ANALYSIS OF FINANCIAL STATEMENT

1.Overview of Financial Reporting an Financial Statement Analysis

• Overview of Financial Statement Analysis

• Identify the Industry Economic Characteristics
• Tools for Studying Industry Economics
• Value Chain Analysis
• Porter’s Five Forces Classification
• Economic Attributes Framework
• Identify the Company Strategy
• Framework for Strategy Analysis
• Asses the Quality of the Financial Statements
• Balance Sheet – Measuring Financial Position
• Income Statement – Measuring Operating Performance
• Statement of Cash Flows
• Summary of Financial Statements and Notes
• Analyze Profitability and Risk
• Tools of Profitability and Risk Analysis
• Value the Firm
• Role of Financial Statement Analysis in an Efficient Capital Market
  

2. Asset and Liability Valuation and Income Measurement

• Asset and Liability Valuation
• Historical Value: Acquisition Cost
• Historical Value: Adjusted Acquisition Cost
• Historical Value: Present Value of Cash Flows Using
• Historical Interest Rates
• Current Values: Current replacement Cost
• Current Values: Net Realizable Value
• Current Values: Present Value of Cash Flows
• Using Current Interest rates
• GAAP Valuations
• Income Recognition
• Treatment 1: Value Changes Recognized on the Balance Sheet and Income Statement When realized
  

3. Income Flows Versus Cash Flows

• Key Relationships in the Dynamic of a Business
• Income Flows, Cash Flows and Life Cycle relations
• Net Income and Cash Flow from Operations
• Investing and Financing Activities
• Illustrations of Cash Flow Relations
• Preparing the Statement of Cash Flows
• Algebraic Formulation
• Classifying Changes in Balance Sheet Accounts
• Illustration of the Preparation Procedure

4. Profitability Analysis

• Profitability Analysis
• Rate of Return on Assets
• Disaggregating ROA
• Economic and Strategic Factors in the Interpretation of ROA
• Analyzing the Profit margin for ROA
• Analyzing Total Assets Turnover
• Supplementing ROAs in Profitability Analysis
• Rate of Return on Common Shareholders’ Equity
• Earnings Per Common Share
• Calculating EPS
• Criticisms of EPS
• Interpreting Financial Statement Rations
• Comparisons with Corresponding Ratios of Earlier Periods
• Comparisons with Corresponding Ratios of Other Firms

5. Risk Analysis

• Framework for Risk Analysis
• Analyzing Short-term Liquidity Risk
• Analyzing Long-term Solvency Risk
• Analyzing Credit Risk
• Analyzing Bankruptcy Risk
• The Bankruptcy Process
• Models of Bankruptcy Prediction
• Synthesis of Bankruptcy Prediction research
• Market Equity Beta Risk
• Financial reporting manipulation Risk
• Motivation for Earnings Manipulation
• Empirical Research on Earnings Manipulation
• Application of Beneish’s Model to Sunbeam Corporation
• Summary of Income manipulation Risk

6. Quality of Accounting Information and Adjustments to Reported Financial Statement Data

• Accounting Quality
• High Quality Reflects Economic Information Content
• High Quality Signals Earnings Persistence Over Time
• Discontinued Operations
• Extraordinary Items
• Changes in Accounting Principles
• Items of Other Comprehensive Income
• Impairment Losses on Long-lived Assets
• Restricting and Other Charges
• Changes in Estimates
• Gains and Losses from Peripheral Activities
• Restated Financial Statement Data
• Account Classification Difference
• Financial reporting Worldwide
• Warnings Management
• Accounting for Fixed Assets
• Fixed Asset Valuation
• Depreciable Life
• Depreciation Method
• Impairment of Fixed Assets
• Persistent Earnings and Fixed Asset Reporting
• Accounting for Intangible Assets
• Accounting for Research and Development Costs
• Accounting for Software Development Costs
• Accounting for Goodwill
• Persistent Earnings and Intangible Asset Reporting
• Valuing Intangibles – Is it Possible?

