FSA Syllabus

ACCT 581: Financial Statement Analysis

Course Outline

Course Description

The objective of this class is to provide you with a framework for analyzing a firm’s past
performance, estimating its future performance, and valuing its equity. The course integrates key
concepts from accounting, finance, economics, and business strategy and applies them to
financial decision-making. The course focuses on teaching you to interpret numbers in the
financial statements. You should leave the course with the ability to generate reasonably
accurate (or at least logically consistent) forecasts of a firm's future financial performance,
including revenues, earnings, asset balances and free cash flows

The class is case-oriented. You are responsible for preparing cases in advance of the class
session, including familiarizing yourself with the relevant accounting issue. The course illustrates
contemporary forecasting and valuation techniques used by practitioners as well as evidence
from academic research on the effectiveness of these techniques. Students planning a career in
accounting, the financial industry, consulting, or general management, will find the knowledge
acquired in this course relevant.

COURSE INFORMATION
Instructor: Patricia M. Dechow Term/period: Fall 2017
Phone: (213) 740-9585 Units: 3.0
Office Hours: Before, during the break, Class times: Wednesday: 6:30-9:30
or after class, or by appointment Classroom: Popovich Hall: JKP 112
Location of My Office: ACC 117 Section 14279: Graduate Accounting Students
Email: patricia.dechow@marshall.usc.edu Section 14268: MBA and Other Students

Course duration: Wednesday August 23 to Wednesday December 6th
th
Final Exam Date: December 6

Prerequisites

You should have taken an introductory financial accounting and introductory finance class. Upper
level financial accounting classes and corporate finance are also helpful. The stated prerequisite
is GSBA510.
Course website: blackboard

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Course Outline

WHAT YOU WILL HAVE LEARNED BY THE END OF THE COURSE
By the end of the class you will:
• Have a framework for analyzing a business. We will incorporate key elements that you have
learned in your other classes and apply this knowledge systematically to value a business.
• Become familiar with the organization and disclosure of information reported in 10-K filings and
the notes to the financial statements. You will have a detailed understanding of assets and
liabilities reported on the balance sheet. You will also understand what assets and liabilities
are NOT reported under accounting rules and determine the importance of these off-balance
sheet items for understanding the value of a business.
• Be proficient at calculating and interpreting financial ratios. You will understand how to use
ratios to compare a firm to its competitors and to evaluate changes in ratios over time. You will
also know how to use these ratios to help forecast the future.
• You will understand how accounting errors (either intentional manipulation by management or
unintentional mistakes) impact reported income and the book value of equity.
• Learn about earnings announcements and the reporting of GAAP and non-GAAP earnings
numbers.
• Have a framework for forecasting future earnings and predicting the stock market’s response to
quarterly earnings announcements.
• Be able to read and critically evaluate financial analyst reports on publicly listed companies.
• Understand major valuation models. You will learn a unified framework for valuation and so be
comfortable moving between discounted cash flow models, residual income models, and
models based on market multiples such as the price-earnings ratio and the market-to-book
ratio.
• Be proficient at inputting financial data into the eVal valuation excel spreadsheets and using
eVal to forecast and value companies.

COURSE MATERIALS & REQUIREMENTS

th
Lundholm and Sloan, Equity Valuation and Analysis, 4 edition. This book is available at the USC
bookstore or online at: amazon.com or createspace.com.

Note: I have placed a copy of the book on reserve at the Library.
Online Cases: Available on Blackboard or
http://www.lundholmandsloan.com/index.html
Online Software: eVal: http://www.lundholmandsloan.com/software.html
FactSet: You will receive an account so that you can access FactSet during the semester

OFFICE HOURS
Because this is an evening class, it may be easiest for you to schedule an appointment to meet
me at a time that best suits you. I will be available to discuss the course with you before class,
during the break in the middle of class, or after class. I also check my email regularly so if you
have a question you can email me.
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Course Outline

TEACHING & LEARNING ACTIVITIES
Reading and understanding financial statements is very contextual. There is only so far theory
(e.g., knowing accounting rules) can take us. It is a bit like learning how to drive a car, where you
can learn the road rules but the only way you become a good driver is by driving a lot,
encountering different road conditions, making mistakes, and learning from your mistakes.
Financial Statement Analysis is similar, the best way to learn is by actually engaging in the task.
This means the class is very “hands on” – and involves the use of cases that require you to read
financial statements and answer questions. This is hard because sometimes you do not know
where to start. Please try all cases before class. The more financial statements you read, the
easier it gets to understand what to look for even though the issues or concerns change from one
firm to another. You need to dive into the details to learn how to analyze financial statements.
The Lundholm and Sloan website has Webcasts that many students find helpful for reviewing
concepts discussed in class. Often hearing the same information more than once can help
consolidate your understanding. Therefore, if you feel that you did not quite understand
something I discussed in class, please check the webcasts.
Periodically we will work on in-class exercises. For these classes, you will want to bring your
laptop. In addition, financial statement materials can be very long and you will often want to read
them from your computer rather than print them all out.

