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Indian Institute of Management

Lucknow

POST GRADUATE PROGRAMME


FA01205
FINANCIAL STATEMENT ANALYSIS
COURSE OUTLINE
TERM IV, 2016-2017
Instructor and Contact Information
NAME: DR. SESHADEV SAHOO
E-MAIL: SESHADEV@IIML.AC.IN
OFFICE: ROOM # 213, CHINTAN, IIM LUCKNOW
OFFICE TEL: +915226696635 (Desk), +919956333508 (Cell)

Credit: Full Credit Course


Session/ Duration: 20 sessions (90 minutes each)
COURSE DESCRIPTION
Financial statement analysis is an essential skill in a variety of occupations including investment
management, commercial lending, corporate finance, performance evaluation and extension of
credit. Recent years have seen an increased interest in and scrutiny of the accounting numbers that
are being disclosed by many publicly listed companies. In addition to that, over the years, it has
become an increasingly complex endeavour, as corporate financial statements have become difficult
to decipher. This course takes an in-depth look into company financial statements and shows how
information therein can be analysed and processed to aid many individuals including creditors,
investors, managers, consultants, auditors, directors, regulators and employees in their business
decisions. It equips students with a wide array of tools and techniques useful in many fields of
finance. Emphasis is on the quality of financial reporting and identifying the warning signs of
manipulation. Topics in this course include; segment reporting analysis, consolidation versus
standalone statement, reformulation, profitability analysis (including comprehensive income,
earnings per share, earnings management), cash flow analysis, capitalization versus expensing, offbalance sheet financing, inter corporate investment, distress prediction and projection of financial
statements. This course will also expose students to future trends in financial reporting, both national
and international.
COURSE OBJECTIVE
In today's competitive environment, effective managerial decision making requires in-depth
understanding and analysis of financial statements. The purpose of this course is to:

Understand and interpret financial filings including financial statements, managers


commentaries, footnotes and other sources of financial information.
Capture the underlying economics of business organisation. Use financial to evaluate a
companys performance.
Concisely articulate the firms pasttell the story of the firm.
Make informed predictions about future performance
Use information that a company discloses to value the companys stock.
Understand a range of factors that can indicate the quality and reliability of financial
statement information;
Detect earnings manipulation notions using accounting information and notes to accounts.
Recognise warning signals and red-flags from financial statements.

COURSE LEARNING OUTCOMES


On completion of this course, students should be able to:
1. Analyse and interpret financial statements and related reports of companies from the
viewpoints of various interest groups i.e. investors, creditors, and management.
2. Sift and analyse important information from the notes to the financial statements, portion of
annual reports and adjust the statements as needed
3. Apply different tools and techniques for assessing a company's performance, such as
financial ratios, cash flow analysis and forecasting techniques
4. Understand the business environment a company operates in and the financing, investing
and operating strategies of a company.
5. Avoid being misled by deceptive financial statements and continue to integrate the financial
numbers with a corporate finance perspective.
6. Project the companys financial statements over both the short and long term by applying
techniques in prospective analysis
7. Estimate the companys economic value using the residual income model. Value a company
by using valuation models.
8. Synthesize the results of the various analyses above and come up with distress prediction.
ALIGNMENT OF INTENDED PROGRAM & COURSE LEARNING OUTCOMES

SL.No. Programme Objectives


1
To acquire knowledge and skills in key functional
areas
2
To internalize the knowledge and skills in key
functional areas
3
To integrate and apply business knowledge
4

To develop a global perspective

To inculcate values of professionalism, ethical


leadership and social responsiveness
2

Course Learning (CL) outcomes


CL 1 to 8; Case Discussions &
Assignments
CL 1 to 8, Case Discussions &
Assignments
CL 7,8, Case Discussions &
Assignments
CL 4, 5; Case Discussions
CL 2, 3 & 5; Case Discussions

Project Report & Viva voce

To master relational and interpersonal


communication skills

REQUIRED COURSE MATERIALS AND READINGS


Basic Text Book (TB):
Financial Statement Analysis by K.R. Subramanian, John Wild, Tata McGraw-Hill, 10e
India edition (2014). Hereafter, this text book would be referred as SW.

Financial Statement Analysis and Security Valuation by Stephen H Penman, McGraw Hill
4th Edition-Special Indian edition (2014), Hereafter, this text book would be referred as
SHP.

Recommended Book (RB) for supplement:


The Analysis and Use of Financial Statements by Gerald I. White, Ashinpaul C.Sondhi,
Dov Fried, Wiley India Edition, 7th Edition. (WSF). Hereafter, this text book would be
referred as WSF.
Scheme of Evaluation:
Mid Term Exam
End Term Exam
Quizzes (total three: all are
compulsory)
Group project, assignment
and presentation
Participation including
case discussion
Total

25 Marks
35 Marks
20 Marks
10 Marks

10 Marks
100 Marks

Lecture Plan:
Session
#

Topic Topics to be
covered in the course

Readings and Book


Chapter

Assessment Criteria

1-2

Consolidated versus standalone financial


statements: Holding company and consolidated
financial statements (CFS), treatment of minority
interest, valuation of goodwill.

BV Chapter # 1
(Page: 1-54)

Problems at the end of Chapter2.


Exercise: Theories of CFS.
Research Paper: Value
relevance of CFS

3-4-5

Viewing the business through financial


statements: Reformulation of financial statement i.e.
equity statement, Analytical adjustments to balance
sheet, reformulation of income statement and equity
statements.

