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2/6/12

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INSTRUCTOR’S/SOLUTIONS MANUAL

FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS, AND VALUATION

A STRATEGIC PERSPECTIVE

SEVENTH EDITION


JAMES M. WAHLEN
Professor of Accounting
James R. Hodge Chair of Excellence
Kelley School of Business
Indiana University


STEPHEN P. BAGINSKI
Herbert E. Miller Chair in Financial Accounting
J. M. Tull School of Accounting
Terry College of Business
The University of Georgia



MARK T. BRADSHAW
Associate Professor of Accounting
Carroll School of Management
Boston College






















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CONTENTS

Some Suggestions for Using This Textbook............................................           I-i to I-x
      Schedule 1............................................................................................                   I-xi
      Schedule 2............................................................................................                  I-xii
      Schedule 3............................................................................................    I-xiii to I-xiv

Solutions to Questions, Exercises and Problems, and Teaching Notes to Cases
Chapter 1     Overview of Financial Reporting, Financial Statement
                     ..... Analysis, and Valuation............................................       1-1 to 1-39

Chapter 2:    Asset and Liability Valuation and Income
                     ..... Measurement.............................................................       2-1 to 2-31

Chapter 3     Income Flows Versus Cash Flows:  Understanding the
                     ..... Statement of Cash Flows..........................................       3-1 to 3-40

Chapter 4     Profitability Analysis......................................................       4-1 to 4-41

Chapter 5     Risk Analysis..................................................................       5-1 to 5-40

Chapter 6     Financing Activities........................................................       6-1 to 6-41

Chapter 7     Investing Activities.........................................................       7-1 to 7-40

Chapter 8     Operating Activities........................................................       8-1 to 8-39

Chapter 9     Accounting Quality.........................................................       9-1 to 9-17

Chapter 10   Forecasting Financial Statements................................... 10-1 to 10-103

Chapter 11   Risk-Adjusted Expected Rates of Return and the
                     ..... Dividends Valuation Approach.................................   11-1 to 11-20

Chapter 12 Valuation:  Cash-Flow-Based Approaches...................   12-1 to 12-60

Chapter 13   Valuation:  Earnings-Based Approaches......................   13-1 to 13-24

Chapter 14   Valuation:  Market-Based Approaches.........................   14-1 to 14-29





















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Some Suggestions for Using this Textbook


      Our discussions with professors who teach courses in financial reporting, financial statement analysis, and equity valuation and our study of the course outlines of users of previous editions of this book lead us to make the following observations:

1.     There is little consensus regarding the objectives and content of courses in financial statement analysis.  Courses vary in their relative emphasis on (a) the concepts, tools, and skills for analyzing financial statements, (b) the effects of alternative accounting principles on the quality of accounting information, and (c) valuation.

2.     At various institutions, faculty in accounting, finance, and economics may teach this course.

3.     The course may focus on the most recent research findings and the methodological issues in conducting empirical research using financial statement data.

4.     The course may presume that students have had only an introductory financial accounting course or that students have had the equivalent of a major in accounting.

            It is not surprising that the professors we spoke with felt that the textbooks on the market satisfied some of their needs, but seldom did one textbook satisfy all of them.  We have no delusions in this regard about the potential for this textbook either.  We have five premises in writing this book:

1.     Analyzing financial statements and valuing firms is an integrated process in which the analyst must understand industry competitive dynamics, firm strategy, accounting information content and quality, profitability and risk assessment, forecasting, and valuation models.  We strive to integrate these six components of the process throughout this book.  We discuss this in more detail below in the section on positioning this text.

2.     The usual goal of financial statement analysis is to value a firm.  Therefore, we discuss the important concepts, tools, and skills of financial statement analysis with this objective constantly in view.

3.     The financial statement analysis course serves as a synthesizing experience for students, integrating concepts and skills from accounting, finance, economics, business strategy, and related disciplines.

4.     Examples, illustrations, problems, and cases based on current data for actual companies enhance student motivation and skill development.



