University of Southern California
Leventhal School of Accounting
Marshall School of Business
ACCT 416
Spring 2006
Office Hours:
9:00 a.m. – 10:50 a.m. Tues., Thurs., & Fri. and by appointment.
Randy Beatty
Accounting Bldg. 101a
213-740-4828 (O)
310-546-9363 (H)
Leventhal School Administrative Coordinator – Eunice Joshua-Clarke (213-740-2431)
Class time & location: Section #: 18166D 2:00 p.m. - 3:50 p.m. TTh - 205 Accounting Building
Section #: 18165D 4:00 p.m. - 5:50 p.m. TTh – 205 Accounting Building
email: rbeatty@marshall.usc.edu
For Campus-Wide Emergencies:
Emergency Info. Line
213-740-9233
USC Emergencies
213-740-4321
Information
Tune KUSC Radio at 91.5 (FM)
USC Info. Line
213-740-2311
COURSE DESCRIPTION AND OUTLINE
1.
Course Objectives
This course examines the role of financial statement analysis in the evaluation of the firm and the prediction of its
future condition. The course is designed to provide:
i.
ii.
iii.
the skills to analyze financial statements
exposure to public sources of financial information used in capital markets
an appreciation for the usefulness and limitations of financial statement analysis in specific
decision contexts
With these objectives, we investigate the following topics:
i.
fundamental analysis
ii.
forecasting
2.
i.
ii.
iii.
Prerequisites
Introductory Financial Accounting
Introductory Statistics
Introductory Finance/Economics
3a.
Required Materials
Acctg:
Krishna Palepu, Paul Healy, and Victor Bernard (KPB), Business Analysis & Valuation,
Third Edition, Harcourt Brace Jovanovich, Inc., 2004.
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3b.
i.
Reference Materials
Finance: Ross, Westerfield, Jaffee, Corporate Finance, McGraw Hill, 2005
Seventh edition. RWJ
Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the
Value of Companies, John Wiley & sons, 2005 4th edition. KGW
Acctg: Kieso, Weygandt, and Warfield, Intermediate Accounting, John Wiley and Sons,
Eleventh edition, Volumes I and II 2004. KWW
Earlier versions of the finance and accounting reference texts can be used to supplement your background as needed.
ii.
A number of readings, class notes, and projects are in electronic form, BB, (Blackboard).
The readings are the electronic images of the original articles or working papers.
Documents have been saved in word, excel, text, and pdf formats. Example solutions to Accounting 581
& 499 cases have been placed in electronic reserve. The spring 1999, 2000, 2001, 2002, 2004, and 2005
clients were Lone Star Technologies, Pagenet, Entrust Technologies, Mattel, K-Swiss, and Reliance Steel
and Aluminum. These example solutions can be very useful to organize your thoughts about the major
project deliverables.
4.
Policies: Statement for Students with Disabilities/ Academic Integrity
Any student requesting academic accommodations based on a disability is required to register with Disability
Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained
from DSP. Please be sure the letter is delivered to me as early in the semester as possible. DSP is located in STU
301 and is open 8:30 a.m. – 5:00 p.m., Monday through Friday. The phone number for DSP is 213-740-0776.
Students are expected to adhere to, and will be bound by, the University and school policies governing academic
integrity. The policy of the Marshall School of Business applies to the retention of graded material.
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5.
Course Grade
The course grade is based on the following:
i.
Individual Project: Management Strategy - Industry Identification
Page Limit: 3 pages (2 pages text)*
Due Date: March 30, 2006
ii.
20%
In-class exercise: Management Strategy - Industry Identification
5%
Due Date: April 4, 2006
iii.
Individual Project: Three Questions & Answers
Page Limit: 2 pages*
Due Date: TBD
iv.
Group Project: Industry/Fundamental Analysis
10%
35%
Page Limit: 8 pages (6 pages text)*
Due Date: April 18, 2006
v.
Individual Project: Forecasting/Fundamental Analysis
Page Limit: 6 pages (4 pages text)*
Due Date: May 1, 2006

6.
30%
The organization and presentation of your analysis are important in determining your grade. I will not
consider any material submitted in excess of the page limit. Graphs, tables, appendices etc. must be
included within the page limit. Double spacing of text is required. Author(s) should choose margins and
font size to produce a favorable impact on the reader. The reader should be able to clearly determine
assumptions and method of analysis without resorting to extraordinary means. Penalty: Any project
submitted that does not conform to these requirements will have one letter grade deduction from the
final assessed evaluation!
Retention of Graded Work
Retained paperwork, unclaimed by students, will be discarded after October 1, 2006.
