The University of Illinois Department of Accountancy




                                     Tentative Accy 517 Syllabus
...
Grading:
   1. Group projection, non-financial firm                              10%
   2. Group bank projection          ...
Typically, the background material includes one or two footnotes and financial statements
   from recent annual reports, t...
Money Management Databases
     You can obtain the investment holdings for individual money management firms by using any
...
Course Schedule

Session 1, Tuesday, January 18
        Janet O’Brien, CPA                                                ...
Session 9, Tuesday, February 15
Case: UAL Retirement Plans                                                   Class handout...
Short class: time to prepare Bank Financial Projections due Tuesday, March 29

Spring Break: Saturday, March 19-- Sunday, ...
Session 20, Thursday, March 31
Case: Accounting Fraud at WorldCom                                                  104-071...
Appendix
                                Possible industries/firms
                   Feel free to choose your own industr...
6. Insurance companies, life
    Conseco, Inc.
    John Hancock Financial Services, Inc.
    Lincoln National Corp.
    Me...
Merck & Co Inc.
    Schering-Plough Corp.

13. Processed foods
    Campbell Soup Co.
    General Mills Inc.
    Hershey Fo...
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Monday, January 14 Tuesday, January 15

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Monday, January 14 Tuesday, January 15

  1. 1. The University of Illinois Department of Accountancy Tentative Accy 517 Syllabus Financial Statement Analysis, spring 2005; TT 12:00-1:50 p.m. Michael J. Sandretto; 225 C DKH 244-6410 (office); 352-4832 (home--before 10:30 p.m.) sandrett@uiuc.edu; michaeljsandretto@earthlink.net (home) Office hours: Tuesday and Thursday, 2:30-3:30 p.m., and by appointment Reading Material: Palapu, Krishna G., Paul M. Healy, and Victor L. Bernard, Business Analysis & Valuation: Using Financial Statements, 3rd edition, South-Western College Publishing (Cincinnati, Ohio) 2004. Case packet 1, cases and readings TIS Case packet 2, chapters 10, and 11 from Advanced Accounting The Course: This course is designed to help you understand and interpret financial statements and to value firms. Although we will use a textbook, the course focuses on cases we analyze and discuss each class. If you read the cases and participate in class discussions, you will be well-prepared for the open-book, open-note, final exam, which will consist of about four-six essay questions. Much of the analysis is general but the course focuses on publicly traded U.S. corporations subject to SEC regulations. We will focus on three primary areas: (1) Financial accounting information, including financial statements and footnotes; (2) financial projections, and (3) valuation models. Within the past fifteen years published financial statements have become far more complex and far less useful for valuing companies. Part of the problem lies with the nature of business. In the past, most of a company’s value consisted of physical assets, supported by a simple financial structure. Now, intangibles are the most important assets for many companies and, in most cases, those assets are not shown on a firm’s balance sheet. In such cases, price-to-book ratios may be meaningless. Companies and their financial structures are also far more complex than in the past. They are larger, operate in far more countries, and use complex hedges to limit risk. Thus, for most firms it is now far more difficult to estimate the future performance and current value. Another problem is that firms change far more rapidly than in the past. Reported net income may be a poor predictor of future income because of write-downs, restructurings, acquisitions, and rapid growth or decline. As a result, simple rules of thumb, such as price-earnings ratio, often work poorly. Finally, analysts place great pressure on firms to meet quarterly earnings-per-share (EPS) targets. It is very difficult to predict EPS because business is volatile. As a result, managers probably distort accounting earnings far more than in the past to meet analysts’ expectations. Given that setting, analysts must know what information is available and must understand it. They must also know how to adjust and incorporate that information into financial projections and then use those projections to value companies. This course is designed to help you with those tasks. Copyright © by Michael J. Sandretto, 2005
