overview of the accounting prin-
ciples governing financial statements and a discussion of one of the most
abused and confusing notions in finance: cash flow. Two recurring themes will
be that defining and measuring profits is more challenging than one might ex-
pect, and that profitability alone does not guarantee success, or even survival.
In Chapter 2, we look at measures of financial performance and ratio analysis.

The Cash Flow Cycle

Finance can seem arcane and complex to the uninitiated. However, a
comparatively few basic principles should guide your thinking. One is
that a company’s finances and operations are integrally connected. A company’s
4 Part One Assessing the Financial Health of the Firm

FIGURE 1.1 The Cash Flow–Production Cycle

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activities, method of operation, and competitive strategy all fundamentally

shape the firm’s financial structure. The reverse is also true: Decisions that
appear to be primarily financial in nature can significantly affect company
operations. For example, the way a company finances its assets can affect
the nature of the investments it is able to undertake in future years.
The cash flow–production cycle shown in Figure 1.1 illustrates the
close interplay between company operations and finances. For simplicity,
suppose the company shown is a new one that has raised money from
owners and creditors, has purchased productive assets, and is now ready to
begin operations. To do so, the company uses cash to purchase raw mate-
rials and hire workers; with these inputs, it makes the product and stores
it temporarily in inventory. Thus, what began as cash is now physical in-
ventory. When the company sells an item, the physical inventory changes
back into cash. If the sale is for cash, this occurs immediately; otherwise,
cash is not realized until some later time when the account receivable is
collected. This simple movement of cash to inventory, to accounts receiv-
able, and back to cash is the firm’s operating, or working capital, cycle.
 Chapter 1 Interpreting Financial Statements 5

Another ongoing activity represented in Figure 1.1 is investment. Over a

period of time, the company’s fixed assets are consumed, or worn out, in the
creation of products. It is as though every item passing through the business
takes with it a small portion of the value of fixed assets. The accountant rec-
ognizes this process by continually reducing the accounting value of fixed
assets and increasing the value of merchandise flowing into inventory by an
amount known as depreciation. To maintain productive capacity and to fi-
nance additional growth, the company must invest part of its newly received
cash in new fixed assets. The object of this whole exercise, of course, is to
ensure that the cash returning from the working capital cycle and the
investment cycle exceeds the amount that started the journey.
We could complicate Figure 1.1 further by including accounts payable
and expanding on the use of debt and equity to generate cash, but the fig-
ure already demonstrates two basic principles. First, financial statements are
an important window on reality. A company’s operating policies, production
techniques, and inventory and credit-control systems fundamentally de-
termine the firm’s financial profile. If, for example, a company requires
payment on credit sales to be more prompt, its financial statements will
reveal a reduced investment in accounts receivable and possibly a change
in its revenues and profits. This linkage between a company’s operations
and its finances is our rationale for studying financial statements. We seek
to understand company operations and predict the financial consequences
of changing them.
The second principle illustrated in Figure 1.1 is that profits do not equal
cash flow. Cash—and the timely conversion of cash into inventories, ac-
counts receivable, and back into cash—is the lifeblood of any company. If
this cash flow is severed or significantly interrupted, insolvency can occur.
Yet the fact that a company is profitable is no assurance that its cash flow
will be sufficient to maintain solvency. To illustrate, suppose a company
loses control of its accounts receivable by allowing customers more and
more time to pay, or suppose the company consistently makes more mer-
chandise than it sells. Then, even though the company is selling mer-
chandise at a profit in the eyes of an accountant, its sales may not be
generating sufficient cash soon enough to replenish the cash outflows re-
quired for production and investment. When a company has insufficient
cash to pay its maturing obligations, it is insolvent. As another example,
suppose the company is managing its inventory and receivables carefully,
but rapid sales growth is necessitating an ever-larger investment in these
assets. Then, even though the company is profitable, it may have too little
cash to meet its obligations. The company will literally be “growing
broke.” These brief examples illustrate why a manager must be concerned
at least as much with cash flows as with profits.
6 Part One Assessing the Financial Health of the Firm

To explore these themes in more detail and to sharpen your skills in

using accounting information to assess performance, we need to review
the basics of financial statements. If this is your first look at financial ac-
counting, buckle up because we will be moving quickly. If the pace is too
quick, take a look at one of the accounting texts recommended at the end
of the chapter.

