Interpreting and Analyzing Financial Statements

While this book can be used to supplement any financial accounting text, the activities have been designed to accompanyFinancial Accounting,5th edition, by Walter T. Harrison, Jr., and Charles T. Horngren (Prentice Hall, 2004). WHY THESE ACTIVITIES WERE DEVELOPED When I first started assigning a comprehensive financial statement analysis as a capstone project, it became evident many students didn't know where to begin. They were overwhelmed by all of the numbers and felt frustrated. As a result, this series of preliminary activities was developed to prepare students for the capstone project. Each activity concentrates on only one aspect of financial statement analysis. After completing the preliminary activities, students feel confident in their strategies and ability to successfully complete a comprehensive financial statement analysis. USING DATA FROM WELL-KNOWN CORPORATIONS These activities use financial data from companies familiar to students. The actual numbers make the class relevant and more interesting to students. Because students are already familiar with the companies, they more easily grasp the material and remember the concepts. FOCUS IS ON INTERPRETING AND ANALYZING Most amounts are provided and calculations are kept to a minimum so students can focus their time and attention on interpretation and analysis. Fifteen minutes on average is required for completion of each activity. RATIO ANALYSIS Activities point out the significant role ratios have in analyzing financial statements. Students acquire a "feel" for the expected range and magnitude of the ratios and identify whether a high or low ratio is usually preferred. Commonly used ratios are studied. TREND PERCENTAGES AND COMMON-SIZE STATEMENT ANALYSIS Trend percentages are used to evaluate both the income statement and the balance sheet. Emphasis is placed on comparing the rate of increase or decrease of various account classifications within each financial statement. Common-size statements are used to compare companies of different size. EXCEL SPREADSHEETS Financial statements are prepared and analyzed using Excel spreadsheets. To reinforce understanding, students are required to prepare formulas to create common-size statements, trend percentages, and ratios. A comparative analysis of two companies is used to demonstrate the effectiveness of Excel formulas. An Excel graph is created in one activity and then pulled into a PowerPoint presentation. Excel techniques introduced provide valuable tools for successful completion of the comprehensive analysis project and presentation in Chapter 10. INTERNET RESEARCH Internet activities are used to introduce a comprehensive set of websites offering financial information while also requiring financial statement analysis. These Internet websites provide valuable sources of information for successful completion of the comprehensive analysis project in Chapter 10. OTHER RESEARCH Other research activities require readingThe Wall Street Journal,calling a local bank, or utilizing library resources that are available. The final chapter contains a corporate analysis that requires in-depth research of a company. These research activities expose students to a variety of resources available to help with gathering financial information. FOUR-YEAR COMPARISON Financial statements are introduced using four years of comparative information. Each line item is studied and the student develops an overall strategy to analyze the financial statement. Questions lead to increased understanding and highlight important trends. ETHICAL ISSUES Ethical issues are incorporated into a number of the activities. RANGE AND MAGNITUDE OF AMOUNTS Companies are carefully selected so students get a "feel" for the range and magnitude of expected amounts and ratios in the corporate world.[read more]