B10.2303.020
Financial Statement Analysis
Stern School of Business
New York University
Spring 2008
Course Objective:
Financial statements provide the most comprehensive corporate data available to
users and investors without access to internal information. These data are widely
used as inputs to a wide variety of decisions (economic, investments, public
policy, and personal). This course is designed to help you understand the
numbers reported by companies in their financial statements. It will give you the
basic tools needed to analyze and compare data across industries as well as
over time. The course will also introduce you to differences between U.S. GAAP
and IFRS.
Required Textbook
The Analysis and Use of Financial Statements (3rd Edition) (WSF)
Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried
John Wiley & Sons, Inc., 2003
Assignments & Grading:
1. Group Assignments: Company Analysis
In the first class session, Professor Sondhi will explain how you are to
select a company which you (in teams of 3-5) will analyze.
a. Direct method cash flow statement & analysis
b. Comprehensive ratio analysis & discussion
c. Adjusted analysis & discussion
2. Final Exam (Individual)
Course Outline
1. Accounting Income – The Income Statement (WSF Ch 2)
 Issues in Revenue and Expense Recognition
 Analysis of Recurring versus Nonrecurring items
 Significance of Nonrecurring Items to Credit Analysis and
Firm Valuation
 Introduction to the Concept of The Quality of Earnings
2.
The Balance Sheet & Statement of Stockholders’ Equity (WSF Ch 2)
 Uses and Analyses of The Balance Sheet
 Uses and Analyses of The Statement of Stockholders’ Equity
 Balance Sheet Integrity
3.
Analysis of Cash Flows (WSF Ch 3)
 Distinction between the direct and indirect statement of cash
flows
 Recast an indirect statement of cash flows to a direct basis
 Games companies play with the statement of cash flows
 Definition and use of the concept of Free Cash Flows
 Analyze the impact of acquisitions and divestitures on
reported cash flows
 Analysis of trends in components of cash flows
Group Assignment 1:
Prepare a direct method cash flow statement and analysis for selected
company
4.
Foundations of Ratio and Financial Analysis ( WSF Ch 4)
 Use of common-size statements
 Construction and use of activity, liquidity, solvency, and
profitability ratios
 Construction and use of operating and cash cycle measures.
 Three- and Five-component disaggregation of return on
assets, return on invested capital, and return on equity ratios
 Integrated analysis of ratios and its use in the evaluation of
corporate performance.
 Computation and analysis of earnings per share and other
ratios used for valuation.
 Analysis of Operating and Financial Leverage
Group Assignment 2:
Prepare a comprehensive ratio analysis of the selected company and
discuss your findings
5.
Analysis of Inventories (WSF Ch 6)
 Comparative analysis of the usefulness inventory and cost of
goods sold data provided by different inventory methods.
 Analysis of cash flow and working capital effects of different
inventory methods.
 Analysis of the impact of price changes on reported income
under different accounting methods.
 Adjust the financial data and ratios of companies using
different inventory methods.
 Analysis of the information content of two different signals
transmitted by a decline in the LIFO Reserve.
6.
Long-lived Assets - Analysis of the Capitalization versus Expensing
Decision (WSF Ch 7)



7.
8
Capitalization versus expensing: Impact on financial
statements and ratios.
Analytical adjustments
Additional Analysis of fixed asset data
Long-lived Assets - Analysis of the Depreciation and Impairment
(WSF Ch 8)
 Discussion and comparison of Depreciation Methods
 Impairment of fixed assets: Analysis of impact on ratios and
cash flows
 Implications for Quality of Financial Reporting and Earnings
 Liabilities for Asset Retirement Obligations

Analysis of Income Taxes (WSF Ch 9)
 The liability Method
 Deferred Tax Liabilities, Deferred Tax Assets, FIN 48, and
The Valuation Allowance
 Deferred Taxes – Analytical Issues
 Analysis of Income Tax Disclosures
10.
Analysis of Financing Liabilities (WSF Ch 10)
 Comprehensive review of debt including debt with equity
features
 Bond Covenants
 Analytical Implications
11.
Analysis of Leases and Off-Balance Sheet Debt (WSF Ch 11)
 Capital versus Operating Leases
 Analysis of Lease Disclosures
 Off-Balance Sheet Debt and its Implications for Quality of
Financial Reporting and Earnings
 Securitizations
Group Assignment 3:
Prepare a comprehensive adjusted ratio analysis and discuss your findings