  2. 2. Grading: 1. Group projection, non-financial firm 10% 2. Group bank projection 10% 3. Group non-financial firm projection and valuation or Bank projection and valuation 15% 4. Group industry analysis, valuation, and presentation 25% 5. Class participation 10% 6. Final exam 30% Grading is strictly on a curve. The mean grade will be approximately 3.45-3.6 on a 4.0 scale. Group presentations. You will be assigned to one five-person group for all four of the group assignments. I will try to balance those groups by program so that groups do not consist entirely of accounting students or entirely of MBAs. I will pass out a list of the groups on the third or fourth day of class. 1. Write-up: Non-financial firm projection. Prepare a 5-10 page write-up of your firm, plus Excel spreadsheets that project the firm’s income statement and balance sheet for four or five years. Please do not exceed 10 pages of text. 2. Write-up: Bank projection. Prepare a 5-10 page write-up of your bank, plus Excel spreadsheets that project the bank’s income statement and balance sheet for four or five years. Please do not exceed 10 pages of text. 3. Write-up: Non-financial firm or bank projection and valuation. Prepare a 6-15 page write-up of your company, plus Excel spreadsheets to support your valuation. This should be the same firm or bank from 1 or 2 from above. You may change your financial projections from above, but if you do, please mention why you have made the changes. Please do not exceed 15 pages of text. 4. Write-up and Presentation: Group industry analysis, valuation, and presentation. Select an industry and then analyze and value two companies within that industry. One of the firms may be a firm from the prior assignment. Your write-up should be 10-20 pages of text. You should also include Excel projected income statements and balance sheets for four or five years for each firm, and valuation calculations for each firm. Please do not exceed 20 pages of text. You should also prepare a PowerPoint for your presentation and bring handouts of the PowerPoint presentation for your classmates. Each presentation should last 15-20 minutes, depending on the number of students in the class. I have attached as an appendix a list of possible industries and companies for this project but you need not select from this list. Note: the write-up will be due the last day of class for all groups. 5. Final Exam. The open-book, open-note, final exam will consist of about four-six essay questions. Prior to the last day of class, I will pass out background material for the final examination. At the examination, I will pass out a two-three page set of essay questions related to the background material. 2
  3. 3. Typically, the background material includes one or two footnotes and financial statements from recent annual reports, two or three recent Internet articles, and a document from the FASB, PCAOB, or SEC Web sites. I will have copies of that background material available at the examination, but it would be better to make notes on the copy you receive in class, and bring that copy to the exam. You may bring any other material to the exam, including a calculator or computer. However, a calculator or computer is not required because the questions require minimal calculations and I do not count off for math errors unless they are so serious I cannot understand your answer. Selected Web sites SEC Edgar Database www.pwcglobal.com may provide the most usable downloads of SEC Edgar information. On that Web page select “EDGARSCAN” from the Pull-down menu titled “Online Solutions” in the center of the page. Select “EDGARSCAN” on each of the next two pages to arrive at the following Web page: http://edgarscan.pwcglobal.com/servlets/edgarscan and then enter the name of a company, such as General Motors corp. Select a filing, such as 10-K 2000-12-31. To download an Excel file containing one of the three principal financial statements, under Item 8, select “Excel Spreadsheet” to the right of the statement you wish to download. To download an entire 10-K, under “Fetch the entire filing as,” select “rich text.” FASB Web site http://www.fasb.org/ Two useful sections of the FASB Web site are the comment letters: http://www.fasb.org/ocl/fasb-selectproject.php and current Exposure Documents: http://www.fasb.org/draft/ Public Company Accounting Oversight Board (PCAOB) Web site http://www.pcaobus.org/ This page of the PCAOB Web site provides Inspection reports for the four largest CPA firms: http://www.pcaobus.org/inspections/index.asp Pension Benefit Guarantee Corporation (PBGC) Web site http://www.pbgc.gov/ 3