5.     The text, questions, exercises, problems, cases, software, and related materials should provide sufficient flexibility to permit professors to adapt these materials to suit their particular objectives and needs.

Positioning of the Book
      As we indicate in the preface to the book, we find it helpful to view financial statement analysis as a triangle.  The analysis of profitability and risk using financial statements is in the center of the triangle.  Interpreting profitability and risk ratios requires an understanding of the economic characteristics of the industries in which a firm competes and the business strategies a firm has selected to compete in those industries.  The analyst should not naively accept reported financial statement information when performing profitability and risk analysis, but should first assess its quality and make appropriate adjustments.  The assessment of quality and appropriate adjustments may differ depending on whether the firm’s financial statements have been prepared in accordance with U.S. GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).  The analysis of a firm’s profitability and risk in the recent past serves as a prelude to forecasting its future profitability and risk.  Forecasts of future earnings, cash flows, and dividends provide the bases for valuing a firm.  We depict these elements below: 


Forecasting and Valuation of Firms
等腰三角形:     Assessment of
 Profitability and 
Risk
 













Industry Economics                                    GAAP and IFRS
                                      and                                                 and the Quality of
                           Business Strategy                               Accounting Information

      As authors of this book, we find it useful to reflect on the courses that we teach in financial statement analysis and then place a dot inside the triangle to indicate the relative emphasis on each of the elements depicted as points of the triangle.  You may find it useful to do the same.  We discovered that, although the location of our dots differed somewhat, all of the elements were needed for effective financial statement analysis.  De-emphasizing any of the elements can take away from the potential richness of the course.  Thus, we have tried to position our book to cover this entire triangle.  Furthermore, we must not only include each of these elements in our courses, but we need to cover them in a balanced and integrated manner.  We accomplish this balance and integration in this textbook by continually relating each of the elements to the others and designing problem and case materials that require students to do the same.

Structure of the Book
The material in this textbook divides into three main segments:
1.     Core concepts and tools of financial statement analysis:  Chapters 1 to 5.

2.     Quality of accounting information and U.S. GAAP and IFRS:  Chapters 6 to 9.

3.     Forecasting and valuation of firms:  Chapters 10 to 14.

      Not only do instructors differ on their relative emphasis on each of these parts, but they also differ as to the sequence in which they cover them.  We have designed this textbook so that instructors have flexibility to sequence the topics to suit their particular preferences.  Chapter 1 is an overview of financial statement analysis and is intended as a starting point for all courses.  We can think of several sequencing scenarios for which we feel the textbook is adaptable:

      Scenario 1:  Begin with the core concepts of financial statement analysis (Chapters 1 to 5), move to alternative GAAP (Chapters 6 to 9), and finish with valuation (Chapters 10 to 14).

      Scenario 2:  Begin with the tools of profitability and risk analysis (Chapters 4 and 5) and then move to valuation (Chapters 10 and 14).  Fill in with materials on particular GAAP as needed for assigned problems and cases (Chapters 6 to 9).

      Scenario 3:  Begin with concepts and procedures underlying the financial statements (Chapters 2 and 3) and then move to alternative GAAP (Chapters 6 to 9).  Move next to the tools of financial statement analysis (Chapters 4 and 5) and their application in valuation settings (Chapters 10 to 14).

Other sequences are also possible.  The key is balanced coverage of each of the elements, not necessarily their sequence.

