POST GRADUATE PROGRAMME

FA01205
FINANCIAL STATEMENT ANALYSIS
COURSE OUTLINE
TERM IV, 2019-2020

Instructor and Contact Information

NAME: DR. SESHADEV SAHOO
E-MAIL: SESHADEV@IIML.AC.IN
OFFICE: ROOM # 213, CHINTAN, IIM LUCKNOW
OFFICE TEL: +91-522-6696635 (Desk), +91-9956333508 (Cell)

Credit: Full Credit Course

Session/ Duration: 20 sessions (90 minutes each)

COURSE DESCRIPTION

Financial statement analysis is an essential skill in a variety of occupations including investment

management, commercial lending, corporate finance, performance evaluation and extension of
credit. Recent years have seen an increased interest in and scrutiny of the accounting numbers that
are being disclosed by many publicly listed companies. In addition to that, over the years, it has
become an increasingly complex endeavour, as corporate financial statements have become difficult
to decipher. This course takes an in-depth look into company financial statements and shows how
information therein can be analysed and processed to aid many individuals including creditors,
investors, managers, consultants, auditors, directors, regulators and employees in their business
decisions. It equips students with a wide array of tools and techniques useful in many fields of
finance. Emphasis is on the quality of financial reporting and identifying the red flags. Topics in this
course include; consolidation versus standalone statement, reformulation, forecasting performance,
strategic implication of cash flow statement, inter corporate investment, analysis of multinational
operations. This course will also expose students to recent practices in analyst reporting practices for
financial statement analysis.

COURSE OBJECTIVE

In today's competitive environment, effective managerial decision making requires in-depth

understanding and analysis of financial statements. The purpose of this course is to:

 Understand and interpret financial filings including financial statements, manager’s

commentaries, footnotes and other sources of financial information.
 Capture the underlying economics of business organisation. Use financial to evaluate a
company’s performance.
 Concisely articulate the firm’s past—tell the story of the firm.
 Make informed predictions about future performance
 
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 Use information that a company discloses to value the company’s stock.
 Understand a range of factors that can indicate the quality and reliability of financial
statement information;
 Detect earnings manipulation notions using accounting information and notes to accounts.
Recognise warning signals and red-flags from financial statements.

COURSE LEARNING OUTCOMES

On completion of this course, students should be able to:

1. Analyse and interpret financial statements and related reports of companies from the
viewpoints of various interest groups i.e. investors, creditors, and management.
2. Sift and analyse important information from the notes to the financial statements, portion of
annual reports and adjust the statements as needed
3. Apply different tools and techniques for assessing a company's performance, such as
financial ratios, cash flow analysis and forecasting techniques
4. Understand the business environment a company operates in and the financing, investing
and operating strategies of a company.
5. Avoid being misled by deceptive financial statements and continue to integrate the financial
numbers with a corporate finance perspective.
6. Project the company’s financial statements over both the short and long term by applying
techniques in prospective analysis
7. Estimate the company’s economic value using the residual income model. Value a company
by using valuation models.
8. Synthesize the results of the various analyses above and come up with distress prediction.

ALIGNMENT OF INTENDED PROGRAM & COURSE LEARNING OUTCOMES

SL.No. Programme Objectives Course Learning (CL) outcomes

1 To acquire knowledge and skills in key functional CL 1 to 8; Case Discussions &
areas Assignments
2 CL 1 to 8, Case Discussions &
To internalize the knowledge and skills in key Assignments
functional areas
3 To integrate and apply business knowledge CL 7,8, Case Discussions &
Assignments
4 To develop a global perspective CL 4, 5; Case Discussions

5 To inculcate values of professionalism, ethical CL 2, 3 & 5; Case Discussions

leadership and social responsiveness
6 To master relational and interpersonal Project Report & Viva voce
communication skills

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REQUIRED COURSE MATERIALS AND READINGS

Basic Text Book (TB):

 The Analysis and Use of Financial Statements by Gerald I. White, Ashinpaul C.Sondhi,
Dov Fried, Wiley India Edition, 7th Edition. (WSF). Hereafter, this text book would be
referred as WSF.

