Download financial statement analysis (acctg 663)

FINANCIAL STATEMENT ANALYSIS (ACCTG 663)
SUMMER 2014
INSTRUCTORS
Financial Analysis Module
Professor David G. DeBoskey, PhD
Charles W. Lamden School of Accountancy
Email: [email protected]
COURSE DESCRIPTION AND OBJECTIVES
The goal of this course is for you to develop skills and abilities in using financial statement information
and related disclosures to understand and evaluate the underlying economics of a company. Financial
information and disclosures are collected from company’s Form 10-K, 10-Q, and proxy statements.
These SEC filings are the primary source of information about the company’s past and current
performance, business strategy, and competitive environment—and serve as the foundation for
estimating the fundamental value of a company.
PREREQUISITE
This course is designed for students that have a working knowledge of financial accounting. The
minimum prerequisite is successful completion of BA 650 (Financial Reporting and Analysis I).
WHO SHOULD TAKE THIS COURSE?
This course should be of interest to students pursuing the following careers:
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Financial accounting and reporting (from staff accountants to analysts, controllers, CFOs)
External and internal auditing
Equity research (sell-side, buy-side)
Investment banking
Management consulting
Private equity and venture capital
TEXT AND MATERIALS
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Whalen, Baginski, and Bradshaw. Financial Reporting, Financial Statement Analysis, and
Valuation, 7th Edition. South-Western, Cengage Learning.
Cases and other materials posted on Blackboard or handed out in class
FINANCIAL ANALYSIS (8 JULY – 14 AUGUST)
ACCTG 663 | Summer 2014
Course Syllabus
The financial analysis module of the course will focus on understanding the key underpinnings of the
core financial statements: balance sheet, income statement, statement of other comprehensive income
and statement of cash flows. We will be examining annual reports from many different companies and
see how to quickly analyze a corporation. You will learn to focus on the important information and
separate the hype form facts. Key skills will center on understanding risk analysis, profitability analysis
and cash flow integration. We will try to understand the different corporate games that are commonly
being played (Sunbeam, Satyam, among many others). We will try to understand how “risky” a business
is and whether a corporation can remain solvent in the future. Finally, you will be introduced to the
special topics of inventory valuation, operating and financial leverage, off-balance sheet financing,
strategic planning models and mergers and acquisitions (time permitting).
Student Learning Outcomes (SLOs): Financial Analysis Module
At the end of this course you should be able to:
SLO 1 Understand key fundamental relationships among the major financial statements.
SLO 2 Calculate and analyze key ratio groupings including: liquidity, solvency and profitability.
SLO 3 Prepare analyses of company financial statements in a strategic manner.
SLO 4 Understand the impact of operating and financial leverage on profitability analysis.
SLO 5 Understand the importance of cash flow analysis including cash sufficiency
COURSE REQUIREMENTS AND ASSESSMENT OF LEARNING OUTCOMES
Your grade in this class based on your performance on the requirements listed in the table below. Keep
track of your ongoing performance in this class and please come and see me if you have any questions
or concerns. Standard letter grades (including pluses/minuses) will assigned at the end of the semester.
Requirements
Professionalism and Contributions
Assignments/Cases
Exam
Special Lecture Series Essay
Team Project-Group Presentation
Team Project-Individual Firm Report
Total
%
10
15
30
10
25
10
100
Professionalism and Contributions. Your contribution to class discussions is a valuable part of your
learning experience, and the experiences of the other students in the class. Class contribution is
evaluated based on the quality, not quantity, of your class contributions (i.e., responses to the queries
and/or the questions that you ask related to class discussions) and professional conduct. The following
exemplify this evaluation:
ACCTG 663 | Summer 2014
Course Syllabus
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Excellent means that you arrive on time to all class sessions, routinely make quality
contributions to class discussions indicating you are prepared for class and focused on the class
discussion, are respect all the other students in the class.
Good means that you generally arrive on time to class or missed class infrequently, make
occasional quality contributions to class discussions, and generally conduct yourself in a
professional manner.
Poor means that you are either frequently late to class, and/or missed noticeable amounts of
class time, and/or have little to contribute to class or made unconstructive comments, and/or
have noticeably failed to conduct yourself in a professional manner.
Assignments and cases. The class assignments serve as a basis for class discussion and/or in-class
activities. The assignments vary in length and are not all equally weighted. Careful and thoughtful
completion of the assignments will contribute to your understanding of the material and performance
on the exams and final project. All QE assignments (see schedule below) should be completed before
class and hardcopies should be brought to each session, as indicated. No electronic copies will be
accepted.