Sample Course Outlines
      One use of this textbook is in a two-course sequence designed for students who will be intensive users of financial statements in their professional responsibilities (security analysis, credit analysts, investment bankers, financial consultants).  The first course, Corporate Financial Reporting, emphasizes alternative accounting principles and their effects on the financial statements and on assessments of the quality of accounting information.  The second course, Financial Statement Analysis, applies the tools of financial statement analysis to the financial data of actual companies, both for the purpose of studying their profitability and risk and for valuing them.  Schedules 1 and 2 in this instructor’s/solutions manual present course outlines for these two courses.  Another approach is to use the textbook in a single course, Financial Reporting and Statement Analysis, which combines the content of the two-course sequence.  Schedule 3 presents an outline for this course.
      When students have previously taken courses in intermediate and advanced accounting principles, the instructor may omit Chapters 6 to 9.  Most students, however, will find that the financial statement user perspective taken in the study of various alternative accounting principles in these chapters enhances their understanding and broadens their perspective.  The material on valuation in Chapters 11 to 14 is sometimes covered in finance courses instead of the course in financial statement analysis.
      Schedules 1, 2, and 3 also indicated suggested problems and cases for undergraduate and graduate courses.  We suggest making heavy use of questions, exercises, and problems for undergraduate courses and a mixture of problems and cases for graduate courses.  The cases are more integrative and generally more complex than the problems.  The problems, however, require both analysis and interpretation.  In that sense, the problems are like mini-cases.

Term Paper Project

      We have found that assigning a term paper project is an excellent synthesizing device for the financial statement analysis course.  Students can either work alone and analyze two companies in the same industry or work in groups to analyze three or four companies in the same industry.  Analyzing more than four companies is cumbersome and typically not necessary.  We have students summarize the economics and current conditions in the industry, describe the strategies of each of the firms, input the financial statement data with appropriate adjustments into a spreadsheet program (such as FSAP), perform a profitability and risk analysis, prepare forecasted financial statements, and value the firms.  We ask students to turn in progress reports throughout the term to insure that they are making progress on the project.  The first item turned in, at about the one-third point in the course, is an outline of the economic characteristics of the industry and the strategies of the firms.  The second item turned in, at about the two-thirds point in the course, is a printout of the financial statements and financial statement ratios and a short description of the accounting quality issues (both high- and low-quality) and the data adjustments made together with a comparative analysis and interpretation of the profitability and risk ratios.  The third item turned in is a set of forecasted financial statements and valuations of the firms, which occurs with approximately two weeks left in the course.  We often devote the last several class periods of the term to short project presentations by students.  Appendix 1.1 of the text provides students with guidance in conducting the term project.

Overview of Cases

      The teaching note for each case describes the objectives of the case as well as suggestions for teaching it.  We present below a summary of the principal purpose of each case.

      Case 1.1:  Starbucks.  This integrative case introduces the series of parts that appear in each of the remaining chapters.  The purpose of the integrative case series is to permit students to apply the material covered in each chapter to the financial statements and other information for the same company.  Case 1.1 leads students to review the important concepts and principles underlying the balance sheet, income statement, and statement of cash flows and to begin conducting financial statement analysis.  The case works well for a first class if students have not done any class preparation, because the instructor can walk students through selected questions to orchestrate the desired review.  The instructor might also provide solutions to the first four parts of the case involving each financial statement and the relations between them, and then spend time with interpretations.  We find Starbucks works well for this integrative case because most students are familiar with their coffee shops, the firm has a relatively simple business model (which makes understanding the accounting and building the forecasts a bit easier), and the financial statements involve a broad range of interesting accounting issues.  Of course, other firms can be used as integrative cases equally effectively.

      Case 1.2:  Nike:  Somewhere Between a Swoosh and A Slam Dunk.  This case reviews the basic concepts and principles from the introductory financial accounting course and introduces tools for analyzing financial statements.  The case works well for a first class if students have not done any class preparation, because the instructor can walk students through selected questions to orchestrate the desired review.  The instructor might also provide solutions to the first four parts of the case involving each financial statement and the relations between them, and then spend class time with interpretations.

      Integrative Case 2.1:  Starbucks.  This portion of the integrative case on Starbucks examines the firm’s disclosures on income taxes, with emphasis on the relation between book income and taxable income and interpretation of changes in various deferred tax accounts.

      Integrative Case 3.1:  Starbucks.  This case focuses on interpreting the statement of cash flows of Starbucks.  It also examines the relation between net income, cash flow from operations, and EBITDA.

