Lahore University of Management Sciences

ACCT- 411 Applied Financial Analysis

Fall Semester 2015
Instructor Arslan Shahid Butt
Room No. SDSB- 437
Office Hours Monday & Wednesday 10 Am-12 Pm- Other times by appointment
Email Arslan.butt@lums.edu.pk
Telephone +923364856818
Secretary/TA Muhammad Umar/TBA
TA Office Hours TBA
Course URL (if any) Suraj.lums.edu.pk

COURSE BASICS
Credit Hours 3
Lecture(s) Nbr of Lec(s) Per Week 2 Duration 1 Hour and 15 Minutes
Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration
Tutorial (per week) Nbr of Lec(s) Per Week Duration

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. Strengthen students understanding of the accounting principles, methods and disclosures underlying financial
2. statements.
3. 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
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LEARNING OUTCOMES

On completion of this course students should be able to

1. Identify and apply tools and techniques for the appropriate analysis of financial statements.
2. Analyze the information contained in the financial statements and all additional notes and reports which form part
of the financial report of an organization.
3. Analyze the effects of financial reporting choices on financial statement and ratios.
4. Analyze and interpret financial statement and accompanying disclosures and to evaluate financial reporting quality.
5. Write an effective report that analyses and provides justification for decision making.
6. 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
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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 COURSE ASSESSMENT ITEM
Students get a number of opportunities to CP, Project and Exam
demonstrate their ability to communicate
effectively (CLO #5)
Ethical perspectives are substantiated in the Cases, Project and Exam
cases and in the project (CLO #4&6)
Major Goal: Analytical thinking and problem Project, CP, Quizzes, Cases, and Exam
solving skills are essential for success in this
course (CLO #1-6)
Application of information technology in Project and Cases
preparing the project report (CLO#6)
Students work in groups of 4-5 persons each Project and Cases
for cases, project and analysis.
Develop students understanding of companys Cases, CP, Quizzes, Project and Exam
financial reporting choices and its effects to
the securities markets, industry, and the
economy as a whole (CLO #6)
Major Goal: Comprehensive coverage of CP, Quizzes, Project, Cases and Exam
topics in Applied Financial Analysis (CLO #1-6)
NA NA

GRADING BREAKUP AND POLICY

Assignment(s):
Home Work:
Quiz(s): 15%
Class Participation: 5%
Attendance: 5%
Midterm Examination: 25%
Project: 20% (10 % report + 10% presentation)
Final Examination: 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.
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EXAMINATION DETAIL

Yes/No: Yes
Combine Separate: Combined
Midterm
Duration: 1 Hour and 40 Minutes
Exam
Preferred Date: During last week of examinations
Exam Specifications: Closed Books & Closed Notes

Yes/No: Yes
Combine Separate: Combined
Final Exam
Duration: 1 Hour and 40 Minutes
Exam Specifications: Closed Books & Closed Notes

COURSE OVERVIEW
RECOMMENDED
SESSION TOPICS SESSION OBJECTIVES
READINGS
1 Framework for Financial Course Pack Reading Reference 1 Discuss the role of financial reporting and
Statements Analysis 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
4-6 Foundations of Ratio and
Financial Analysis
{Common size statements;
Categories of ratios;
Integrated ratio analysis.
Earnings per share; Alternate
capital structures.}
Course Pack Reading Reference 2
Course Pack Reading Reference 3
Course Pack Reading Reference 4
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.
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7 Analysis of Inventories { Course Pack Reading Reference 5 Calculate the effect of inflation / deflation of
Impact of change in prices; inventory costs on the financial statements
Alternative methods of and ratios of companies that use different
computing cost; Adjustments inventory valuation methods
from LIFO to FIFO; Financial (FIFO)/LIFO/AWCO)
ratio effect; Reporting and Convert a companys financial statement
measurement issues; from LIFO to FIFO for the purpose of
Empirical perspectives; comparison
Market reactions to method Explain the issues that analyst should
changes; Is a change to LIFO consider when examining a companys
good news or bad news?} inventory disclosures
Case: Inventory Analysis of
Nucor
8-9 The Capitalization Decision { Course Pack Reading Reference 6 Explain and evaluate the effects on financial
Acquiring the asset: The statements and ratios of capitalizing /
capitalization decision; expensing costs
Capitalization of interest Analyze and interpret the financial
costs; Intangible assets statement disclosures regarding long lived
Analysis of Long Lived Assets} assets
Case: Software Capitalization
at IBM
10 Analysis of Depreciation and Course Pack Reading Reference 7 Explain and evaluate the effects on financial
Impairment {Depreciation statements and ratios of different
Methods: analysis of fixed depreciation methods
asset disclosures; Impairment Explain and evaluate the effects on financial
of long lived assets; Liabilities statements and ratios of
for asset retirement impairments/revaluations of assets
obligations}

11-12 Analysis of Income Taxes
{Deferred taxed; effective tax
rate; analysis of tax footnote
disclosures; permanent and
temporary tax differences.}
Course Pack Reading Reference 8
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 Course Pack Reading Reference 8 Describe the effective interest rate method
Liabilities { Long term debt; and its implications for financial analysis.
debt with equity features; Calculate and evaluate the effects of
effects of changes in interest discount/premium bonds from the
rate; } perspective of financial analysis.
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16 Analysis of Leases {Leases and Course Pack Reading Reference 10 Evaluate the different motivations for
incentives, financial reporting leasing an item instead of outright purchase.
for leases } 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.
17 Analysis of off-balance sheet Course Pack Reading Reference 11 Describe the different types of motivations
debt and understate/evaluate the impact of off
Case: Off Balance Sheet balance sheet financing.
Financing Techniques for
Texaco and Caltex
18-19 Analysis of Pension and other Course Pack Reading Reference 12 Describe, evaluate and calculate the impact
employee benefits 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.
20-22 Interoperate Investments Course Pack Reading Reference 13- Describe the classification, measurement
{Investment in securities; 14 and disclosure under IFRS for 1) investment
Analysis of marketable in financial assets, 2) investment in
securities; Equity method of associates, 3) joint ventures, 4) business
accounting; Consolidations combinations, 5) special purpose vehicles.
and comparison} Analyze the effect on financial statement
and on ratios of different methods used to
account for inter-corporate investments.
23-24 Analysis of Multinational Course Pack Reading Reference 15 Compare and contrast the current rate and
Operations 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.

25 A Synthesis Course Pack Reading Reference 16 Evaluate and understand the impact of
various accounting policies and be able to
adjust the financial statements for the
purpose of financial statement analysis.
26-27 Students Presentations N/A Group presentations based on financial
analysis of the chosen company.
28 Pre Exam Syllabus Review N/A Final Review and round up of the entire
syllabus specially covering the areas where
students lacks as identified by the group
report & presentations.
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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