Indian Institute of Management

Lucknow

POST GRADUATE PROGRAMME

FA01205
FINANCIAL STATEMENT ANALYSIS
COURSE OUTLINE
TERM IV, 2015-2016
Instructor and Contact Information
NAME: DR. SESHADEV SAHOO
E-MAIL: SESHADEV@IIML.AC.IN
OFFICE: ROOM # 213, CHINTAN, IIM LUCKNOW
OFFICE TEL: +915226696635 (Desk), +919956333508 (Cell)

COURSECREDIT(1.00)

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 warning signs of
manipulation. Topics in this course include; segment reporting analysis, consolidation versus
standalone statement, reformulation, profitability analysis (including comprehensive income,
earnings per share, earnings management), cash flow analysis, capitalization versus expensing, offbalance sheet financing, inter corporate investment, distress prediction and projection of financial
statements. This course will also expose students to future trends in financial reporting, both national
and international.
COURSE OBJECTIVE
In today's dynamic economic environment, effective managerial decision making requires indepth understanding and analysis of financial statements. The purpose of this course is to:

Understand and interpret financial filings including financial statements, managers

commentaries, footnotes and other sources of financial information.
1

Capture the underlying economics of business organisation. Use financial to evaluate a

companys performance.
Concisely articulate the firms pasttell the story of the firm.
Make informed predictions about future performance
Use information that a company discloses to value the companys 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 companys financial statements over both the short and long term by applying
techniques in prospective analysis
7. Estimate the companys 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

1
To acquire knowledge and skills in key functional
areas
2
To internalize the knowledge and skills in key
functional areas
3
To integrate and apply business knowledge
4

To develop a global perspective

To inculcate values of professionalism, ethical

leadership and social responsiveness
To master relational and interpersonal
communication skills

Course Learning (CL) outcomes

CL 1 to 8; Case Discussions &
Assignments
CL 1 to 8, Case Discussions &
Assignments
CL 7,8, Case Discussions &
Assignments
CL 4, 5; Case Discussions
CL 2, 3 & 5; Case Discussions
Project Report & Viva voce

REQUIRED COURSE MATERIALS AND READINGS

TEXTBOOK
1. 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.
2. Financial Statement Analysis and Security Valuation by Stephen H Penman, McGraw Hill
4th Edition-Special Indian edition (2014), hereafter, and this book would be referred as SHP.
3. HBS Readings, Cases, and some reference materials- Bound Volume (BV)-2015-2016
REFERENCE BOOK (S)

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.

EVALUATION
Examinations: There will be two examinations. The first exam covers Sessions 1 to
10 and the second exam covers Sessions 11 to 2 0 .
Group Project Report: Each student will be assigned to a group consist of 5 students
to complete project. Please see information on pages 5-6 for project requirements.
More details of this group project report will be posted on and will also be
discussed in class.
Class Participation and assignments: Students are responsible for all materials
covered and readings including numerical assigned. Be prepared to answer certain
questions that had been emphasized in prior classes or from the reading assignments.
Your performance and participation will then be used to determine your participation
mark. Each assignments needs to be submitted by due date and time.

GRADING SCHEME
Mid Term Exam
End Term Exam
Quizzes (three)
Group Project
Participation
Total

25 Marks
35 Marks
20 Marks
20 Marks
10 Marks
100 Marks

ACADEMIC DISHONESTY
Academic dishonesty or misconduct is cheating that relates to an academic activity. It is a violation
of trust between the Institute and its stakeholders. Plagiarism, fabrication, deception, cheating and
sabotage are examples of unacceptable academic conduct. Please consult the PGP Manual for the
section on academic dishonesty
COURSE SCHEDULE
Session
#

Topic Topics to be
covered in the course

Readings and Book

Chapter

Assessment Criteria

Framework for financial statement analysis:

Statutory financial reports, disclosure quality,
sources of financial information, analysis of segment
data

SW Chapter # 1&2,
and BV Chapter # 1

Case 1: Analysis of segment

data for Lucent and Roche.
Assignment #1: Segment data
analysis for two diversified
companies.

(page-1-30)
Case-1 BV Page-28

2&3

Overview of financial statements: Holding

company and consolidated financial statements
(CFS), Standalone vs. consolidated statement,
minority interest.

