FINANCIAL STATEMENT ANALYSIS (ACCTG 663)

Transcription

1 FINANCIAL STATEMENT ANALYSIS (ACCTG 663) SUMMER 2016 INSTRUCTORS Financial Analysis Module Professor David G. DeBoskey, PhD Charles W. Lamden School of Accountancy 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: 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 Whalen, Baginski, and Bradshaw. Financial Reporting, Financial Statement Analysis, and Valuation, 8 th Edition. South-Western, Cengage Learning. Cases and other materials posted on Blackboard or handed out in class

2 FINANCIAL ANALYSIS (23 MAY 1 JULY) 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 SLO 2 SLO 3 SLO 4 SLO 5 Understand key fundamental relationships among the major financial statements. Calculate and analyze key ratio groupings including: liquidity, solvency and profitability. Prepare analyses of company financial statements in a strategic manner. Understand the impact of operating and financial leverage on profitability analysis. 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 10 Assignments/Cases 10 Exam 30 Special Lecture Series Essay 10 Team Project-Group Presentation 25 Team Project-Individual Firm Report 15 Total 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:

3 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. Generally, exams are open book and open notes. 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 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 ( 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:

4 Exams (both in-class and take-home) are individual work only. No collaboration of any kind is allowed. 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 ( 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 account and check it on a regular basis. Make sure that you have the correct address listed in Blackboard. All s 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 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.

5 Class Schedule (Financial Statement Analysis: May 23 July 2) May 23 Introduction to Course: What is Financial Statement Analysis Learning Objectives: 1. Overview of financial reporting and financial statement analysis 2. Understand most effective means of mastering the course 3. Debits/Credits/Financial Statement Mechanics (REVIEW) 4. Big Data Analysis 5. Game Theory 6. Ratio Analysis Tutorial 7. Earnings vs. Cash Flows May 23 Letter to Shareholders and Preliminary Analysis of Starbucks Read through the Starbucks Annual Report (pp ) ( 13). Read through the CEO s letter to shareholders. 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? **YOU MAY HAVE TO LOOK AT YEARS BEFORE 2009, GO TO 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. May 23 Overview of Financial Reporting Read: Chapter 1: Bring in the Starbucks 10-K report *See link above* (on computers is fine) May 23: Preparation Hand-In #3: Case 1.1 (Starbucks): questions a) and b) only. Note the questions are on page 73 (8 th edition).

6 We will go over Starbucks three main financial statements, as well as some of the relevant footnotes. May 25 Tools 1 and 2: Common Size Statements and Percentage Changes Read: Chapter 1: pp In class: We will do problem 1.11 Preparation Hand-In #1: 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 2009? (See exhibits 1.26 and 1.27 in your textbook). USE EXCEL AND DOWNLOAD DATA FROM USE TEMPLATE I PROVIDED UNDER STUDENT TOOLS ON BLACKBOARD. FILL IN THE DATA FROM THE 10-K. Preparation Hand-In #2: Case 1.1 (Starbucks): questions c) thru k) only. Note the questions are on pp (8 th edition). June 1 Tool 3: Statement of Cash Flows June 1: Indirect Method Read Chapter 3: 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. Jun 1: Patterns of Cash Flows Read Chapter 3: 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 (3.19), Sunbeam (3.20), and Montgomery Ward (3.21) Jun 1: Select groups for project and do in-class case (Zhang) that you can find on blackboard. June 6 Tool 4: Profitability Analysis - Using ROA and ROCE June 6: ROA and its Components Read: Chapter 4 (through 297)

7 Preparation Hand-In #1: Case 3.3 (PowerModule W.T. Grant): *See Blackboard for help on how to do this case. June 1 Preparation Hand-In #2- Problem 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 (as time permits): we will go over QEs: 4.11, 4.12, 4.13, and Please calculate these ratios prior to class (not a hand-in). June 1: ROCE and relating ROA to ROCE AND RETURN ON NET OPERATING ASSETS (RNOA) Read: Chapter 4: pp ; Preparation Hand-In #1: problem 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 June 8: Tool 5 Risk Analysis Using Ratios and Comparisons Among Statements Read: Chapter 5 Preparation Hand-In #1: Problems 4.25 and 5.14 (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) Jun 8 Tool 6: Pro-forma Earnings and Leftovers from Prior Weeks (NON-GAAP EARNINGS) Read: Chapter 6: You need to skim this chapter that is, do not sweat the details. June 8: We will go over problem 6.10 in class. Not a hand-in. Preparation Hand-In #1: Problem 6-11 Jun 13 Financing Activities Read: Chapter 7 In class: 7-12 and 7-13 Preparation Hand-In #1: Problem 7-20

8 Jun 13 Investing Activities Read: Chapter 8 In class: 8-14 Preparation Hand-In #1: Problems 8-15 and 8-19 June 15 Operating Activities Read: Chapter 9 (you may find this chapter a little confusing just go with it). In class: 9-7 and 9-8 Preparation Hand-In #1: Problems 9-21 and 9-22 and 9-23 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 Jun 20 SPECIAL LECTURE Full Class Period Special Lecture Series (Intangible Assets, Mergers & Acquisitions, and SEC Reporting: Professor Marco Casalins: Thomas Jefferson School of Law) Jun 22 Special Lecture Series Part I Class Preparation (NONE WHITEBOARD LECTURE): In-class Assignment: June 27 Group Presentations and Individual Reports Due All Teams Present Minutes. Preparation Hand-In #1: Individual Firm Reports and PRESENTATIONS ON REPORTS (One Package per team with all individual reports collated). PLEASE HAVE ON COPY OF YOUR POWERPOINT SLIDES PRINTED 3 to a page (HANDOUT FORMAT). June 29 EXAM (Chapters 1,3,4,5,6, 7 and 8 AND 9) Final Individual Essay on SEC, M&A and Intangible Assets.

9 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

10 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 4members per team), write a short report (no more than 8-12 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. 3. PREPARE A minute powerpoint presentation on your research reports. The presentation should cover the necessary steps required to do a substantial financial statement analysis. You can go industry/firm/ratio grouping for all firms OR/ Individual Firm/industry/ratio groupings for individual firm 1, firm 2 etc. How you present should be based on the story you re telling NOT WHAT YOU THINK MY PREFERENCE IS.

11 Report Formatting: 1. Please use times new roman, 12 point font with double spacing. 2. Please cite/reference any outside sources in your bibliography. 3. Please put a cover page and list all team members names. 4. 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 June 27, 2016 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.