ACCT 411-Applied Financial Analysis-Arslan Shahid Butt

Lahore University of Management Sciences

ACCT‐411 Applied Financial Analysis Fall Semester 2013‐2014

Instructor Arslan Shahid Butt

Room No.

Office Hours 30 Minutes after each class or by appointment

Email [email protected]

Telephone +923364856818

Secretary/TA TBA

TA Office Hours TBA

Course URL (if any) N/A

Course Basics

Credit Hours 4

Lecture(s) Nbr of Lec(s) Per Week 2 Duration 1 Hour and 50 Minutes

Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration

Tutorial (per week) Nbr of Lec(s) Per Week Duration

Course Distribution

Core

Elective Open for Student Category

Close for Student Category

COURSE DESCRIPTION

Whether you watch analysts on CNBC or read articles in The Wall Street Journal, you'll hear experts insisting on the importance of "doing your homework" before investing in a company. In other words, investors should dig deep into the company's financial statements and analyze everything from the auditor's report to the footnotes. But what does this advice really mean, and how does an investor follow it? This course is to answer these questions by providing a succinct yet advanced overview of financial statements analysis. If you already have a grasp of the definition of the balance sheet and the structure of an income statement, this course will give you a deeper understanding of how to analyze these reports and how to identify the "red flags" and "gold nuggets" of a company. In other words, it will teach you the important factors that make or break an investment decision.

COURSE PREREQUISITE(S)

Successful completion of Corporate Financial Reporting II

COURSE OBJECTIVES

Strengthen students’ understanding of the accounting principles, methods and disclosures underlying financial statements. Examine the impact that the choice of accounting methods and management estimates have on financial statements. Consider how reported financial statement information can be adjusted to create more useful input for financial analysis

Learning Outcomes

On completion of this course students should be able to Identify and apply tools and techniques for the appropriate analysis of financial statements. Analyse the information contained in the financial statements and all additional notes and reports which form part of the financial report of an organization. Write an effective report that analyses and provides justification for decision making.

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Grading Breakup and Policy

Assignment(s): Home Work: Quiz(s): 15% Class Participation: 5% Attendance: 5% Midterm Examination: 25% Project: 20% (10 % report + 10% presentation) Final Examination: 30% Project: The financial statement analysis project is aimed at developing students’ understanding of and practical skills in financial statement analysis and valuation. It is also designed to enhance teamwork, analytical and communication skills. To complete this project, you are required to form teams of either 3 or 4 members. Each team must select a different industry and obtain approval from the lecturer. Each team member must select a company within the approved industry and analyze the company’s financial reports using the FSA tools identified in the course. The group must also complete an industry comparative analysis of the 2 companies. Written reports must be submitted. Additionally, each group is required to formally present the findings of the individual and group analyses to the class. An overall group mark will be awarded to each student but the lecturers reserve the right to provide a reduced mark where a student has provided a sub‐standard individual company analysis. Further details on the nature and requirements of the project will be discussed early in the course.

Examination Detail

Midterm Exam

Yes/No: Yes Combine Separate: Combined Duration: 1 Hour and 40 Minutes Preferred Date: During last week of examinations Exam Specifications: Closed Books & Closed Notes

Final Exam

Yes/No: Yes Combine Separate: Combined Duration: 1 Hour and 40 Minutes Exam Specifications: Closed Books & Closed Notes

COURSE OVERVIEW

Session # Topics Recommended

Readings Objectives/ Application

1 Framework for Financial Statements Analysis

Course Pack Reading Reference 1

Discuss the role of financial reporting and financial statement analysis

Discuss the role of key financial statements and importance of supplementary information

Describe the steps In financial statement analysis framework

2 Accounting Policies and their impact on Financial Analysis Case: Orthodontic Centers of America


Describe the general principles of revenue recognition and the implications of these principles for financial analysis

Describe the general principles of expense recognition and the implications of these principles for financial analysis

Describe, calculate and analyze basic and diluted EPS 3 Cash Flow Statement Analysis


Compare cash flows for operating, investing and financing activities


Convert cash flows from indirect to direct method

Describe how cash flow is linked to income statement and balance sheet

Calculate free cash flows 4‐6 Foundations of Ratio and Financial

Analysis {Common size statements; Categories of ratios; Integrated ratio analysis. Earnings per share; Alternate capital structures.}


Classify, calculate, analyze and describe the relationships between activity, liquidity , solvency , profitability and valuation ratios

Evaluate a company based on intelligent ratio analysis

Demonstrate the application and importance of DuPont analysis.