 Financial Statement Analysis and Security Valuation by Stephen H Penman, McGraw Hill
4th Edition-Special Indian edition (2014), Hereafter, this text book would be referred as
SHP.
 Bound Volume- Collection of cases and other reference material (Hereafter, this text
book would be referred as BV)

Recommended Book (RB) for supplement:

 Financial Statement Analysis by K.R. Subramanian, John Wild, Tata McGraw-Hill, 10e
India edition (2014). Hereafter, this text book would be referred as SW.

Scheme of Evaluation:

Mid Term Exam 25 Marks

35 Marks
End Term Exam
20 Marks
Quizzes (total three: all are
compulsory)
10 Marks
Group project, assignment
and presentation
Participation including 10 Marks
case discussion
100 Marks
Total

Lecture Plan:
Session Topic Topics to be Readings and Book Case/Assignment/Assessment
# covered in the course Chapter Criteria

1 Analysis of segment Data-segment reporting and WSF Chapter # 13 Case 1: Analysis of segment
analysis, using segment data to estimate consolidated pp.484, and data for Lucent and Roche.
earnings and risk. Segment information, internal BV Chapter # 2 (page- Example: ITC Segment
growth and resource allocation strategy of the firm. 60-83) Report Analysis

Quiz-1 & Mid-Term

Examination
2-3 Consolidated versus standalone financial BV Chapter # 1 Exercise: Theories of CFS.
statements: Holding company and consolidated (Page: 1-59) Discussion: ITC Ltd. and SBI
financial statements (CFS), treatment of minority Ltd, Coal India Ltd.
interest and goodwill.
Quiz-1 & Mid-Term
Examination

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4-5 Viewing the business through financial SHP Chapter # 7, 8, Case 2: Strategic Financial
statements: Reformulation of financial statement i.e. 9 Page: 105-107 Statement of Nike Inc.
equity statement, Analytical adjustments to balance BV-Chapter-3 pp.84-86 Assignment #1: Understanding
sheet, reformulation of income statement and equity business through reformulated
statements. statement: Chubb Corp.
BV Chapter-3 pp.99-101
Quiz-1 & Mid-Term
Examination

6 Analysis of Cash Flows: cash flows and company SHP Chapter # 10 Case 3: Case: Analysis of Cash
life cycle, Strategic evaluation of cash flow (page-340-360) Flow Statement: Nike Inc.
statement, financial flexibility, spot the red flags in SW Chapter # 7
using cash flow statement, analysis of cash flow Page (400-419)
trends. Cash flow statement of distressed firms. Case 4: Spot the Red Flags in a
BV-chapter-4 pp.87-88 Cash Flow Statement: EDS and
Cerner Corporation
(Assignment-#2)
BV Chapter-4 pp.102-103

Assignment # 2: CFS analysis

Suzlon Energy Ltd and
Jaiprakash Associates Ltd.

Assignment-2, Quiz-2 & Mid-

Term Examination

7-8 Profitability Analysis: Evaluation of overall SHP Chapter # 11 Case 5: Ahold Versus Tesco-
performance of the firm, drivers of operating (Page 362-390) Analyzing performance
profitability, financial and operating liability
leverage effects on shareholder profitability, BV Chapter #5
modified Du-pont framework. Page-89-99 Quiz-2&Mid-Term
Examination

9-10 Forecasting Financial Statements: A typical one- SW Chapter # 9 Case 6: An overview of

year projection, sensitivity analysis, projecting Page 492-504 Financial Statement Analysis;
financial flexibility, multiyear projections, selecting SHP Chapter # 13,14 The Mechanics (Home Depot
key forecast drivers. & 15 (page 440-486- Financial Statements).
561)
Quiz-2&Mid-Term
BV Chapter #6 Examination
Page-100-125