Exams. There will be one exam during the course. The final exam is individual work and is to be
completed without unauthorized assistance. Late exams will not be accepted.
Team Project. Student teams will prepare a firm analysis specific to an industry and related firms
including at least one international firm of the same industry (industry is measured by the first two digits
of the SIC). In addition, each member of the team will prepare an individual written report for one firm
in their groupings. Each member must write a report for a unique firm in your group’s presentation.
Each group will present a 20 minute presentation. See Appendix A for the project requirements.
Special Lecture Essay. You will be assigned a list of several essays based on the special lectures by
Professor Casalins. You will be expected to draft formal responses to at least 2 essay questions and
submit them via digital dropbox.
ACADEMIC HONESTY
The SDSU Standards for Student Conduct (http://www.sa.sdsu.edu/srr/conduct1.html) states that
unacceptable student behavior includes cheating, plagiarism, or other forms of academic dishonesty
that are intended to gain unfair academic advantage. Unprofessional conduct adversely impacts your
fellow students, the accounting faculty, the Charles W. Lamden School of Accountancy, SDSU, and the
accounting profession. The Charles W. Lamden School of Accountancy takes academic honesty very
seriously and vigorously enforces university policy related to any such infractions. Any student
suspected of academic dishonesty will be reported to the SDSU Center for Student Rights and
Responsibilities; if found responsible, the student will receive an F in ACCTG 663.
The following examples illustrate how the SDSU Standards for Student Conduct applies to this course:
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Exams (both in-class and take-home) are individual work only. No collaboration of any kind is
allowed.
ACCTG 663 | Summer 2014
Course Syllabus
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Collaboration is permissible and encouraged on any group assignments. However, the final
write-up of cases or other assignments should be exclusively your own (as required). For
example, after discussing a case with your in-class group, you should form your own opinion and
submit your own analysis.
All course materials are for your use only. It is a violation of the student conduct policy to share
these materials with other class members or others outside the class, especially future ACCTG
663 students.
If at any time you are unclear about the any aspect of your responsibilities pertaining to the
student conduct policy, please contact me rather than make assumptions.
MEDIA AND TECHNOLOGY
Class materials (e.g., lecture notes) will be posted on the Blackboard course site
(http://blackboard.sdsu.edu). Some of the work for this class requires the use of word processing (e.g.,
MS Word), spreadsheet (e.g., MS Excel), and Internet (e.g., Firefox) software applications. Also, you
must have your own email account and check it on a regular basis. Make sure that you have the
correct email address listed in Blackboard. All emails will be sent to the address listed in Blackboard.
SPECIAL CIRCUMSTANCES
Students with documented special needs or circumstances should notify me at the beginning of the
semester so the necessary accommodations can be arranged. In addition, please feel free to meet with
me during office hours or by appointment to discuss any issues or concerns you have about the class.
CHANGES
You are expected to check your email and the Blackboard site for any changes. If you are not in class
when changes to the course or schedule are made, you are still responsible for new/updated material.
Changes can be made any time at the discretion of the instructor.
Class Schedule (Financial Statement Analysis: July 8—August 14)
July 8 Introduction to Course: What is Financial Statement Analysis
Learning Objectives:
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Overview of financial reporting and financial statement analysis
Understand most effective means of mastering the course
Debits/Credits/Financial Statement Mechanics (REVIEW)
Game Theory
Ratio Analysis Tutorial
Earnings vs. Cash Flows
July 8 Letter to Shareholders and Preliminary Analysis of Starbucks
ACCTG 663 | Summer 2014
Course Syllabus
Read through the Starbucks Annual Report (pp. 72-77)
(http://www.sec.gov/Archives/edgar/data/829224/000095013408021134/v50316e10vk.htm#1
13). Read through the CEO’s letter to shareholders.
http://www.sec.gov/Archives/edgar/vprr/09/9999999997-09-002286
Preparation Hand-In #1:
Answer the following questions and bring them to class in hardcopy form (keep a copy for
your review and to take notes on during class):
1. What type of a business is Starbucks?
2. Are they a growth company, a mature company, a start-up or a company nearing
bankruptcy?
