INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE

Executive Post Graduate Programme in Management

Course Outline

Course Code and Course Title FM 08-10 Financial Statement Analysis

Course type Compulsory/Elective
Pre-requisites (if any) Nil
Course Credit 2
Total no. of sessions 6
Session Duration 180 minutes
Term /Quarter VII
Year and Batch 2 Year 2017-18 and EPGP08/EPGCFM-
09
Sections (if any) A

Instructor(s) Prof.K.K Ramesh

Contact Details [email protected]
Office
Consultation Hours Based on the prior appointment

Financial Statement Analysis

Introduction

Financial Reports are the key source of information about the economic activities of a firm. They are the primary
means by which managers communicate the company’s performance, financial position and strategy to investors and
other stakeholders. Investors and other stakeholders rely on financial reports to assess the plans and performance of
firms in order to make investment and business decisions.

The responsibility for the preparation of the financial statements is entrusted with the corporate managers because of
their intimate knowledge of the firm’s business activities. Even though accounting conventions and standards limit
their ability to influence the accounting numbers to some extent, managers are still allowed considerable discretion
in choosing firm’s accounting and disclosure policies. As investors view profits as a measure of managers’
performance, this accounting discretion granted to them may sometimes provide managers incentives to distort
reported profits by making biased assumptions. Thus, users of the financial statements should be aware of this
managerial discretion in accounting choices and its impact on the financial statements. They have to understand that
management can shape the financial information communicated to them.

Under such circumstances, in order to make intelligent investment and business decisions, users of financial
statements must be able to meaningfully interpret financial reports, construct measures of financial performance and
analyze the reporting choices made by companies. Since corporate managers have the discretion in choosing the
accounting and disclosure policies, which might be at times biased, users must learn to undo the effects of these
accounting choices. The purpose of this course is to give the foundation for such analysis.

This course covers current practices in corporate financial reporting and fundamental issues relating to asset
valuation and income determination. The course will provide students with the skills necessary to analyze and assess
the information contained in a set of financial statements and notes thereby increasing their ability to extract and
interpret information in financial statements. The course will also emphasize the general features of the financial
reporting environments and illustrate those features with prominent recent examples.

Course objective and Scope

The primary objective of the course is to advance the student’s understanding of how financial reporting is used in a
variety of decision making and contracting contexts (e.g., investment decisions or lending contracts). The course is
designed to improve the student’s ability to analyze financial statements and firms’ accounting policies. It will also
enhance the student’s ability to use financial statements as part of an overall assessment of a firm’s strategy and
valuation.

The course provides both a framework for and the tools necessary to analyze financial statements. At the conceptual
level, it emphasizes that preparers and users of financial statements have different objectives and incentives. At the
same time, the course is applied in nature and draws heavily on real business problems and uses cases to illustrate
the application of the techniques and tools.

The course also attempts to broaden the student's knowledge of how generally accepted accounting principles and
financial reporting practices are applied in enhancing the reliability and quality of financial statements and how the
differences in principles and their application impact on financial statements and business decisions.

In this course, the students will try to answer the following questions:

 How does accounting capture the underlying economics of a business organization? How does it not?

 How can we use financial statements to evaluate a company’s performance? Which aspects of performance
matters?

 How can we use information that a company discloses to value the company’s stock?
  Do managers manipulate earnings numbers? How and why do they do so? Can the market see through
these manipulations?

While this is not a course in equity valuation per se, equity valuation is one of the most common uses of financial
statement data. Accordingly, the course will briefly examine the relation between stock prices and financial
statement information.

This course is appropriate for any student who anticipates interacting with or taking part in the capital markets.
Anyone aspiring to work as analysts or investors will find that the financial accounting knowledge gained in the
course will allow them to perform these roles with greater sophistication. The financial accounting knowledge
gained in this course will also help students to successfully fulfill their obligations as future senior general
managers, entrepreneurs, private equity investors and board members. This course should be of interest to students
who expect to be in senior decision-making positions within corporations where financial statement analysis,
forecasting, and valuation are important skills. It should also be useful to students interested in investment banking,
venture capital, investment management, or public accounting.

Course Pedagogy

The course will be in a lecture/discussion/case analysis format.

Staff

Instructor:

KK Ramesh

Course Delivery

Lectures:
12 sessions of 1.5 hours each.
Required Textbooks

Main

John J. Wild, K.R. Subramanyam and Robert F. Halsey, Financial Statement Analysis, Tata McGraw-Hill
Publishing Company Limited.

Reference

Gerald I. White, Ashwinpaul C. Sondhi and Dov Fried, The Analysis and Use of Financial Statements, Wiley India
Pvt. Ltd.

Krishna G. Palepu, Paul M. Healy and Victor L. Bernard, Business Analysis and Valuation Using Financial
Statements, Cengage Learning India Private Limited, New Delhi.

Grading
The grading will be based on the following weighting scheme:

 Class Participation - 10%

 Financial Reporting Project (Group) - 20%
 Quiz - 20%
 End Term Exam - 50%
SESSION PLAN

Session # Topics Reading

Introduction and Overview
1 Introduction and Overview of the Chapter 1, Financial Statement Analysis, John J.
Course. Wild, K.R. Subramanyam and Robert F. Halsey
Overview of Financial Statement
Analysis
Business Analysis
Financial Analysis
Valuation

2-3 Financial Reporting Environment Chapter 2,6 Financial Statement Analysis, John J.
Framework for the Preparation and Wild, K.R. Subramanyam and Robert F. Halsey
Presentation of Financial Statements
Generally Accepted Accounting
Principles (GAAP)
International Financial Reporting
System (IFRS)

4-5 Understanding Annual Reports Chapter 1, Financial Statement Analysis, John J.

Income Statement Wild, K.R. Subramanyam and Robert F. Halsey
Balance Sheet
Cash Flow Statement

Session # Topics Reading

Financial Analysis Tools and Techniques
6-8 Ratio Analysis Chapter 1, 8 and 10,Financial Statement Analysis,
Evaluation of Liquidity, Leverage John J. Wild, K.R. Subramanyam and Robert F.
and Solvency, Investment efficiency Halsey.
and Operating efficiency.
Common-Size Analysis
Trend Analysis
Exercise

9 - 10 Financial Statement Analysis Caselets

Consolidated financial statements.
Accounting for corporate
restructuring
11 - 12 Cash Flow Analysis Chapter 7,Financial Statement Analysis, John J.
Wild, K.R. Subramanyam and Robert F. Halsey.
Exercise

The cases and numerical caselets to be discussed in the class room will be announced prior to the class.

WISHING YOU ALL THE VERY BEST IN YOUR LEARNING ENDEAVOUR