Financial Statement Analysis (Jahresabschlussanalyse)
BSc in Business Administration · 2012 · 2nd semester · Spring Term 2010
Faculty: Prof. Dr. Thorsten Sellhorn, MBA
Teaching assistants: Stefan Hahn (email@example.com; ‐234),
Julia Lerchenmüller (firstname.lastname@example.org; ‐232)
1 Course Objectives
While the previous course (Foundations of Financial Accounting) largely assumed a preparer perspective to
the recording of a firm’s business activities, this course adopts the standpoint of the user of financial
accounting information. We will take the firm’s financial statements, notes and other accompanying
information as a basis for understanding the firm’s past business activities and forecasting its future
business activities. From the perspectives of (external) equity investors and financial analysts as well as
creditors (banks, rating agencies), we will employ traditional financial ratios as well as basic forecasting and
equity valuation techniques in order to develop a fundamental assessment of a firm’s profitability, financial
stability and prospects, thereby ultimately assessing firm value. Because the focus of this course is on
analysis and valuation from a financial accounting perspective, we will adopt a specific accounting
perspective on the valuation and forecasting process. Therefore, we will not only be building on knowledge
from the previous course when analyzing balance sheets, profit and loss statements and cash flow
statements, but will also be touching upon fundamental financial accounting issues not covered previously.
While this course deals with analyzing financial statements and other real‐world information relevant to
firm valuation, we will focus on a basic understanding of these topics rather than require you to master all
the practical issues involved in the collection of relevant information and in the assessment of a firm’s
strategy. However, the textbook by Lundholm and Sloan (LS), on which this course is based (see description
below), will help those interested in deepening and applying their knowledge. Other opportunities for this
will be provided in later seminar‐type courses, such as “Seminar in Financial Accounting” and “Cases in
This course is about teaching you a framework for financial statement analysis with the main objective of
equity valuation from a financial accounting standpoint. Here is what this course is not about:
• It is not about teaching you advanced valuation theory. We do use basic valuation theory structure in
our discussion, but you will learn advanced valuation theory in other (finance) courses.
• It is also not about teaching you US GAAP. Being originally a US textbook, the LS book relies on US firms
and frames its accounting discussions in the context of US GAAP rules. However, given that IFRS and US
GAAP are converging rapidly, the accounting issues discussed in the LS book are easily applied to the
IFRS world. We do not expect you to know any of these US GAAP rules for the exam. However: US
companies still operate under US GAAP rules today. If you are interested in US firms, paying attention
to the US GAAP rules applicable to the companies you may end up being involved with professionally
may still be a worthwhile activity!
2 Course materials
2.1 Required textbook
Lundholm / Sloan, Equity Valuation and Analysis (with eVal), 2nd edition, Boston et al.: McGraw‐Hill/Irwin
2007, ISBN: 978‐0‐07‐310026‐5. [LS]
The textbook by Lundholm and Sloan takes a pragmatic approach to equity valuation and analysis with a
distinct financial accounting emphasis. In contrast to some finance‐based valuation texts, it focuses less on
the theory of valuation models (although it does a good job there too), but discusses how understanding
the financial statements helps in the valuation process.
While some of the LS textbook’s material goes beyond what we can cover in this course, it will support the
basic structure of this course in terms of a useful framework for equity valuation. The book’s main advan‐
tages are the following: First, while it covers the whole financial statement analysis and equity valuation
process from a sound theoretical basis, it does so within relatively few pages. Second, it comprises numer‐
ous case studies that can be used to deepen your understanding of the material and provide hands‐on ex‐
perience. We are sure that the LS textbook will prove to be a resource that many of you will find useful
during your studies and professional lives far beyond this class.
Relevant sections from LS are indicated in the “Course Structure” below.
Availability – Ten copies of the LS textbook are available in the WHU Library. The book is awaiting a new
edition, so availability of the current edition in bookstores is limited. If you do want to purchase your own
copy, please do so online at www.libri.de or order one at Vallendar’s Kolibri bookstore (ask for ISBN
0077219856). If questions arise, please do not hesitate to contact us.
2.2 Other required materials
We encourage you to download and print the PDF version of the Volkswagen Annual Report 2008 from
myWHU or order your own printed copy from the Volkswagen website. If questions arise, please do not
hesitate to contact us.
2.3 Other voluntary and recapitulating readings
• Bonse /Linnhoff /Pellens, Analyse von Jahres‐ und Konzernabschlüssen, in: Busse von Colbe/
Coenenberg/ Kajüter/ Linnhoff/ Pellens (eds.), Betriebswirtschaft für Führungskräfte, 3rd edition, Stutt‐
gart 2007, pp. 545‐566 (on myWHU).
• Bonse /Linnhoff /Pellens, Jahresabschlüsse, in: Busse von Colbe/ Coenenberg/ Kajüter/ Linnhoff/ Pellens
(eds.), Betriebswirtschaft für Führungskräfte, 3rd edition, Stuttgart 2007, pp. 481‐518 (on myWHU).