3. How have they grown in the past few years?
4. What is the CEO’s message to shareholders?
5. What data is given in support of this message?
6. How would you analyze (moving forward) if Starbucks is successful in its new strategy?
Preparation Hand-In #2: Bring in one article from the financial press or from an analyst about
Starbucks that was published within the past 6 months. Be prepared to discuss this article.
Hint: Use lexus/nexus online resource from the library resources to search for press releases.
July 8
Overview of Financial Reporting
Read: Chapter 1: Bring in the Starbucks 10-K report *See link above* (on computers is fine)
July 8: Preparation Hand-In #3: Case 1.1 (Starbucks): questions a) and b) only. Note the
questions are on page 77.
We will go over Starbucks’ three main financial statements, as well as some of the relevant
footnotes.
July 8 Tools 1 and 2: Common Size Statements and Percentage Changes
Read: Chapter 1: pp. 42-49
In class: We will do problem 1.12
Preparation Hand-In #4: Bring in common size and percentage balance sheets and income
statements for Starbucks from the 10-K provided in the links above. Be prepared to put yours
on the class computer. How has the company changed since 2005? (See exhibits 1.27 and 1.28
in your textbook).
Preparation Hand-In #5: Case 1.1 (Starbucks): questions c) thru k) only. Note the questions
are on pp 77-81.
ACCTG 663 | Summer 2014
Course Syllabus
July 10 Tool 3: Statement of Cash Flows
July 10: Indirect Method
Read Chapter 3: 172-201
In class: We will go over problem 3.23 in class. Not a hand-in.
We will go over Case 1.1 (Starbucks) l-q in class on page 81.
Not a hand-in.
July 10: Patterns of Cash Flows
Read Chapter 3: 155-165
Preparation Hand-In #1: Problems 3.9, 3.10, 3.11
In class: we will go over Starbucks’ SCF, Coca-Cola (3.15), XM Satellite (3.18), Sunbeam (3.19),
and Montgomery Ward (3.20)
July 10: Select groups for project and do in-class case (Zhang) that you can find on blackboard.
Preparation Hand-In #1: Case 3.3 (PowerModule ™ W.T. Grant): *See Blackboard for help on
how to do this case.
July 15 Tool 4: Profitability Analysis - Using ROA and ROCE
July 15th: ROA and its Components
Read: Chapter 4 (through 294)
July 18: Preparation Hand-In #1- Problem 4.10. After class, I will post the answers on
blackboard. I will assume for these two classes that you can do the computations to derive
the components.
In class: we will go over QEs: 4.11, 4.12, 4.13, and 4.15. Please calculate these ratios prior to
class (not a hand-in).
July 17: ROCE and relating ROA to ROCE AND RETURN ON NET OPERATING ASSETS (RNOA)
Read: Chapter 4: pp. 295-298; 299-305
Preparation Hand-In #1: problem 4.11. After class, I will post the answers on blackboard. I
will assume that you can do the computations to derive the components.
In class: we will go over problem 4.20 (parts b and c only). Please calculate the ROCE for this
firm. We will also relate the ROA to the ROCE for Starbucks
ACCTG 663 | Summer 2014
Course Syllabus
July 17: Tool 5 Risk Analysis – Using Ratios and Comparisons Among Statements
Read: Chapter 5
Preparation Hand-In #1: Problems 4.24 and 5.13 (They both relate to Abercrombie and Fitch).
In particular, relate the risk implied in the ROCE to the risk for A&F.
Preparation Hand-In #2: Case 4.2 (Wal-Mart- Parts A & B)
PowerModule™ Analysis of a Company (to be determined by class vote)
July 22
Tool 6: Pro-forma Earnings and Leftovers from Prior Weeks
Read: Chapter 6: You need to skim this chapter – that is, do not sweat the details.
July 22: We will go over problem 6.10 in class. Not a hand-in.
Preparation Hand-In #1: Problem 6-11
July 24
Financing Activities
Read: Chapter 6
In class: 6-12 and 6-13
Preparation Hand-In #1: Problem 6-20
Investing Activities
Read: Chapter 7
In class: 7-14
Preparation Hand-In #1: Problems 7-15 and 7-19
July 29
Operating Activities
Read: Chapter 8 (you may find this chapter a little confusing – just go with it).