7 Analysis of Inventories { Impact of change in prices; Alternative methods of computing cost; Adjustments from LIFO to FIFO; Financial ratio effect; Reporting and measurement issues; Empirical perspectives; Market reactions to method changes; Is a change to LIFO good news or bad news?} Case: Inventory Analysis of Nucor


Calculate the effect of inflation / deflation of inventory costs on the financial statements and ratios of companies that use different inventory valuation methods (FIFO)/LIFO/AWCO)

Convert a company’s financial statement from LIFO to FIFO for the purpose of comparison

Explain the issues that analyst should consider when examining a company’s inventory disclosures

8‐9 The Capitalization Decision {Acquiring the asset: The capitalization decision; Capitalization of interest costs; Intangible assets Analysis of Long Lived Assets} Case: Software Capitalization at IBM


Explain and evaluate the effects on financial statements and ratios of capitalizing / expensing costs

Analyze and interpret the financial statement disclosures regarding long lived assets

10 Analysis of Depreciation and Impairment {Depreciation Methods: analysis of fixed asset disclosures; Impairment of long lived assets; Liabilities for asset retirement obligations}


Explain and evaluate the effects on financial statements and ratios of different depreciation methods

Explain and evaluate the effects on financial statements and ratios of impairments/revaluations of assets

11‐12 Analysis of Income Taxes {Deferred taxed; effective tax rate; analysis of tax footnote disclosures; permanent and temporary tax differences.}


Explain how deferred tax assets and liabilities are created and the factors that determine how these should be treated for the purpose of financial statement analysis.

Describe the valuation allowance for deferred tax assets and how should it be treated in financial analysis.

Analyze disclosures pertaining to deferred tax items and the effective tax rate reconciliation

13‐15

Analysis of Financing Liabilities { Long term debt; debt with equity features; effects of changes in interest rate; }


Describe the effective interest rate method and its implications for financial analysis.

Calculate and evaluate the effects of discount/premium bonds from the perspective of financial analysis.

16 Analysis of Leases {Leases and incentives, financial reporting for leases }


Evaluate the different motivations for leasing an item instead of outright purchase.

Calculate and evaluate the implications on the


financial statements and ratios of leasing the item (operating/ hire‐purchase/ finance) instead of purchasing.

Compare the disclosures pertaining to finance / operating lease.

17 Analysis of off‐balance sheet debt Case: Off Balance Sheet Financing Techniques for Texaco and Caltex


Describe the different types of motivations and understate/evaluate the impact of off balance sheet financing.

18‐19 Analysis of Pension and other employee benefits


Describe, evaluate and calculate the impact of defined benefit plans assumptions on the defined benefit obligation and pension expense.

Interpret pension plans disclosures including cash flow related information.

Evaluate the underlying economic liability or asset of a company’s pension plan

Calculate the underlying economic pension expense.

20‐22 Intercorporate Investments{Investment in securities; Analysis of marketable securities; Equity method of accounting; Consolidations and comparison}

Course Pack Reading Reference 13‐ 14

Describe the classification, measurement and disclosure under IFRS for 1) investment in financial assets, 2) investment in associates, 3) joint ventures, 4) business combinations, 5) special purpose vehicles.

Analyze the effect on financial statement and on ratios of different methods used to account for inter‐corporate investments.

23‐24 Analysis of Multinational Operations


Compare and contrast the current rate and the temporal method, evaluate the impact of each on the company’s balance sheet and on the income statement and determine which method is appropriate in which scenario.

Analyze the effect on parent company’s financial ratios of the currency translation method used.

25 A Synthesis


Evaluate and understand the impact of various accounting policies and be able to adjust the financial statements for the purpose of financial statement analysis.

26‐28 Students’ Presentations

N/A Group presentations based on financial analysis of the chosen company.

Textbook(s)/Supplementary Readings

Course Pack for Applied Financial Analysis

Financial Reporting and Analysis (Level 1 & 2), CFA Institute, USA

White Sondhi and Fried, The Analysis and Use of Financial Statements, 3rd Edition. John Wiley and Sons

ACCT 411-Applied Financial Analysis-Arslan Shahid Butt

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