INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABAD

FACULTY OF MANAGEMENT SCIENCES (Department of Finance)

TITLE OF DEGREE PROGRAM

BBA/MBA Program 3 Elective

DEFINATION OF CREDIT HOURS : DEGREE PLAN: PREREQUISITES: COURSE OFFERED: COURSE TTLE: Course Objectives and Outcomes:

Semester 5 Analysis of Financial Statements (FIN-)

1. To enhance financial statements users understanding of financial reporting in order to facilitate improved decision-making 2. To review financial statements for fairness and completeness in reporting. 3. To apply and critically assess the principal tools and techniques available for analysis. How Program Content Meets The Program Objectives? Cost information are one of the most important input to good decision making. Understanding of different cost concepts, cost elements, cost flow and cost accumulation enables the students to base their decisions on objective information. Text Books: ESSENTIAL TEXT: 1. Gibson, C. H, Financial Reporting and Analysis: Using Financial Accounting Information. 2. White & Sondhi, The Analysis and Use of Financial Statements. Lectures:

The medium of instruction will be English. Instructional methods will vary with each instructor. However, some suggested techniques are Quizzes and other tests with feedback and discussions; Problem Solving Lectures and class discussions; Power Point Presentations; Guests Speaker; Group Activities; Oral reports and other student presentations; Web based assignments and activities General Rules and Procedures 1. Students unable to submit an assignment on the due date should discuss the matter in advance with the professor. At the professors discretion, late assignments may not be accepted. Where late assignments are accepted, the professor will apply a late penalty. 2. Test dates and assignment due dates are announced in class. Students are responsible for keeping track of these dates. There will be no makeup quiz, midterm or final for any reason whatsoever. 3. Success in this course is based heavily on in-class participation and assignments, therefore; attendance and active in-class participation is essential to a students success. All in-class assignments must be completed in-class; they cannot be made up with a take-home. Failure to attend these classes will therefore result in zero in that particular assignment. Course Assessment Midterm exam Assignments, Projects Quizzes Final Topics Covered This course is developed around four major topic areas: 1. The Demand side of financial statement information 2. Supply side of financial Statement information 3. Basic elements of the Balance sheet 4. Basic elements of the Income statement 5. Basics of Analysis 6. Liquidity of short term assets 7. Long term debt paying ability 8. Profitability Analysis: 9. Analysis for the Investors 10. Credit Risk Analysis 20% 20% 10% 50%

11. Analysis of cash flows 12. Analysis of inventories 13. Leases and off-balance sheet debt 14. Analysis of business Combinations

Course Contents:
Week 1 The Topics Demand side of financial information Suggested Reading statement Chapter 1

Introduction, Objectives of Financial Statement Analysis, parties demanding financial statement information, conflicts amongst diverse parties, potential and availability of information to reduce uncertainty. Chapter 2 Supply side of financial Statement information Traditional assumptions of the Accounting model Business entity, going concern, Time period, Monetary unit, Historical cost, Conservatism, Realization, Matching, Industry practices, transaction Approach, Cash basis, Accrual Basis Basic elements of the Balance sheet Assets, Current assets, Long term assets, Intangibles, Liabilities- Current liabilities, Long Chapter 3 term liabilities, share holders equity, Treasury stock, statement of shareholders equity, problems in balance sheet presentation. Basic elements of the Income statement Net sales, CGS, Operating revenue, operating expenses, other income or expense, Special income statement items (Unusual or infrequent items disclosed separately, Equity in earnings of non Chapter 4 consolidated subsidiaries, discontinued, operations, extraordinary items, cumulative effect of change in accounting principle, minority share of earnings), earnings per share, retained earnings, dividends and stock splits. Basics of Analysis Ratio Analysis, Common size Analysis- Vertical Chapter 5 and Horizontal Analysis, year to year change analysis, financial statement variation by type of industry, Review of descriptive information, Trend Analysis, Industrial averages and comparisons with competitors.

Liquidity of short term assets Chapter 6 current assets, current liabilities and operating cycle, Analysis of receivable ( receivable turnover ratio, number of days in sales), analysis of inventories, prepayments and liquidity of other current assets Liquidity of short term assets Chapter 6 Current assets compared with current liabilities (working capital and short term liquidity ratioscurrent ratio, quick ratio, cash ratio), other liquidity considerations- working capital turnover ratio, offbalance sheet items and liquidity consideration. Long term debt paying ability Chapter 6 Income statement consideration-Interest coverage, fix charges coverage ratio. Balance sheet consideration: debt ratio, (special considerationsreserves, deferred taxes, minority interest, redeemable preferred shares, Debt/equity ratio, debt to tangible net worth, total capitalization ratio. Chapter 7 Long term debt paying ability Special items that influence firms long term debt paying ability-long term assets vs long term Debt. Long term leasing, Joint ventures, Contingencies, Financial instruments with off-balance sheet risk, Financial instruments with concentrations of credit risk, Disclosure about fair value of financial instruments. Profitability Analysis: Profitability measures- Net profit margin, total Chapter 8 asset turnover, Return on assets, Dupont Return on Assets, Variation in computation of Dupont ratios considering only operating accounts, Operating profit margin, operating Asset Turnover, Return on operating assets, Sales to fixed Assets, return on Investment, return on Total equity, return on common equity Profitability Analysis: The relationship between profitability ratios, Gross Chapter 9 profit margin, trends in profitability, segment reporting, comprehensive income, Performa financial information.

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Analysis for the Investors. Financial leverage and magnification effect, basic Chapter 10 earnings per share and diluted earnings per share, P/E and Dividend yield ratio, mean reversion and return forecasting, percentage of retained earnings, Dividend pay-out ratio, BV/MV Credit Risk Analysis Analysis of cash flows Analysis of inventories Analysis of business Combinations Leases and off-balance sheet debt
Presentations, Revision & Practice Session

14

Chapter 11

15 16

Chapter 12