Financial Statement Analysis

Aims and Objectives

Financial reports are the primary means by which managers communicate company results to investors, creditors and analysts.  These parties use the reports to judge company performance, to assess creditworthiness, to predict future financial performance, and to analyse possible acquisitions and take-overs.  Users of financial statements must be able to meaningfully interpret financial reports, construct measures of financial performance and analyse the reporting choices made by companies.  Also, since company managers choose accounting techniques when making their reports, users must learn to undo the effects of these accounting choices.  The purpose of this course is to give the foundation for such analysis.

Topics Covered

In this course, students will:

• Learn how firms’ operating activities are reflected in their financial reports
• Analyse the link between accounting choices and their reflection in the financial reports
• Understand the rationale for various accounting methods
• Develop a critical view of managers’ accounting choices
• Identify and undo earnings management
• Learn to compute and interpret financial ratios

Who should attend?

This is a class that is relevant and needed for everyone in the business world.  Reading and interpreting financial statements is a basic skill that impacts any business decision that relies on financial statements.  This course focuses on practical application of the accounting knowledge gained in the core financial accounting course.  The core accounting courses focuses on preparing financial statements, while this course focuses on reading and interpreting the financial statements.

Format and Teaching Methods

The course consists of 10 sessions of approximately 3 hours each.

Developing expertise in financial analysis requires a significant amount of practice.  We will therefore approach this task by learning the relevant theory and experimenting with its applications.  We will look at “textbook” cases as well as at financial statements of real companies.

Reading Materials

Business Analysis & Valuation (text-only, without cases) by Krishna Palepu, Paul M. Healy and Victor Bernard, 3rd edition (South-Western College Publishing)

Pre-requisites

The course requires a good understanding of basic accounting at the core-course level.

Assignments and Assessment

Individual assignments (20%)
Class participation (10%)
Final exam (70%)