Financial Statement Analysis - 2018/19

Educational objectives

The main objective of this course is to equip you with the knowledge to: a) read, interpret and analyze financial statements to make informed business decisions regarding investment, credit, or resource allocation; b) compare financial statements; c) analyze the quality of financial statements; d) understand and present to stakeholders the firm’s financial results. Such skills are required for equity and credit analysts, executives, bankers, auditors, consultants and other users of financial information.

Topics

The business environment: Macroeconomic indicators, industry characteristics, competitive position, firm’s strategy.

Review of financial statements: Review of line items from the core course Introduction to Accounting; Common-size financial statements, cross-sectional comparisons and time-series analysis; Introduction to XBRL for financial reporting.

Financial reporting quality: Overview of earnings quality and earnings management; Concept of accrual accounting; How diagnostics are developed to detect manipulation in financial statements.

Reformulation of financial statements: Why reformatting financial statements is necessary for analysis; How operating, investing and financing activities are depicted in reformatted financial statements; Working capital analysis; Income statement ratios and balance sheet ratios, such as profit margin ratios and leverage ratios; The different types of cash flows in a business and how they relate to each other; Direct and indirect calculation of cash from operations; Cash flow analysis; Free cash flow and capital expenditures; Profitability analysis.

Credit risk analysis: Liquidity and solvency ratios for credit analysis.

Learning outcomes

Knowledge and understanding: Knowledge of the main line items of the financial statements; Understanding financial statement analysis and evaluation tools for various business decisions; Knowledge of the main accounting ratios; Understanding how free cash flow is generated and disposed of; Knowledge of profitability analysis and liquidity analysis; Understanding how XBRL format improves financial statement analysis.

Ability to apply knowledge and understanding: Reformulate income statements and balance sheets; Analyze financial statements using appropriate accounting ratios; Compare financial statements and conduct time-series and cross-sectional analyses; Carry out an accounting quality analysis on a set of financial statements; Perform a credit risk analysis; Build a spreadsheet and apply automated data analysis tools and techniques to extract financial data and analyze financial statements.

Making judgments: Interpret the outcome of financial statement analysis and assess the financial situation of a firm;