REGENT UNIVERSITY COLLEGE OF SCIENCE & TECHNOLOGY

FIRST TRIMESTER, 2011 / 2012 ACADEMIC YEAR BSc ACCOUNTING LEVEL 400

SUBJECT: FINANCIAL STATEMENT ANALYSIS LECTURER: FRED ASAH-APAU ICA GHANA, MFin, PhD Candidate in Management Control Systems (Glasgow University) DATE: FRIDAY 2ND DECEMBER 2011 OFFICE: DEPARTMENT OF ACCOUNTING AND BUSINESS STUDIES VENUE & TIME: C 104, 07.00 9.30 Email: amdentinter@yahoo.co.uk Cell Phone: 0242750459 / 0272485897
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Pre-requisite(s)
SOAC 4593 Financial Statement Analysis is a BSc Accounting & Information Systems and Bachelor of Business Administration eCommerce Option Level 400 course and an addition to the earlier lectures at Level 300 in the area of Business Accounting. Successful completion of Level 300 models (or its equivalent with the approval of the Dean / Lecturer) is required for SOAC 4593 Level 400. The course is intended primary for BSc Accounting & Information Systems and BBA eCommerce Option students.

Course description This course examines the comprehensive treatment of the analysis of financial statements as an aid to decision making. Primary attention is placed on investing and lending decisions as they affect the financial manager.

Learning Objectives
By the end of the course students should be able to: Discuss the roles of financial reporting and financial statement analysis. Discuss the roles of the key financial statements (income statement, balance sheet, cash flow statement, and statement of changes in owners equity) in evaluating a company s performance and financial position. Discuss the importance of financial statement notes and supplementary information (including disclosures of accounting methods, estimates, and assumptions) and managements discussion and analysis. Discuss the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.

Identify the groups (operating, investing, and financing activities) into which business activities are categorized for financial reporting purposes and classify any business activity in the appropriate group. Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements.
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Learning Objectives continued

Explain the accounting equation in its basic and expanded forms. Explain the process of recording business transactions using an accounting system based on the accounting equations. Explain the need for accruals and other adjustments in preparing financial statements. Prepare financial statements given account balances and/or other elements in the relevant accounting equation, and explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners equity.

Explain the objective of financial statements and the importance of reporting standards in security analysis and valuation. Explain the role of financial reporting standard - setting bodies (including the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, Ghana Accounting Standard Board) and

regulatory authorities such as the International Organization of Securities Commissions, the U.K. Financial Services Authority, and the U.S. Securities and Exchange Commission in establishing and 4 enforcing reporting standards.

Learning Objectives continued

Discuss the status of global convergence of accounting standards and the ongoing barriers to developing one universally accepted set of financial reporting standards. Describe the International Financial Reporting Standards (IFRS) framework, including the objective of financial statements, their qualitative characteristics, required reporting elements, and the constraints and assumptions in preparing financial statements. Explain the general requirements for financial statements. Compare and contrast the key concepts of financial reporting standards under IFRS and alternative reporting systems, and discuss the implications for financial analysis of differing financial reporting systems. Describe the components of the income statement and the alternative presentation formats of that statement. Discuss the general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long term contracts, installment sales, barter transactions, gross and net reporting of revenue), and the implications of revenue recognition principles for financial analysis.
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Learning Objectives continued

Discuss the general principles of expense recognition, such as the matching principle, specific expense recognition applications (including depreciation of long - term assets and inventory methods), and the implications of expense recognition principles for financial analysis. Distinguish between the operating and non-operating components of the income statement. Define and interpret the asset and liability categories on the balance sheet, and discuss the uses of a balance sheet. Describe the various formats of balance sheet presentation. Compare and contrast current and noncurrent assets and liabilities. Compare and contrast cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items. Describe how noncash investing and financing activities are reported.

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Identify the analytical phases, sources of information, and output of financial analysis. Differentiate between computation and analysis of ratios, and explain key questions that should be addressed in ratio analysis. State and explain key aspects of the International Financial Reporting Standards (IFRS) framework as they pertain to the objectives and qualitative characteristics of financial statements. Identify and explain the major international accounting standards for each asset and liability category on the balance sheet, and the key differences from U.S. generally accepted accounting principles (GAAP). Evaluate a companys past financial performance and explain how a companys strategy is reflected in past financial performance. Prepare a basic projection of a companys future net income and cash flow.