      Case 3.2:  Prime Contractors.  Prime Contractors shifted its strategy from an asset-intensive business to a people-intensive business.  Students study the statement of cash flows to see evidence of this strategic shift.  The case also illustrates that net income and cash flow from operations can move in opposite directions and students are asked to explain how this can happen.

      Case 3.3:  W.T. Grant company:  A Case Study of Bankruptcy.  Grant was profitable up to the last year before its bankruptcy, but was unable to generate cash internally.  This case demonstrates the need for a statement of cash flows.  The case provides the relevant financial statement ratios, so students need not make many calculations.  The case demonstrates how a poorly executed business strategy can sink even a large, well-established company.  It also brings up several accounting issues, including inadequate provisions for uncollectible accounts, recognition of interest income on installment receivables, consolidation policy, and control systems for decentralized firms.  Students do not need background in the specifics of these accounting issues in order to observe their effect on the financial statements.  The W.T. Grant bankruptcy occurred in 1975, yet continues to serve as a classic study of how cash flow problems can lead to financial difficulty.

      Integrative Case 4.1:  Starbucks.  Part A of this case asks students to compute various profitability ratios for Starbucks and explore reasons for changes in its profitability during the most recent three years.  Part B of the case provides the same financial ratios for Panera Bread Company as those computed in Part A for Starbucks and asks students to compare the profitability of the two firms.

      Case 4.2:  Profitability and Risk Analysis of Walmart Stores.  Part A of this case asks students to calculate traditional profitability and risk ratios for the most recent year in the case and then interpret the changes in profitability and risk in recent years.  Walmart shifted its strategy to (1) increase the emphasis on supercenters, which combine their traditional discounts store concept with grocery products, and (2) grow through acquisitions abroad.  The effects of these strategic shifts show up in the financial statement ratios.  The instructor can assign the parts of this case involving profitability analysis with Chapter 4 and the parts involving risk analysis with Chapter 5.  Alternatively, the instructor can assign the case as an integrative case for Chapters 4 and 5.  Problem 10.6 asks students to prepare forecasted financial statements for Walmart and Problems 11.14, 12.17, 13.20, and 14.23 ask students to value Walmart.  Thus, the instructor can use Case 4.1 and these four subsequent problems for an integrated study of Walmart.  Part B of this case provides profitability and risk ratios for Carrefour and Target and asks students to compare the profitability and risk of these firms with Walmart.  Differences in the design and effectiveness of the strategies of these three firms come out clearly in this part of the case.  As with Part A, instructors can assign the profitability parts of Part B when covering Chapter 4 and the risk parts when covering Chapter 5 or assign it as an integrative case after covering both Chapters 4 and 5.

      Case 5.2:  Massachusetts Stove Company:  Bank Lending Decision.  This case is based on an actual, privately-held company that asked that its identity not be revealed.  The setting of the case and the financial statement data are almost identical to those for the company in the time period set forth in the case.  The industry faced a downsizing as a result of new environmental regulations and a decrease in demand.  This company focuses on retail direct marketing and has apparently carved itself a unique niche.  Substantial uncertainty surrounds the future of this company (unsettled lawsuit, continued design and testing costs to meet EPA regulations), so the loan decision is not an easy call.

      Case 5.3:  Fly-by-Night International Group:  Can This Company Be Saved?  This case, based on the financial statements of Flight Group International, analyzes a company approaching bankruptcy.  Students must identify causes of the firm’s problems and suggest changes they would make to keep the firm out of bankruptcy.  Students are also asked to apply the Altman bankruptcy prediction model to this firm.  A unique aspect of the case is that the majority shareholder is also the chief executive officer and chairman of the board.  Part of the firm’s difficulties relates to dealings by this individual with the firm, which are not exactly arms’ length.  This case serves as an excellent vehicle for discussions of corporate governance and ethical issues.