The Balance Sheet

The most important source of information for evaluating the financial
health of a company is its financial statements, consisting principally of a
balance sheet, an income statement, and a cash flow statement. Although
these statements can appear complex at times, they all rest on a very sim-
ple foundation. To understand this foundation and to see the ties among
the three statements, let us look briefly at each.
A balance sheet is a financial snapshot, taken at a point in time, of all the
assets the company owns and all the claims against those assets. The basic
relationship, and indeed the foundation for all of accounting, is
Assets  Liabilities  Shareholders’ equity
It is as if a herd (flock? column?) of accountants runs through the busi-
ness on the appointed day, making a list of everything the company owns,
and assigning each item a value. After tabulating the firm’s assets, the ac-
countants list all outstanding company liabilities, where a liability is simply
an obligation to deliver something of value in the future—or more collo-
quially, some form of an “IOU.” Having thus totaled up what the com-
pany owns and what it owes, the accountants call the difference between the
two shareholders’ equity. Shareholders’ equity is the accountant’s estimate of
the value of the shareholders’ investment in the firm just as the value of a
homeowner’s equity is the value of the home (the asset), less the mort-
gage outstanding against it (the liability). Shareholders’ equity is also known
variously as owners’ equity, stockholders’ equity, net worth, or simply equity.
It is important to realize that the basic accounting equation holds for
individual transactions as well as for the firm as a whole. When a firm pays
$1 million in wages, cash declines $1 million and shareholders’ equity falls
by the same amount. Similarly, when a company borrows $100,000, cash
rises $100,000, as does a liability named something like loans outstanding.
And when a company receives a $10,000 payment from a customer, cash
rises while another asset, accounts receivable, falls by the same figure. In
each instance the double-entry nature of accounting guarantees that the
basic accounting equation holds for each transaction, and when summed
across all transactions, it holds for the company as a whole.
 Chapter 1 Interpreting Financial Statements 7

To see how the repeated application of this single formula underlies the
creation of company financial statements, consider Worldwide Sports
(WWS), a newly founded retailer of value-priced sporting goods. In Jan-
uary 2014, the founder invested $150,000 of his personal savings and
added another $100,000 borrowed from relatives to start the business.
After buying furniture and display fixtures for $60,000 and merchandise
for $80,000, WWS was ready to open its doors.
The following six transactions summarize WWS’s activities over the
course of its first year.
• Sell $900,000 of sports equipment, receiving $875,000 in cash, with
$25,000 still to be paid.
• Pay $190,000 in wages, including the owner’s salary.
• Purchase $380,000 of merchandise at wholesale, with $20,000 still
owed to suppliers, and $30,000 worth of product still in WWS’s inven-
tory at year-end.
• Spend $210,000 on other expenses, such as utilities and rent.
• Depreciate furniture and fixtures by $15,000.
• Pay $10,000 interest on WWS’s loan from relatives and another
$40,000 in income taxes to the government.
Table 1.1 shows how an accountant would record these transactions.
WWS’s beginning balance, the first line in the table, shows cash of
$250,000, a loan of $100,000, and equity of $150,000. But these numbers
change quickly as the company buys fixtures and an initial inventory of mer-
chandise. And they change further as each of the listed transactions occurs.

TABLE 1.1 Worldwide Sports Financial Transactions 2014 ($ thousands)

Assets ⴝ Liabilities ⴙ Equity

Accounts Fixed Accounts Loan from Owners’
Cash Receivable Inventory Assets ⴝ Payable Relatives Equity
Beginning Balance 1/1/14 $ 250  $100 $ 150
Initial purchases (140) 80 60 
Sales 875 25  900
Wages (190)  (190)
Merchandise purchases (360) 30  20 (350)
Other expenses (210)  (210)
Depreciation (15)  (15)
Interest payment (10)  (10)
Income tax payment (40)  (40)
Ending Balance 12/31/14 $ 175 $25 $110 $ 45  $20 $100 $ 235
8 Part One Assessing the Financial Health of the Firm