ASSESSMENT
Group Case Homeworks handed in 20%
Midterm (Wednesday October 11) 20%
Project (Wednesday November 15) 20%
Final Exam (Wednesday December 6) 30%
Participating in Class 10%

GROUP CASES
The Group Cases are handed in as one per group, with groups ranging from 3-5 students. We
will organize team membership and case selection in the first class.
You must hand in a case from each of the major parts of the course (Accounting Analysis,
Financial Analysis, Forecasting, Valuation, and Synthesis and Review). The case homework is
not graded on accuracy alone. An honest and thoughtful effort will get most of the credit. The
homework should not be more than three pages with four supporting pages of tables or
calculations.
Each group member may have a different set of skills but it is important to work together and all
participate. Later in the course I will ask group members to let me know how the group worked
out, so please try and make a positive contribution to your group and if you have problems let
members know in advance. Remember you have to feel like you are doing more than your fair
share of the work for other group members to actually think that you have done your fair share of
the work.

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Course Outline

Cases are due at the start of class. You can use Blackboard to submit cases. Please submit all
cases as PDFs regular letter size paper. On days when your team hands in a case you should
be ready to answer questions and get involved in class.

QUIZ AND FINAL EXAM
For the Quiz and Final Exam, you will receive a 10K and supporting material for a firm at least
two days in advance of the test date. The test will involve answering questions about the firm
based on information in the 10K. Attending the Quiz and Final Exam is mandatory.

GROUP PROJECT
Each team will apply the framework covered in the class to provide a valuation of a company. I
will provide more details on the project later in the course.

CLASS PARTICIPATION

Class participation portion of your grade is based on:
• Class attendance and positive and quality contributions shared in class, made with
thought and preparation prior to the class meetings.
• Class attendance and discussion of other team’s projects during the project presentation
phase of the class.
• A positive attitude that enriches the learning experience of the class (e.g., helping
another student struggling to answer a question, looking on the bright side of things if a
case is tough, etc.).
I have listed some cases as “in class activities” and for these cases you are not expected to
prepare beforehand.

CLASS ETIQUETTE
1. Arrive at class on time and avoid leaving early.
2. Bring a name tent to class and sit in the same location.
3. Turn off cellphones and other audible electronics.
4. Do not use laptops unless required for an in-class exercise.
5. If you feel another member of the class is distracting you, let me know, and where
appropriate, I will anonymously communicate your feedback to them.
6. Sit in the same spot for all classes (we will establish a seating chart in the third class).

CELL PHONE AND LAPTOP POLICY

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Course Outline

Research has shown that the human brain is not good at multi-tasking. The human brain
functions sequentially which means it takes a fraction of a second for your brain to switch from
viewing material on your laptop, checking messages on your phone, or listening to the class.
Even when you view what is on someone else’s laptop your brain has to switch from listening to
the class to focusing on the laptop. Thus, every time you switch activities your brain has to go
back and remember “where it was” on the other activity. Therefore, laptops and cell phones
are not to be used during class unless I specifically request you to open up your laptops and
do some activity.

GRADING POLICY
There is no mandated curve or hard target for classes at Marshall. Historically, graduate
electives at the Marshall School have had an average GPA of around 3.5.

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Course Outline

Support Systems
Student Counseling Services (SCS) - (213) 740-7711 – 24/7 on call
Free and confidential mental health treatment for students, including short-term
psychotherapy, group counseling, stress fitness workshops, and crisis intervention.
https://engemannshc.usc.edu/counseling/
National Suicide Prevention Lifeline - 1-800-273-8255

Provides free and confidential emotional support to people in suicidal crisis or emotional
distress 24 hours a day, 7 days a week. http://www.suicidepreventionlifeline.org
Relationship & Sexual Violence Prevention Services (RSVP) - (213) 740-4900 - 24/7 on
call
Free and confidential therapy services, workshops, and training for situations related to
gender-based harm. https://engemannshc.usc.edu/rsvp/
Sexual Assault Resource Center

For more information about how to get help or help a survivor, rights, reporting options,
and additional resources, visit the website: http://sarc.usc.edu/
Office of Equity and Diversity (OED)/Title IX compliance – (213) 740-5086

Works with faculty, staff, visitors, applicants, and students around issues of protected
class. https://equity.usc.edu/
Bias Assessment Response and Support

Incidents of bias, hate crimes and microaggressions need to be reported allowing for
appropriate investigation and response. https://studentaffairs.usc.edu/bias-assessment-
response-support/
Student Support & Advocacy – (213) 821-4710