      Case 5.4:  Millennial Technologies:  Apocalypse Now.  This case is based on financial data for Centennial Technologies and illustrates three essential analyses: (1) detecting the games firms can play to make themselves appear more profitable than they are, (2) assessing credit risk of a firm with a viable product but significant short-term liquidity risk, and (3) assessing bankruptcy risk for a firm that has limited access to capital markets because of purported fraudulent reporting.  This case asks students to apply Beneish’s model for detecting earnings manipulation and the Altman model for predicting bankruptcy.

      Integrative 6.1:  Starbucks.  Starbucks makes use of operating leases for much of its store space and, therefore, leaves property, plant and equipment, and debt off its balance sheet.  This case asks students to compute the present value of operating lease commitments and calculate several debt ratios both without and with capitalization of operating leases.

      Case 6.2:  Oracle Corporation:  Share-Based Compensation Effects/Statement of Shareholders’ Equity.  Oracle Corporation’s Statement of Shareholders’ Equity reports several material equity transactions.  Students are asked to compute the long-term-debt-to-shareholders’-equity ratio to measure the extent to which Oracle uses leverage.  Then, students must identify how Oracle’s share-based compensation plans and stock repurchase plans affect leverage and future return on equity.  Finally, students must describe how the equity transactions reported in the statement are shown in the statement of cash flows.

      Case 6.3:  Long-Term Solvency Risk:  Southwest and Lufthansa Airlines.  Actual Southwest Airlines (U.S. GAAP) and Lufthansa Airlines (IFRS) balance sheets and note excerpts show the extent to which the two airlines use operating leases.  Students use these two very different financial statement and note presentations to capitalize operating leases and compare long-term solvency risk between these two companies before and after effective lease capitalization.

      Integrative Case 7.1:  Starbucks.  This comprehensive case covers all of Starbucks’ investing activities.  Students must read and evaluate accounting policy for long-lived operational assets including fixed assets, leasehold improvements, asset retirement obligations, and asset impairment and R&D (these latter two as compared to IFRS rules).  Students identify Starbucks’ use of fair value in accounting for majority-owned equity investments, how Starbucks will incorporate accounting standard changes in the area, and how Starbucks accounts for resulting goodwill and its potential impairment.  Students also must evaluate how Starbucks reflects its minority passive investments in net income and other comprehensive income and how it reflects its minority active investments in net income.  Students are required to effectively consolidate its minority active investments.

      Case 7.2:  Disney Acquisition of Marvel Entertainment.  Students must answer several questions about how Disney must account for its September 2009, $4 billion cash and stock acquisition of Marvel.  Emphasis is placed on the new accounting rules in the area (the acquisition method).


      Integrative Case 8.1:  Starbucks.  Starbucks recognizes revenue in retail transactions, as a supplier of other companies, and from transactions with franchisees.  This portion of the integrative case asks students to address questions regarding Starbucks’ accounting for revenue recognition.

      Case 8.2:  Arizona Land Development Company.  This case illustrates the effects of alternative income recognition methods on the three principal financial statements.  The case provides full financial statements under each income recognition method.  Students therefore devote time to understanding the different effects on the financial statements instead of performing the laborious calculations.  The link between asset valuation and income recognition, discussed in Chapter 2, come through clearly.  The case also demonstrates that the alternative income recognition methods do not affect cash flows.  Students must make a judgment as to the appropriate time to recognize income.

      Case 8.3:  Coca-Cola Pensions.  Students analyze Coca-Cola’s pension footnote to explain changes in the net pension liability, trace changes in pension assets and liabilities to net income (through pension expense) and to other comprehensive income.  Students must also explain how a change in an expected compensation level increase assumption affects the pension liability and current and future pension expense.

      Integrative Case 9.1:  Starbucks.  This portion of the integrative case requires students to analyze issues of earnings quality for Starbucks.  Specifically, students must take a position on how they will treat Starbucks’ restructuring charges, accounting changes, self-insurance reserves, and other comprehensive income items when forecasting future earnings.