Abstracting from the accounting details, there are two important things to
note here. First, the basic accounting equation holds for each transaction.
For every line in the table, assets equal liabilities plus owners’ equity. Second,
WWS’s year-end balance sheet across the bottom of the table is just its be-
ginning balance sheet plus the cumulative effect of the individual transac-
tions. For example, ending cash on December 31, 2014 is the beginning cash
of $250,000 plus or minus the cash involved in each transaction. Incidentally,
WWS’s first year appears to have been a decent one: Owner’s equity is up
$85,000 over the year, on top of whatever the owner paid himself in salary.
To further convince you that the bottom row of Table 1.1 really is a
balance sheet, the table below presents the same information in a more
conventional format.
Worldwide Sports Balance Sheet, December 31, 2014 ($ thousands)
Cash $175 Accounts payable $ 20
Accounts receivable 25 Total current liabilities 20
Inventory 110 Loan from relatives 100
Total current assets 310 Equity 235
Fixed assets 45 Total liabilities and
Total asssets $355 Shareholders’ equity $355

If a balance sheet is a snapshot in time, the income statement and the

cash flow statement are videos, highlighting changes in two especially im-
portant balance sheet accounts over time. Business owners are naturally
interested in how company operations have affected the value of their in-
vestment. The income statement addresses this question by partitioning
the recorded changes in owners’ equity into revenues and expenses, where
revenues increase owners’ equity and expenses reduce it. The difference
between revenues and expenses is earnings, or net income.
Looking at the right-most column in Table 1.1, WWS’s 2014 income
statement looks like this. Note that the $85,000 net income appearing at
the bottom of the statement equals the change in shareholders’ equity
over the year.
Worldwide Sports Income Statement, 2014 ($ thousands)
Sales $900
Wages 190
Merchandise purchases 350
Depreciation 15
Gross profit $345
Other expenses 210
Interest expense 10
Income before tax $125
Income taxes 40
Net income $ 85
 Chapter 1 Interpreting Financial Statements 9

FIGURE 1.2 Ties among Financial Statements

Assets at beginning = Liabilities at beginning + Equity at beginning
Cash Shareholders' Equity

Cash flow Income

statement statement
Operating

Financing

Revenues

Expenses
Investing
Balance
sheets

Assets at end = Liabilities at end + Equity at end

© Stryker.
See stryker.com. Follow
Investors > Financial informa-
tion for financial statements.
The focus of the cash flow statement is solvency, having enough cash in
the bank to pay bills as they come due. The cash flow statement provides
a detailed look at changes in the company’s cash balance over time. As an
organizing principle, the statement segregates changes in cash into three
broad categories: cash provided, or consumed, by operating activities, by
investing activities, and by financing activities. Figure 1.2 is a simple
schematic diagram showing the close conceptual ties among the three
principal financial statements.
To illustrate the techniques and concepts presented throughout the
book, I will refer whenever possible to Stryker Corporation. If you or a
relative have ever contemplated a hip or knee replacement, you probably
know Stryker. The firm is a leading medical technology company with an
especially strong position in orthopedic products. It derives about 60 per-
cent of its revenue from the sale of hip and knee replacements and 40 per-
cent from medical and surgical equipment—known in the trade as
“medsurg.” The company competes in over 100 countries and produces
almost 60,000 products and services in 29 facilities throughout the globe.
Headquartered in Kalamazoo, Michigan, with annual sales of over
$9 billion, Stryker trades on the New York Stock Exchange and is a mem-
ber of the Standard & Poor’s 500 Stock Index. The firm was founded in
1946 by Homer Stryker, a practicing orthopedist, and was originally
known as The Orthopedic Frame Company, changing its name to Stryker
Corporation in 1964. In 1979, Stryker went public and commenced an
extended period of remarkably rapid growth. Beginning in 1976, Stryker’s
average compound growth rate in earnings per share exceeded 20 percent
per annum for over 30 years, and its corporate mantra became “20 per-
cent growth forever.” Recent years have been more challenging, how-
ever, as maturing products, the financial crisis, and the medical device
excise tax tied to ObamaCare have taken their toll.
10 Part One Assessing the Financial Health of the Firm

