Ac­count­ing

Course content

Financial statement analysis / Accounting is the process of reviewing and analyzing a company's financial statements to make better economic decisions. Financial statement analysis consists of four main sections. First, we introduce the components of the financial statements including the income statement, balance sheet, statement of changes in owners’ equity and cash flow statement, show how transactions are recorded (basic debit-credit entries), and how these transactions enter into the financial statements. We also address the conceptual differences between accrual and cash flow based accounting. Second, we show how profitability and liquidity risk can be measured. Key financial ratios are defined and analyzed and we discuss why it is crucial that accounting data are measured consistently across time and firms. Third, forecasting is essential as it serves as the foundation for many business decisions including whether to extend loans to firms or estimating the value of a corporation. Thus, we address how to develop prom forma statements (i.e. income statement, balance sheet and cash flow statement), which articulate. We also address how to add realism in the projected earnings and cash flow measures. Finally, we discuss the different valuation approaches and their strengths and weaknesses. The concept of cost of capital is also introduced and different techniques to estimating cost of capital are discussed.