• Busse von Colbe /Jödicke/Pellens, Konzernabschlüsse, in: Busse von Colbe/ Coenenberg/ Kajüter/
Linnhoff/ Pellens (eds.), Betriebswirtschaft für Führungskräfte, 3rd edition, Stuttgart 2007, pp. 519‐544
• Interesting research papers and articles from the financial press that pertain to course discussions will
be distributed as the term progresses.
2.4 Additional useful references
Classic German financial statement analysis textbooks
• Baetge/Kirsch/Thiele, Bilanzanalyse, 2nd edition, Düsseldorf 2004.
• Küting/Weber, Die Bilanzanalyse, 9th edition, Stuttgart 2009.
• Coenenberg et al., Jahresabschluss und Jahresabschlussanalyse, 21st edition, Stuttgart 2009.
• Hommel/Rammert, IFRS‐Bilanzanalyse case by case, Stuttgart 2006 (2nd edition announced for summer
• Pellens/Fülbier/Gassen/Sellhorn, Internationale Rechnungslegung, 7th edition, Stuttgart 2008.
U.S.‐style textbooks with a focus on security valuation
• Penman, Financial Statement Analysis and Security Valuation, 4th edition, Columbus 2009.
White/Sondhi/Fried, Analysis and Use of Financial Statements, 3rd edition, Hoboken 2003.
For additional reading tips, please do not hesitate to contact us.
2.5 Information on German firms
Elektronischer Bundesanzeiger: www.ebundesanzeiger.de / www.unternehmensregister.de
3 Instruction format, requirements and grading
The course consists of lectures and a final exam. Additional tutorials may be offered if the class voices an
interest. Written homework assignments will be provided to make you familiar with possible exam ques‐
tion formats and to motivate your consistent working towards the course objectives.
During the lectures, material will be presented and discussed in class. Active participation in class discus‐
sions and providing excellent input are strongly encouraged and will be rewarded. Examples of excellent
input include asking insightful questions, reading and bringing related articles to class, volunteering to lead
discussions or demonstrate examples, and relating class discussion to “real life” (e.g. internship expe‐
riences, press articles) or other courses.
Below, under “Course Structure”, you will find the required sections from the LS textbook. Studying these
assigned readings ensures that you will be able to follow along and participate in class discussions. Other
recommended readings and references may be distributed as the course progresses.
The exam will cover material from this course and, being an exam for the entire two‐course module, it will
also contain elements from the previous course, “Foundations of Financial Accounting”. A few further notes
on material relevant for the exam follow:
• The relevant material for the “Financial Statement Analysis” part of the exam is defined by the material
we discuss in class. Reading the sections from the LS textbook indicated as “required readings” below
under “Course Structure” will help you understand and retain this material.
• While the readings indicated under 2.3 and 2.4 above will not be required reading for the exam, we do
encourage you to look at some of them nonetheless. This will enhance your understanding and reten‐
tion of the overall material as well as your ability to contribute to class discussions.
• During the lectures, we may touch upon interesting current issues not covered as such in the readings.
Also, some of the material included in the lecture slides may turn out to be in excess of what we will
end up covering in class. Lecture slides illustrate concepts and facilitate class discussion – they are not
meant to be the sole basis of your learning.
During voluntary tutorials, the teaching assistants will discuss mock exam questions or your homework
assignments to help you prepare for the exam. Tutorials do not introduce new material but serve to dee‐
pen your understanding of the relevant material as well as make you familiar with question types to be
expected on the exam. They will only be offered at your request and are strictly voluntary. Please discuss
among yourselves whether you would like tutorials to be offered. (In that case, please contact us well in
advance of the final exam date.)
There will be two individual written homework assignments, which will be distributed after the second and
fourth class sessions, and which will relate to the material covered in the first/second and third/fourth class
sessions, respectively. These homework assignments serve to deepen your understanding of the material
by providing you the opportunity of testing your knowledge and collecting hands‐on experience. They also
give a good indication of the types of exercises you will find on the final exam. You should write up your
answers manually and individually, although you may work on them with other students. There will be an
approximately one‐week deadline for each one.
Grading is based on the exam. Each successfully completed individual written homework assignment will
yield 5 points towards the exam.
Participation will be awarded a bonus of up to a third of a grade on the final grade based on extraordinary
involvement and excellent input in class discussions.
