Santa Clara University

San Jose State University

Financial Statement Analysis

F/S Adjustment Issues



 Revenue Recognition and Earnings Management

 Returned merchandise volume

 A/R aging

 Level of warranty expense

 Earnings management vs. earnings fraud



 Inventory Cost Flows

 LIFOFIFO restatement

 Choice of cost flow assumption

 LIFO liquidation layers

 Obsolescent and/or slow-moving inventory

 Inventory financing



 Capital Assets

 Historical vs. current value

 Depreciable lives and methods

 Maintenance and repair policies



 Intangibles

 Hidden values on the balance sheet

 Cost expiration periods

 In-process R&D and goodwill issues

 Intrinsic nature of recorded and unrecorded intangibles



 Liabilities

 Expense recognition

 Solvency and liquidity

 Contingencies

 Off balance sheet financing (leases)

 Hybrid securities—what is really debt?

 Concentration of risk



 Leases

 Operatingcapital lease conversion

 FASB 13 rationale for classification as capital lease



 Retirement Benefits

 Underfunding/overfunding analysis

 Reasonableness of assumptions

 Magnitude of actuarial gains and losses



 Income Taxes

 Composition of deferred liabilities and assets

 Composition of income tax expense

 Effective tax rate

 Use of the valuation allowance

 Equity and Comprehensive Income

 Earnings sustainability impact



 Corporate Acquisitions

 Method used; earnings/cash drag impact

 Earnings management via reserves and “hidden” assets



 Investments

 Classification

 Unrealized gains or losses

 Equity method impact on cash and income

 Consolidation policies



 Foreign Exchange Reporting

 Functional currency determination

 Currency movement risk

 Consistency with respect to unrealized gains and losses on translation/remeasurement



 Segment Reporting

 Shifts in source of profitable operations

 FX exposure

 Industry exposure