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• The federal government made at least $37 billion in overpayments in 2005. Current estimates are between $40 billion and $100 billion in annual overpayments. • The Heritage Foundation reports: Federal spending has reached $22,000 per household, in constant dollars, for the first time since World War II. “Discretionary” spending voted on each year by Congress has jumped 49 percent in just three years, and entitlement spending nears 11 percent of gross domestic product (GDP) for the first time ever. Furthermore, the upcoming retirement of the baby boomers will put an enormous strain on Social Security, Medicare, and Medicaid and sharply increase spending. It is imperative for lawmakers to get the nation‟s finances in order immediately by restructuring entitlement programs and reducing federal spending. Putting off the difficult decisions until the federal budget‟s condition deteriorates further will result in much harsher and more expensive policy choices. 7 Summary and Conclusions Clearly ethics, the rule of law, and property rights have great importance in financial reporting. But this statement needs to be elaborated as follows: • The laws have to be based on sound economics in order to be cost-effective and efficient. SOX seems to be cost-effective and efficient in several ways, but the SOX provisions on whistleblowers and internal control face serious doubts about being cost-effective and efficient. • The proportion of stocks held by individual persons has greatly declined, and the proportion of stocks held by institutions such as mutual funds, pension funds, and hedge funds has greatly increased. As a result, the property rights of individuals in stocks have become diluted, so the vigilance of stock-owning individuals over top management has been eroded. Now the financial institutions do less to scrutinize the performance of top management and do more to pursue their own profit from money management fees. This dilution of individual property rights also dilutes economic efficiency, because people tend to be more careful with their own money than with other people‟s money. • The relationship between corporate owners and managers used to be one of principal (owner) and agent (manager). Now it is one of principal (owner), agent (financial institution), and subagent (manager). The new relationship is more distant, more remote, more bureaucratic, and more inefficient. The previously efficient ownership society has become the less efficient agency society. • If laws that handicap corporate raiders were repealed, more stock would end up in the hands of individuals, and less in the possession of financial institutions. That would slow down the dilution of individual property rights that also dilutes economic efficiency. • But one thing has not changed. Our economy and our society are as dependent on ethical behavior as they ever were. On the one hand, ethics cannot be forced upon the unwilling. On the other hand, unethical behavior can be punished and deterred with greater force. That is the main accomplishment of SOX. Downloadable Resources for this chapter available at www.wiley.com/go/portablembainfinance
The Integrity of Financial Accounting: Sarbanes-Oxley and Fraudulent Financial Reporting Information about the Sarbanes-Oxley Act and Corporate Governance and Financial Reporting Ethics and the Golden Rule Internet Links Notes 1 Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers. 2 GAO Report to the U.S. Senate Committee on Banking, Housing, and Urban Affairs, October 4, 2002. 3 Deloitte & Touche. 4 Some of the Sarbanes-Oxley provisions are not new, but simply reiterate and codify existing laws. 5 For example, in 2000 Enron paid Arthur Andersen $25 million for audit work and another $27 million for consulting services. Also in 2000, Sprint paid Ernst & Young $2.5 million in audit fees plus $63.8 million for other services, General Electric paid KPMG $23.9 million for audit fees plus
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Table of Contents Title Page Copyri
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Chapter 6 - Planning Capital Expend
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For Further Reading Part IV - Manag
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Successful Postmerger Implementatio
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This book is printed on acid-free p
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Syllabus How Chapter Topics in This
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Some of these experts are full-time
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About the Contributors Richard T. B
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Advances in Quantitative Analysis o
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enterprise development. Dr. Zachara
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The left side shows Nutrimin‟s in
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Gail, let‟s go over this balance
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Gail, do you have any questions abo
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11. Not all expenses are cash outfl
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Financial Statements: Who Uses Them
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profitability to keep investing for
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Financial Accounting Standards It i
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Downloadable Resources for this cha
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Next, we explain each of these thre
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liquidity. Or, more simply, achievi
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If these ratios are seriously defic
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The debt-to-equity ratio is evaluat
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year 1 to year 3. The net effect wa
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to rate of return on the equity. Th
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Other types of comparisons of finan
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income/sales), asset turnover (sale
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successful businesspeople should ha
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More than a decade ago, a special c
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companies is used for illustration.