SHP Chapter # 7, 8,
9

Case 1: Understanding business


through reformulated Financial
statement: Chubb Corporation

BV Chapter # 3
Case-2-Page: 105-107

6-7

Estimation and evaluation of earnings per share


(EPS): Basic and Diluted EPS, Adjustment to
Bonus, Right, and stock split. Segment reporting and
analysis.

SW Chapter # 6,
(Page 328-377)
BV Chapter # 4
Page 108-134

Exercise-at the end of BV


Chapter # 4.
Assignment #1: Exercise at the
end of Chapter 4.

SW Chapter # 1&2,
and BV Chapter # 1

Case 2: Analysis of segment


data for Lucent and Roche.

(page-1-30)
Case-1 BV Page-28

Cash Flow Analysis: cash flow information, cash


flow statement an internal (and external) perspective.

SHP Chapter # 10
(page-340-360)
SW Chapter # 7
Page (400-419)

Case 3: Analysis of Cash Flow


Statement: Colgate-Palmolive,
and Coal India Ltd. (to be
distributed in the class)
Assignment # 2: CFS analysis
Suzlon Energy Ltd (BV
Chapter # 5 page-135-140).

Profitability analysis: application tools,


measurement of overall performance of the firm;
importance of return on invested capital, return on
common equity, Modified Dupont analysis.

9-10

SHP Chapter # 11
(Page 362-390)

Case 4: Ahold Versus TescoAnalyzing performance

BV Chapter #6
Page-141-151

MID TERM EXAMINATION


11

Projecting financial statements: Forecasting


models and time series properties of earnings:
Analyst Report.

SW Chapter # 9
Page 492-504
SHP Chapter # 14 &
15 (page 486-561)

Case 5 Alpha Manufacturing


Co. Ltd. (to be distributed in the
class)

12-13

Accounting value and Economic Value: EVA,


Value creation and Residual Earnings, RIV
Model (EBO Model), Abnormal Earning
Growth (AEG): anchoring value on Earnings
and BV.

SHP Chapter # 5,6,


13 Page 148191,192-229
440-484. BV Chapter
# 7 page-152-189

Case 6: Vyaderm
Pharmaceuticals.
Exercise: valuation of Coca
Cola, Valuation of equity for
ONGC

14

Off-Balance sheet financing activities: Leases and


off-balance sheet debt, Financial reporting by
lessors.

SW Chapter # 3
(Page 136-193)
BV Chapter # 8 (190)

Case 7: Off-Balance Sheet


Financing at Big 5 Sporting
Goods Corporation

15-16

Analysis of inter-corporate investments:


Investments in securities, analysis of marketable
securities, equity method of accounting.

SW Chapter # 5

Case:8
Exercise at the end of the
Chapter 5 (SW)

5
Exercise at the end of Chapter 8
(BV)

17

Analysis of multinational operations: effects of


exchange rate changes, Basic accounting issues,
foreign currency translation. Analytical difficulties
related to foreign operations

BV Chapter #10
Page-215-249

18-19

Earnings Quality: Earnings management, Analysis


of quality of financial statements: Analysts checklist,
cutting through accounting quality, income shifting,
And transaction manipulation.

SHP Chapter # 17
(Page-606-648)
BV Chapter # 11
Page-250-280

Case 9
Assignment #3
Spot the Red Flags in a Cash
Flow Statement: EDS and
Cerner Corporation (BV
page266-2670

SW Chapter # 4
BV Chapter # 9
Page-206-214

Case 10: Polymedica


Corporation (A)

Specialized Industry: Capitalization decision,


capitalization versus expensing, analytical
adjustments-specialized industries (R& D, Oil and
Gas, Advertising cost).

Accounting and Finance based measures of risk: SHP Chapter 19


Earning variability, credit risk and distress prediction (Page 696-719)
model, equity risk
SW Chapter # 10
(page 526-568)
BV Capter-12 page281-294

20

Case 11: Predicting firs


financial distress: The Merrill
Lynch Co.
Assignment # 4: Suzlon
Energy Ltd. Predicting a firm's
financial distress

END TERM EXAMINATION

Class Participation
Class participation is an integral part of the learning experience. It is expected that every student will
be prepared for each class and be a willing participant in the discussions and case studies analysis.
Students will be given marks for responding to questions raised by other students and the instructor.
Marks are also given for giving insightful comments based on your reading, analysis and pre-class
preparation. General comments with few additional inputs will get very low scores. Consistent
participation is expected.
Homework Assignments
The primary objective of homework assignments is to help you review the lecture material before
attending class. A few assignments will follow class. Written assignments are declared in the class
as well as posted at Claroline. The assignments will be a combination of computational problems,
and short cases. Assignments will be graded based on your effort and your accuracy in completion.
There are four scheduled assignments in total; you are required to submit all of them. Students may
work on the home works in small groups (maximum of 3 students). In fact, I encourage students to
submit all assignments in handwritten format only.
DETAILS OF GROUP PROJECT
Financial Statements Analysis Project: This will be team-based effort. Each team will select three
well-known publicly traded companies, which are listed and traded either on the Indian stock market
5

(BSE, NSE) or USA Stock Exchange. You are expected to play as an expert analyst in the finance
world and contribute that knowledge to class discussion, which is an important component of your
class participation. You are also required to complete a written end-of semester team report that
analyses the companies financials, earnings quality, assets quality, liabilities position, operating
strategy and other relevant accounting and disclosure policies. As part of the report you will need to
follow what you learn in the course for analysing the financial statements and apply your expertise
in analysing the financial statement for investment decision making. Final submission will also
follow a brief oral presentation and via-voce for each group. The group member must have to identify
his/her own contribution in the group. The date for submission of project report will be given in due
course.