ACCT 411-Applied Financial Analysis-Arslan Shahid Butt

Lahore University of Management Sciences
ACCT- 411 Applied Financial Analysis

Fall Semester 2014
Instructor
Room No.
Office Hours
Email
Telephone
Secretary/TA
TA Office Hours
Course URL (if any)
COURSE BASICS
Credit Hours
Lecture(s)
Recitation/Lab (per week)
Tutorial (per week)
Arslan Shahid Butt

SDSB- 437
Monday & Wednesday 10 Am-12 Pm- Other times by appointment
Arslan.butt@lums.edu.pk
+923364856818
Tahir
TBA
Suraj.lums.edu.pk
3
Nbr of Lec(s) Per Week
Duration
Duration
Duration
1 Hour and 15 Minutes
COURSE DISTRIBUTION
Core
Elective
Open for Student Category
Close for Student Category
COURSE DESCRIPTION
Whether you watch analysts on CNBC or read articles in The Wall Street Journal, you'll hear experts insisting on the importance of
"doing your homework" before investing in a company. In other words, investors should dig deep into the company's financial
statements and analyze everything from the auditor's report to the footnotes. But what does this advice really mean, and how
does an investor follow it? This course is to answer these questions by providing a succinct yet advanced overview of financial
statements analysis. If you already have a grasp of the definition of the balance sheet and the structure of an income statement,
this course will give you a deeper understanding of how to analyze these reports and how to identify the "red flags" and "gold
nuggets" of a company. In other words, it will teach you the important factors that make or break an investment decision.
COURSE PREREQUISITE(S)
1.
Successful completion of Corporate Financial Reporting.
COURSE OBJECTIVES
1.
2.
3.
Strengthen students understanding of the accounting principles, methods and disclosures underlying financial
statements.
Examine the impact that the choice of accounting methods and management estimates have on financial
statements.
Consider how reported financial statement information can be adjusted to create more useful input for financial
analysis
LEARNING OUTCOMES
On completion of this course students should be able to

1.
2.
3.
4.
5.
6.
Identify and apply tools and techniques for the appropriate analysis of financial statements.
Analyze the information contained in the financial statements and all additional notes and reports which form part
of the financial report of an organization.
Analyze the effects of financial reporting choices on financial statement and ratios.
Analyze and interpret financial statement and accompanying disclosures and to evaluate financial reporting quality.
Write an effective report that analyses and provides justification for decision making.
Discuss and debate a variety of topics including the ethical and global perspectives in application of financial
reporting standard and choices and analyze the effects respectively
UNDERGRADUATE PROGRAM LEARNING GOALS & OBJECTIVES

General Learning Goals & Objectives
Goal 1 Effective Written and Oral Communication
Objective: Students will demonstrate effective writing and oral communication skills
Goal 2 Ethical Understanding and Reasoning
Objective: Students will demonstrate that they are able to identify and address ethical issues in an organizational
context.
Goal 3 Analytical Thinking and Problem Solving Skills
Objective: Students will demonstrate that they are able to identify key problems and generate viable solutions.
Goal 4 Application of Information Technology
Objective: Students will demonstrate that they are able to use current technologies in business and management
context.
Goal 5 Teamwork in Diverse and Multicultural Environments
Objective: Students will demonstrate that they are able to work effectively in diverse environments.
Goal 6 Understanding Organizational Ecosystems
Objective: Students will demonstrate that they have an understanding of Economic, Political, Regulatory, Legal,
Technological, and Social environment of organizations.
Major Specific Learning Goals & Objectives
Goal 7 (a) Discipline Specific Knowledge and Understanding
Objective: Students will demonstrate knowledge of key business disciplines and how they interact including
application to real world situations. (including subject knowledge)
Goal 7 (b) Understanding the science behind the decision-making process (for MGS Majors)
Objective: Students will demonstrate ability to analyze a business problem, design and apply appropriate
decision-support tools, interpret results and make meaningful recommendations to support the decision-maker
Indicate below how the course learning objectives/outcomes specifically relate to any program learning goals and objectives.
PROGRAM LEARNING GOALS AND