  4. 4. Money Management Databases You can obtain the investment holdings for individual money management firms by using any Edgar database, including www.pwcglobal.com. Simply type in the name of the money management firm and then select Form 13-F, which is a listing of the stocks owned as of the end of a quarter, together with the number of shares owned of each company. The total value of all stocks owned at the end of that quarter will be listed at the top or bottom of Form 13-F. You can also obtain detailed information on each money manger by viewing the manager’s Form ADV, available at: http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_OrgSearchInit.asp Nelson’s Directories provides information about money management firms at: http://www.nelsons.com/enhanced_listings/listings.asp And at the following free registration site: http://www.nelsons.com/wbmm/login.asp?DestURL=wbmm/default.asp? NewPath=true&newPath=true Financial Information Numerous Web sites provide a wide range of financial information. Two of the most relevant for this course are: TheStreet.com at: http://www.thestreet.com/ Yahoo! Finance at: http://finance.yahoo.com/ Yahoo! Finance also provides industry information at: http://biz.yahoo.com/p/sum_conameu.html 4
  5. 5. Course Schedule Session 1, Tuesday, January 18 Janet O’Brien, CPA Class handout Cisco Systems, Inc., In-process Research and Development Expenses Class handout Session 2, Thursday, January 20 Case: The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000 Ch. 1, pp. 10-33, Palepu Read: Chapter 1, A Framework for Business Analysis and Valuation Using Financial Statements, Palepu, Healy, and Bernard Report on 2003 Limited Inspection of Deloitte & Touche, Issued by the PCAOB. Session 3, Tuesday, January 25 Case: Microsoft’s Financial Reporting Strategy 100-027 Case: PolyMedica (A) 104-023 Read: Chapter 2, Strategy Analysis, Palapu, Healy, and Bernard Session 4, Thursday, January 27 Case: Knowles Electronics Holdings, Inc. Case packet Read: Chapter 8, Prospective Analysis: Valuation Implementation, Palepu, Healy, and Bernard Note on Alternative Methods for Estimating Terminal Value, HBS 298-166 Session 5, Tuesday, February 1 Case: Harnischfeger Corporation Ch. 3, pp. 17-40, Palepu Read: Chapter 3, Overview of Accounting Analysis, Palapu, Healy, and Bernard The Earnings Game: Everyone Plays, Nobody Wins, HBR R0106c Session 6, Thursday, February 3 Case: Standard International 100-064 Read: Measuring Interim Period Performance 100-002 Case: Revenue Recognition Exercises 103-065 Read: Revenue Recognition Guidelines 103-066 Chapter 3, Overview of Accounting Analysis, Palepu, Healy, and Bernard Case: Pre-Paid Legal-Services, Inc. Ch. 4, pp. 46-60, Palepu Session 7, Tuesday, February 8 Read: Chapter 4, Implementing Accounting Analysis, Palepu, Healy, and Bernard Mini-lecture: Pension footnotes Session 8, Thursday, February 10 Case: IBM (B) 100-033 Read: Retiree Benefits 197-021 Mini-lecture: Projected pension expenses and cash flows 5
  6. 6. Session 9, Tuesday, February 15 Case: UAL Retirement Plans Class handout Required: Projected UAL pension expenses and cash flows Session 10, Thursday, February 17 Case: Deferred Taxes and the Valuation Allowance at Lucent Technologies, Inc. (A) 103-064 Bethlehem Steel Corp. Class handout Read: Accounting for Income taxes 100-035 Mini-lecture: Employee stock option footnotes. Handouts on direct charges to owners’ equity. Session 11, Tuesday, February 22 Case: eBay Inc.: Internet Success or Fairy Tale? 104-049 Cisco Systems, Inc. Non-qualified Employee Stock Options Class handout Read: FASB and Employee Stock Options 196-137 Read: Chapter 4, Implementing Accounting Analysis, Palepu, Healy, and Bernard Session 12, Thursday, February 24 Case: Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc 101-011 Chapter 5, Financial Analysis, Palepu, Healy, and Bernard. Session 13, Tuesday, March 1 Case: Olympic Financial Ltd. 197-081 Read: Chapter 5, Financial Analysis, Palepu, Healy, and Bernard. Session 14, Thursday, March 3 Case: Harley Davidson, Inc.: Motercycle Manufacturer or Financing Company? 105-027 Session 15, Tuesday, March 8 Case: Hicorp, Inc. 198-014 Chapter 6, Financial Analysis, Palepu, Healy, and Bernard. Mini-lecture: Cash flow projections Session 16, Thursday, March 10 Case: Amazon.com Valuation Exercise 800-441 Case: Amazon.com Cash Flow Projections Class handout Case: Financial Projections for a Startup Class handout Read: Chapter 6, Prospective Analysis: Forecasting, Palepu, Healy, and Bernard Session 17, Tuesday, March 15 Case: Banc One Corporation (A) 195-207 Read: Chapter 6, Prospective Analysis: Forecasting, Palepu, Healy, and Bernard Turn in: Technology Financial projections Session 18, Thursday, March 17 Case: Valuation Ratios in the Airline Industry Ch. 7, pp. 21-30, Palepu Read: Chapter 7, Prospective Analysis: Value Theory, Palapu, Healy, and Bernard 6
