Financial Statement Analysis: Acctg 663 Fall 2012 –Wednesdays 7:00 P.M. – 9:40 P.M. Professor David DeBoskey SSE 2401 E-mail: debocpafa2005@aol.com OFFICE HOURS: Thursday 10:30 A.M. – 11:30 A.M. and by appointment 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. This course explores in greater depth financial reporting topics introduced in the core course in financial accounting and also examines additional topics not covered in that course. 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. This course is designed to prepare you to interpret and analyze financial statements effectively. The viewpoint is that of the user of financial statements. This course is designed primarily for students who expect to be intensive users of financial statements as part of their professional responsibilities. PREREQUISITE This course is designed for students that have a working knowledge of financial accounting. The minimum pre-requisites for this course are the core course in financial accounting (Acctg 620, BA650 or Acctg 201) and a core course in managerial/cost accounting. 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, 7th Edition. South-Western, Cengage Learning. Cases and other materials posted on Blackboard or handed out in class Assignments Readings, cases and/or problems are assigned for each class. You should come to class prepared to discuss your analysis of the cases and problems. Regular class participation is important to the learning process for you and your classmates. Ten percent of your grade will be based on “class preparation.” You can receive these points either from actively discussing the cases and problems in class or handing in the assignment at the beginning of the class. No late assignments will be accepted nor will I accept e-mailed or faxed assignments. All assignments should be prepared using word processing software with type size no smaller than 12 point. You can include tables or spreadsheets as well, as long as they are carefully labeled and defined. During class discussions, please feel free to make changes to your solutions, but do so in a way that clearly indicates that they are the result of class discussion (e.g., using a different color of ink). You may work in groups to discuss homework assignments. However, each person should prepare his/her own individual homework solutions to be submitted. Ideally, you should work through each day’s assignment on your own before discussion it with anyone. You can then make changes to your solution based on your learning in any discussion. Interpretations of the analysis should be in your own words. Additional assignments either will be discussed in class or are extra problems for your benefit. I will tell you the assignments that will be discussed in class prior to that class. Group Project You will self-select yourselves into groups of 5 or 6 in class on September 26. In total, I would like to see 8 groups. On October 17, each group will choose an industry to analyze, for example, fast food or women’s clothes. Each person in the group will choose his/her own firm in the industry. Your group will present orally a 15 minute industry analysis using the firms in your industry, followed by 5 minutes of Q &A. The 15 minutes will be strictly adhered to – like the NFL football draft, you will be on the clock and cut-off after the 15 minutes. There will be four presentation dates: November 7 & 14 and November 21 & November 28. On October 17, each group will choose the presentation date (tie breakers will be decided in class). The analysis should cover the relevant topics discussed up to the presentation date. You are to summarize the economics and current conditions in the industry and each firm in your industry. Describe the strategies each of the firm pursues, perform a profitability and risk analysis, a cash flow statement analysis, and talk about any other relevant items. The oral presentation will be accompanied by either your power point slides or a 5-10 page report. Each person will attach a 1-2 page analysis of his/her firm including tables and graphics – attached to that put the firm’s most recent annual report. More details of the project will be given as the semester progresses. Timetable Select group of 5-6 in class Select industry and firms Select presentation date September 26 October 17 October 17 Examinations There will be two examinations: one on October 17 and the other on December 12. Grading Grading will be based on the following weights: Class Preparation Exam 1 Oral Presentation/Industry Report Firm Analysis Exam 2 10% 30% 15% 5% 40% In addition, I will be taking attendance on group presentation dates. Seating Chart I will be using a seating chart to get to know your names. I will bring the chart to class on September 5, so please select your seat on that date. You must remain in that seat for the entire class – unless you expressedly ask me for a changed seat. Assignments and cases. The class assignments (QEs, Problems and Cases) 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. All homework (QE and other assignments MUST be handed in at the beginning of class to receive credit). Please bring a second hardcopy for your own review during that week’s lecture and for exam preparation etc. Exams. There will be two in-class exams during the course. The exams are individual work and are to be completed without unauthorized assistance. 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: 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 (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. Syllabus August 29 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 4. Game Theory 5. Ratio Analysis Tutorial 6. Earnings vs. Cash Flows September 5 Letter to Shareholders and Preliminary Analysis of Starbucks Read through the Starbucks Annual Report (pp. 72-77) (http://www.sec.gov/Archives/edgar/data/829224/000095013408021134/v50316e 10vk.htm#113). Read through the CEO’s letter to shareholders. http://www.sec.gov/Archives/edgar/vprr/09/9999999997-09-002286 Preparation Hand-In: Answer the following questions 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? 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. September 5 Overview of Financial Reporting Read: Chapter 1: Bring in the Starbucks 10-K report *See link above* September 5: Preparation Hand-In: 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. September 12 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: 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). How does this tie in with what we did on September 5th? Case 1.1 (Starbucks): questions c) thru k) only. Note the questions are on pp 77-81. September 19 and 26 Tool 3: Statement of Cash Flows September 19: 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. Homework: 3.22. Not a hand-in September 19 and 26: Patterns of Cash Flows Read Chapter 3: 155-165 Preparation Hand-In: 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) September 26: Select groups for project and do in-class case (Zhang) that you can find on blackboard. Preparation Hand-In: Case 3.3 (W.T. Grant): *See Blackboard for help on how to do this case. October 3 and 10 Tool 4: Profitability Analysis - Using ROA and ROCE October 3: ROA and its Components Read: Chapter 4 (through 294) October 3: Preparation Hand-In - 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. October 3: Select industry and firm for group project 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). October 10: ROCE and relating ROA to ROCE Read: Chapter 4: pp. 295-298; 299-305 Preparation Hand-In: 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 October 17: Midterm October 24: Tool 5 Risk Analysis – Using Ratios and Comparisons Among Statements Read: Chapter 5 Preparation Hand-In: 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. October 31 Putting it all Together Preparation Hand-In: Case 4.2 (Wal-Mart- Parts A & B) November 7 Tool 6: Pro-forma Earnings Read: Chapter 6: You need to skim this chapter – that is, do not sweat the details. November 7: We will go over problem 6.10 in class. Not a hand-in. Homework: Problem 6.11 November 7, 14, 21 and 28 Group Presentations (2 Groups on Each Day) November 14 Financing Activities Read: Chapter 6 In class: Preparation Hand-In: November 21 Investing Activities Read: Chapter 7 In class: Preparation Hand-In: November 28 Operating Activities Read: Chapter 8 (you may find this chapter a little confusing – just go with it). In class: Preparation Hand-In: In class: we will discuss what a pension is, how pension plans work, what other post-retirements benefits, and how firms can change their assumptions to present different net assets and liabilities *November 28: Problem Session We will go over a few review problems during this class. Bring in your book. *December 5 class vote) Putting it all Together: Analysis of a Company (to be determined by All information including questions will be put on blackboard December 12 Final (Same time as our usual class time)