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Explain International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP) rules for determining inventory cost including which costs are capitalized and methods of allocating costs between cost of goods sold and inventory. Discuss how inventories are reported in the financial statements and how the lower of cost or net realizable value is used and applied. Explain the accounting standards related to the capitalization of expenditures as part of long - lived assets, including interest costs. Compute and describe the effects of capitalizing versus expensing on net income, shareholders equity, cash flow from operations, and financial ratios including the effect on the interest coverage ratio of capitalizing interest costs. Explain the differences between accounting profit and taxable income, and define key terms including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense. Explain how deferred tax liabilities and assets are created and the factors that determine how a company s deferred tax liabilities and assets should be treated for the purposes of financial analysis.
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Learning Objectives continued

Compute the effects of debt issuance and amortization of bond discounts and premiums on financial statements and ratios. Explain the role of debt covenants in protecting creditors by restricting a companys ability to invest, pay dividends, or make other operating and strategic decisions. Explain the categorization of inter-corporate investments into minority passive, minority active, joint ventures, and controlling interest. Distinguish local currency, functional currency, and the presentation currency. Analyze the impact of changes in exchange rates on the translated sales of the subsidiary and parent company. Contrast accrual accounting and cash accounting and explain why accounting discretion exists in an accrual accounting system. Describe the relationship between the level of accruals and the persistence of earnings, and the relative multiples which the cash and accrual components of earnings should rationally receive in valuation. List and explain the opportunities and motivations for management to intervene in the external financial reporting process, and the mechanisms that discipline such intervention.
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Measurement of learning outcome

Home-work assignments, mid-semester exams, and quizzes; End of semester examination.
Methodology
The above outcomes will be achieved through a combination of lectures, in-class discussions and working through case studies. Each student must come to class prepared to actively participate in discussions.

Grading policy

Home-work assignment, mid-semester exams, & class quizzes 30% Attendance 10% End of semester examination Total 60% 100%

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TEXTBOOKS
Conducting a course with one required textbook is very convenient. Unfortunately, this will not be the case in this course. Instead, several textbooks will be recommended as the course is made up of two areas in academic and have been consolidated as one subject; and Each student will be expected to acquire one in each section to use them as course textbooks for reading on the assigned topics and practicing problem solving. A set of problems for class discussion will be given to students. The following is a list of possible textbooks (please note, this list is not exhaustive. Please ensure you acquire a recent edition).
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Textbooks continued
1. 2. 3. Essentials of Financial Analysis by George T. Friedlob, and Lydia L. F. Schleifer, Published by John Wiley & Sons, Inc. ISBN 0-471-22830-3 Financial Statement Analysis: A Practitioners Guide (Wiley Finance) by Martin S. Fridson and Fernando Alvarez (July 5, 2011) Financial Statement Analysis by K. R. Subramanyam and John Wild (May 19, 2008) Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson (Aug 15, 2009) Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective (with Thomson One Printed Access Card) by James M. Wahlen, Stephen P. Baginski and Mark Bradshaw (Aug 10, 2010) Financial Statement Analysis by John J. Wild, K. R. Subramanyam and Robert F. Halsey (Nov 28, 2005) Financial Statement Analysis Workbook: Step-by-Step Exercises and Tests to Help You Master Financial Statement Analysis (Wiley Finance) by Martin S. Fridsonand Fernando Alvarez (Jul 29, 2002) Financial Statement Analysis and Security Valuation by Stephen H. Penman (Mar 23, 2009)

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5. 6. 7. 8.

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MANAGEMENT DECISION MAKING PROCESS

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Figure 1
Long-term Planning process

1. Identify objectives 2. Search for alternative courses of action 3. Gather data about alternatives

4. Select alternative courses of action

5. Implement long-term plan in the form of the annual budget
Annual budgeting process

6. Monitor actual results 7. Respond to divergencies from plan

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ACCOUNTING CONCEPTS AND CONVENTIONS AND THEIR APPLICATION

1. 2. 3. 4. 5. The Business Entity The Cost Concept The Going Concern Concept The Dual Aspect Concept The Accrual Concept money accrued is not actually cash received in a period of account. 6. The Realisation Concept Revenue is considered as earned on the day which is realised and this is when goods are transferred to the customer in exchange for a valuable consideration.
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ACCOUNTING CONVENTION
Conservatism Accountants always estimate possible future losses and ignores possible future profits. Consistencies There must be consistency in the application of methods. Materiality The size of an amount will influence the treatment of it.

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USERS OF FINANCIAL STATEMENTS

1. A companys managers - use the financial reports to determine the companys profitability. 2. Stockholders - potential investors use the financial reports as an aid in deciding whether or not to buy the stock. 3. Bondholders decide whether to maintain it, dispose off the investment, or renew it. 4. Security analysts evaluate reports with an economic decision in mind. 5. Suppliers to decide whether or not to sell merchandise to a company on credit.
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USERS OF FINANCIAL STATEMENTS continued 6. Lending institutions assess the credit

worthiness before extending credit. 7. Employees to assess whether the employers have the capacity to absorb any wage increment.

8. Labor unions - use the financial reports to help determine their demands when they negotiate for employees. 9. Regulatory authorities compliance with regulations, e.g., payment of taxes. 10. General public social responsibility.
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