BV Chapter # 2
(Page: 31-104)

4, &5

Viewing the business through Financial

statements: Preparing for analysis; Reformulation of
financial statement i.e. equity statement, Analytical
adjustments to balance sheet, reformulation of
income statement.
Estimation of earnings per share (EPS): Basic and
Diluted EPS, Adjustment to Bonus, Right, and stock
split.

SHP Chapter # 7, 8,
9

6&7

Cash Flow Analysis: cash flow information, cash

flow statement an internal perspective.

BV Chapter # 3
Case-2-Page: 105-107

SW Chapter # 6,
(Page 328-377)
BV Chapter # 4
Page 108-134
SHP Chapter # 10
(page-340-360)
SW Chapter # 7
Page (400-419)

Problems at the end of Chapter2.

Exercise: Theories of CFS.
Research Paper: Value
relevance of CFS
Case 2: Understanding business
through reformulated Financial
statement: Chubb Corporation

Exercise-at the end of BV

Chapter # 4.
Assignment #2: Exercise at the
end of Chapter 4.
Case 3: Analysis of Cash Flow
Statement: Colgate-Palmolive,
and Coal India Ltd( to be
distributed in the class)
Assignment # 2: CFS analysis
Suzlon Energy Ltd (BV
Chapter # 5 page-135-140).

9 & 10

Profitability analysis: application tools,

measurement of overall performance of the firm;
importance of return on invested capital, return on
common equity, Modified Dupont analysis.

SHP Chapter # 11
(Page 362-390)

Accounting value and Economic Value: EVA, Value

SHP Chapter # 5,6, 13

Page 148-191,192-229
440-484. BV Chapter #
7 page-152-189

Case 4: Ahold Versus TescoAnalyzing performance

BV Chapter #6
Page-141-151
MID TERM

11 & 12

creation and Residual Earnings, RIV Model

(EBO Model), Model for anchoring value on
i
4

Case 5: Vyaderm Pharmaceuticals.

Exercise: valuation of Coca Cola,
Valuation of equity for ONGC

5
Case 6: Off-Balance Sheet
Financing at Big 5 Sporting
Goods Corporation

13

Off-Balance sheet financing activities: Leases and

off-balance sheet debt, Financial reporting by
lessors.

SW Chapter # 3
(Page 136-193)
BV Chapter # 8 (190)

14

Analysis long lived assets: Capitalization decision,

capitalization versus expensing, analytical
adjustments-specialized industries (R& D, Oil and
Gas, Advertising cost).
Analysis of inter-corporate investments:
Investments in securities, analysis of marketable
securities, equity method of accounting.
Analysis of multinational operations: effects of
exchange rate changes, Basic accounting issues,
foreign currency translation. Analytical difficulties
related to foreign operations

SW Chapter # 4
BV Chapter # 9
Page-206-214

Case 7: Polymedica
Corporation (A)

SW Chapter # 5

Exercise at the end of the

Chapter 5 (SW)

BV Chapter #10
Page-215-249

Exercise at the end of Chapter 8

(BV)

17 &18

Earnings Quality: Earnings management, Analysis

of quality of financial statements: Analysts checklist,
cutting through accounting quality, income shifting,
And transaction manipulation.

SHP Chapter # 17
(Page-606-648)
BV Chapter # 11
Page-250-280

Case 8: Assessing earnings

quality-Nuware Inc.
Assignment #3
Spot the Red Flags in a Cash
Flow Statement: EDS and
Cerner Corporation (BV
page266-2670

19

Accounting and Finance based measures of risk: SHP Chapter 19

Earning variability, credit risk and distress prediction (Page 696-719)
SW Chapter # 10
model, equity risk
(page 526-568)
BV Capter-12 page281-294
Projecting financial statements: Forecasting
SW Chapter # 9
models and time series properties of earnings:
Page 492-504
Analyst Report.
SHP Chapter # 14 &
15 (page 486-561)
End Term

15

16

20

Case 9: Predicting firs

financial distress: The Merrill
Lynch Co.
Assignment # 4: Suzlon
Energy Ltd. Predicting a firm's
financial distress
Case 10: Alpha Manufacturing
Co. Ltd. (to be distributed in the
class)

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
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
5

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.