GSBA 510 Lecture Deck Class 25 F24 V1 (1)

Page 1: Introduction to the Course

• Course: GSBA 510 - Accounting Concepts and Financial Reporting

• Focus: Analysis and Interpretation of Financial Statements (DeFond, Chapter 12)

Page 2: Recording Notice

• This class session will be recorded via Zoom and Panopto.

• Participation and comments during the session will be recorded, including during breaks.

Page 3: Class Topics Overview

• Main Topic: Analysis and Interpretation of Financial Statements using DeFond, Chapter 12.

Page 4: Representation of Financial Statements

• Emphasis on how financial statements are structured and analyzed at USC Leventhal School.

Page 5: Learning Objective I: Income Statement Analysis

• Objective: Identify persistent earnings and discuss the content and format of the income statement.

Page 6: Earnings Persistence

• Definition: Past earnings predict future cash flows; firm value equals present value of future cash flows.

• Persistent Earnings:

  • Expected to continue (sustainable, recurring, normalized, permanent earnings).

• Transitory Earnings:

  • Not expected to recur regularly.

Page 7: Multi-Step Income Statement

• Organized to present earnings by persistence; persistent items appear higher.

Page 8: Discontinued Operations

• Reported separately when a company disposes of a segment.

• Information reported includes:

  • Income or loss from operations before discontinuance.

  • Gain or loss from the disposal of the segment.

Page 9: Changes in Accounting Principles

• Companies may change accounting principles to better reflect economics.

• Prior years’ financial statements must be restated for comparability.

Page 10: Comprehensive Income

• Includes shareholder wealth items not in the income statement:

  • Net income.

  • Changes in market value of securities.

  • Unrealized gains/losses from currency translations.

• Reported in addition to or separately from the income statement.

• Accumulated Other Comprehensive Income: Part of stockholders' equity.

Page 11: Multi-Step Income Statement Order

• Identifies the correct sequence on a multi-step income statement:

  1. Revenue

  2. Gross profit

  3. Net operating income

  4. Income from continuing operations

  5. Net income.

Page 12: Learning Objective II: Sources of Financial Information

• Objective: Explain sources of information used by investment professionals and horizontal analysis.

Page 13: Sources of Information

• SEC Edgar Database:

  • Publicly-traded companies must publish audited financial statements (10K, 10Q).

• Data Aggregators:

  • Bloomberg, Moody’s for industry norms and ratios.

  • ThomsenOne for analyst reports.

  • FactSet and S&P/Capital IQ for detailed data.

• Company Websites:

  • Investor Relations sections for SEC filings and Annual Reports.

Page 14: Analytical Techniques

• Financial statement dollar levels are not enough; analysis methods include:

  • Horizontal analysis (comparative)

  • Trend analysis

  • Vertical analysis (common-size)

  • Ratio analysis.

Page 15: Horizontal Financial Statements

• Definition: Compares two or more years, assessing dollar and percentage changes.

• Caution with percentages: account for small numbers and negatives.

Page 16: Starbucks Recent Income Statements (Horizontal Analysis)

• Displays changes in key financial metrics over time:

  • Net revenues, costs, and income with dollar and percentage change representations.

Page 17: Starbucks Balance Sheets (Horizontal Analysis)

• Presenting current assets, liabilities, and equity with changes over time.

Page 18: Starbucks Statement of Cash Flows (Horizontal Analysis)

• Analysis of cash flows from operating, investing, and financing activities, showing year-to-year changes.

Page 19: Trend Analysis

• Companies often provide 5-year trend data on sales, net income, and assets for growth tracking.

Page 20: Learning Objective III: Vertical Financial Statement Analysis

• Objective: Explain vertical analysis (common-size) in financial statements.

Page 21: Vertical Analysis (Common-Size)

• Highlights the relative importance of accounts as a percentage of a key figure, aiding comparison across firms.

Page 22: Starbucks Common-Size Income Statement

• Shows net revenues, costs, and profits as percentages, facilitating analysis of financial performance.

Page 23: Starbucks Common-Size Balance Sheet

• Displays assets and liabilities, illustrating each item as a percentage of total assets.

Page 24: Learning Objective IV: Financial Ratios

• Objective: Define and discuss various financial ratios used for firm analysis.

Page 25: Ratio Analysis Overview

• Types of ratios include:

  • Profitability: Gross profit percentage, profit margin, asset turnover, return on assets, ROE.

