Financial Statement Analysis
                                        ACC 380K.7
                                  Professo...
-2-


Analysis is to strike a balance between time spent on how to use financial statement
information versus time spent o...
-3-



Course Materials
The textbook for the course is Financial Reporting and Statement Analysis by Clyde P.
Stickney and...
-4-



Grades
Grades for the course will be determined on the basis of the following assignments and
weights.
            ...
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                        Financial Statement Analysis
                             Course Schedule
                  ...
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Session    Date     Topic/Assignment


  6       10-15     Accounting Topics – Part II
                    Assignme...
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Session    Date     Topic/Assignment


 10       11-12     Forecasting
                    Assignment: Assignment #...
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ACC 380K.7, Financial Statement Analysis

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ACC 380K.7, Financial Statement Analysis

  1. 1. Financial Statement Analysis ACC 380K.7 Professor Ross Jennings University of Texas at Austin Fall 2001 Course Contacts Professor: Ross Jennings Office: CBA 4M.228 Office Hours: Monday 9-11 or by appointment Phone: 471-5340 E-mail: RJennings@mail.utexas.edu Web Site: http://www.bus.utexas.edu/faculty/ross.jennings/ TA: Joon Lee Office: CBA 4.352 Office Hours: Tuesday 10-12 Phone: 232-6116 E-mail: joon.lee@bus.utexas.edu Introduction This course provides an overview of the use of financial accounting information in estimating the value of publicly-traded common stocks. This process consists of five steps: (a) analysing the industry and economic environment in which the firm operates; (b) analysing the accounting choices that the firm makes; (c) analysing the recent financial performance and position of the firm, over time and in comparison to other firms; (d) forecasting the financial performance of the firm in the future; and (e) estimating the value of the firm. We begin with the last step, in order to have a clear idea of where we are going. We review the dividend discount model and the residual income model as alternative valuation methods. The purpose of the rest of the course is to allow us to estimate firm value with more confidence by understanding the economic environment of the firm, the accounting choices the firm has made, the recent performance of the firm, and by forecasting complete financial statements which imposes a discipline on valuation estimates. Next, we begin the five financial analysis steps by examining the economic environment in which the firm operates to determine its sources of value and the risks that it faces. This knowledge will allow us to evaluate financial information and project that information into the future with more confidence. In the second step, we discuss the importance of the accounting choices that the firm makes and the limitations of current accounting rules to provide useful information in some economic situations. One challenge of teaching a course in Financial Statement
  2. 2. -2- Analysis is to strike a balance between time spent on how to use financial statement information versus time spent on how to read or interpret financial statement information. In this course we will review set of financial accounting topics that are important to understanding the information presented in the financial statements. Those topics include accounting for (a) inventories; (b) fixed assets; (c) R&D and advertising; (d) goodwill; (e) leases; (f) stock-based compensation; (g) pensions and other post-retirement employee benefits (OPEB); (h) deferred tax assets and liabilities; (i) contingencies; (j) restructurings; and foreign currency translation adjustment. We will also discuss recent accounting rules related to consolidations and segment disclosures. The third step is to use financial accounting information to compute ratios to evaluate the financial performance and position of a firm. These ratios will evaluate the efficiency, leverage, liquidity, and profitability of the firm. Using these ratios we will evaluate past performance and trends that may persist into the future, and identify potential areas for improvement. In the fourth step, we use our previous analysis of the firms’s accounting, economic environment and recent performance to form a basis for forecasting complete financial statements into the future. The final step is to use these forecasts as a basis for estimating the value of the firm, hopefully with much more confidence than at the beginning of the course. Assignments We will meet once each week for three hours. In general, during the first part of each class session we will discuss the assignment for that session. Some of these assignments will be done in groups and some will be done individually. During the second part of each class session we will have a lecture/discussion of the new topic that will be the basis for the next week’s case. Overhead slides for the lecture/discussion will be made available in advance. Each week you should do the following before coming to class: (a) complete the assigned readings for that day, (b) prepare the written assignment for that day (if any) and the assignment to be discussed in class that day, (c) briefly review the overheads that will be used in class that day. The better prepared you are, the more you will get out of each class and the more you will be able to contribute to your classmates. Groups A substantial amount of work in this class will be done in groups. Your first group assignment is due on September 17, the second class session. Before that time you are expected to form a group that has no more than three persons in it. When you have formed the group, one of the members should send me an e-mail giving me the names and e-mail addresses of all of the members of the group. You may maintain the same group for all group assignments, or you may change groups whenever you wish. However, each time there is a change in group membership one of the members from each group that is affected should send me an e-mail with the names and e-mail addresses of the new members of the group.
