FINANCIAL STATEMENT ANALYSIS (ACCTG 663)
SUMMER 2012 (FINAL 7/12/2012)
INSTRUCTORS
Financial Analysis Module
Professor David G. DeBoskey, PhD
KPMG Faculty Fellow
Charles W. Lamden School of Accountancy
Email: debocpafa2005@aol.com
Financial Valuation Module
Professor Damon M. Fleming, PhD
Ernst & Young Faculty Fellow
Charles W. Lamden School of Accountancy
Email: dfleming@mail.sdsu.edu
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. 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.
PREREQUISITE
This course is designed for students that have a working knowledge of financial accounting. The
minimum prerequisite is successful completion of BA 650 (Financial Reporting and Analysis I).
WHO SHOULD TAKE THIS COURSE?
This course should be of interest to students pursuing the following careers:
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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
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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
ACCTG 663 | Summer 2012
Course Syllabus
FINANCIAL ANALYSIS (10 JULY – 24 JULY)
The financial analysis module of the course will focus on understanding the key underpinnings of the
core financial statements: balance sheet, income statement, statement of other comprehensive income
and statement of cash flows. We will be examining annual reports from many different companies and
see how to quickly analyze a corporation. You will learn to focus on the important information and
separate the hype form facts. Key skills will center on understanding risk analysis, profitability analysis
and cash flow integration. We will try to understand the different corporate games that are commonly
being played (Sunbeam, Satyam, among many others). We will try to understand how “risky” a business
is and whether a corporation can remain solvent in the future. Finally, you will be introduced to the
special topics of inventory valuation, operating and financial leverage, off-balance sheet financing,
strategic planning models and mergers and acquisitions (time permitting).
Student Learning Outcomes (SLOs): Financial Analysis Module
At the end of this course you should be able to:
SLO 1 Understand key fundamental relationships among the major financial statements.
SLO 2 Calculate and analyze key ratio groupings including: liquidity, solvency and profitability.
SLO 3 Prepare analyses of company financial statements in a strategic manner.
SLO 4 Understand the impact of operating and financial leverage on profitability analysis.
FINANCIAL VALUATION MODULE (26 JULY – 9 AUGUST)
The valuation module of the course focuses on developing a financial model, based on proforma
financial statements, to forecast a company’s future performance. These projections, combined with
other information and estimates (e.g., cost of capital), become the inputs into the valuation components
of the financial model, which include the discounted cash flow, residual income, and market multiple
methods.
Student Learning Outcomes (SLOs): Financial Valuation Module
At the end of this course you should be able to:
SLO 1 Develop flexible and comprehensive financial statement forecast models.
SLO 2 Estimate risk-adjusted rates of return on equity capital, debt capital, as well as weighted average
costs of capital for use in various valuation models.
SLO 3 Develop flexible and comprehensive valuation models based on cash flows, earnings, and
market multiples.
ACCTG 663 | Summer 2012
Course Syllabus
COURSE REQUIREMENTS AND ASSESSMENT OF LEARNING OUTCOMES
Your grade in this class based on your performance on the requirements listed in the table below. Keep
track of your ongoing performance in this class and please come and see me if you have any questions
or concerns. Standard letter grades (including pluses/minuses) will assigned at the end of the semester.
Requirements
Professionalism and Contributions
Assignments/Cases
Exam 1
Exam 2
Team Project
Total
%
10
20
20
20
30
100
Professionalism and Contributions. Your contribution to class discussions is a valuable part of your
learning experience, and the experiences of the other students in the class. Class contribution is
evaluated based on the quality, not quantity, of your class contributions (i.e., responses to the queries
and/or the questions that you ask related to class discussions) and professional conduct. The following
exemplify this evaluation:
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Excellent means that you arrive on time to all class sessions, routinely make quality
contributions to class discussions indicating you are prepared for class and focused on the class
discussion, are respect all the other students in the class.
Good means that you generally arrive on time to class or missed class infrequently, make
occasional quality contributions to class discussions, and generally conduct yourself in a
professional manner.
Poor means that you are either frequently late to class, and/or missed noticeable amounts of
class time, and/or have little to contribute to class or made unconstructive comments, and/or
have noticeably failed to conduct yourself in a professional manner.
Assignments and cases. The class assignments 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.
Exams. There will be two in-class exams during the course. The exams are individual work and are to
be completed without unauthorized assistance. Late exams will not be accepted.
Team Project. Student teams will prepare a technical research presentation that provides a
comprehensive financial and valuation review of a company for senior level analysts. See Appendix A
for the project requirements:
ACCTG 663 | Summer 2012
Course Syllabus
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:
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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.
ACCTG 663 | Summer 2012
Course Syllabus
ANTICIPATED CLASS SCHEDULE (SUBJECT TO CHANGE DUE TO CLASS DYNAMICS)
*(QE= QUESTIONS AND EXERCISES SHOULD BE ATTEMPTED AND WRITTEN DOWN BEFORE LECTURE.
