Chapter 1. Our story begins with a man and a woman named Robert and Gail from San Diego. Gail is a former realtor, and Robert was a financial adviser. They were married for 33 years, and their daughter, Danielle, was 13 years old at the time. The family had been living in a 2,000-square foot house, and they wanted something bigger. They began the process of buying a new home, but they had a significant amount of debt, including a small mortgage on their condo. Robert was also having heart trouble and a bad knee, so they were concerned about whether they'd be able to move. Their home had been built in 1952, and the house had asbestos, so the couple knew that the city would require an environmental remediation. It took two years to get a diagnosis that Robert's heart was fine. During this time, the two lived in a condo nearby while they waited for their house to be ready for them. After numerous other delays, the couple left the condo and moved into their newly built home on a street in Rancho Santa Fe, California. During this time, the couple decided to buy the condo in their new neighborhood. However, Gail started getting strange headaches while the sale of the house was being negotiated, and it came out that she had a brain tumor. Robert thought that it would be a long battle, but she was able to have surgery and a successful cancer treatment. Robert eventually had a second tumor on his right lung that was discovered. Her tumor went into remission, but it came back, and she eventually died of lung cancer. Robert was left with $500,000 in debt. He then sued the builder who built their home, so he was awarded the land value. He also sued the seller of the condo. In 2010, Robert was awarded $1.3 million. The couple made a down payment on their new house, but then the builder defaulted on the payments, and they lost the home. #### EXAMPLE 6 #### EXAMPLE 7 ### **Case 3: The Leveraged Buyout of Texaco and Texaco's Financial Results** In 1993, a very well-known company, Texaco, was sold. This transaction involved a private equity firm that made a leveraged buyout and took the company public again. You should read the full description of the deal, but to summarize, a company called General Motors bought the company. The leveraged buyout had the following main players: • Robert Rubin, former Secretary of the Treasury of the United States, who invested $3 million in his father's company and founded Crestone Capital Management. • Peter Karmanos Jr., owner of the Carolina Hurricanes, who invested $7.5 million in the company. • David Bonderman and Steve Hymon, co-founders of TPG Capital, who invested $25 million. • Carl Icahn, who invested $50 million. • Arthur D'Amato, who invested $200 million. • The management group bought the remaining shares of common stock for $140 million. Once acquired, the company then went public with a new name, Chevron. The deal took the company private and then sold a portion of the company to a public company. This case is significant because the public had no idea that a leveraged buyout of a major corporation could take place. Once a case like this can take place, then almost anything can be bought. ### **Case 4: Tyco International and the Leveraged Buyout** In 1998, the company Tyco International agreed to take over the company's former competitor, ADT, in a hostile takeover. At the same time, the company completed an offering of 6.5 million shares of common stock, and net proceeds were $2 billion. At the time, Tyco made over $8.8 billion in revenue and $14 billion in operating income. Tyco, Inc. is now known as Tyco International. ### **Case 5: AOL and the Leveraged Buyout of the Time Warner** AOL was the internet service provider for the company Time Warner. Time Warner was losing about $1.3 billion a year and AOL was losing about $1 billion. At the time of the deal, Mr. Ted Turner, founder of AOL, had a 12 percent ownership interest in the company. The CEO of AOL had a 4 percent ownership interest. AOL has since divested from both Time Warner and AOL itself, and it is now called Oath, which is a part of Verizon. **Summary** • The debt of corporations in the United States is a big issue. • The debt structure of corporations has two parts: debt and equity. • Debts consist of short-, medium-, and long-term, secured and unsecured, operating and capital leases, and bank loans. • Equity has different forms of ownership, such as common stocks, preferred stocks, and debt. • Debt equity deals are transactions in which debt is exchanged for equity. • Companies that have a lot of debt, or bad debt, will use debt to buy equity. • Examples of these types of deals include the company Texaco and the bank United Bank, or the leveraged buyout of Texaco. • The debt equity deals have an option to buy more debt at a certain price or a limited time. ## CHAPTER ## 4 ## **Accounting Standards** **Lessons Learned** • The Financial Accounting Standards Board (FASB) is responsible for accounting standards for financial institutions. • The Governmental Accounting Standards Board (GASB) is a group of state government's accountants responsible for GAAP for local governments. • The International Accounting Standards Board (IASB) is an international standard-setting body. • FASB allows for three exceptions, which will be described in Chapter 6. **Basic Understandings** • There is a group that oversees accounting standards in the United States. • The standards that are maintained are for financial institutions. • Financial institutions will require GAAP. • The standards are issued by the FASB. • To provide exceptions to these standards, the FASB created a series of exceptions. • GAAP will eventually be adopted by many companies worldwide. **Key Terms** • The United States has an official standard-setter, the Financial Accounting Standards Board. • The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133. • The FASB created exceptions to the following standard, which now requires companies to present the economic results of transactions as part of a single financial statement: Statement of Financial Accounting Standards No. 133. • Not all exceptions are created equal: One type of exception allows companies to recognize revenue when a contract is signed and is legally enforceable. • Other exceptions let companies record revenue and book a loss for an option, even if it hasn't vested yet. • The U.S. Government Accounting Standards Board (GASB) is an international body that sets the rules for the State and local governments. • The GASB has created a set of accounting principles for state governments. **What Every Manager Needs to Know** • There are two groups that provide rules for accounting standards. • The Financial Accounting Standards Board creates accounting standards for private companies. • The Governmental Accounting Standards Board works with state and local governments. • Accounting is an imperfect science that allows for different methods of accounting. • Accountants provide numbers, not an analysis of the real world. • Accountants use a model to compare business transactions in order to determine what is a proper method of accounting. • Accounting transactions are used to compare different years of data. • Accountants recognize that many transactions occur at the same time. • Accountants are not required to do a complete analysis. • For instance, if one part of the business generates more revenue than another, then the company does not have to show every piece of revenue. • Many companies will consolidate all revenue in a single financial statement. • Accountants also have the opportunity to change their mind about accounting policies. • The new policies may end up working or they may be disastrous for the company. • Financial statements are often prepared on the basis of how much cash is in the bank. • When a business is making money, it has more cash flow. • There are two accounting methods: LIFO and FIFO. • The FASB allows companies to choose a method of accounting. • If you decide to use one method, you have to follow it for every company. • The FASB allows for exceptions. • The three exceptions are when: 1. A company operates with unusual circumstances (such as an unanticipated event, or when a company can't find a buyer for a product). 2. A company records assets when it sells, but doesn't record assets as income until the cash is received. 3. A company recognizes revenue when there is a contract that has been signed and a legal obligation. • LIFO works when companies have the potential to use more current assets.