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INTERNATIONAL ISLAMIC UNIVERSITY, ISLAMABAD

FACULTY OF MANAGEMENT SCIENCES

(Department of Finance)

TITLE OF DEGREE PROGRAM : BBA/MBA Program

DEFINATION OF CREDIT HOURS : 3

DEGREE PLAN: Elective

PREREQUISITES:

COURSE OFFERED: Semester 5

COURSE TTLE: Analysis of Financial Statements (FIN-)

Course Objectives and Outcomes:

1. To enhance financial statements users understanding of financial reporting inorder 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 AccountingInformation.

2. White & Sondhi, The Analysis and Use of Financial Statements.

Lectures:

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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 matterin advance with the professor. At the professors discretion, late assignments may

not be accepted. Where late assignments areaccepted, 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, mid-

term 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 inthat particular assignment.

Course Assessment

Midterm exam 20%Assignments, Projects 20%

Quizzes 10%

Final 50%

Topics Covered

This course is developed around four major topic areas:

1. The Demand side of financial statement information2. Supply side of financial Statement information

3. Basic elements of the Balance sheet

4. Basic elements of the Income statement5. Basics of Analysis

6. Liquidity of short term assets

7. Long term debt paying ability8. Profitability Analysis:

9. Analysis for the Investors

10. Credit Risk Analysis

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11. Analysis of cash flows

12. Analysis of inventories13. Leases and off-balance sheet debt

14. Analysis of business Combinations

Course Contents:

Week Topics Suggested Reading

1 The Demand side of financial statementinformation

Introduction, Objectives of Financial Statement

Analysis, parties demanding financial statement

information, conflicts amongst diverse parties,

potential and availability of information to reduceuncertainty.

Chapter 1

2Supply side of financial Statement informationTraditional 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

Chapter 2

3 Basic elements of the Balance sheetAssets, Current assets, Long term assets,Intangibles, Liabilities- Current liabilities, Long

term liabilities, share holders equity, Treasury

stock, statement of shareholders equity, problemsin balance sheet presentation.

Chapter 3

4 Basic elements of the Income statementNet sales, CGS, Operating revenue, operating

expenses, other income or expense, Special income

statement items (Unusual or infrequent items

disclosed separately, Equity in earnings of nonconsolidated 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.

Chapter 4

5 Basics of AnalysisRatio Analysis, Common size Analysis- Vertical

and Horizontal Analysis, year to year change

analysis, financial statement variation by type of

industry, Review of descriptive information, TrendAnalysis, Industrial averages and comparisons with

Chapter 5

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6 Liquidity of short term assetscurrent assets, current liabilities and operating

cycle, Analysis of receivable ( receivable turnover

ratio, number of days in sales), analysis ofinventories, prepayments and liquidity of other

current assets

Chapter 6

7 Liquidity of short term assets

Current assets compared with current liabilities(working capital and short term liquidity ratios-

current ratio, quick ratio, cash ratio), other liquidityconsiderations- working capital turnover ratio, off-

balance sheet items and liquidity consideration.

Chapter 6

9 Long term debt paying abilityIncome statement consideration-Interest coverage,

fix charges coverage ratio. Balance sheet

consideration: debt ratio, (special considerations-

reserves, deferred taxes, minority interest,

redeemable preferred shares, Debt/equity ratio, debtto tangible net worth, total capitalization ratio.

Chapter 6

10 Long term debt paying abilitySpecial 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 financialinstruments.

Chapter 7

11 Profitability Analysis:Profitability measures- Net profit margin, totalasset turnover, Return on assets, Dupont Return on

Assets, Variation in computation of Dupont ratios

considering only operating accounts, Operatingprofit margin, operating Asset Turnover, Return on

operating assets, Sales to fixed Assets, return on

Investment, return on Total equity, return on

common equity

Chapter 8

12 Profitability Analysis:

The relationship between profitability ratios, Grossprofit margin, trends in profitability, segmentreporting, comprehensive income, Performa

financial information.

Chapter 9

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13 Analysis for the Investors.Financial leverage and magnification effect, basic

earnings per share and diluted earnings per share,

P/E and Dividend yield ratio, mean reversion andreturn forecasting, percentage of retained earnings,

Dividend pay-out ratio, BV/MV

Chapter 10

14 Credit Risk AnalysisAnalysis of cash flows

Analysis of inventories

Chapter 11

15 Analysis of business CombinationsLeases and off-balance sheet debt Chapter 12

16 Presentations, Revision & Practice Session