PLEASE BRING A HARDCOPY TO EACH SESSION)
Date
Class Session
10-July
Income Flows versus Cash Flows: Understanding the
Statement of Cash Flows
Special Topics: Disaggregating the Basic Accounting
Equation and Solving for Unknowns
Pre-Class
Readings
In-class
Assignment
1.WBB 3
Zhang (Found
on blackboard)
2. Cash Flow
Pre-Reading
Packet (see
blackboard)
*QE: 3.8, 3.11
and 3.16
3. Satyam
(reading links on
bb)
12-July
Overview of Financial Reporting, Financial Statement
Analysis and Valuation
1.WBB 1
*QE: 1.4, 1.6,
1.8, 1.10 and
1.12
2.WBB 2 (Read
for background
only)
17-July
Special Topics: LIFO/FIFO Valuation (WBB 8: 650-657)
Game Theory (Nash’s Equilibrium)
Special Lecture #1 (Ratio Analysis)
3.WBB 8: 650657
Inventory Case
(In-Class)
Profitability Analysis
1.WBB 4
Special Topics: Debt/Equity Financing & Operating and
Financial Leverage
2.WBB 6: 440448
*QE: 4.18, 4.19
and 4.20
Special Lecture #2 (Operating Leverage)
19-July
Special Lecture #3 (Accounting Quality)
3. WBB 9: 730758
Risk Analysis (Liquidity and Solvency Analysis)
1. WBB 5: CH5:
351-379; 391399
Operating
Return
Decomposition
(handouts)
*QE: 5.1, 5.2,
and 5.21 (a-d)
ACCTG 663 | Summer 2012
Course Syllabus
Special Topics: Operating Cycle/Net Trade Cycle
2. Case 5.4:
Millenial
Technologies
3. WBB 6: 485493
Special Topics: Off-Balance Sheet Financing: Operating
and Capital Leases (Proposed New Leasing Rules)
24-July
Sunbeam (class
discussion)
Case 6.1
(Starbucks)
4. (Lightner,
DeBoskey &
Bosco, Lease
Article)
Risk Analysis (Con’t from 19-July) & Final Exam
Special Topics: Strategic Planning Models (Time
permitting)
See blackboard
for any readings
Final Exam (Open Book/Open Notes):
Chapters:
1,2,3,4,5,6, & 8 (Only pages emphasized on syllabus, if no
pages are referenced the entire chapter is testable)
26-July
Financial statement forecasting
WBB 10
Case 10.1
31-July
Expected returns and dividends-based valuation
WBB 11
Case 11.1
2-Aug
Project Research
N/A
N/A
7-Aug
Cash flow-based valuation
WBB 12
Case 12.1
9-Aug
Earnings-based and market-based valuation & Final Exam
WBB 13 & 14
Case 13.1, 14.1
14-Aug
Project Presentations
N/A
N/A
ACCTG 663 | Summer 2012
Course Syllabus
APPENDIX A
Team Project Description
1) Each team must select a company and develop a financial analysis model in Excel. Company
selection is critical. This learning experience will be better if teams select a company in the
following industries (broadly defined): manufacturing, retail, wholesale, or other industries with
inventory, fixed assets. Conglomerates or businesses with distinct business units in different
industries should be avoided (e.g., GE). The Excel model must include:
a) Five years of annual financial statement information. This information can be obtained from
Form 10-K filings found on EDGAR or the company’s website (e.g., investor relations webpage).
b) Five years of common size balance sheets, common size income statements, and common size
statement of cash flows.
c) Analyze all major ratio groups including: profitability, liquidity, solvency, and efficiency. There is
no minimum number of ratios to use. Discuss and analyze the firms’ key accounting policies.
Simply regurgitating the accounting rules or information in the firm’s disclosures is not analysis
and will be negatively weighted. Focus on the key issues and considerations for management
regarding the impact of accounting policies on financial reporting.
d) Two years of financial projections for earnings and cash flows, including relevant
subcomponents of earnings (e.g., revenue gross profit, EBITDA) and cash flow groupings (e.g.,
CFO).
e) Use at least two different valuation approaches to estimate the value of the firm’s stock price at
the end of (1) the last fiscal year of historical data and (2) the second year of the financial
projections.
2) Prepare a three page analyst report summarizing your findings. The report must include:
a) Highlights. This should be a strong introduction that briefly describes the company, its industry,
and key findings. Provide your investment recommendation for the company.
b) Business description and competitive positioning. Financial analysis.
c) Valuation
d) Investment risks.
3) Prepare a professional presentation not exceeding 30 minutes. The following are specific
requirements for the presentation:
a) YOU MUST use the standard PowerPoint template posted in the Pitch Presentation folder on
BLACKBOARD. You can change logos and graphs, but the main slide template formatting should
NOT be changed (Note: sample slides that are in template deck are FOR ILLUSTRATIVE
PURPOSES—you can disregard them and replace with you OWN inventions).
b) All TEAM MEMBERS MUST participate and have a speaking role in the presentation.
c) Try NOT to make the presentation too GIMICKY. Remember, you’re making a professional
presentation. Assume your target audience is senior level managers that are very
knowledgeable in accounting and financial reporting issues.
d) Clearly show the connections in your research from issue to issue (use of visual aids may be
helpful). Clearly discuss and analyze all relevant issues and go beyond stating the obvious.
Demonstrate mastery of the technical area.