  7. 7. Short class: time to prepare Bank Financial Projections due Tuesday, March 29 Spring Break: Saturday, March 19-- Sunday, March 27 Session 19, Tuesday, March 29 Case: Merck & Company: Evaluating a Drug Licensing Opportunity 201-023 Read: Chapter 8, Prospective Analysis: Valuation Implementation, Palepu, Healy, and Bernard Download: Cash-flow projection Excel spreadsheet from Sandretto Web page Turn in: Bank Financial Projections 7
  8. 8. Session 20, Thursday, March 31 Case: Accounting Fraud at WorldCom 104-071 Read: Chapter 9, Equity Security Analysis, Palepu. Read: Selected portions of the Sarbanes-Oxley Act Session 21, Tuesday, April 5 Case: Warnaco Group, Inc. (A) 101-068 Read: Chapter 9, Equity Security Analysis, Palepu Short class: time to prepare: Non-financial firm or bank Projections and Valuations due Tuesday, April 12 Session 22, Thursday, April 7 Case: The Great Atlantic & Pacific Tea Company, Inc. 104-070 Read: Bond Ratings 104-060 Read: Chapter 10, Credit Analysis and Distress Prediction, Palepu Session 23, Tuesday, April 12 Case: Machinery International (A) 100-012 Read: Chapter 11, Mergers and acquisitions, Palepu Chapter 11, Translation of Foreign Financial Statements (case packet 2). Turn in: Non-financial firm or bank Projections and Valuations Session 24, Thursday, April 14 Case: Machinery International (B) 101-061 Read: Chapter 10, Foreign Currency Transactions (case packet 2). Session 25, Tuesday, April 19 Case: Enron Corporation: May 6, 2001 Sell Recommendation 104-075 Read: Chapter 13, Communication and Governance, Palepu, Healy, and Bernard Session 26, Thursday, April 21 No Class: Prepare for Group Presentations Note: I will be in my office all day for office hours. Session 27, Tuesday, April 26 Group Industry Analysis Presentations (3 groups) Session 28, Thursday, April 28 Group Industry Analysis Presentations (3 groups) Session 29, Tuesday, May 2 Group Industry Analysis Presentations (3 groups) Final Exams: Friday, May 6-Friday, May 13 8
  9. 9. Appendix Possible industries/firms Feel free to choose your own industry and firms Some of the following categories include five or six firms. You need not include more than two or three firms in your industry analysis. I listed companies that seemed interesting either because of how they operate or because of their accounting practices. The following is a useful link for finding other industries and firms within those industries: http://biz.yahoo.com/p/s_conameu.html 1. Airlines AMR Corp. (American Airlines) Delta Air Lines Inc. Southwest Airlines Inc. UAL Corp. (United Airlines) U.S. Airways Group Inc. 2. Appliance Manufacturers Maytag Corp. Whirlpool Corp. 3. Auto industry Ford Motor Co. General Motors Corp. 4. Biotechnology Applera Corp-Celera Genomics Group Cambridge Antibody Tech Group PLC Celgene Corp. Genentech Inc. Millennium Pharmaceuticals Inc. Vertex Pharmaceuticals Inc. 5. Health food grocery chains Whole Foods Market Inc. Wild Oats Markets Inc. 9
  10. 10. 6. Insurance companies, life Conseco, Inc. John Hancock Financial Services, Inc. Lincoln National Corp. MetLife Inc. Principal Financial Group, Inc. 7. Insurance companies, property and casualty Allstate Corp. American International Group, Inc. Berkshire Hathaway, Inc. Ohio Casualty Corp. Progressive Corp. 8. Investment banks/brokerage firms Goldman Sachs & Company Merrill Lynch & Co., Inc. Morgan Stanley Dean Witter & Co. 9. Money center banks Bank America Corp. Bank One Corp. Citicorp JP Morgan Chase & Co. 10. Regional banks Fifth Third Bancorp SouthTrust Corp SunTrust Banks AmSouth Bancorp First Union Corp 11. Personal Computer Manufacturers Note: Because three groups chose to analyze Dell and HP in Fall 2004, this section is not available for Spring 2005. Dell Computer Corp. Hewlett Packard Company Gateway Inc. 12. Pharmaceuticals Eli Lily & Co. Johnson & Johnson Inc. 10
  11. 11. Merck & Co Inc. Schering-Plough Corp. 13. Processed foods Campbell Soup Co. General Mills Inc. Hershey Foods Corp Kellogg Co. 14. Restaurant chains Bob Evans Farms, Inc. Darden Restaurants, Inc. (Olive Garden and Red Lobster) Krispy Kreme Doughnuts, Inc. McDonald’s Corp Panera Bread Company Tricon Global Restaurants, Inc. Wendy’s International, Inc. 15. Large Technology firms, weak financial condition AT&T Corp. Lucent Technologies, Inc. Xerox Corp. Sun Microsystems, Inc. 16. Large Technology firms, strong financial condition IBM Corp. Intel Corp. Microsoft Corp. Oracle Corp. 17. Medium-size technology firms EMC Corp. Linear Technology Corp. Applied Materials 11

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