TABLE 1.2 Stryker Corporation, Balance Sheets ($ millions)*

December 31
Change in
2012 2013 Account
Assets
Cash $ 1,395 $ 1,339 $ (56)
Marketable securities 2,890 2,641 (249)
Accounts receivable, less reserve for possible losses 1,430 1,518 88
Inventories 1,265 1,422 157
Other current assets 1,168 1,415 247
Total current assets 8,148 8,335
Gross property, plant, and equipment 2,232 2,497 265
Less accumulated depreciation and amortization 1,284 1,416 132
Net property, plant, and equipment 948 1,081 133
Goodwill and intangible assets, net 3,566 5,833 2,267
Other assets 544 494 (50)
Total assets $13,206 $15,743
Liabilities and Shareholders' Equity
Long-term debt due in one year 16 25 9
Taxes payable 70 131 61
Trade accounts payable 288 314 26
Accrued compensation 467 535 68
Accrued expenses 1,035 1,652 617
Total current liabilities 1,876 2,657
Long-term debt 1,746 2,739 993
Other long-term liabilities 987 1,300 313
Total liabilities 4,609 6,696
Common stock 38 38
Additional paid-in capital 1,098 1,160
Retained earnings 7,461 7,849
Total shareholders’ equity 8,597 9,047 450
Total liabilities and shareholders’ equity $13,206 $15,743

*Totals may not add due to rounding.

See nysscpa.org/
glossary for an exhaustive
glossary of accounting terms.
Tables 1.2 and 1.3 present Stryker’s balance sheets and income state-
ments for 2012 and 2013. If the precise meaning of every asset and liability
category in Table 1.2 is not immediately apparent, be patient. We will discuss
many of them in the following pages. In addition, all of the accounting terms
used appear in the glossary at the end of the book.
Stryker Corporation’s balance sheet equation for 2013 is
Assets  Liabilities  Shareholders’ equity
$15,743 million  $6,696 million  $9,047 million
Another random document with
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The Project Gutenberg eBook of Love in chief
 This ebook is for the use of anyone anywhere in the United
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Title: Love in chief

A novel

Author: R. K. Weekes

Release date: April 29, 2024 [eBook #73491]

Language: English

Original publication: New York: Harper & Brothers, 1904

Credits: Gísli Valgeirsson, Chris Miceli and the Online

Distributed Proofreading Team at https://www.pgdp.net
(This file was produced from images generously made
available by The Internet Archive/American Libraries.)

*** START OF THE PROJECT GUTENBERG EBOOK LOVE IN

CHIEF ***
TRANSCRIBER’S NOTE
Changes to the text are noted at the end of the book.
LOVE IN CHIEF

A Novel

BY

ROSE K. WEEKES
“One should master one’s passions (love, in chief),
And be loyal to one’s friends.”
 NEW YORK AND LONDON
HARPER & BROTHERS
PUBLISHERS · MCMIV
Copyright, 1904, by Harper &
Brothers.

All rights reserved.

Published September, 1904.

 CONTENTS
CHAPTER PAGE
I. Write Me as One who Loves His Fellow-men 1
II. He that Showed Mercy on Him 11
III. The Proper Study of Mankind is Man 21
IV. I Always Did What I Devised 35
V. She Goes on Sunday to the Church 48
VI. Honesty is the Best Policy 64
VII. Courage Quand Même 78
VIII. I Will Not Let Thee Go 100
IX. We Took Sweet Counsel Together 113
X. Was That the Landmark? 125
XI. In Arden 141
XII. And Wilt Thou Leave Me Thus? 156
XIII. The First Drops of the Thunder-Shower 177
XIV. Small Beer 189
XV. Colloquies with an Outsider 205
XVI. A Night-Piece 218
XVII. The One Shall be Taken 243
XVIII. The Other Left 254
XIX. Romance Brings Up the Nine-Fifteen 268
XX. So They Two Went On 283
LOVE IN CHIEF
 LOVE IN CHIEF