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The identification of nonrecurring
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The Dow Chemical single-step income
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is a pretax measure, but income fro
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Sources: Companies‟ annual report
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Exhibit 3.11 Examples of discontinu
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amortization purposes, the Company
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Examples of nonrecurring items disc
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During Fiscal 2006, inventory quant
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The nonrecurring items of Boston Sc
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The disclosure presented earlier in
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gains or losses that appear as part
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ecurring as for Kimberly-Clark, the
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Summarizing Nonrecurring Items and
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This example of using the SEB works
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Exhibit 3.27 Other income (expense)
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Source: Pfizer, Inc., annual report
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Exhibit 3.30 Acquisitions note: Pfi
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Source: Pfizer, Inc., annual report
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Exhibit 3.33 Cost-reduction initiat
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Exhibit 3.36 Share-based payment no
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The Pfizer Worksheet Analysis: Down
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Some Further Points on the Pfizer W
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• It is common to treat items as
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FedEx Corporation (2007) First Sola
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1 The American Institute of Certifi
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28 These alternative translation me
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If you need some instruction in Exc
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To solve using Excel, open your Exc
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As you can see from the previous ex
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C6 = 5 • Now enter the “=” si
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Ordinary Annuity An ordinary annuit
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To confirm that the number of payme
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The FV of this first payment into t
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Exhibit 4.15 Finding the future val
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Exhibit 4.18 Finding the present va
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From Exhibit 4.20, we see that as t
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Exhibit 4.22 Amortization schedule
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Exhibit 4.25 Regular cash flows wit
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Internet Links For Further Reading
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Investors who are risk averse will
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considering the risk of a single as
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Portfolio Risk Stand-alone risk is
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In spite of unique or diversifiable
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If a particular stock is highly sus
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The formula tells us that, to begin
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for the entire market of stocks sin
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The dividend per share for preferre
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If you are able to determine the cu
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Debt finance is the lower-cost meth
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We don‟t observe many firms whose
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Capital Structure in Practice Finan
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are able to observe regularities in
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dividends and capital gains. We wil
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where EBIT is earnings before inter
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Since long-term debt holders have a
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accept more investment projects. Re
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A beer company is considering build
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accounts receivable, and tabulates
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profit by the tax rate determines t
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Accounting profit often mixes varia
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The concept that future cash flows
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Like project A, project C also cost
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The after-tax interest rate is the
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equal mix of debt and equity, its d
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The payback period rule stipulates
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The IRR rule is appealing in that i
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complete with its real options is g
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What does it matter that one invest
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Exhibit 7.3 Time line in dollars an
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There are a number of countries in
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eturn of 10% on its investments in
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Exhibit 7.12 Summary of exchange ra
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and so will the value of the liabil
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Source: CIA, World Factbook, availa
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Exhibit 7.18 Net present value of c
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equired interest payments to be pai
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So if the assistant treasurer was r
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This theory is far from perfect, as
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The Consulting Firm Jennifer, Jean,
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part by a statute, the Uniform Limi
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formation in Delaware (or any state
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purpose of requiring qualification.
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Phil‟s death may terminate the bu
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the transfer. This means that if Br
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These rules extend to tort liabilit
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In the absence of a meeting, stockh
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A more detailed discussion on the b
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Partnerships If possible, the resul
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associated with this arrangement ar
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Partnerships are also not separate
Page 254 and 255: For most start-up businesses, howev
Page 256 and 257: form, even at the risk of some unli
Page 258 and 259: likely that our consultants will be
Page 260 and 261: Thus, the corporation and LLC, with
Page 264 and 265: It is not possible to fully describ
Page 266 and 267: usiness corporation for all purpose
Page 268 and 269: a cash-basis taxpayer to be taxed a
Page 270 and 271: The Tax Reform Act of 1986 substant
Page 272 and 273: limit is the product of the value o
Page 274 and 275: he would have spent anyway. In fact
Page 276 and 277: protect Brad from the scenario of h
Page 278 and 279: paying for the privilege. If the st
Page 280 and 281: The second tax scenario attaches to
Page 282 and 283: include that nullity in his taxable
Page 284 and 285: then the capital gain to be taxed h
Page 286 and 287: Most relevant to Morris is Section
Page 288 and 289: To begin with, the ESOP will have t
Page 290 and 291: general partner of a limited partne
Page 292 and 293: small businesses) is also subject t
Page 294 and 295: oth Lisa and Brad would be free to
Page 296 and 297: Assume that a limited liability com
Page 298 and 299: corporations, and had been audited
Page 300 and 301: There is plenty of blame from the c
Page 302 and 303: • An important study about top ma
Page 306 and 307: $79.7 million for other services, a
Page 308 and 309: Budgets offer a variety of benefits
Page 310 and 311: determine the impact of specific pr
Page 312 and 313: Exhibit 11.2 Budget variance report
Page 314 and 315: udget, we just add more to it next
Page 316: income statement. The financial bud
Page 319 and 320: For a manufacturing company, cost o
Page 321 and 322: C&G‟s Gift Shop has a policy to m
Page 323 and 324: Meeting cash obligations as they co
Page 325 and 326: was unusually low, say, due to the
Page 327 and 328: A fixed budget, sometimes called a
Page 329 and 330: A large part of the budget selling
Page 331 and 332: • Centralized resource allocation
Page 333: Merewitz, Leonard, and Stephen H. S
Page 337 and 338: This chapter starts with a discussi
Page 339 and 340: Interestingly the numbers for quart
Page 341 and 342: Exhibit 12.4 Scenarion analysis.