In class: 8-7 and 8-8
Preparation Hand-In #1: Problems 8-21 and 8-22 and 8-23
In class: we will discuss what a pension is, how pension plans work, what other postretirements benefits, and how firms can change their assumptions to present different net
assets and liabilities
ACCTG 663 | Summer 2014
Course Syllabus
31 Jul EXAM (Chapters 1,3,4,5,6, 7 and 8)
Full Class Period
Special Lecture Series (Intangible Assets, Mergers & Acquisitions, and SEC Reporting: Professor Marco
Casalins: Thomas Jefferson School of Law)
5 Special Lecture Series Part I
Class Preparation (completed before class):
In-class Assignment:
7Aug
Special Lecture Series Part II
Class Preparation (completed before class):
In class assignment:
12 Aug Group Presentations and Individual Reports Due
All Teams Present 20 Minutes.
Preparation Hand-In #1: Individual Firm Reports (One Package per team with all individual
reports collated)
14 Aug Individual Essays
Final Individual Essay on SEC, M&A and Intangible Assets. Due 9 PM PST ON DIGITAL DROPBOX
ACCTG 663 | Summer 2014
Course Syllabus
APPENDIX A
Team Project Description
APPENDIX A: Examining an annual report (Any Industrial Firm is OK):
As a team, select an industry to analyze. Using your WEB browser, each team member should access the
annual report or 10-K for one publicly traded company in the industry, with each member selecting a
different company.
Required:
1. On an individual basis, each team member should write a short report (no to exceed 4 pages)
that incorporates the following:
a. List and discuss one significant accounting policy (revenue recognition, inventory
accounting, fixed asset accounting, goodwill, fair value accounting (if your footnotes
have a fair value disclosure I expect to see that one included too) or any other such
significant disclosure found in the footnotes). Please be sure to evaluate whether you
believe the policy seems fair compared to the other companies your team has examined
(include this evaluation in part 2 below; although your accounting policy summary
should be in the individual report alone).
b. Calculate the debt-to-asset ratio at the end of the current and prior years, and explain
any change between the two years.
c. Calculate the current ratio and working capital ratios at the end of the current and prior
years, and explain any change between the two years.
d. Calculate the total asset turnover ratio (and its components: accounts receivable
turnover, inventory turnover, and fixed asset turnover). Please use averages for all
calculations just like we did in class.
e. Calculate the gross profit margin, operating profit margin, net profit margin (a/k/a net
income, or net earnings) of the current and prior years and explain any changes
between the two years.
f. Calculate the Return on Assets (adjusted with interest expense add back), Return on
Equity, Return on Common Equity and Return on Net Operating Assets (RNOA) for the
current and prior years and explain any changes between the two years. A 5-way ROE
decomposition would be useful too if your group feels it is additive or explains things
better.
g. Be sure to include industry benchmarks, where available for your ratios above. You can
include them in your synthesized group reports if that is easier, or you can have them in
ACCTG 663 | Summer 2014
Course Syllabus
the individual and group reports. You can find industry ratios at: Dun&Bradstreet
Industry Norms and Trends (Library dome resources online), Bloomburg laboratory,
Hovers, or finance websites that contain such data. Just be sure to cite your industry
sources.
2. Then, as a team (no more than 3 members per team), write a short report (no more than 6-8
pages) comparing and contrasting your companies using these attributes. Discuss any patterns
across the companies that you observe as a team. Provide explanations for any differences
discovered.
ACCTG 663 | Summer 2014
Course Syllabus
Report Formatting:
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4.
Please use times new roman, 12 point font with double spacing.
Please cite/reference any outside sources in your bibliography.
Please put a cover page and list all team members’ names.
Attach and an addendum the individual reports (which should not exceed 3 pages per person).
Please make sure to identify whose report it is (put a name on each individual report).
5. You will have to synthesize the individual reports to get it down the page requirement for the
group report.
6. The group report will be worth 100 points (25% of final grade) and all members will receive the
same grade. The individual report is worth 50 points (10 % of final grade).
7. The final reports are due on August 12, 2014 the penultimate class and I will only accept
hardcopies of the final written reports. Please make sure that they’re professionally assembled
and that they’re self-contained documents. Quality checks should be pervasive in your group
dynamics.
Evaluation
Each report will be evaluated on its own merits. Organization, clarity and responsiveness to the
requirements will be heavily weighted. I am looking for you to show me what you have learnt not what
you have memorized. So, please make sure your reports have a unique, demonstrative and purposeful
flow to them. Use of a few graphs (data visualization techniques: heat maps, bubble graphs,
radar/spider graphs (excel)) would be useful to include. Please do not speak to other groups about the
content and formatting of your reports, I expect to see variety. Most importantly, have fun and continue
learning.