_New York University Stern School of Business



New York University Stern School of Business

Financial Statement Analysis

B10.2303-Summer 2001

Professor John Bildersee 432 Tisch--998-0027

Email — jbilders@stern.nyu.edu Fax 995-4004

Web site — stern.nyu.edu/~jbilders

GOAL--We discuss the rationale, objectives, tools, and techniques of accounting, their impacts on corporate financial reporting and financial statement analysis, and their use within the context of other data systems and efficient markets. Traditional and nontraditional methods of financial statement analysis are described, compared and examined. We develop and analyze information from financial statements, associated notes, and allied sources and use those pieces of information to understand the operations and condition of the firm.

ACCOUNTING COURSE REQUIREMENTS—You should have a working knowledge of the materials presented in the financial accounting core course and have a willingness to analyze and interpret materials that are described in many forms; the descriptions included in annual reports are frequently imperfect and incomplete.

YOUR EXPECTATIONS—There are no simple answers to financial analysis issues. If there were, there would be little use for the course; investment and other analytical decisions would be easy and straight forward. Do NOT look for this course to provide you with the one, single, correct way to evaluate an investment opportunity. There are too many alternatives; there is disagreement as to the nature of a market equilibrium; the future is uncertain; user goals differ; the past may have been improperly measured or measured using different accounting methodologies; each firm presents itself differently and is changing; the data sets are always incomplete and are not entirely compatible with each other; and each firm represents a different package of investments, funding, policy, expertise, and analytical problems in the short-term and in the long-term.

Instead, look at the course as being able to offer you ways to analyze and compare companies in a noisy and imperfect environment and to point out issues and considerations that can affect your analysis. You may want to analyze the same firm differently in different circumstances or if you change your goals and standards; you may want to analyze two firms differently even if you retain the same goal for each firm.

TECHNIQUE--Discussion-lecture is the basic approach. Examples illustrating strengths and problems in various areas will be used. Examples will be a mix of 'blackboard' examples, examples from the annual reports and examples drawn from other sources.

Questions and comments are an integral part of the course; they are always welcome and may offer opportunities to clarify specific and general issues. Current events are also relevant.

We will not be able to cover all aspects of financial reporting so that many of our analyses are representative of those associated with other areas of financial reporting.

SOURCES—

1. Stickney and Brown (SB), FINANCIAL REPORTING AND STATEMENT ANALYSIS, (4th edition) (1999). This text bridges accounting and finance; it provides selected materials in several accounting topics, then offers analysis and examples of corporate reporting.

2. Annual reports will be distributed to be used for examples during the semester. Two major sources of examples are GE and Pfizer. Although transparencies will be used in class to aid discussions, you can download these reports and bring them to class for easy access.

3. The class website has additional support materials for your use. These materials supplement the course, but are not substitutes for classroom attendance.

Each firm presents its information in unique way; you should review each company's presentation whether or not it is presented directly in class. Failure to do so may hinder your understanding of the materials.

ASSIGNMENTS--

1. Exam #1 (c.25%)-This exam will be in-class; short answer, and problem oriented. The exam will involve finding and developing information from an annual report. If you cannot take the exam at the appointed time, then it is your obligation to take the exam BEFORE the scheduled time.

2. Exam #2 (c.35%)-This exam will be in-class; short answer, and problem oriented. It is likely that part (or all) of this exam will involve finding and developing information from an annual report. If you cannot take the exam at the appointed time, then it is your obligation to take the exam BEFORE the scheduled time.

3. In-Class Contributions to Discussion (c.5%)-There is no certain way to grade for contributions in the classroom. However, those who are prepared AND contribute regularly and thoughtfully in the classroom, including the discussion cases, will benefit. Cases and problems to be discussed (as time permits) are indicated for most classes. You do not have to hand in any of the cases or problems to be discussed.

4. Financial Statement Analysis Project (c.35%)-The goal of this project is to become familiarize with a specific firm and to make a projection about its performance in the near future using techniques presented here and elsewhere and using information from financial statements and related sources. All work must be typed.

The project is actually a series of assignments designed to familiarize you with different aspects of financial analysis. By the end of the semester, you will be able to make a reasonable projection of a firm that is not undergoing dramatic changes.

Tentative Assignment Due Dates--(All assignments are due at the sessions indicated. Note list of session dates and numbers below.)

3 Assignment 1 and annual report due (Annual report will be retained)

4 Assignment 2 due

5 EXAM #1

8 Assignment 3 due

9 EXAM #2

10 Assignment 4 due

Note: Assignments 1 through 4 ONLY can be done as group assignments.

. Sessions & Dates-- (Summer 01 (5/16-8/01))

1- 5/16

2- 5/23

3- 5/30

4- 6/6

5- 6/ 13

6- 6/ 20

7- 6/ 27

8- 7/11

9- 7/18

10- 7/25

TENTATIVE SCHEDULE--

Financial Analysis Tools

1-2 Introduction to Financial Statement Analysis

Common Size (Percentage) Statements; cross-sectional Analysis

Financial Ratios-Liquidity, Leverage, Turnover, Profitability

SB: Chapter 1, 3, 8 (553-578), 9 (619-627,643-648).

Cash Flows (SFAS 95); Transactions Analysis

SB: Chapter 2 (64-88), Chapter 9 (636-638)

Accounting Alternatives & the Quality of Accounting Numbers

3-7 Accounting & Corporate Reporting

Note that exam #1 is scheduled for the fifth class

Measurement Policies-Assets

Inventory

SB: Chapter 5 (302-312)

Property, Plant and Equipment; Portfolio Concepts

SB: Chapter 5 (312-328)

Investments - Minority and Majority

SB: Chapter 7 (461-490)

Measurement Policies-Financial Instruments

Debt; Leases

Other Financial Instruments

SB: Chapter 6 (370-397)

Measurement Policies-Financial Liabilities

Pensions

Nonpension Postretirement Benefits

SB: Chapter 6 (398-411)

Foreign Currency Related Issues-(Comprehensive Income)

SB: Chapter 7 (491-503)

Selected Uses of Financial Information

8 - 10 Forecasting Financial Statements

Forecasting Models

Error Metrics

Developing Accounting-based Forecasts

Sensitivity Analysis

SB: Chapter 10

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