WRITE ME AS ONE WHO LOVES HIS FELLOW-MEN

The waiting-room of Dr. Maude’s surgery at Monkswell was sparely

furnished with guests, mainly because the December weather was of
that mild and unseasonable type commonly called unhealthy. The
darkness outside was pierced by a fine, invisible rain, borne on a
south wind, and the waiting-room, though heat as well as light was
spread only by a single gas-burner, was not cold. One patient was
with the doctor; the details of his complaint could have been
overheard by the others if they had cared to listen, but they did not;
sufficient unto them were their own diseases. Five centres of self-
complacent misery were sitting on a cane-seated bench; the sixth
person was leaning against the wall with his hands in his pockets.
The only other representative of the male sex was eight years old,
and had come to have a tooth out; too stolid to feel nervous, he sat
sucking peppermints. His mother, in a decent black mantilla and a
square-fronted bonnet trimmed with red chrysanthemums, was
talking to a girl with a baby about wrongs invisible to the unjaundiced
eye. The young mother’s dark eyes and delicate features had the
remains of real beauty, though two years of matrimony had made her
middle-aged; her pretty young sister, sitting beside her, showed what
she must have been. The baby was not handsome; its pinkish-purple
face was framed in a yellow woollen hood, and the colour which
should have tinged its cheeks had settled upon its ugly little button of
a nose and on its chin. It wheezed; the mother coughed loosely; the
girl stared before her; the young man also coughed, but
inobtrusively. He did not give to phthisis its due dignity.
The surgery presently discharged its patient and received the
small martyr to toothache. The young man took the seat left vacant;
and the gaslight, falling on his face, showed thin, brown features,
eyebrows strongly arched and strongly marked, and bright, vagrant
eyes which took an interest in everything. He edged a little closer to
the young mother and looked inquiring. Finding that did not answer,
he plunged into conversation with a speech which was admirable in
sentiment but not discreet in wording.
“Jolly baby, that.”
“Yes, he was a fine boy,” said the girl, her tired eyes quickening as
she looked down at her child, “but he’s after his teeth now, and it’s
pulled him daouwn awful. We didn’t have a wink of sleep with him
last night.”
“You must be pretty tired, then,” quoth the stranger. “Wonder if the
little chap would come to me?”
“He don’t like strangers,” said the mother, doubtfully. She was
unused to hear her boy called either a jolly baby or a little chap; and
she distrusted the abilities of a young man, plainly unmarried,
moreover, who used such terms.
“I’ll hold him like a patent rocking-chair,” the stranger asserted.
“Come on, sonny. You won’t howl at me, will you? Great land, what a
weight you are! I never turned ayah before—yes, put my eye out, will
you? What’s wrong besides the teeth?”
“He’s got a touch of bromtitus; I caught it washing-day, and he took
it from me. Oh, it’s crool work washing in the winter; our houses
hasn’t any coppers, and we has to do it all out at the back.”
“Do you mean you wash the clothes in the open air?”
“Every mite of ’em. My husband he’s been to the landlord times
and again, but he won’t do nothing for us; and they’re the cheapest
houses round, so we just have to put up with it.”
“What a beastly shame! Who’s your landlord?”
“Old Fane, up at Fanes. Ah, he is a hard man. Last time as Mr.
Searle went to see him, ‘You can take or leave it,’ he says; ‘I can get
plenty more as won’t complain. I will not be pestered with
discontented gutter-birds,’ he says. So my husband he come away;
there wasn’t nothing to be done.”
 “Fane, I think you said,” said the brown-eyed stranger, upon
whose face the tale had painted a gleeful anticipation, as he took
down the name in a pocket-book. “I’m thinking I’d like a little friendly
conversation with Mr. Fane. Whereabouts is your place?”
“Burnt House, they call it; right out in the fields it is. If he’d put in
one copper for the six houses, you wouldn’t think he’d ever miss the
money. But he don’t care about us poor folks. I wish we was in
Farquhar’s houses, that I do.”
Conversation was here broken by Dr. Maude, who summoned
Mrs. Searle and her sister and the baby. Her short interview left her
in tears. The doctor had ordered milk, which seemed to her as far
beyond her means as caviare or turtle-soup. It would be got, but
meanwhile Mrs. Searle would starve, Mr. Searle would swear, and
the debt at the shop would grow. The stranger gave her a shilling,
and fled into the surgery to escape her thanks.
The place smelt strong of drugs; shelves laden with bottles
climbed up one wall, and the others were decorated with framed
photographs and cases of medical books. Everything was strictly
professional and methodically neat; and the doctor, slight and dark in
appearance, cool and composed in manner, was the essence of his
room embodied.
“What’s your trouble?” he asked of the stranger, who stood before
him interested and insouciant, his hands still in his pockets.
“Hæmorrhage from the lungs. Oh, I’ve had the charming complaint
before, and I know the ways of it; I’ve been despaired of three times
already. But I’d like you just to tinker up my old constitution, if that’s
possible.”
“When did the hæmorrhage occur?”
“I had a smart attack Sunday, and it’s been off and on ever since.”
“Then you ought to be in bed.”
“Quite so, Æsculapius, but I haven’t one.”
“There is the workhouse infirmary at Alresworth.”
