Accounting 5353-930
Financial Statement Analysis
Spring 2002
Classroom: Nichols Center, Room , Wednesdays 6:30-9:20 p.m.
Professor Frances L. Ayres
Office: 201 Adams Hall
Office Phone: 325-5768
E-mail: Fayres@ou.edu
Office Hours: Tuesday 3:00-5:00 p.m. (Norman), Wednesday, Nichols Center (5:30-6:30 p.m.) and
by appointment
Texts:
Required: Palepu, Healy and Bernard, Business Analysis & Valuation Using Financial Statements,
Second Edition
Optional: White, Sondhi and Fried, The Analysis and Use of Financial Statements,
Second Edition, Wiley, 1997.
Class web: http://www.ou.edu/class/acct5353
Course Objectives: This course is intended to increase your ability to use and make decisions
using information presented in the financial statements of publicly traded companies. A number of
different decision contexts will be examined including valuation of potential acquisitions,
investment analyses, credit analyses, managing corporate financing policies and analyzing business
communications. We will consider the role of both accounting and non-accounting information.
Course conduct: This course is based primarily on a combination of readings, discussion, and case
analyses. The readings and lectures will serve as background to assist you in analyzing the assigned
cases. The cases used in this course are based on real world situations and many come from the
financial statements of publicly traded companies. By their nature the types of problems addressed
in the cases typically do not fit neatly into a single category. They reflect a myriad of real world
issues typically faced by management. When you read the cases and think about the problems you
should not confine yourself to accounting issues or too narrowly to the questions asked at the end
of the case (or distributed in class). Rather, you should try to think broadly about the company and
consider issues relating to management motivations, business risk and strategic planning issues. In
other words, with each case consider the question, “What is really happening in this company and
do the financial statements reflect these events? If not, then what is really happening?” Active
participation by class members is a must for successful completion of the class. Active participation
implies more than just attending class and reading the materials although these are essential
components. It also means you must be willing to take a position, justify that position and to share
your views with the class. Evaluation of your participation will be based on the quality of your
participation as well as your willingness to contribute in class.
University Reasonable accommodations: Any student in this course that has a disability that may
prevent him or her for fully demonstrating his or her ability should contact me personally as soon
as possible so that we can discuss accommodations necessary to ensure full participation and
facilitate your learning opportunity.
Cases: Each team will be responsible for two primary cases through the course of the semester. For
the cases on which you are assigned you are expected to serve as discussion leader/facilitator for
the class discussion of that case. I expect that we will spend 45-60 minutes on each case. Some
cases may take more time than others. I do not expect you to present the class with a solution but
rather to be able to raise issues and to lead the class discussion of the case. For cases for which you
are a primary presenter your team must turn on a typed analysis of the cases. The typed analysis
should address the questions raised in the case as well as any additional issues that your team
decides are important and how you addressed these issues. The typed case analyses are due the
week following the case discussion. For cases for which you are not a primary presenter you should
also prepare a short analysis of the case that includes numerical analysis where appropriate and a
summary of key points. This mini-analysis will normally be 1-2 typed pages and are to be done
individually. Mini-analyses are to be prepared by class time for the class in which the case is to be
discussed. All students must be prepared to discuss each case regardless of whether it is a primary
case, and all students will be responsible for understanding the concepts utilized in the cases.
Team project: Each team will also be responsible for one major team case project. Each team is to
select a company of their choice and will conduct a complete analysis and valuation of that
company. You are also to present your analysis to the class and to turn in a page summary of your
analysis no more than 15 pages in length. The company must be a publicly traded company that is
not a bank or insurance company. It also must be a company that you are not analyzing in another
class. You should begin to think about your company choice as soon as possible and start to gather
information on the company. Your analysis should include the following:
a) complete comparative ratio analysis and common size financial statements and discussion of
key issues suggested from ratio analysis;
b) critical analysis of footnotes and restated ratios/common size statements based on restated
financials. Include discussion of any differences obtained from those in part a;
c) computation of z score and discussion of risk default;
d) computation of the estimated value of the company including a detailed discussion of the
assumptions on which your valuation is based. Relative to current market prices determine if
the company you select is under- or over-valued and by how much.
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Grades:
Mini-analyses
Class participation
Primary cases
Midterm exam
Team project
Final exam
Total
20%
10%
20% (10% each)
5-25%*
25% (includes peer evaluation)
0-20%*
100%
* You do not need to take the final if you are satisfied with your pre-final grade. If you are not
satisfied with your pre-final grade you can take the final exam. The final will allow you to improve
your exam grade. Your grade will be based on all but the final using the percentages shown, unless
you elect to take the final. If you take the final your midterm exam will be weighted at 5% and the
final at 20%.
Class participation: I will evaluate your class participation based on my assessment of your
overall contributions to class discussions as evidenced by preparation and willingness to volunteer
and contribute to the class. I will include attendance, but attendance alone is not a basis for an A or
B in class participation. Outstanding class participation means that you are prepared to discuss the
homework and cases, attend class and contribute positively to the class discussion.
Peer evaluation: There will be a peer evaluation at the end of the semester. You will be asked to
evaluate your team members’ performance throughout the semester in terms of working together on
the assigned homework and preparing for your sessions as discussion leaders.
Assignment schedule: NOTE: PHB refers to Palepu, Healey and Bernard, and WSF is White,
Sondhi and Fried
January 16 Course Introduction
See first day assignment handout (Use of Dupont Analysis and Rim Model)
January 23 Chapters 1-2 PHB- Framework and Strategy analysis
Background Ch. 1 & 7, WSF
Case: America Online, Inc.
3
January 30 Chapter 3, PHB-Accounting Analysis
Background: Ch.8, WSF Ch. 3, WSF, pp. 66-69 WSF, pp. 237-244 WSF
Case: Harnischfeger Corporation –Team 1
February 6 Chapter 4, PHB, Asset Analysis
Background. Ch. 7, Ch. 9 WSF
Case: Boston Chicken, Inc.- Team 2
February 13 Chapter 5, PHB, Liability and Equity Analysis
Background, Ch 11, WS
Case: Manufactured Homes, Inc.-Team 3
February 20 Chapter 6, PHB, Revenue Analysis
Background: Ch. 2, WSF
Case: Oracle Systems, Inc.-Team 4
February 27 Chapter 7, PHB, Expense Analysis
Background: Ch. 7,8 WSF
Case: Pre-Paid Legal Services Inc. –Team 5
March 6 Valuation issues modeling and example
Chapter 11, PHB Valuation Theory and Concepts
Chapter 12, PHB Valuation Implementation
Background: Chapter 19 WSF
Case; TBA
March 13 Exam 1
March 20 Spring Break
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March 27 Chapter 8, 15 PHB Entity Accounting Analysis and Acquisitions
Background: Ch. 13,14 WSF
Case: Thermo Electron Corporation –Team 1
April 3 Chapter 9, PHB Financial Analysis
Background: Ch. 3, 4 WSF
Case: Home Depot – Team 2
April 10
Cases: Revco D.S., Inc. –Team 3
Schneider and Square D. –Team 4
April 17 Ch. 13 PHB
Background: Ch. 5, WSF
Case: Arch Communications Group, Inc.-Team 5
April 24 Team Presentations of projects
May 1 Final Exam (optional)
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