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Accounting and Analysis in Practice [ACCt-UB 12]

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Overview

This course counts towards the accounting major at Stern.

 

The course explains how managers communicate their strategy and financial performance via financial statements and how these financial statements are used by corporate and investment bankers and buy-side and sell-side financial analysts who advise investors. A good understanding of the practical aspects of how financial statements are used is crucial to a successful career. These practical aspects are best communicated in a mix of traditional cases and discussions with industry professionals. Our New York City location gives us an unparalleled access to such professionals. The course offers a unique opportunity to interact with them.

Design

This course is designed to provide practical insights into the following aspects of financial reporting and analysis:

 

We will take a comprehensive look at the strategy and resulting numbers for the following companies. You will read financial statements, investor presentations, earnings calls transcripts, and analyst reports. We will also have guest speakers that cover various aspects of these companies or industries.

 

We will examine each one of the above companies using the framework below.

The Six Pack

The course highlights how and why businesses differ along the six key drivers listed below:

Size

How do we measure size? Market cap, or sales, assets, or number of employees? What are the merits or demerits of each metric? Is the industry fragmented or do a few large firms dominate it? What are the reasons for such patterns? For example, how do economies of scale and scope affect the distribution of sizes? What role do network externalities play in industry consolidation? How do the bigger firms differ from the smaller firms in the industry? How does size affect risk and return?

Growth

What are the drivers of growth? How does growth affect the business model of a company? How does growth affect the financing of a company? What do we know about the rate at which an innovation is adopted by a wider market?

Margins

What are the major components of costs as a percentage of sales? What are the drivers of margins? For example, is the margin driven by pricing power, conversion efficiency, or purchasing power? Is the company primarily driven by the success of its R&D, the efficiency of its production, or the successful marketing of its products to customers? How do the margins change as a company matures? How do companies offset low margins with high volumes, and vice versa? How does that affect its hiring and management practices?

Volume or net asset turnover

How asset intensive is the business model? Does it create barriers to entry? What risks does it create? How does it affect the financing needs of the companies in that industry? Are the revenue-generating assets listed on the balance sheet?

Business risk

How does the extent of fixed costs, i.e., operating leverage, affect the business model of a company? Does it lead to ruinous price competition in a down cycle? Which costs are fixed in the short-run vs. the long run? How does a company mitigate the risks arising from fixed costs?


Is the business cyclical? What do we know about business cycles? What risks do they create? How does fiscal and budgetary policy change in response to business cycles? How does that affect the business we are trying to understand? Is its business model sustainable enough to survive the downturn of a business cycle? Can and how does a company mitigate the risk of down cycles? How does cyclicality affect the financing of a company?


Is the business regulated? Why? What aspects of regulation must it manage in order to be successful? How does that affect risk?

Financial risk

How much financial leverage do companies in the industry have? Is there a wide variation? How have the business risk, industry cycle, corporate performance, and the financial policy affected the leverage? What types of debt do the companies have? How does leverage change over the life cycle of a company? Why do industries differ in their borrowing costs? What is the company’s credit rating? How have the business risk and the extent of leverage affected the borrowing costs? How has debt structuring affected the interest rate?

Prerequisites

Help and Office

Materials

Grading

Students will be evaluated as follows:

Schedule

Class Topic
1
  • Course introduction; readings and cases on financial reporting, credit risk assessment and valuation
2
  • The Six-Pack Framework: Size
3
  • The Six-Pack Framework: Growth
4
  • The Six-Pack Framework: Margins
5
  • The Six-Pack Framework: Net operating asset intensity
6
  • The Six-Pack Framework: Business Risk
7
  • The Six-Pack Framework: Financial Risk
8
  • Guest speaker: What do CFOs do; what challenges do they face in communicating their financial performance to outsiders
9
  • Company 1
10
  • Company 2
11
  • Guest: Speaker: How do equity investors use financial reports and talk to the CFOs

12
  • Company 3
13
  • Company 4
14
  • Project presentation 1: External judges will be present depending upon availability
15
  • Project presentation 1: External judges will be present depending upon availability
16
  • Guest speaker: How lenders use financial reports and make credit decisions
17
  • Company 5
18
  • Company 6
19
  • Project presentation 2: External judges will be present depending upon availability
20
  • Project presentation 2: External judges will be present depending upon availability
21
  • Guest speaker: How do investment bankers use financial reports
22
  • Company 7
23
  • Company 8
24
  • Guest speaker: How do investment bankers use financial reports
25
  • Company 9
26
  • Company 10
27
  • Project presentation 3: External judges will be present depending upon availability
28
  • Project presentation 3: External judges will be present depending upon availability