Indian Institute of Management, Shillong

POST GRADUATE PROGRAM IN MANAGEMENT (2019 – 21)

Course Outline

Course Code Term V

Title of the Course: Advanced Financial Statement Analysis Credit: 1.00

Name of the Faculty: DR. SESHADEV SAHOO & PROF. AJAY KUMAR GARG
Email ID: [email protected], [email protected] Contact No.: 9956333508,
9721450567

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.

1
 • Concisely articulate the firm’s past—tell the story of the firm.
• Make informed predictions about future performance
• 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

2
 REQUIRED COURSE MATERIALS AND READINGS

Basic Text Book (TB):

Financial Statement Analysis- Charles H. Gibson, Cengage Learning 13 e, ISBN-13: 978-81-315-
2525-8 (CHG). Hereafter, this textbook would be referred to as CHG.
• Handouts- Collection of cases and other reference material (Hereafter, this text book
would be referred as HO)

Recommended Book (RB) for supplement:

• Financial Statement Analysis by K.R. Subramanian, John Wild, Tata McGraw-Hill, 10e India
edition (2014). Hereafter, this textbook would be referred to as SW.
• Financial Statement Analysis and Security Valuation by Stephen H Penman, McGraw Hill 4th
Edition-Special Indian edition (2014), Hereafter, this text the book would be referred to as SHP
Scheme of Evaluation:

Mid Term Exam 30 Marks

30 Marks
End Term Exam
(10+10) Marks
Quizzes (total four: all are compulsory)
10 Marks
Group project, assignment and presentation
Class participation including case discussion 10 Marks
100 Marks
Total

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

1-2 Analysis of segment Data-segment reporting and Handouts- #1 and Case: Analysis of segment data
analysis, using segment data to estimate Chapter # 8 pp.335- for Lucent and Roche.
consolidated earnings and risk. Segment 341 (CHG) Example: ITC Segment Report
information, internal growth and resource allocation Analysis
strategy of the firm. Quiz-1 & Mid-Term
Examination
3-4 Consolidated versus standalone financial Handouts-#2 Exercise: Theories of CFS.
statements: Holding company and consolidated Chapter # 2 pp.54-93 Discussion: Larsen and
financial statements (CFS), treatment of minority (CHG) Toubro, HDFC Ltd, ITC Ltd.
interest and goodwill. Quiz-1 & Mid-Term
Examination
5-6 Viewing the business through financial statements: SHP Chapter # 7, 8, 9 Exercises
Reformulation of financial statement i.e. equity Page: 105-107
statement, Analytical adjustments to balance sheet, Quiz-1 & Mid-Term
reformulation of income statement and equity Examination
statements.

7-8 Profitability Analysis: Evaluation of overall SHP Chapter # 11 Case: Ahold Versus Tesco-
performance of the firm, drivers of operating (Page 362-390) Analyzing performance (HBR)

3
 profitability, financial and operating liability Quiz-2& Mid-Term Examination
leverage effects on shareholder profitability,
modified Du-pont framework
9-10 Analysis of inter-corporate equity investments: SW Chapter # 5 Exercise at the end of the
reporting practices for intercorporate investments, pp.262-301 Chapter 5 (SW)
separation of operating from investment results,
equity method versus consolidation-analytical Quiz-2 & Mid-Term
consideration. Examination

MID TERM EXAMINATION

11 Analysis of Liabilities: Leases and off-balance SW Chapter # 3 Exercise at end of Chapter #3
sheet financing activities, analysis of deferred Page 136-151
taxes, contingent liabilities and off-balance sheet
items.

12 Forecasting Financial Statements: A typical one- SW Chapter # 9 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)

13 Analysis of Cash Flows: cash flows and company life

cycle, Strategic evaluation of cash flow statement, Chapter # 10 pp.393- Exercise at end of Chapter #3
financial flexibility, analysis of cash flow trends. Cash 436 (CHG)
flow statement of distressed firms

14-15- Value of Operations: Residual income valuation SHP Chapter # 5,6, Reading: Understanding
16 model (RIVM), abnormal earning growth model 13 Page 148- Economic Value Added-HBS
(AEG). Economic value and accounting value 191,192-229 Exercises
(EVA). 440-484. Cases: IndusInd Bank: Residual
Income Valuation (Ivey Product
No W16287-PDF-ENG)
Case: TTK Prestige: Economic
Value Added Analysis (Ivey
Product No W16727-PDF-ENG)

17-18 Financial analysis of specialized industries, industry Chapter # 12 pp.540- Case: Afudc Equity and Debt
specific metrics and their Interpretation-Banking, 586 (CHG)
Insurance, Oil & Gas, Telecom and Electricity Case: Santander Holdings
Generation and Distribution companies. USA Inc.: Attracting
Quiz-3 & End-Term
Deposits
Examination

4
19-20 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 Case: Poseidon Concepts
specialized industry issues. Spot the red flags. page-167-185 Corporation: Boom to boost
(HBR)
Case: Spot the Red Flags in a
Cash Flow Statement: EDS and
Cerner Corporation
Quiz-4 & End-Term

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
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. 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. Detailed
guidelines of the project will have shared in the class.

5
List of Harvard Cases:
1. Ahold versus Tesco-Analyzing Performance- HBR Case-Sept. 18, 2012-No. 9-113040
2. Understanding Economic Value Added- HBR-July 11, 2006- No.-9206016.
3. Quality of Earnings Analysis-HBR –Feb.4, 2013- No.- 9-194-050 (Author- David Hawkins)
4. Poseidon Concepts Corporation: Boom to boost- IVEY-W18028
5. Cases: IndusInd Bank: Residual Income Valuation (Ivey Product No W16287-PDF-ENG)
6. Case: TTK Prestige: Economic Value Added Analysis (Ivey Product No W16727-PDF-ENG)