Page 343 and 344: Pitfalls Although this analytic tec
Page 345 and 346: Exhibit 12.6 Variable cost element
Page 347 and 348: Variable Cost as a Function of Outp
Page 349 and 350: If scenario 2 yields a lower profit
Page 351 and 352: Microsoft certainly does not price
Page 353 and 354: If it is determined that dumping ha
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Leaving government agencies and not
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transaction processing. Each proces
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Exhibit 13.3 E-commerce transaction
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To summarize the analysis, the busi
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Capacity costs are probably the mos
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which it was, but for the inventory
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They called this strategic cost man
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A closer study, however, revealed s
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the benefits of business planning.
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The last type of plan is called a d
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The Business Plan We will progress
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Hook the Reader That means having t
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Industry The goal of this section i
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upscale suburban client who wants p
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Company and Product Description Com
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Exhibit 14.8 shows the competitive
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Exhibit 14.9a Advertising schedule.
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Scope of Operations What is the pro
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Development Time Line A development
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By law, most organization types req
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As mentioned in the development pla
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that can be depreciated, you should
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1 Special thanks to Matt Feczko, Mi
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For better or worse, the business e
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Leeson bet and lost. Japanese stock
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Between February and April 1994, Da
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LTCM could be picky when it came to
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An investor who wished to invest in
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Similarly, the swaps market has rev
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speculator would suffer losses equa
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American manufacturer will suffer l
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The ease with which futures facilit
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Exhibit 15.1 Call option payoff dia
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Exhibit 15.2 Payoff diagram for a w
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Notice that the put option payoff r
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Bank, owns a large block of NASDAQ
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can be tailored so that the money r
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Finally, the last step is to choose
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3 Fischer Black, who co-invented th
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not include assets that the firm ha
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Thus, a business valuation will usu
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Negative • Acme is highly depende
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Exhibit 16.3 Acme Manufacturing, In
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Profitability ratios reflect the re
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When we talk about the value of a b
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This example illustrates that with
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Income Approach: Discounted Cash Fl
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Exhibit 16.5 Acme Manufacturing, In
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Victoria explains that the second p
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Victoria analyzes Acme‟s audited
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In summary, the discounted cash flo
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Adjustment for Illiquidity As previ
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51% position sells for a higher pri
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examples. The proper application of
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The subject of this chapter is grow
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Finally, an acquisition can be effe
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M&A activity has been the focus of
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companies continue to make the same
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equals was taking on a distinctive
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Anatomy of a Successful Acquirer: T
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employees kept their original jobs
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where ΔCF t is the incremental cas
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where it‟s ultimately buried. Suc
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The following example summarizes th
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make sure that you are at least awa
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acquisition, there is no immediate
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its vascular business, which was so
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While all employees should be part
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makes strategic and financial sense
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Bhagat, Sanjai, Ming Dong, David Hi
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The 2008 financial crisis underscor
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Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
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Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
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• Results of meetings with vendor
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• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
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The answer is: profits. The company
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19 Information Technology and You D
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People‟s lives have been turned u
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its self-contained rechargeable bat
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Random-Access Memory (RAM) Random-a
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On laptop computers and PDAs, the s
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Operating System An operating syste
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the spreadsheet software together w
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Exhibit 19.5 Pro forma sales and in
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Database Software A database is a c
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Internet e-mail addresses often con
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Personal Finance Software There are
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There are several different approac
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One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
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industrial revolution, and has occu
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Dummies Inc. has a series of books
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organization. This chapter is desig
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As technology has evolved, the term
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While the software mentioned earlie
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Most of the focus of the investor c
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Data Access and OLAP Before the lat
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Exhibit 20.5 illustrates a differen
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Productivity Tools Workers expect t
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Client-server technology is based o
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Today, most programmers write in C+
Page 577 and 578:
Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
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Online analytical processing (OLAP)
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server) and the rest on the users
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the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
Page 650 and 651:
Cell Center for Research in Securit
Page 652 and 653:
Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
Page 660 and 661:
Askin Capital Management Barings Ba
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market approach publicly traded gui
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Electronic data interchange (EDI) E
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Extensible markup language (XML) Ex
Page 668 and 669:
short term liquidity users and uses
Page 670 and 671:
Fourth generation programming (4GL)
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Going private Going private transac
Page 674 and 675:
Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
Page 682 and 683:
Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
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Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
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Relevant range Relevant range assum
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Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
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Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
Page 710 and 711:
acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
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discounting with discount rate form
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