OBJECTIVES
Goal 1 Effective Written and Oral

Communication
Goal 2 Ethical Understanding and

Reasoning
Goal 3 Analytical Thinking and
Problem Solving Skills
Goal 4 Application of Information
Technology
Goal 5 Teamwork in Diverse and
Multicultural Environments
Goal 6 Understanding Organizational
Ecosystems
Goal 7 (a) Program Specific
Knowledge and Understanding (Subject
Knowledge)
Goal 7 (b) Understanding the
science behind the decision-making
process
COURSE LEARNING OBJECTIVES

Students get a number of opportunities to
demonstrate their ability to communicate
effectively (CLO #5)
Ethical perspectives are substantiated in the
cases and in the project (CLO #4&6)
Major Goal: Analytical thinking and problem
solving skills are essential for success in this
course (CLO #1-6)
Application of information technology in
preparing the project report (CLO#6)
Students work in groups of 4-5 persons each
for cases, project and analysis.
Develop students understanding of companys
financial reporting choices and its effects to
the securities markets, industry, and the
economy as a whole (CLO #6)
Major Goal: Comprehensive coverage of
topics in Applied Financial Analysis (CLO #1-6)
NA
COURSE ASSESSMENT ITEM

CP, Project and Exam
Cases, Project and Exam
Project, CP, Quizzes, Cases, and Exam
Project and Cases
Project and Cases
Cases, CP, Quizzes, Project and Exam
CP, Quizzes, Project, Cases and Exam

NA
GRADING BREAKUP AND POLICY

Assignment(s):
Home Work:
Quiz(s):
Class Participation:
Attendance:
Midterm Examination:
Project:
Final Examination:
15%
5%
5%
25%
20% (10 % report + 10% presentation)
30%
Project: The financial statement analysis project is aimed at developing students understanding of and practical skills in financial
statement analysis and valuation. It is also designed to enhance teamwork, analytical and communication skills. To complete this
project, you are required to form teams of either 3 or 4 members. Each team must select a different industry and obtain approval
from the lecturer. Each team member must select a company within the approved industry and analyze the companys financial
reports using the FSA tools identified in the course. The group must also complete an industry comparative analysis of the 2
companies. Written reports must be submitted. Additionally, each group is required to formally present the findings of the
individual and group analyses to the class.
An overall group mark will be awarded to each student but the lecturers reserve the right to provide a reduced mark where a
student has provided a sub-standard individual company analysis. Further details on the nature and requirements of the project will
be discussed early in the course.
EXAMINATION DETAIL
Midterm
Exam
Yes/No:
Combine Separate:
Duration:
Preferred Date:
Exam Specifications:
Yes
Combined
During last week of examinations
Closed Books & Closed Notes
Final Exam
Yes/No:
Combine Separate:
Duration:
Exam Specifications:
Yes
Combined
Closed Books & Closed Notes
COURSE OVERVIEW
SESSION
4-6
TOPICS
RECOMMENDED
READINGS
SESSION OBJECTIVES
1 Framework for Financial

Statements Analysis
Course Pack Reading Reference 1
Discuss the role of financial reporting and

financial statement analysis
Discuss the role of key financial statements
and
importance
of
supplementary
information
Describe the steps In financial statement
analysis framework
2 Accounting Policies and their

impact on Financial Analysis
Case: Orthodontic Centers of
America
3 Cash Flow Statement Analysis
Foundations of Ratio and

Financial Analysis
{Common size statements;
Categories
of
ratios;
Integrated ratio analysis.
Earnings per share; Alternate
capital structures.}
Describe the general principles of revenue

recognition and the implications of these
principles for financial analysis
Describe the general principles of expense
recognition and the implications of these
principles for financial analysis
Describe, calculate and analyze basic and
diluted EPS
Compare cash flows for operating, investing
and financing activities
Convert cash flows from indirect to direct
method
Describe how cash flow is linked to income
statement and balance sheet
Calculate free cash flows
Classify, calculate, analyze and describe the
relationships between activity, liquidity ,
solvency , profitability and valuation ratios
Evaluate a company based on intelligent
ratio analysis
Demonstrate the application and importance
of DuPont analysis.
Analysis of Inventories {
Impact of change in prices;
Alternative
methods
of
computing cost; Adjustments
from LIFO to FIFO; Financial
ratio effect; Reporting and
measurement
issues;
Empirical
perspectives;
Market reactions to method
changes; Is a change to LIFO
good news or bad news?}
Case: Inventory Analysis of
Nucor
The Capitalization Decision {
Acquiring the asset: The
capitalization
decision;
Capitalization of interest
costs;
Intangible
assets
Analysis of Long Lived Assets}
Case: Software Capitalization
at IBM
Analysis of Depreciation and
Impairment
{Depreciation
Methods: analysis of fixed
asset disclosures; Impairment
of long lived assets; Liabilities
for
asset
retirement
obligations}
Calculate the effect of inflation / deflation of

