22319 Financial Statement Analysis

Subject level: Undergraduate

Handbook description

This subject introduces the role of accounting numbers in understanding the valuation of businesses, in addition to specific applications such as security analysis, credit analysis, financial policy analysis, the evaluation of takeovers and initial public offerings and other context-specific settings in which accounting data plays a central role. Four key generic skills are highlighted as a precursor to undertaking context-specific financial analysis and valuation: business analysis; accounting analysis; financial analysis; and prospective analysis. Students first learn the importance of each of these steps, and then how to apply them in context-specific settings. The subject also highlights the use of accounting numbers via the residual income approach to valuation. This is closely aligned with systems such as Economic Value Added or Economic Profits, as promulgated in early accounting literatures and currently by major consulting firms.

Subject objectives/outcomes

On successful completion of this course, students should be able to:

1. Understand the basic techniques of financial analysis and business valuation.
2. Appreciate the linkage between industry analysis, strategic business analysis, accounting analysis, financial analysis and prospective analysis.
3. Understand how to use various different valuation models, as well as the benefits and limitations of those models.
4. Prepare a valuation and justify it in terms of the underlying business, accounting and financial considerations.
5. Work effectively in teams so developing interpersonal, leadership and communication skills.

Contribution to graduate profile

The aim of this course is to demonstrate and then apply a framework for business analysis and valuation using financial statement data. The course focuses on establishing a clear linkage between several skills normally acquired by business students so as to enable them to conduct rigorous business analysis and prepare sound business valuations. The course combines skills in business strategy, finance and accounting, so as to enable students to apply these methods of analysis in combination. It also contributes to the accounting major by demonstrating the analysis of accounting quality and its implications for financial analysis and valuation.

Teaching and learning strategies

The course is taught as a combination of a two hour lecture and a one hour tutorial each week. Questions are specified in advance for tutorials. Lecture sessions will contain the basic material and introduce key concepts, and tutorials will demonstrate the application of these skills.

Content

• Industry and strategy analysis: Understanding the strategic decisions businesses make to create/maximise shareholder value, as well as the constraints within which this occurs.
• Accounting analysis: Understanding the link between strategic considerations and the financial statements, including identification of the quality of accounting numbers.
• Financial analysis: Assessing the financial performance and position of a business using ratio analysis and cash flow analysis, in light of the strategic direction and accounting quality identified.
• Prospective analysis: Forecasting financial results and valuation
• Application: Using forecasted financial statements to develop a valuation, and the assessment of that value's sensitivity to strategic, accounting and financial considerations.

Assessment

Examinations will be conducted under University examination conditions, and hence thoroughly address concerns regarding secure assessment. The assignment and homework will be secured through a combination of updating of assessment tasks across semesters and/or plagiarism detection software.

Recommended text(s)

Palepu, K., P. Healy and V. Bernard, Business Analysis and Valuation using Financial Statements: Text and Cases, 3rd ed., Southwestern, 2004.

Indicative references

Penman, S., Financial Statement Analysis and Security Valuation, McGraw Hill, 2001 or 2004.