  3. 3. -3- Course Materials The textbook for the course is Financial Reporting and Statement Analysis by Clyde P. Stickney and Paul R. Brown, fourth edition, published by Dryden. Throughout the semester we will be using the annual reports of three competing chains of grocery stores, Albertson’s, Kroger, and Safeway. You may obtain a copy of their annual report either by logging onto their web site or by calling their investor relations department. Here are those internet addresses and telephone numbers: Albertson’s http://www1.albertsons.com/corporate/ 208-395-6200 Kroger http://www.kroger.com/aboutourcompany.htm 513-762-1220 Safeway http://www.safeway.com/corp_home.asp 925-467-3790 I also recommend that you obtain two or three annual reports of other publicly-traded companies to use as resources throughout the class. A big part of this class is getting comfortable reading annual reports, and you will get more out of that part of the class if you have several different annual reports to refer to and compare as we discuss many of the topics in the course. Many companies now have their financial statements on-line at the company web site where they can be downloaded and printed out. Alternatively, you can send the company an e-mail message or short note asking for a hard copy of the most recent annual report and you will receive the published version with the glossly pictures. Class Web Site There is a web site for the class located at http://www.bus.utexas.edu/faculty/ross.jennings/ This site contains links to (a) the syllabus, (b) all assignments, (c) overhead slides for each class session, (d) specific company sites that will be useful during the semester, and (e) other sites with financial statement analysis resources.
  4. 4. -4- Grades Grades for the course will be determined on the basis of the following assignments and weights. Grading Summary Assignment #1 – Group 5% Assignment #2 – Group 10% Assignment #5 – Individual 10% Two of Assignments #6, 7, 8, and 9 – Individual 20% Assignment #10 – Individual 10% Assignment #11 – Group 10% Assignment #12 – Group 5% Final Project – Group 20% Class Participation 10% Total 100% Honor Code Collaboration is strongly encouraged outside of class, but within limits. The limits on your collaboration are described at the end of each of the cases you are expected to prepare. Please read these limitations carefully and adhere to them. Violations will be considered to be violations of the Honor Code. Disabilities The University has requested that I include the following information in this syllabus: The University of Texas at Austin provides upon request appropriate academic accommodations for qualified students with disabilities. For more information, contact the Office of the Dean of Students at 471-6259, 471-4641 TTY.
  5. 5. -5- Financial Statement Analysis Course Schedule Professor Ross Jennings University of Texas at Austin Fall 2001 Session Date Topic/Assignment 1 9-10 Introduction In-Class: Overview of course, schedule and grading policy A trial valuation of a firm with limited information 2 9-17 Valuation – Part I Assignment: Assignment #1 (in groups, write up and turn in) Read Chapter 1 in Stickney and Brown In-Class: Introduction to valuation, using the dividend discount model and the residual income model 3 9-24 Industry Analysis Assignment: Assignment #2 (in groups, write up and turn in) Assignment #3 (class discussion only) Read Chapter 2 in Stickney and Brown In-Class: Overview of industry analysis 4 10-1 Ratio Analysis – Part I Assignment: Assignment #4 (class discussion only) Problems 2.6, 3.3, 3.4, 3.6, 3.7, 3.10 (class discussion only) Read Chapter 3 in Stickney and Brown In-Class: Introduction to ratio analysis. 5 10-8 Accounting Topics – Part I Assignment: Assignment #5 (individual, write up and turn in) Read Chapter 4 in Stickney and Brown In-Class: Various accounting topics: the income statement, special items, extraordinary items, discontinued operations and deferred taxes.
  6. 6. -6- Session Date Topic/Assignment 6 10-15 Accounting Topics – Part II Assignment: Assignment #6 (individually, write up and turn in) Problem 4.4 (class discussion only) Read Chapter 5 in Stickney and Brown In-Class: Various accounting topics: inventory, plant and equipment, goodwill, advertising and research & development. 7 10-22 Accounting Topics – Part III Assignment: Assignment #7 (individually, write up and turn in) Problem 5.3 (class discussion only) Case 5.4 (class discussion only) Read Chapter 6 in Stickney and Brown In-Class: Various accounting topics: leases, stock-based compensation, pensions and other post-retirement employee benefits (OPEB), and contingencies. 8 10-29 Accounting Topics – Part IV Assignment: Assignment #8 (individually, write up and turn in) Case 6.1 (class discussion only) Read Chapter 7 in Stickney and Brown In-Class: Various accounting topics: consolidations, segment disclosures, and international accounting standards. 9 11-5 Ratio Analysis – Part II Assignment: Assignment #9 (individually, write up and turn in) Problems 7.9 and 7.10 (class discussion only) Read Chapter 8 in Stickney and Brown In-Class: More on ratio analysis You should be prepared to discuss all assignments in class on the day they are due, but you must only turn in two of assignments 6, 7, 8, and 9.
  7. 7. -7- Session Date Topic/Assignment 10 11-12 Forecasting Assignment: Assignment #10 (individually, write up and turn in) Problems 8.1, 8.4 (class discussion only) Read Chapter 10 in Stickney and Brown In-Class: Step-by-step introduction to forecasting 11 11-19 Valuation – Part II Assignment: Assignment #11 (in groups, write up and turn in) Scan Chapters 11 and 12 in Stickney and Brown In-Class: Using forecasted financial statements to value firms and estimating the cost of capital 12 11-26 Valuation – Part III Assignment: Assignment #12 (in groups, write up and turn in) No reading In-Class: Complete the discussion of valuation 13 12-3 Group Presentations Assignment: Final project is due Friday, December 7, 2001 In-Class: Group Presentations You should be prepared to discuss all assignments in class on the day they are due, but you must only turn in two of assignments 6, 7, 8, and 9.

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