Assists students and families in resolving complex issues adversely affecting their
success as a student EX: personal, financial, and academic.
https://studentaffairs.usc.edu/ssa/
Diversity at USC – https://diversity.usc.edu/

Tabs for Events, Programs and Training, Task Force (including representatives for each
school), Chronology, Participate, Resources for Students

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Course Outline

CLASS SCHEDULE

PART I: INTRODUCTION AND BUSINESS STRATEGY ANALYSIS

WEEK 1
Session A: Wednesday, August 23
Course Introduction and Overview
Reading: Textbook Chapter 1
Handout: Analyzing Apple Case and an overview of a 10K

Session B:
Business Strategy Analysis
Reading: Information Collection Textbook Chapter 2 (skim only)
Reading: Understanding the Business Textbook Chapter 3

PART III: ACCOUNTING ANALYSIS

WEEK 2
Session A: Wednesday, August 30
Accounting Analysis: Review of Key Accounting Concepts
Analyzing Apple: Questions 1 - 7

Session B:
Accounting Analysis: Understanding how Different Accounting Rules affects ratios
Case: EnCom Corporation in textbook, spreadsheet of Bcourse:
Stage 1 and 2 (attempt before class)

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Course Outline

WEEK 3

Session A: Wednesday, September 6
Accounting Analysis: Revenue Recognition
Case: Apple and the iFad in textbook: Questions 1, 2, 4, 5, and 6 (HW)

Session B:
Introduction to Ratio Analysis

PART IV: FINANCIAL ANALYSIS

WEEK 4
Accounting Analysis: Where does the entity start and stop?
Case: Boston Chicken in textbook (HW)

Session B:
Ratio Analysis: Advanced Dupont Analysis and Cash Flow Analysis
Reading: Textbook Chapter 5 and 6

WEEK 5
Case: Analyzing Apple: Questions 8-12 (HW)

Session B:
Ratio Analysis: Margins and Turnover
Understanding Factset Tipsheets
(Useful for forecasting Apple’s EPS and Project – also widely used in asset management type
jobs)
Interpreting Margins and Turnovers (in textbook) (attempt before class - in class exercise)

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Course Outline

PART V: FORECASTING
WEEK 6
Forecasting Details
Reading: Textbook Chapter 7: Structure Forecasting

Session B:
Textbook Chapter 8: Forecasting Details
Workshop on forecasting and discussion of Apple

WEEK 7
Session A: Wednesday, October 4
Forecasting Application
Case: Analyzing Apple: Question 13 (HW)
Groups will present their Q4 EPS Forecasts for Apple please have presentation on a USB drive

Session B:
Review for Midterm

WEEK 8
Session: Wednesday, October 11

MIDTERM EXAM

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Course Outline

PART VI: VALUATION

WEEK 9
Reading: Textbook Chapter 9: Understanding the Cost of Capital

Session B:
Textbook Chapter 10: Valuation models
Case: Encom Corporation Stage 3 in textbook

WEEK 10

Wednesday 10/25/2017: Apples FY 2017 Earnings Release (Projected)

Valuation: Application of Discounted Cash Flows and Residual Income Models
Case: Analyzing Apple: Question 14 – 16 (HW)

Session B:
Valuation Application: Predicting Returns at Earnings Announcements
Case: Intel (in textbook) (HW)

PART VII: SYNTHESIS, REVIEW AND APPLICATIONS

WEEK 11
Session A: Wednesday, November 1
Determinants of Valuation Ratios
Case: Restaurant Industry in 2003 in textbook – (in class exercise)

Session B:
Valuation Applications: Mergers
Case: AOL Time Warner in textbook (HW)

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Course Outline

WEEK 12
Valuation Applications: Initial Public Offerings
Case: Has Zynga Lost its Zing (HW)

Session B:
Project Workshop
Q&A on Projects

WEEK 13
Project Presentations

Session B:
Project Presentations

PROJECTS Due
Wednesday, November 15

WEEK 14
Session: Wednesday, November 22

Thanksgiving – NO CLASS

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Course Outline

WEEK 15
Comprehensive Case: Tesla
Case: Tesla: (HW)

Session B:
Review for final exam

WEEK 16

Wednesday, December 6, 2017
Scheduled time: 7:00pm – 9:00pm
FINAL EXAM

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ACCT 581: Financial Statement Analysis

National Suicide Prevention Lifeline - 1-800-273-8255

Sexual Assault Resource Center

Office of Equity and Diversity (OED)/Title IX compliance – (213) 740-5086

Bias Assessment Response and Support

Student Support & Advocacy – (213) 821-4710

Diversity at USC – https://diversity.usc.edu/

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