 “To which I’m on the way; but I didn’t think I could git.”
Then there was silence, while Maude applied his stethoscope.
After testing the lungs he tried the heart, and after the heart other
organs, and soon discovered that his patient was a collection of
inceptive diseases. His questions elicited a tale of ill-health lightly
borne in which he did not believe, for stoicism is rare in surgery
patients.
“I don’t know your face—where do you come from?” Maude asked
him.
“I was at Alresworth with a travelling company as a kind of a sort
of a shadowy understudy of a sub-super, but I knocked up Sunday
and was left behind. Nobody missed me. I can’t act any more than a
dead egg,” said the patient, candidly—“ninety-nine, ninety-nine,
ninety-nine; is that enough? But that don’t matter in the profession.
Hullo, were you in the cricket-team at Queens? Nice game, cricket. I
always shone in it myself.”
He disengaged himself, and walked across to study the
photographed groups on the wall.
“Come back, please; I have not done with you,” said the doctor.
“What’s your name?”
“Oh, I don’t know—John Smith, I guess. Last time I played cricket
was near the English cemetery at Iquique. Jolly ground it was, too.
There’s never a drop of rain from year’s end to year’s end, so the turf
isn’t too good; but we had thousand-foot precipices on three sides of
the ground, and what could you ask more? We played till Saunders
made a boundary hit, and then we hadn’t a rope long enough to
fetch up the ball. Next time Saunders went up there was after Yellow
Jack had done with him. My hat! it was hot enough for kingdom
come. The very abomination of desolation; red hills, and never a
blade of grass, except the thread of green where the water comes
down from the snows.”
“Well, John Smith,” said the doctor, “I can’t do much for you; your
constitution’s rotten. You had better stop talking, take this medicine,
and go to the infirmary, if it’s true that you have no home. A motor
’bus passes here at seven, and goes to Alresworth.”
The patient made a grimace. “More land of counterpane for me, I
suppose. Passes here at seven, does it? I shall certainly be ’bus-
sick; but, after all, tout passe, tout casse, tout lasse. Take my tip,
Æsculapius, and don’t you drop your cricket. Good-night.”
It was only half-past six. Maude felt an impulse to recall the
picturesque stoic and bid him wait in the surgery until the omnibus
passed; but honesty is a rare quality, and the stranger, by pleasing
him, inspired him with mistrust. An observant man, he noticed that
John Smith spoke French like a Frenchman: a Parisian could have
detected the difference, for his accent was that of Guernsey: but
Maude had learned modern languages at a public school. In brief,
the rain was inaudible in the surgery; the stranger was a
questionable character; and Maude did not ask him in.
John Smith went out whistling; his frame was lean and gaunt and
loose-jointed, but he walked with a fine swing. The surgery was the
last house of the village. Some hundred yards further on the railway
embankment spanned the road, and a lane turning up just beyond it
led to the station. John Smith, sauntering along in the increasing
rain, found shelter beneath the arch and stayed there. The wind blew
up from the south straight through the tunnel, and the scene
circumscribed by the arc of masonry was wild and beautiful. Across
the black sky raced a froth of fleecy clouds, through which a half-
moon shone, girt by a pallid zone of blue and bronze. The wild
streamers were so unearthly pale, the heaven so solemnly dark, that
only by the moon’s presence could sky be told from cloud. Gray hills,
crowned with dark soft masses of woodland, folded down to a valley
deep in mist, where a cluster of golden lights burned like a
constellation magnified by rain; while up to his very feet the
streaming road was turned to a sheet of glory by a common street-
lamp.
John Smith immediately brought out a penny pencil and a penny
exercise-book and began to write. Valiantly disregarding the
inequalities of the brick-work, he rested the paper against the wall.
He had thought of some elegant words and phrases for describing
the evening sky, and wanted to fix them fast on paper before they
escaped from his volatile memory. Actor he had been by chance,
artist he was by nature; an artist in words, he professed himself
gravely; a lover of apt phrase and finely balanced sentence; one of
that happy confraternity whose goal in a strange room is always the
bookcase. He had as many interests as ideas, but this reigned
paramount.
The wind blew, and the rain came with it. It may have been the
cold, or it may have been the weight of Mrs. Searle’s baby, or it may
have been the inevitable sequence of his disease, which suddenly
arrested the writer’s hand, and made him, choking, press a
handkerchief to his lips to quell the flow. He knew how to meet the
attack, and, lacking any other couch, lay down in the road; he could
not well be wetter, and a mud-bath, at least, is warm. His
handkerchief was drenched, but the stream did not stop. Presently
the moon dimmed before his eyes, and his own troubled breathing
seemed a far-off sound. It crossed his blurred mind that he was
about to solve the great riddle, and go out with the wind; and he
reflected with satisfaction that Dr. Maude, who had unmercifully
turned him out into the rain, would be visited by pangs of
conscience. He felt neither fear nor elation, but a certain regret in
leaving a world which he had persistently enjoyed in spite of all; after
which consciousness went out like a spark, and John Smith lay still
in the road.
 II