MID TERM EXAMINATION

11-12 Value of Operations: Residual income SHP Chapter # 5,6, Reading: Understanding
valuation model (RIVM), abnormal earning 13 Page 148- Economic Value Added-HBS
growth model (AEG). Economic value and 191,192-229 Case 7: Vyaderm
accounting value (EVA). 440-484. Pharmaceuticals.
BV Chapter # 7
page-126-163 Quiz-3 & End-Term

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13 Analysis of growth and sustainable earnings: SHP Chapter # 12 Case:8 A Question of growth:
Cutting to the core- sustainable earnings, analysis of (Page 392-428) Microsoft Corporation
growth, sustainable earnings and valuation.
BV Chapter # 8 Exercise at the end of the
page-164-166 Chapter 12 (SHP)

14-15 Analysis of inter-corporate investments: reporting WSF Chapter 13, Exercise at the end of the
practices for intercorporate investments, separation pp.454-471 Chapter 5 (SW)
of operating from investment results, equity method SW Chapter # 5
versus consolidation-analytical consideration. pp.262-301 Quiz-3 & End-Term

16-17 Analysis of multinational operations: effects of WSF Chapter 15, Exercise at the end of Chapter
exchange rate changes, role of functional currency, pp.546-580 15 (WSF).
all-current versus temporal method-income statement
effects, balance sheet effects, impact on reported SW Chapter # 5 Quiz-3 & End-Term
cash flows. Exchange rate changes exposure and pp.302-310
effects.

18-19 Analysis of the quality of the financial statements: SHP Chapter # 17 Reading: Quality of earnings
- Earnings management, detecting income shifting, (Page-606-648) Analysis-HBS
Transaction manipulation, quality scoring, BV Chapter # 9
specialized industry issues. page-167-185 Case: 9 Poseidon Concepts
Corporation: Boom to boost

Assignment #3
A Quality Analysis: ABC Co.
Ltd.

Assignment & End-Term

20 Analysis of Business Combinations- Effects of WSF Chapter 14, Exercise at the end of Chapter
accounting methods, choosing the acquisition pp.504-538 14 (WSF).
method, push down accounting, Spinoffs.

END TERM EXAMINATION

Class Participation
Class participation is an integral part of the learning experience. It is expected that every student will
be prepared for each class and be a willing participant in the discussions and case studies analysis.
Students will be given marks for responding to questions raised by other students and the instructor.
Marks are also given for giving insightful comments based on your reading, analysis and pre-class
preparation. General comments with few additional inputs will get very low scores. Consistent
participation is expected.

Homework Assignments

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The primary objective of homework assignments is to help you review the lecture material before
attending class. A few assignments will follow class. Written assignments are declared in the class
as well as posted at ‘Claroline’. The assignments will be a combination of computational problems,
and short cases. Assignments will be graded based on your effort and your accuracy in completion.
There are four scheduled assignments in total; you are required to submit all of them. Students may
work on the home works in small groups (maximum of 3 students). In fact, I encourage students to
submit all assignments in handwritten format only.

DETAILS OF GROUP PROJECT :

Financial Statements Analysis Project: This will be team-based effort. Each team will select three
well-known publicly traded companies, which are listed and traded either on the Indian stock market
(BSE, NSE) or USA Stock Exchange. You are expected to play as an expert analyst in the finance
world and contribute that knowledge to class discussion, which is an important component of your
class participation. You are also required to complete a written end-of semester team report that
analyses the companies’ financials, earnings quality, assets quality, liabilities position, operating
strategy and other relevant accounting and disclosure policies. As part of the report you will need to
follow what you learn in the course for analysing the financial statements and apply your expertise
in analysing the financial statement for investment decision making. Final submission will also
follow a brief oral presentation and via-voce for each group. The group member must have to identify
his/her own contribution in the group. The date for submission of project report will be given in due
course. Detailed guidelines for the project will issued at the end of session-4.

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