Page 26: Liquidity Ratios

• Measures a firm’s ability to meet current obligations using:

  • Working capital, current ratio, quick ratio, cash flow ratios.

Page 27: Long-Term Solvency Ratios

• Assessing a firm’s long-term debt repayment capacity:

  • Debt-to-equity, interest coverage ratios.

Page 28: Ratios for Common Stockholders

• Includes ratios such as earnings per share, price-earnings, dividend yield, and payout ratio.

Page 29: Gross Profit Percentage Analysis

• Calculated as gross profit divided by net sales, showing profit efficiency.

Page 30: Profit Margin Analysis

• Profit margin calculated as net income divided by net sales, illustrating profitability for shareholders.

Page 31: Asset Turnover Ratio

• Assessing sales generated per invested dollar in assets, indicating operational efficiency.

Page 32: Return on Assets Analysis

• Evaluates profit generated for every dollar of assets, showing effective asset utilization.

Page 33: Return on Common Stockholders' Equity

• Measures profit earned per dollar of shareholder’s investment, indicating company growth potential.

Page 34: Short-Term Liquidity - Working Capital

• Analyzing the difference between current assets and current liabilities for financial stability.

Page 35: Current Ratio

• A comparison of current assets to current liabilities, assessing overall liquidity.

Page 36: Quick Ratio

• Examining liquid assets available to meet short-term liabilities.

Page 37: Operating Cash Flow to Current Liabilities Ratio

• Evaluates cash flow sufficiency to cover current obligations from operations.

Page 38: Accounts Receivable Turnover Ratio

• Indicates how effectively a company collects accounts receivable.

Page 39: Average Collection Period

• Demonstrates the average time taken to collect outstanding receivables, indicating efficiency in collections.

Page 40: Inventory Turnover Ratio

• Reflects the frequency of inventory being sold and replaced over a period.

Page 41: Days’ Sales in Inventory

• Represents the average days needed to sell the existing inventory, providing insight into sales effectiveness.

Page 42: Debt-to-Equity Ratio

• Measures debt financing relative to equity, indicating financial leverage and risk level.

Page 43: Times-Interest-Earned Ratio

• Assesses income coverage for interest expenses, illustrating the firm’s solvency level.

Page 44: Operating Cash Flow to Capital Expenditures Ratio

• Relates operational cash flow to capital expenditures, indicating sustainable investment funding.

Page 45: Earnings per Share

• The net income available to common shareholders, pivotal for investment analysis.

Page 46: Price-Earnings Ratio

• Evaluates the market price relative to earnings per share, useful for investment valuation.

Page 47: Dividend Yield

• Represents the earnings returned to shareholders as dividends relative to share price.

Page 48: Dividend Payout Ratio

• Indicates the portion of earnings distributed as dividends to shareholders, reflecting company policy.

Page 49: Question on Profitability Ratios

• Quiz question assessing recognition of key profitability ratios for performance assessment.

Page 50: Learning Objective V: Limitations of Financial Analysis

• Objective: Discuss challenges in analyzing financial statements.

Page 51: Limitations of Financial Statement Analysis

• Consider external economic and industry conditions.

• Recognize comparability issues due to accounting methods, company size, and operations.

Page 52: Further Limitations

• Quantitative methods serve as initial tools; qualitative factors are essential for comprehensive analysis.

Page 53: Appendix 12A

• Focuses on financial statement disclosures.

Page 54: Learning Objective VI: Financial Statement Disclosures

• Objective: Describe the nature and function of financial disclosures.

Page 55: Types of Financial Disclosures

• Categories: Parenthetical disclosures, notes to financial statements, supplementary information.

Page 56: Parenthetical Disclosures

• Provides additional details next to account titles on financial statements for clarification.

Page 57: Notes to the Financial Statements

• Enhance financial statements by providing additional context and details on transactions.

Page 58: Significant Accounting Policies

• Notes explain selected policies, complex transactions, detailed amounts, commitments, and contingencies.

Page 59: Additional Disclosures

• Public companies report financial information by segment, quarterly data, and significant events post reporting period.

Page 60: Supplemental Information

• Includes management discussion, analysis, and comparative selected financial data.

Page 61: Environmental, Social, and Governance (ESG)

• Highlights corporate social responsibility efforts, including charitable contributions and employee volunteer initiatives.

Page 62: Class 27 Topics

• Quiz covering Chapters 10, 11, and 12.

• Continuation of financial statement analysis discussion.

• Introduction to debits and credits (Defond, Appendix C).