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WEEK
ISSUES COVERED
TEXT READING ASSIGNMENT
1
Introduction / Strategy/Data Availability
Chapter 1: A Framework for Business
Analysis and Valuation Using Financial
Statements
Chapter 2: Strategy Analysis
2
Strategy
Chapter 3: Overview of Accounting
Analysis
Chapter 4: Implementing Accounting
Analysis
3
Industry/Data Availability
Chapter 5: Financial Analysis
4
Profitability
Chapter 9: Equity Security Analysis
5
Profitability/Liquidity
Chapter 10: Credit Analysis and Distress
Prediction
6
Forecasting
Chapter 6: Prospective Analysis:
Forecasting
Chapter 7: Prospective Analysis:
Valuation Theory and Concepts
7
Solvency
Chapter 8: Prospective Analysis:
Valuation Implementation
Chapter 12: Corporate Financing Policies
4
Assignment Schedule
WEEK
ISSUES COVERED
ASSIGNMENT
1
Introduction / Strategy
General Mills/Nestle (1989/2005)
Outline 1
2
University Holiday/ Strategy
Disclosure Access / Outline 1
3
Industry/Data Availability
Comparable Firm Exercise
Thursday: Industry Identification
General Mills/Nestle (1989/2005)
Outline 1 Supplement
S&P Industry Analysis
4
Profitability
Comparable Firm Exercise
Thursday: Industry Identification
General Mills (1989/2005)
5
Profitability/Liquidity
General Mills (1989/2005)
Three Questions Exercise (DATE: TBD)
6
Forecasting
Group Project
Thursday: Industry/
Fundamental Analysis
General Mills/Lone Star Steel
Southland Corp.
7+
Solvency
Forecasting/Fundamental Analysis:
General Mills (1989/2005)
5
Selected REFERENCE Chapters in KWW, WRJ, & CKM
WEEK
ISSUES COVERED
1
Introduction /Strategy/Data Availability
KWW
KWW
RWJ
RWJ
2
KWW
KWW
KWW
RWJ
3
KWW
KWW
4
KWW
KWW
Chapter 4: Income Statement and Related Information
pp. 129-145 (General Income Statement, Discontinued Items, Extraordinary Items, &
Changes in Accounting Principle).
Chapter 5: Balance Sheet and Statement of Cash Flows
pp. 182-186 (General Balance Sheet),
pp. 194-199 (General Cash Flow Statement),
pp. 200-201 (Typical Ratios).
Chapter 1: Introduction to Corporate Finance
pp. 14-17 (Agency Problem)
Chapter 11: An Alternative View of Risk and Return: The Arbitrage Pricing Theory
pp. 307-310 (Betas and Expected Returns)
Strategy
Chapter 7: Cash and Receivables
pp. 322-324 (Uncollectible Accounts),
pp. 337-338 (Presentation of Accounts Receivable).
Chapter 8: Valuation of Inventories: A Cost Basis Approach
pp. 380-386 (Inventory methods and LIFO Reserve)
Chapter 9: Inventories: Additional Valuation Issues
pp. 422-428 (Lower of Cost or Market)
Chapter 7: How to Value Bonds and Stock
pp. 112-119 (“Gordon’s Model”)
Industry/Data Availability
Chapter 10: Acquisition and Disposition of Property, Plant, and Equipment
pp. 472-478 (Self-Constructed Assets)
Chapter 21: Accounting for Leases
pp. 1090-1093 (lease rules)
pp. 1114-1118 (lease disclosure examples)
Profitability
Chapter 11: Depreciation, Impairments, and Depletion
pp. 523-525 (depreciation methods)
pp. 531-535 (depreciation revisions & impairments)
Chapter 12: Intangible Assets
pp. 578-585 (goodwill & R&D)
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5
KWW
KWW
6
KGW
KGW
7
KWW
KWW
RWJ
Profitability/Liquidity
Chapter 13: Current Liabilities
pp. 631-635 (loss contingencies, litigation & warranties)
pp. 637-640 (environmental liabilities & self-insurance)
Chapter 19: Deferred Income Taxes
pp. 972-974 (deferred income tax example permanent, temporary)
Forecasting
Copeland, et. al., Ch. 11: Forecasting Performance.
Forecasting
pp. 233-273.
Copeland, et. al., Ch. 12: Estimating Continuing Value (Gordon’s Model)
pp. 275-294.
Solvency
Chapter 14: Long-term Liabilities
pp. 681-682 (early extinguishment –ordinary income)
pp. 689-692 (off-balance sheet financing)
Chapter 20: Accounting for Pensions and Postretirement Benefits
pp. 1042-1045 (pension disclosures)
Chapter 15: Capital Structure: Basic Concepts
pp. 402-426 (M&M Propositions 1 & 2 Optimal Capital Structure)
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