HE THAT SHOWED MERCY ON HIM

Ten minutes later a train passed southwards across the arch. It had
discharged passengers at the station, and among them one who
soon came driving down the lane in a high dog-cart fitted with
pneumatic tyres, acetylene lamps, and a correct groom sitting up
behind. As it turned the corner the horse, a handsome chestnut
signally well groomed, shied violently at John Smith’s prostrate
figure, and was promptly checked by the driver, who had him well in
hand. He looked back over his shoulder. “What’s that, Simpson?”
“Drunken man, sir,” said the correct groom, stolidly.
“Pleasant weather to lie in the road. Still, will you?” He gripped the
reins as though to curb the restive horse gave him pleasure. “Just go
and see if he’s all right, Simpson. He’ll get run over lying under the
arch there.”
Simpson got down. He resented his master’s charitable fads when
they affected his comfort, but he dared not complain. It was true that
Mr. Farquhar carried generosity to his servants to its extreme limit,
but those who transgressed his laws had to go. He bent over John
Smith and announced with undeviating stolidity: “Been fighting, sir.”
“Fighting, has he? Come and hold the horse for a minute.”
Servant and master changed places, and Farquhar in his turn
scrutinised the features of John Smith. He moved the stained
handkerchief, sniffed at his lips, laid a finger on the spot where the
pulse should have beaten, and then stood up.
“Shift the seat as far forward as it’ll go. Yes; now put the cushions
in the bottom of the cart. The rug over them. Is the back let down?
That’s right.” He picked up John Smith and shouldered him as if he
were a gun. The luckless artist in words weighed less than eight
stone, but the strength required to lift him so easily was very great,
and was shown more remarkably still when Farquhar raised him up
at arm’s-length to put him into the dog-cart. Simpson lent his
assistance, protesting only by silence against the introduction of a
drunken and excessively muddy prodigal between the folds of the
new carriage-rug. His discretion was rewarded by his master, who
explained, as he took his seat again and picked up the reins: “It’s a
case of illness, poor chap. The man’s not drunk.”
“Very good, sir,” said Simpson, touching his cap; but he did not
believe it. Even the irreproachable Mr. Farquhar was no hero to his
groom.
About a mile beyond the arch Simpson had to get down to open a
gate, and the dog-cart drew up at the front door of The Lilacs, which
was the pleasing name of Farquhar’s bachelor residence. It was a
large modern villa built of red brick and white stucco, boasting
Elizabethan mullioned windows on the first floor, modern bays below,
a castellated turret, and a Byzantine porch with a cupola, which
tasteful decorations the officious ivy had done its best to veil. Inside,
the house was furnished well and, before all things, comfortably; it
was heated by an arrangement of hot-air pipes in the Russian
fashion, and cooled in summer by genuine punkahs. John Smith was
carried in and laid before the library fire; Simpson was sent to fetch
the doctor, and the master of the house himself attended on the
muddy stranger. Farquhar was a wonderfully good Good Samaritan.
He began by stripping off John Smith’s wet clothes, noting that the
shirt, which had seen its best and almost its worst days, was neatly
marked in a woman’s writing with the name of Lucian de Saumarez.
His other garments, which were in better condition, bore only the red
cotton hieroglyphics of the laundress. Few people could have
excelled Lucian de Saumarez in the art of dressing badly; his hat
alone would have roused envy in a scarecrow. Farquhar did not dare
to give him brandy, but he began to practise a remedy potent as
alcohol and safer. Kneeling beside the parchment-covered
articulated skeleton on the sofa, he ran his fingers over him with
subtle, measured movements, unpleasantly suggestive of the coiling
and uncoiling of a snake. He had learned the art of massage among
strange people in a strange land; it seemed literally to recall the spirit
to the body it had quitted.