7. Liability Recognition and Related Expenses

• Principles of Liability Recognition
• Principles of Liability Valuation
• Application of Criteria for Liability Recognition
• Controversial Issues in Liability recognition
• Issuance of Hybrid Securities
• Off-Balance-Sheet Financing Arrangements Leases
• Operating Lease Method
• Capital Lease Method
• Choosing the Accounting Method Effects on Lessor
• Lease Accounting for tax Purposes
• Converting Operating Leases to Capital Leases
• Impact of Accounting for Operating Leases as Capital Leases
• Derivative Instruments
• Nature and Use of Derivative Instruments
• Accounting for Derivatives

8. Forecasting Pro-Forma Financial Statements

• Overview
• Introduction to Forecasting
• Preparing Pro-Forma Financial Statements
• General Forecasting Principles
• Six-Step Forecasting Game Plan
• Practical Tips for Implementing the Six-Step Game Plan
• Using FSAP to Prepare Pro-Forma Financial Statements
• Project Sales and Other revenues
• Projecting Sales
• Projecting Other revenues
• Project Operating Expenses
• Project the Assets on the Balance Sheet
• Project Liabilities and Shareholders’ Equity
• Project Interest Expense, Interest Income, Income Tax Expense, and the Change in Retained Earnings
• Closing the Loops: Solving for Co-Determined Variables
• Projecting the Statement of Cash Flows
• Shortcut Approaches to Forecasting
• Analyzing Pro-Forma Financial Statements
• Sensitivity Analysis and Reactions to Announcements Summary

9. Foundations of Ratios and Financial Analysis

• Purpose and Use of Ratios
• Ratios: Cautionary Notes
• Common-Size Statements
• Discussion of Ratio by Category
  

  i. Activity Analysis
  ii. iquidity Analysis
  iii. Long term Debt and Solvency Analysis

• Ratios: An Integrated Analysis
  

  i. Analysis of Firm Performance
  ii. Economics Characteristics and Strategies
  iii. Classification and Partitioning or Ratios
  iv. Ratios: Pattern of Disclosure, Definition and Use

10. Empirical Research: Implication for Financial Statement Analysis

• The Classical Approach
• Market Based Research
• Efficient Market Theory
• Modern Portfolio Theory
• Test of the Mechanistic Hypothesis versus the EMH
• The Ball and Brown Study
• Information Content Studies
• The Relationship b/w Earning and Stocks Return
• Market Based Research-Current Status
• Market Anomalies
• Positive Accounting Research
• Disclosure and Regulatory Requirements
• Agency Theory
• Direction of Current Research
• Ball and Brown Revisited-Back to the Future
• Implication for Financial Statements Analysis

11. Analysis of Inventories

• Inventory and Cost of Goods Sold: Basic Relationships
• Scenario 1: Stable Prices
• Scenario 2: rising Prices
• Comparison of Information Provide by Alternative Method
• Balance Sheet Information: Inventory Accounts
• Income Statements Information: Cost of Goods Sold
• LIFO Versus FIFO: Income, Cash Flow and Working Capital Effects
• Adjustment from LIFO to FIFO
• Adjustment of Inventory Balances
• Adjustment of Cost of Goods Sold
• Adjustment of Income to Current Cost Income
• Financial Ratios: FIFO Versus LIFO
• Profitability: Gross Profit Margin
• Liquidity: Working Capital
• Activity: Inventory Turn Over
• Solvency: Debt to Equity
• LIFO: Reporting and Measurement Issues
• Initial Adoption or Change to LIFO
• LIFO Liquidation
• Declining Prices
• LIFO and Interim Reporting
• LIFO Inventory Method

12. Analysis of Long Lived Assets

• Acquiring the Asset: The Capitalization Decision
• Conceptual Issues
• Financial Statement Effects
• Need for Analytic Adjustments
• Valuation Implications
• Other Valuation and Economic Consequences

13. Analysis of Income Taxes

• Accounting for Income Taxes
• Basic Issues
• Deferred taxes: Alternative Approaches

14. Analysis of Financing Liabilities

• Balance Sheets Debt
• Current Liabilities
• Long Term Debt
• Debt with Equity Features
• Effect of Changes in Interest Rates
• Retirement of Debt Prior to Maturity

RECOMMENDED BOOKS:

1. White, Sondhi, Fried: The Analysis and Use of Financial Statements
2. Stickney, Brown, Wahlen: Financial Reporting and Statement Analysis 5th Edition
3. Charles H. Gibson: Financial Reporting Analysis 10th Edition