      Case 9.2:  Citi:  A Very Bad Year.  Citi has reported a large loss during the recent financial crisis.  Students are required to analyze Citi’s earnings quality by examining Citi’s financial statements and note disclosures.  Specific requirements relate to principal transactions, realized gains and losses from sales of investments, provisions for loan losses, restructuring charges, goodwill impairments, and discontinued operations.

      Integrative Case 10.1:  Starbucks.  This case requires students to construct a spreadsheet or use FSAP to prepare forecasted financial statements for Starbucks.  Students must decide on appropriate assumptions to prepare the forecasted financial statements.  By this point, students should be familiar with Starbucks, although it is not essential that students will have prepared the portions of the integrative cases in prior chapters in order to decide on appropriate assumptions.  These forecasted amounts become the base for the integrative cases on valuation in Chapters 11 to 14.

      Case 10.2:  Massachusetts Stove Company:  Analyzing Strategic Options.  This case follows up Case 5.2, which analyzes the credit risk of Massachusetts Stove Company.  The setting of Case 10.2 is five years later.  The firm is healthier but its wood stove products have reached maturity.  Students are asked to prepare forecasted financial statements to assess the desirability of adding gas stoves to the wood stove line of products.  The case provides forecasted assumptions for the best case, most likely case, and worst case scenarios.  Students must design a spreadsheet to permit analysis of these options.

      Integrative Case 11.1:  Starbucks.  Students compute the cost of equity capital for Starbucks and then apply the dividend-based valuation method, using forecasted amounts from Integrative Case 10.1.  Students must also study the sensitivity of the valuation to changes in discount rate and the long-term growth rate.

      Integrative Case 12.1:  Starbucks.  This portion of the integrative case guides students through the valuation of Starbucks using the present value of free cash flows to common equity shareholders and the present value of free cash flows to all debt and equity stakeholders.  The case also asks students to assess the sensitivity of their valuations to changes in assumptions about costs of capital and long-term growth rates.

      Case 12.2:  Holmes Corporation:  LBO Valuation.  This case involves the full range of analyses for a leveraged buyout (LBO), including identifying the desirable attributes of an LBO candidate, preparing projected financial statements, and valuing the company using present values of cash flows, present values of residual income, present value of residual ROCE, and market multiples.  Holmes is not an obvious choice for an LBO, so good discussions develop about whether or not to pursue the firm.  The preparation of forecasted financial statements is relatively straightforward because Holmes’ financial statement relations have been fairly stable in the past.  Although we place this case at the end of Chapter 12, instructors can assign appropriate parts as they cover Chapters 10 to 14, or use it as a synthesis case after covering all of these chapters.  The case requires approximately three hours of class time.

      Integrative Case 13.1:  Starbucks.  This portion of the integrative case guides students through the valuation of Starbucks using the residual income valuation method.  It also asks students to assess the sensitivity of their valuations to changes in the discount rate and long-term growth rate.

      Integrative Case 14.1:  Starbucks.  Students are asked to apply the value-to-book and value-earnings valuation methods to Starbucks.  They also apply these valuation methods with different assumptions about the discount rate and long-term growth rate to study the sensitivity of the valuations to these assumptions.  Comparisons of value-to-book and value-earnings ratios to market-to-book and price-earnings ratios provide a basis for evaluating current market prices.  Students are also asked to reverse engineer the discount rate and long-term growth rate consistent with current market prices.

Computer Software

      A Financial Statement Analysis Package (FSAP) is available on the web site to all adopters of the book.  FSAP permits students to enter financial statement data for a company, which they can then analyze using FSAP.  FSAP also has capabilities for the preparation of forecasted financial statements and valuation of a firm using the valuation methods discussed in Chapters 11 to 14.  The output of FSAP for PepsiCo appears in Appendix C.  FSAP contains a user manual with many line-by-line guides for how to use FSAP.
      We welcome suggestions and comments that might provide guidance for future editions of this book.  The revisions for this edition attempt to reflect the excellent suggestions we have received on the sixth edition.



