AFSA Lecture 1

Course Overview

• The course teaches specific tools for analyzing financial statements of publicly listed companies.
• Topics include accounting analysis, earnings quality assessment, ratio analysis, statement reformulation, forecasting, equity valuation, and security analysis.
• Real company insights will be used when presenting course topics.

Example Cases

• In May 2012, Facebook became a public company on NASDAQ.
• Financial statement analysis helps determine the value of a company's shares.
• Facebook had to file detailed statements before its IPO, so one can use financial statement analysis tools to determine the "true" price.
• Accounting scandals like Wirecard AG and Enron demonstrate the importance of FSA
• Collapse of Enron, earnings manipulations led to overvalued stock price; FSA can help

Required Literature

• Selected chapters and cases.
• Palepu, Healy, and Peek 2022, Business Analysis and Valuation: IFRS Edition (6th ed.).
• All lecture slides, guest lecture content, and the Twitter case

Course Q&A and Feedback

• Questions should be posted on the discussion forum on CANVAS.
• Feedback is welcome via email to [email protected].

Examination and Grading

• Closed-book exam: 80% of the final grade. on April 23, 2025, from 13:30 to 15:30.
• Resit of the exam: Thursday June 05, 2025, 13:30 – 15:30.
• The minimum grade for the exam is 5.0; the exam will be on ANS
• Group assignment: 20% of the final grade that involves financial statement and valuation case study.
• Group Size: 4 members per group; teams must analyze a given company and apply the course content.
• Passing Grade: Requires a combined minimum grade of 5.5 for the exam and assignment.

Assignment Details

• Step 1: Groups of 4 students select their own teams, using the Canvas discussion forum to find team members.
• Step 2: Fill in team information at https://sites.google.com/view/afsa-ese/group-composition by March 18, 2025.
• Step 3: Company assignments will be available on March 21.
• Step 4: Submit the group assignment by April 13, 23:59 hrs.
• Step 5: Peer evaluation of other groups using the same company by April 16, 23:59 hrs. using the provided form at: https://sites.google.com/view/afsa-ese/peer-evaluation
• The assignment is to be finished one week before the exam.
• Each group must grade and comment on other groups with the same company.
• The lecturer has the final say on the grade, using deviation from suggested grades where necessary.
• Grading is mandatory, collusion is prohibited, and unfair treatment can be objected.
• Purpose of the peer evalutation is for students to learn from each other

Schedule and Guest Lecture

• Check times and rooms before the lecture!
• Lecture 6 (April 2, 2025) will be given by Dr. Moritz Bassemir
• It is an official part of the course to talk about business analyses in private firms
• The lecture will focus on (private) M&A transactions, covering public versus private corporations

Participation and Advice

• Attendance in lectures and cases is optional
• Preparation for class is up to the student
• Participation is valuable and encourages better learning of the course
• This course is not difficult and your grade depends on yourself

Course Focus and Real-World Examples

• Real-world examples primarily use U.S. multinational companies.
• While these companies follow U.S. GAAP, knowledge of IFRS settings will be useful
• The course focuses on analyzing financial statements, regardless of accounting rules applied.

Accounting Refresher: Company A Example

• Company A starts operations on 1/1/2022 with $500,000 cash investment.
• Initial balance sheet shows $500,000 in cash and $500,000 in owners' equity.
• Cash accounting methods affect the balance sheet.
• Accrual accounting is used to show financial performance

Accrual Accounting and Financial Statement Analysis (FSA)

• Financial statements are influenced by the accounting system used.
• Accrual accounting: separates costs/benefits from payments/receipts.
• Accounting conventions and standards: gives managers discretion to estimates but also reduce flexibility for managers.
• Managers' reporting strategy: affects accounting choices and voluntary disclosure.
• Auditing, legal liability, and enforcement: enhance financial statement quality through integrity verification

Four Steps of FSA

• It's difficult for outside users to separate true information from distortion and noise in data from managers
• Undoing accounting distortions is not always completely possible, that affect investors
• Effective FSA seeks managers’ inside information from available data
• There are four-key steps

Strategy Analysis

• It is an important starting point for FSA since it:
  • Allows qualitative probing to ground accounting/financial analysis in business reality.
  • Aids in identifying profit drivers and key risks.
  • Helps assess current performance sustainability.
• Course Focus: understanding the company and its business.
• The Industry, competition, and synergies/diversification.
• The "5 Forces" of industry structure and profitability:

1. Rivalry
2. New Entrants
3. Substitute Products
4. Bargaining Power of Buyers
5. Bargaining Power of Suppliers

Self Study

• Review the development of ESG case study
• Understand the importance of ESG and the regulatory framework for the exam

Next Class

• Accounting Analysis (Chapter 3)