4 Course structure
Session Topics Required readings
1. A: MON Jan 11, • Introduction LS 1
11.30‐15.15 • Recap Financial Accounting
• Information Collection
B: TUE Jan 12,
• Business and Strategy Analysis LS 3
• Accounting Analysis LS 4.1 to 4.3
2. A: THU Jan 21, • Accounting Analysis (cont’d) LS 4.4 to 4.6
B: MON Jan 18,
3. A: THU Jan 28, • Financial Ratio Analysis LS 5
B: MON Jan 25,
4. A: THU Feb 04, • Financial Ratio Analysis (cont’d) LS 5
8.00‐11.15 • Cash Flow Analysis LS 6.1 to 6.5 (you may skip 128‐131),
B: THU Feb 04,
5. A: THU Feb 11, • Cash Flow Analysis (cont’d) LS 6.1 to 6.5 (you may skip 128‐131),
8.00‐11.15 • Forecasting 6.7
K‐001 LS 7.1 to 7.6, 7.9
B: THU Feb 11,
6. A: THU Feb 18, • Cost of Capital LS 9
8.00‐11.15 • Valuation LS 10.1
K‐001 LS 10.2 (you may skip 210‐214)
B: THU Feb 18, LS 10.3 (you may skip 217‐220)
LS 10.4, LS 229‐230
• Valuation Ratios LS 11.1 to 11.3, 11.5
THU Feb 25 EXAM All of the above
(time and rooms
to be an‐
5.1 Class #1
Group A: MON Jan 11, 11.30‐15.15 Group B: TUE Jan 12, 15.30‐18.45
Recap Financial Accounting
Business and strategy analysis
5.1.2 Content and learning objectives
Financial statement analysis is a goal‐driven activity. While there are different objectives of financial state‐
ment analysis, we will focus on financial statement analysis undertaken with the ultimate objective of va‐
luing companies. In this session, we will first be introducing the structure of this course and its approach to
financial statement analysis and equity valuation. Second, we will spend some time on a brief recap of the
material covered in the previous course, „Foundations of Financial Accounting”.
We will then discuss sources of information useful for analysis and valuation as well as cover the basics of
business and strategy analysis. Since the focus of this course is on the analysis of financial statements,
these more general topics are treated only briefly. Towards the end of the session, we will start in on the
topic of accounting analysis, which deals with the role of financial statement information in firm valuation.
5.2 Class #2
Group A: THU Jan 21, 8.00‐11.15 Group B: MON Jan 18, 11.30‐15.15
Accounting analysis (cont’d)
5.2.2 Content and learning objectives
In this session, we will continue with the topic of accounting analysis. The objective of this session is to
show you how financial accounting information is useful in analyzing and valuing firms. We will discuss the
kind of information that financial accounting provides, the role of the financial statements in valuing firms,
and the limitations of financial accounting information. We will be looking at the different types of mea‐
surement error introduced into accounting information, related to specific accounting topics. During this
process, we will be briefly introducing several accounting topics not covered in the previous course „Foun‐
dations of Financial Accounting”.
5.3 Class #3
Group A: THU Jan 28, 8.00‐11.15 Group B: MON Jan 25, 11.30‐15.15
Financial ratio analysis
5.3.2 Content and learning objectives
In this session, we will start focusing on financial ratios used to analyze the two main drivers of firm value:
growth and profitability. Financial ratios come in different forms and categories. We will adopt a systematic
approach to this type of analysis, viewing it as an important step in the valuation process.
5.4 Class #4
Group A: THU Feb 04, 8.00‐11.15 Group B: THU Feb 04, 13.45‐17.00
Financial ratio analysis (cont’d)
Cash flow analysis
5.4.2 Content and learning objectives
In this session, we will continue our discussion of financial ratios by introducing DuPont analysis, a useful
way of decomposing and analyzing the drivers of firm profitability. Another focus of this session is the anal‐
ysis of credit risk, i.e. financial statement analysis from a debtholder perspective.
The discussion will then shift to an emphasis on the information contained in the statement of cash flows
and on the construction of inputs to cash flow‐based valuation models.
5.5 Class #5
Group A: THU Feb 11, 8.00‐11.15 Group B: THU Feb 11, 11.30‐15.15
Cash flow analysis (cont’d)
5.5.2 Content and learning objectives
During this session, we will continue our discussion of the information contained in the statement of cash
flows and on the construction of inputs to cash flow‐based valuation models.
We will then see how the information generated during the previous analyses can be used to construct
structured forecasts of the firms’ future financial statements.
5.6 Class #6
Group A: THU Feb 18, 8.00‐11.15 Group B: THU Feb 18, 11.30‐15.15
Cost of capital
5.6.2 Content and learning objectives
During this final session, we will be aggregating what we have learned so far into an actual firm valuation.
First, we will derive the discount rate necessary to express firm value as the net present value of the future
payoffs that the firm is expected to generate. Second, we will contrast traditional discounted cash flow
(DCF) valuation with an accounting‐based valuation model that has recently gained great popularity, the
residual income model (RIM). Finally, we will look at several valuation ratios that related market‐based data
with financial accounting information.
5.7 Final exam
Groups A and B: THU Feb 25
(time and rooms to be announced)