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ACTG 500 – Financial Accounting Analysis

ACCOUNTING 500

FINANCIAL ACCOUNTING ANALYSIS

BY

PROFESSOR

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COURSE DESCRIPTION

After a review of basic accounting principles and terminology, this course provides the student with a

clear understanding of concepts, standards and practices of financial reporting. The student learns

to read, understand and analyze a balance sheet, income statement and statement of cash flows.

Other topics include: concepts of cash, receivables, inventory, payables, assets, liabilities, equity,

revenue and expense recognition and ratio analysis.

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COURSE OBJECTIVE

To provide the student with the ability to read, understand, and analyze financial statements. Although the course will stress accounting and empirical data analysis, its goal is to enable user-oriented analysis of financial statements. At the end of this course, the student will …understand how financial statements are generated in order to separate the economic process that generates the numbers from the accounting process that (sometime) obscures it.[1]

[1] The Analysis and Use of Financial Statements, 2nd Edition, Gerald I. White, Ashwinpaul C. Dov Fried, page iii.

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Accounting 500 Book: Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried, The Analysis and Use of FINANCIAL STATEMENTS, 2nd Edition, John Wiley & Son, ISBN 0-471-11186-4

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Session 1

FRAMEWORK FOR FINANCIAL ACCOUNTING ANALYSIS

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IntroductionWhy is this course critical to your future in business? Whether you are preparing to be an entrepreneur, marketing

executive, banker, accountant, or general manager, you need to understand the enterprise (the company),or a particular division, or a unit, as to how well it is doing.

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How do you determine how well the company is doing?

The ability to read and analyze Financial Statements

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•If you have an accountant or bookkeeper that prepares your financial statements, how do you know whether the company is doing well or “sliding” into insolvency (bankruptcy)?

The ability to read and analyze Financial Statements

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•If you are the CEO, CFO, or head of marketing of a company, how do you know what the impact of your decision is having on the company?

The ability to read and analyze Financial Statements

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Definition of Accounting

The art of recording, classifying, and summarizing—in a significant manner and in terms of money—events, and transactions, which are of financial nature and interpreting the results.

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In short, accounting records the flows of money.

The CompanyMoney Recording transactions

Financial Statements

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What are Financial Statements?

They make up the

Scorecard Scorecard of the Company

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Why are financial statements useful?

It helps investors and creditors Make better economic decisions.

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Why are financial statements useful?

Major fraud can occur even with the best know companies.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

On June 15, a jury found the accounting firm guilty of obstructing justice when it shredded Enron documents.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

The nation's second-largest long-distance phone provider uncovered nearly $3.8 billion in improperly booked expenses, revealing what appears to be one of the largest-ever cases of accounting fraud. Its co-founder, Bernard J. Ebbers, resigned as CEO in May amid an SEC investigation and questions $366 million in personal loans from the company.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

The Justice Department is conducting a criminal investigation of energy trader Enron Corp., whose swift descent into bankruptcy has raised numerous questions.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

The communications network operator is being investigated by the Securities and Exchange Commission and the FBI for its accounting practices, allegedly engaging in network capacity swaps with other firms to inflate revenue.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

Xerox was forced to restate earnings to reflect $1.4 billion less in pre-tax profits over the past five years as part of a settlement with the SEC which also included a $10 million penalty.

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Why are financial statements useful? Major fraud can occur even with the best know companies.

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Financial Statements are, at best, only an approximation of economic reality

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Need For Financial Analysis

• The U.S. has the most complex financial reporting system in the world •Major developed countries and many emerging markets’ financial reporting has also evolved substantially over the years

•Unfortunately, economic events and accounting recognition tends to be different in many countries

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• Even in the U.S., accounting principles and economic events may be recorded differently depending on the company and/or industry

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FOCUS ON INVESTMENT DECISONS

• Financial analysis is focused on the users of financial statements • This course will focus on companies whose securities are publicly traded • • Therefore, the financial analysis will be on companies the follow U.S. generally accepted accounting principles (GAAP)

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Classes of External Users •Credit and equity investors

• Short-term investors (banks and trade creditor) • Immediate liquidity of business for early payback of debt

• Long-term investors (bondholders and pensions) • Long-term assets position and earnings power capable of retiring or refunding obligations at maturity

• Equity investors (shareholders) •Long-term earning powers with ability to increase in value

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Financial Information and Capital Markets

Financial Reports Interrelationship

Capital Market

(Stock Market)

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Financial Information and Capital Markets

Financial Reports

Interrelationship

Capital Market

(Stock Market)

Earnings UP Resources STRONG

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Financial Information and Capital Markets

Efficient Market Hypothesis

The better financial information provided on a timely basis will provide the best indication of a company’s or market’s true economic value

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Financial Information and Capital Markets

Reason why financial information and the Capital Markets are so linked