Georgetown University

Financial Statement Analysis

Financial Statement Analysis (FSA) is the process of reviewing and evaluating an organization's financial statements to gain an understanding of its economic situation. Good FSA enables effective decision-making. For example, it plays an important role in understanding the potential risk and rewards of an investment.

Learning Outcomes of Financial Statement Analysis

  • Analyze wealth creation through the Dupont framework.
  • Prepare and analyze the Statement of Cash Flows.
  • Understand some critical accounting issues and perform pro forma analyses.
  • Understand earnings management.
  • Forecast key variables.
  • Build an integrated valuation model using the residual income framework.

Click Here for Video Transcript

[INSTRUMENTAL MUSIC] GILLES HILARY: Welcome to this course on financial statement analysis. Financial statement analysis can be defined as the process of reviewing and evaluating an organization's financial statements to gain an understanding of its financial health and to enable more effective decision-making.

Often, the decision is to invest in a firm or to lend money to an organization. To a large extent, this is an accurate definition. And this course will critically review balance sheets and income statements, as well as statements of cash flows. We will learn frameworks to conduct this analysis. We will build on our preexisting knowledge of accounting.

We will also prepare statements that adjust for technical differences in accounting norms. For example, we will compare and contrast international and American accounting norms. We will examine how differences in reporting can impact our analysis of the financial statements. However, the definition is incomplete, as we cannot understand the financial statements without understanding the broader environment of the firm.

This class is not just about accounting and factual statements. It is about linking this technical tools to the strategy of the firm and to the objectives of its managers. To do so, we will talk about psychology and economics. But we will also obtain a greater institutional understanding of the environment in which managers operate.

We will learn statistical tools to detect earnings management. The definition is also incomplete in that we will go beyond the review of financial statements. And we will link this analysis to value creation. We will review how accounting can be useful in valuation models. And we will discuss trading strategies.

To do all this, we will go through different parts. And we will go through multiple cases that you can find on the course platform. More specifically, in the first two parts, we will analyze the financial statements, starting with the balance sheet and the income statement before moving to the statements of cash flows.

Next, we will cover some additional quantitative aspects related to value creation and to perform our analysis. Finally, we will cover some risk aspects starting with earnings management before covering more strategic risks. The course will work a bit differently from your other courses. We will not have an online session in the first week. Instead, we will have one session in the second week and a double session in the third week.

I will assume that you will have had a chance to cover all the online materials before our first session in the second week. A large portion of that session will be dedicated to questions that you may have about the online materials. A large portion of the double session will be dedicated to the analysis of two companies.

This analysis will serve as a template for your final project. I hope you will find our discussions both useful and interesting. And I am looking forward to having more interactions in the near future.