30588 - FINANCIAL STATEMENT ANALYSIS FOR COMPANY VALUATION
Course taught in English
Go to class group/s: 31
Class-group lessons delivered on campus
To feel comfortable in this course, you should be familiar with basic financial accounting. Nevertheless, given the initial different background attending students are coming from, an overall review of the main concepts of financial accounting will be presented at the beginning of the course.
Financial statements provide relevant and reliable information about the business operations of a company and stakeholders use this information to make their economic decisions. Given that, accounting information plays a crucial role in the allocation of resources in the economy. However, financial statements are affected by the subjectivity and the discretion that accounting standards leave to financial statement preparers. Such accounting discretion can impair the trustworthiness of the financial statements and the extent to which they truly reflect firm’s business activities. As a result, stakeholders can make incorrect choices with negative implications for the overall economy. Hence, it is crucial to understand the accounting choices that firms can make and their impact on financial statement analysis. The aim of the course is to help students becoming “sophisticated users” of financial reports. The course is designed to develop students’ ability to interpret and use financial accounting information for investment purposes, combining financial statement analysis and the accounting-based valuation framework.
The most important topics that will be covered during the course are the following:
- Financial statement and cash flow analysis that stakeholder run to assess the goodness of their investment in the firm.
- Accounting analysis to identify earnings management instances as well as accounting frauds.
- Credit risk assessment (bankruptcy models)
- Valuation implications of revenue recognition
- Valuation implications of accounting for inventories
- Valuation implications of accounting for tangible and intangible assets
- Valuation implications of accounting for leases
- Valuation implications of segment reporting
- Valuation implications of accounting for financial instruments and taxes.
- Refine their knowledge and understanding of complex accounting choices;
- Identify potential accounting issues that can undermine reliability of financial statements and negatively affect outsiders’ assessment of firm business.
- Identify and assess the linkages between accounting choices and financial statement analysis
- Interpret firms’ accounting choices and their impact on outsiders’ evaluation of the firm.
- Run a critical analysis of financial statements where accounting and comparability issues are acknowledged at the moment of computing and interpreting traditional profitability, activity, liquidity and solvency ratios as well as assessing cash flows generated by the company.
- Perform an accounting analysis to detect potential cases of manipulation of financial statements.
- Apply the acquired technical knowledge and analytical skills to advise investors, banks and any other stakeholder interested in the company as well as accounting standard setters and regulators.
- develop up-to-date applied knowledge of fundamental valuation techniques by analyzing the valuation implications of a wide variety of financial reporting issues in a critical manner
- Face-to-face lectures
- Exercises (exercises, database, software etc.)
- Case studies /Incidents (traditional, online)
- Group assignments
The learning experience of this course includes face-to-face lectures, case discussions and real examples. In the first part of the course, the students will learn the tools underlying financial statement analysis, cash flow analysis and accounting analysis. These tools will be used in the second part of the course to critically assess the implications of accounting choices. In order to better learn how to apply the tools and interpret the results of the critical analyses, case studies and real examples will be used. Thanks to real examples describing “real-life” situations, students will learn how to identify and analyze real firms’ accounting choices and assess their impact on investors’ evaluation. This is expected to develop a critical approach towards accounting issues. Learning how to identify and critically analyze salient accounting choices is a relevant skill as a naïve approach can decrease the chances to detect accounting mistakes and irregularities that are not rare nowadays. Hence, the examination of real cases is definitely important for their future career. Moreover, as real examples are based on newspaper articles and financial statement repositories, students will become familiar with and learn how to use key tools in the business world. As big data are dramatically changing how outsiders use financial statements, students will also learn how to collect real-world financial accounting information from data sources and perform meaningful analyses by using spreadsheets (e.g., MS Excel) and/or statistical software packages (e.g., R). Lastly, active participation and discussion will trigger the use of their communication skills to debate on technical and complex issues.
The students can choose between two options:
- The first option is to take two written exams and the group assignment. Each partial exam represents 40% of the final grade, while the group assignment represents 20% of the final grade. In order to pass the exam, the student has to pass each partial and the group assignment. The group assignment will involve the preparation of an analyst report for which students are expected to collect and analyze data on publicly listed companies or industrial sectors. The aim of the group assignment is apply knowledge and theoretical concepts to real-life cases. Specifically, students will apply the acquired technical knowledge and analytical skills to advise investors, banks and any other stakeholder interested in the company as well as accounting standard setters and regulators. Both written exams will be based on a mix of multiple choices and exercises. The first partial assess students’ knowledge and understanding of ratio analysis, accounting analysis and credit risk assessment. The second partial evaluates student’s ability to apply theoretical concepts. Specifically, students are students are expected to apply accounting standards and assess their impact on financial ratios, cash flows and earnings management measures. The purpose of both partials is to verify: i) student’s knowledge and understanding of the main concepts and methods shared in the course; ii) student’s ability to identify potential accounting issues and iii) apply their analytical reasoning and critical thinking at the moment of analyzing the consequences of accounting choices on investors’ assessment of the firm.
- The second option is to take only a final written exam. The final written exam is a combination of the two partials described above. Hence, it is based on a mix of multiple choices and exercises relative to topics covered in class where computations and open questions are combined. The second option is to take only a final written exam. The final written exam is a combination of the two partials described above. Hence, it is based on a mix of multiple choices and exercises relative to topics covered in class where computations and open questions are combined.
The assessment of non-attending students is entirely based (100% of the final grade) on the final written exam, which has the same content as the one applied to attending students.
The main course material, for both attending and non-attending students, is:
• Palepu K. G., P. M. Healy, and E. Peek (2019), Business Analysis and Valuation: IFRS Edition (Cengage Learning), 5th edition.
In addition to the textbook, slides and other materials (i.e., academic articles, newspaper articles, exercises and useful links, etc.) will be provided during the course. Students will need to refer to the Blackboard platform.