MW 12:30pm-1:30pm, Or By Appointment
MW, 2:00pm to 3:15pm
Final Exam: TBD
Class will not meet on: School Holidays
Final Exam: TBD
This course is designed to prepare you to interpret and analyze financial statements effectively. This course explores in greater depth financial reporting topics introduced in the core course in financial accounting and also examines additional topics not covered in that course. The viewpoint is that of the user of financial statements. However, we develop sufficient understanding of the concepts and recording procedures, to enable you to interpret various disclosures in an informed manner. We discuss each financial reporting issue in terms of its effect on assessments of a firm’s profitability and risk. We then apply the analytical tools and concepts in competitor analysis, and credit decisions. This course is designed primarily for students who expect to be intensive users of financial statements as part of their professional responsibilities.
The United States is moving towards adopting international accounting standards. We will be looking at U.S. GAAP and what kinds of changes you can expect to see in the future. We will see how these changes will impact you both as a student of accounting and as a future user of accounting information. We will be discussing this all during the course.
The readings, problems, and cases for the course come from Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th edition, by Wahlen, Baginski, & Bradshaw. (FSA) You will also need a copy of the General Mills Financial Statements 10-K, which can be downloaded at: http://www.generalmills.com/corporate/investors/index.aspx.
Go to the 2010 Annual Report and download form 10-K.
Three Internet addresses may prove useful to you at some point in the course:
1. Filings with the Securities and Exchange Commission: http://www.sec.gov/.
2. Pronouncement of the Financial Accounting Standards Board: http://www.fasb.org.
3. Pronouncement of the International Accounting Standards Committee: http://www.iasc.org.uk/.
We will also be discussing current articles on the subject. You may not use the 6th Edition.
A financial statement analysis package (FSAP) is available to ease the calculation of financial ratios and to perform other analyses. Access FSAP and the user manual at:
Groups may be 3 to 4 people. Each group will choose a manufacturing or merchandising (retailing) firm to analyze, and compare it to a secondary company. The analysis should cover the relevant topics discussed during the course and Powerpoints will be handed in and presented toward the end of the term. You are to summarize the economics and current conditions in the industry, describe the strategies each of the firms pursue, perform a profitability and risk analysis, and assess the reasonableness of the current market price. More details will be given as the semester progresses. I will assign the groups.
In general, students in this course can expect a grading distribution similar to that used in our core courses, where:
> 25-35% of students can expect to receive A’s (for excellent work)
> 50-70% of students can expect to receive B’s (for good or very good work)
> 5-15% of students can expect to receive C’s (for adequate or below work)
Midterm 35%, Final 45%, Group Presentation 15%, Class Participation 5%
The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.
If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.
ASSIGNMENTS & ATTENDANCE
Readings, cases and/or problems are assigned for each class. You should come to class prepared to discuss your analysis of the cases and problems. Regular class participation is important to the learning process for you and your classmates.
Class attendance is mandatory and part of a student's grade. Absences may be excused only in the case of documented serious illnesses, family emergency, religious observance, or civic obligation. If you will miss class for religious observance or civic obligation, you must inform your instructor no later than the first week of class. Recruiting activities are not acceptable reasons for class absence. A maximum of two unexcused absences will be allowed.
I reserve the right to lower a grade or fail an individual if attendance is unsatisfactory.
Students are expected to arrive to class on time and stay to the end of the class period. Chronically arriving late or leaving class early will have an impact on a student's grade. Students may enter class late only if given permission by the instructor and must do so without disrupting the class.
Assignments are due at the end of the class assigned. No late assignments will be accepted nor or emailed or faxed assignments.
All assignments should be prepared using word processing software with type size no smaller that 12 point. During class discussions, please feel free to make changes to your solutions, but do so in a way that clearly indicates that they are the result of class discussion (e.g., using a different color of ink).
You may work in groups to discuss homework assignments. However, each person should prepare his/her own individual homework solutions to be submitted. Ideally you should work through each day’s assignment on your own before discussing it with anyone. You can then make changes to your solution based on your learning in any discussion. Interpretations of the analysis should be in your own words.
Participation is an essential part of learning in this course. Students are expected to participate in all facets of classroom learning.
Students are expected to come to class prepared, having read text and/or assigned readings prior to class. Homework, case studies, and other assignments, are expected to be completed and handed in on time.
Laptops, cell phones, Smartphones, and other electronic devices are a disturbance to both students and professors. All electronic devices must be turned off prior to the start of each class meeting.
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior. Students who fail to do so may be asked to leave the classroom.
Collaboration on Graded Assignments
Students may not work together on graded assignment unless the instructor gives express permission.
Course evaluations are important to us and to students who come after you. Please complete them thoughtfully.
Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:
The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:
Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505
To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin. Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications. Additionally, your document will become part of the Turnitin database.
Your class may be recorded for educational purposes
If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend. If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.
January 24th & 26th
TOPIC: INTRODUCTION TO COURSE AND FINANCIAL STATEMENT ANALYSIS
READ CHAPTER 1
1. Overview of financial reporting and financial statement analysis.
2. Understand most effective means of mastering course and financial statement analysis.
3. Discussion of General Mills Financials. Prepare problem 1.12 (p. 65, 68, & 69).
January 31st & February 2nd
TOPIC: FINANCIAL REPORTING HIGHLIGHTS
1. Review the purpose, underlying concepts, and accounting principles related to the balance sheet, the income statement, and the statement of cash flows.