Schedule 1


Corporate Financial Reporting Course Outline

(Twenty 90-Minute Class Sessions)

Class                                                                                                  Prepare

Period                     Topic                               Read      Undergraduate        Graduate

    1      Overview of Financial Reporting      Ch. 1        Prob. 1.15               Case 1.1

    2      Asset Valuation and Income              Ch. 2        Case 2.1                  Case 2.1
                 Measurement                                                  Prob. 2.16               Prob. 2.16

    3      Income Flows versus Cash Flows      Ch. 3        Case 3.1                  Case 3.1
                                                                                         Prob. 3.23               Prob. 3.23

    4      Debt Financing                                   Ch. 6        Prob. 6.5, 6.10        Prob. 6.5, 6.10

    5      Shareholders’ Equity/Stock                Ch. 6        Prob. 6.21, 6.22      Prob. 6.24
                 Options                                                                                           Case 6.2

    6      Off-Balance Sheet Financing             Ch. 6        Prob. 6.17, 6.20      Prob. 6.17
                                                                                                                        Case 6.1

    7      Long-Lived Operational Assets         Ch. 7        Prob. 7.15, 7.16,     Case 7.1 (Parts I & V)
                                                                                         7.17

    8      First Examination

    9      Intercorporate Investments                 Ch. 7        Prob. 7.11, 7.18      Case 7.1 (Parts III
                                                                                                                        & IV)

  10      Corporate Acquisitions                       Ch. 7        Prob. 7.22, 7.23      Prob. 7.23
                                                                                                                        Case 7.2

  11      Foreign Currency Translation            Ch. 7        Prob. 7.25, 7.26      Prob. 7.25, 7.26

  12      Revenue Recognition                         Ch. 8        Case 8.1                  Case 8.1

  13      Revenue Recognition                         Ch. 8        Prob. 8.19, 8.21      Case 8.2

  14      Second Examination

  15      Income Taxes                                     Ch. 8        Prob. 8.26               Prob. 8.26

  16      Pensions and Healthcare Benefits      Ch. 8        Prob. 8.22               Prob. 8.22

  17      Derivatives                                         Ch. 8        Prob. 8.23, 8.24      Prob. 8.23, 8.24

  18      Accounting Quality                            Ch. 9        Prob. 9.10, 9.11      Case 9.1, 9.2

  19      Project Presentations

  20      Project Presentations


Schedule 2


Financial Statement Analysis Course Outline

 (Twenty 90-Minute Class Sessions)


Class                                                                                               Prepare

Period                     Topic                               Read     Undergraduate      Graduate

    1      Introduction to Financial State-         Ch. 1      Case 1.1                Case 1.1
                 ment Analysis

    2      Overview of Profitability Analysis    Ch. 4      Prob. 4.21             Case 4.1 (Part A)

    3      Analyzing Restaurant and                  Ch. 4      Prob. 4.23, 4.24    Prob. 4.23, 4.24
                 Capital-Intensive Firms

    4      Analyzing Personnel and Financial   Ch. 4      Prob. 4.22, 4.25    Prob. 4.22, 4.25
                 Services Businesses

    5      Overview of Risk Analysis                Ch. 5      Prob. 5.13, 4.16    Case 5.1

    6      Cross Section Profitability and                         Case 4.1 (Part B)  Case 4.1 (Part B)
                 Risk Analysis