Lucian de Saumarez became conscious of existence in a tingling
thrill of warmth which crept all over his frame. The return to life was
exquisitely delicious; a deep peace rapt him far out of reach of pain,
and his mental faculties came back one by one while yet his bodily
sense was drowned in dreams. But, suddenly, he was aware of a
change, the truth being that Farquhar had paused in his task. Vague
discomfort followed; then he opened his eyes and saw, as a vignette
beyond a tunnel of darkness, the face of a man reading a letter. That
letter, written by a woman’s hand on thick blue paper with a gilded
monogram, was familiar to Lucian; it was the same which he for nine
years had carried close to his heart. Without wonder he saw the
dream-stranger turn the page and read to the end, he watched him
fold it up and put it back in its place; and then the trance reabsorbed
him, and again he revelled in delicious dreams under the magic
touch of Noel Farquhar. Some minutes later he came to himself
completely, and discovered what was being done to his unconscious
frame. Lucian looked on massage as first cousin to hypnotism, and
hated both, with all the lively independence of a character which
could not bear to place itself, even voluntarily, even for a moment, at
the mercy of another man’s will. Prepared with a strong protest, he
opened his eyes and was struck dumb. In the open English face of
Noel Farquhar he recognized the dream-vision who had read his
letter.
“Ah, you’ve come to yourself,” said Farquhar, pleasantly. “You’re
with friends; don’t speak. The doctor will be here directly.”
Lucian put up his eyebrows, sent his eyes straying round the
room, and brought them back to his host’s face with an air of inquiry.
Farquhar smiled.
“How you came here? My horse shied at you and I picked you up.
My name’s Farquhar—Noel Farquhar.”
“M. P.?” said Lucian, who was by fits an ardent politician.
“Quite right. Can I communicate with your friends?”
 “Don’t own any.”
“I hope you won’t say that long. Now you really must not talk any
more; I sha’n’t answer you if you do.”
As he evidently meant to keep his word, Lucian subsided, and
gave himself up to observing. The room was conventionally
furnished, but he saw on the floor the skin of a black panther, and
behind the door the nine-foot spiral ivory horn of a narwhal, trophies
which even Whiteley cannot provide. Himself a wanderer, he rejoiced
to see such tokens of his host’s pursuits; a sportsman is kin to a
sportsman all the world over. From studying the furniture he turned
to study Noel Farquhar.
Most people knew the name of the member for Mid-Kent, and his
face was tolerably familiar through the slanderous presentations
which the papers call portraits. He had been in Parliament for
several years, and was supposed to be a coming man. When he got
on his legs, members deferred their engagements; his speeches
were generally lively, always pithy, and never long, a trinity of virtues
rare as the Christian graces, and, like them, culminating in the last.
He had the advantage of a good voice and delivery. As a politician
he was incorruptible; he would criticise his own party, when it
seemed in danger of deviating from that ideal of rectitude which
animates the bosom of every British statesman. A Bayard without
fear or reproach, a high-souled patriot with a caustic tongue, he had
a niche all to himself among parliamentary celebrities.
He stood in his socks only five feet nine, but the width of his
shoulders was exceptional, and his frame was lean and hard and
supple as a panther’s. Every muscle had been trained and trained
again to the pitch of excellency, and every movement had the sure
grace of controlled strength. The comeliness of perfect health and
physical fitness was his; he diffused a kind of tonic energy which
acted on susceptible people almost like an electric current. For the
rest, he was the typical Englishman: fair-haired, grey-eyed, sunburnt,
pleasant, in spite of the grim curve of cheek and jaw, which matched
the almost ominous strength of his physique. Lucian, like other
people, would have accepted him for what he seemed, if he had not