2. Use common size statements to make preliminary interpretations of the profitability and risk of a firm.
3. Review key principles that drive the preparation of financial reports.
4. Understand the environment in which financial reporting principles are determined, as well as the limitations presented when analyzing a firm using financial reports.
READ: FSA, Chapter 1,
HAND IN: Case 1.2 – (NIKE: Somewhere Between a Swoosh and a Slam Dunk).
Questions on Pages 87, 91, & 95.
February 7th & 9th
TOPIC: STATEMENT OF CASH FLOWS
1. Understand the relation between net income and cash flow from operations for firms in various industries.
2. Understand the relation between cash flows from operating, investing, and financing activities for firms in various stages of their life cycles.
3. Prepare a statement of cash flows from balance sheet and income statement data.
READ: FSA, Chapter 3, General Mills Cash Flow Statement - hand in WT Grant case 3.3, P. 226-243
PREPARE: Problems 3.15 through 3.20, & 3.25
February 14th, 16th, & 23rd
TOPIC: PROFITABILITY AND RISK ANALYSIS
1. Analyze and interpret changes in the operating profitability of a firm using the rate of return on assets and its components, profit margin and total assets turnover.
2. Analyze and interpret changes in the rate of return on common shareholders’ equity including the conditions when a firm uses financial leverage successfully.
3. Understand the importance of effective working capital management and apply analytical tools for assessing short-term liquidity risk.
4. Understand the benefits and risks of financial leverage and apply analytical tools for assessing long-term solvency risk.
READ: FSA, Chapter 4 & 5, Problem 4.15, 4.16, 4.17, 4.18, 4.19 (4.23 & 5.15)
PREPARE: Case 4.2 Wal-Mart, Pages 331-344.
February 28th & March 2nd
TOPIC: DATA ISSUES IN ANALYZING FINANCIAL STATEMENTS
1. Develop an understanding of the concept of “earnings quality,” with emphasis on the sustainability, measurement and manageability of reported earnings.
2. Master the ability for deciding when and how to adjust reported income in order to use it in evaluating performance and in predicting future earnings of a firm.
3. Understanding the differences of Specific Events & Conditions that affect Earnings' Equity.
READ: FSA, Chapter 7, Pages 522-549; Chapter 8, Pages 630-649 & 650-657; Chapter 9
PREPARE: Problem 9.9 & 9.10
March 7th Catch-Up
March 9th MIDTERM
March 21st & 23rd
TOPICS: INCOME RECOGNITION, LIFO FOOTNOTE ADJUSTMENTS, FIXED ASSETS, INTANGIBLES, SOFTWARE DEVELOPMENT COSTS
1. Observe the effects on the financial statements of recognizing income prior to the time of sale, at the time of sale, and subsequent to the time of sale.
2. Observe the time series pattern of income when firms recognize income prior to the time of sale, at the time of sale, and subsequent to the time of sale.
3. Review the accounting for inventories and depreciable assets.
4. Examine the impact on assets and net income of capitalizing and amortizing intangibles development
5. Identify the financial statement effects of alternative ways of organizing research and development activities and restate the income statement to a format that enhances analysis of the profitability of a technology-based firm.
READ: FSA, Chapter 8: Revenue Recognition, Pages 630-649
LIPO, Pages 650-657
PREPARE: Problem 8.15, 8.21, 7.15.
March 28th & 30th
ACCOUNTING FOR INCOME TAXES
1. Understand the need for recognizing deferred income tax expense when book income differs from taxable income because of temporary differences.
2. Understand the conditions that give rise to deferred tax assets and deferred tax liabilities.
3. Use disclosures of individual deferred tax assets and deferred tax liabilities to study amounts recognized for financial and tax reporting.
4. Use disclosures of the effective tax rate to understand why a firm’s average tax rate differs from the statutory tax rate.
5. Analyze the impact of income taxes on assessments of profitability.
READ: FSA, Chapter 2, pages 121-131, & Chapter 8, Pages 661-672.
General Mills Footnote 16.
PREPARE: Problem 2.14, 8.26, In-Class Problem
April 4th & 6th
LIABILITY RECOGNITION AND VALUATION
1. Understand and apply the concept of an accounting liability to various transactions intended to keep debt off of the balance sheet.
2. Observe the importance of identifying the entity bearing the risks and enjoying the economic return when deciding liability recognition issues.
READ: FSA, Chapter 5 (pages 460 – 493)
PREPARE: Problem 6.17, 6.18, 6.19, Hand-Out Problem
1. Understand the distinction between the operating lease method and the capital lease method, including the criteria for using each method and their financial statement effects.
2. Convert firms using the operating lease method to the capital lease method.
READ: FSA, Chapter 8
April 11th & 13th
PENSION AND HEALTHCARE BENEFITS
1. Distinguish between the amounts that firms report on their financial statements with respect to a pension or healthcare benefit plan and to the amounts that appear on the financial statements of the pension or healthcare benefits fund and understand why the two differ.
2. Use pension and healthcare disclosures to measure the economic status and financial performance of a pension or a healthcare benefits plan.
3. Observe the role of actuarial assumptions in accounting for pensions and healthcare benefits.
4. Understanding reserves in the financial statements
READ: FSA, Chapter 8 (pages 672 – 684) Problem 8.22
CATCH UP & REVIEW
April 18th & 20th
TOPICS: FORECASTING FINANCIAL STATEMENTS
READ: Chapter 10, Problem 10. 15
April 27th, 29th, May 2nd, & May 4th - PRESENTATIONS
TBD - FINAL EXAM