    7      Credit Risk Analysis                          Ch. 5      Case 5.2                Case 5.2

    8      Bankruptcy Risk Analysis                  Ch. 5      Case 5.3                Case 5.3

    9      Financial Reporting Manipulation     Ch. 5      Prob. 5.19             Case 5.4
                 Risk Analysis

  10      Examination

  11      Forecasted Financial Statements       Ch. 10    Case 10.1              Case 10.1

  12      Valuation:   Dividends-Based         Ch. 11    Case 11.1              Case 11.1
                 Approaches

  13      Valuation:  Cash-Flow-Based         Ch. 12    Case 12.1              Case 12.1
                 Approaches

  14      Valuation:  Earnings-Based             Ch. 13    Case 13.1              Case 13.1
                 Approaches

  15      Valuation:  Market Multiples          Ch. 14    Case 14.1              Case 14.1

  16      Synthesis Case                                                   Case 12.1              Case 12.1

  17      Synthesis Case                                                   Case 12.1              Case 12.1

  18      Project Presentations                                         Case 11.1              Case 11.1

  19      Project Presentations

  20      Examination


Schedule 3

Financial Reporting and Statement Analysis
(Thirty 90-Minute Class Sessions)

Class                                                                                                  Prepare

Period                     Topic                               Read     Undergraduate      Graduate

    1      Introduction to Financial Reporting  Ch. 1      Prob. 1.15             Case 1.1
                 and Financial Statement Analysis

    2      Asset Valuation and Income             Ch. 2      Case 2.1                Case 2.1
                 Measurement                                                Prob. 2.16             Prob. 2.16

    3      Income Flows versus Cash Flows      Ch. 3      Case 3.1                Case 3.1
                                                                                       Prob. 3.23             Prob. 3.23

    4      Introduction to Profitability               Ch. 4      Prob. 4.21             Case 4.1 (Part A)
                 Analysis

    5      Introduction to Risk Analysis            Ch. 5      Prob. 5.13             Case 5.1

    6      Cross Section Profitability Analysis                Case 4.1 (Part B)  Case 4.1 (Part B)

    7      Financial Reporting Manipulation     Ch. 5      Prob. 5.19             Case 5.4
                 Risk Analysis

    8      Debt Financing                                   Ch. 6      Prob. 6.5, 6.10      Prob. 6.5, 6.10

    9      Shareholders’ Equity/Stock              Ch. 6      Prob. 6.21, 6.22    Prob. 6.24
                 Options                                                                                        Case 6.2

  10      Off-Balance Sheet Financing             Ch. 6      Prob. 6.17, 6.20    Prob. 6.17
                                                                                                                     Case 6.1

  11      Long-Lived Operational Assets         Ch. 7      Case 7.15, 7.16     Case 7.1 (Parts I
                                                                                                                     & V)

  12      First Examination

  13      Intercorporate Investments                Ch. 7      Prob. 7.11, 7.18    Case 7.1 (Parts III
                                                                                                                     & IV)

  14      Corporate Acquisitions                      Ch. 7      Prob. 7.22, 7.23    Prob. 7.23
                                                                                                                     Case 7.2

  15      Foreign Currency Translation            Ch. 7      Prob. 7.25, 7.26    Prob. 7.25, 7.26

  16      Revenue Recognition                         Ch. 8      Case 8.1                Case 8.1



  17      Revenue Recognition                         Ch. 8      Prob. 8.19, 8.21    Case 8.2

  18      Income Taxes                                     Ch. 8      Prob. 8.26             Prob. 8.26

  19      Pensions and Healthcare Benefits      Ch. 8      Prob. 8.22             Prob. 8.22

  20      Derivatives                                         Ch. 8      Prob. 8.23, 8.24    Prob. 8.23, 8.24

  21      Accounting Quality                            Ch. 9      Prob. 9.10, 9.11    Case 9.1, 9.2

  22      Second Examination

  23      Forecasted Financial Statements       Ch. 10    Prob. 10.1             Case 10.1

  24      Valuation:  Dividends-Based           Ch. 11    Case 11.1              Case 11.1
                 Approaches

  25      Valuation:  Cash-Flow-Based          Ch. 12    Case 12.1              Case 12.1
                 Approaches

  26      Valuation:  Earnings-Based             Ch. 13    Case 13.1              Case 13.1
                 Approaches

  27      Valuation:  Market Multiples          Ch. 14    Case 14.1              Case 14.1

  28      Project Presentations

  29      Project Presentations


  30      Third Examination

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