inventory costs on the financial statements
and ratios of companies that use different
inventory
valuation
methods
(FIFO)/LIFO/AWCO)
Convert a companys financial statement
from LIFO to FIFO for the purpose of
comparison
Explain the issues that analyst should
consider when examining a companys
inventory disclosures
Explain and evaluate the effects on financial

statements and ratios of capitalizing /
expensing costs
Analyze and interpret the financial
statement disclosures regarding long lived
assets

statements and ratios of different
depreciation methods
statements
and
ratios
of
impairments/revaluations of assets
11-12
Analysis of Income Taxes

{Deferred taxed; effective tax
rate; analysis of tax footnote
disclosures; permanent and
temporary tax differences.}
Explain how deferred tax assets and

liabilities are created and the factors that
determine how these should be treated for
the purpose of financial statement analysis.
Describe the valuation allowance for
deferred tax assets and how should it be
treated in financial analysis.
Analyze disclosures pertaining to deferred
tax items and the effective tax rate
reconciliation
13-15
Analysis
of
Financing
Liabilities { Long term debt;
debt with equity features;
effects of changes in interest
rate; }
Describe the effective interest rate method

and its implications for financial analysis.
Calculate and evaluate the effects of
discount/premium
bonds
from
the
perspective of financial analysis.
8-9
10
16
Analysis of Leases {Leases and

incentives, financial reporting
for leases }
17
Analysis of off-balance sheet

debt
Case: Off Balance Sheet
Financing Techniques for
Texaco and Caltex
Analysis of Pension and other
employee benefits
18-19
20-22
Interoperate
Investments
{Investment in securities;
Analysis
of
marketable
securities; Equity method of
accounting;
Consolidations
and comparison}
23-24
Analysis of
Operations
25
26-27
28
Multinational
A Synthesis
Students Presentations
N/A
Pre Exam Syllabus Review
N/A
Evaluate the different motivations for

leasing an item instead of outright purchase.
Calculate and evaluate the implications on
the financial statements and ratios of leasing
the item (operating/ hire-purchase/ finance)
instead of purchasing.
Compare the disclosures pertaining to
finance / operating lease.
Describe the different types of motivations
and understate/evaluate the impact of off
balance sheet financing.
Describe, evaluate and calculate the impact

of defined benefit plans assumptions on the
defined benefit obligation and pension
expense.
Interpret pension plans disclosures including
cash flow related information.
Evaluate the underlying economic liability or
asset of a companys pension plan
Calculate the underlying economic pension
expense.
Describe the classification, measurement
and disclosure under IFRS for 1) investment
in financial assets, 2) investment in
associates, 3) joint ventures, 4) business
combinations, 5) special purpose vehicles.
Analyze the effect on financial statement
and on ratios of different methods used to
account for inter-corporate investments.
Compare and contrast the current rate and
the temporal method, evaluate the impact
of each on the companys balance sheet and
on the income statement and determine
which method is appropriate in which
scenario.
Analyze the effect on parent companys
financial ratios of the currency translation
method used.
Evaluate and understand the impact of
various accounting policies and be able to
adjust the financial statements for the
purpose of financial statement analysis.
Group presentations based on financial
analysis of the chosen company.
Final Review and round up of the entire
syllabus specially covering the areas where
students lacks as identified by the group
report & presentations.
TEXTBOOK(S)/SUPPLEMENTARY READINGS
Course Pack for Applied Financial Analysis

Financial Reporting and Analysis (Level 1 & 2), CFA Institute, USA
White Sondhi and Fried, The Analysis and Use of Financial Statements, 3rd Edition. John Wiley and Sons

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Lahore University of Management Sciences