Earnings Quality
B8100/B7100 (Yee's version)
next offered: Spring, 2007
Course Objective:
How does one calculate free cash flow from financial statements?
Is it possible to (legally)
manipulate cash flow from operations?
What is the difference between free cash flow and net income?
What is the deferred tax valuation allowance associated with
NOL carryforwards? When designing an M&A deal, why
do companies prefer to allocate more purchase price to
restructuring charges? Should portfolio managers worry about earnings quality if their portfolios are fully diversified? Earnings Quality answers these questions and
describes how to discern quality (or lack thereof) in
financial reports. The class teaches how to
recognize earnings management and subtle
accounting maneuvers, and how to be a more sophisticated reader of
financial statements.
Syllabus & Class Plan
You may view the MBA
B8100 syllabus here and the EMBA B7100 syllabus here . For each of the main topics
(SOCF, income statement and EPS, revenue recognition, inventories, deferred tax assets and liabilities, capitalization, stock options, M&A,
earnings management, pensions, and liability risk management),
we review the relevant accounting concepts.
Then we
describe ways in which the reported numbers might be managed to mislead,
discuss how accounting information might be adjusted to
improve financial analysis. Finally, we discuss earning quality
from a portfolio management or "CAPM" perspective.
Prerequisites
You should have taken (or passed out of)
the MBA core financial accounting and finance courses.
Non-GSB students:
Earnings quality is NOT an "introductory" accounting class.
You need to have taken a prior financial accounting class covering
capitalization, depreciation and amortization, bond accounting, deferred taxes, goodwill, comprehensive income,
and the basics
of the four main financial statements. The concept of "earnings management" should not be completely new to you. I assume you have prior exposure to (or work experience with) all of these topics under US GAAP.
You can access course notes and the 4 homework assignments at the
course website .
Texts
In addition to the materials posted on the
course website. you should have an "intermediate" level accounting reference.
(Your core-class text is insufficient.) Even if you do not fully
utilize your reference during B8100/B7100, you will find the
reference useful as a banker or manager so, in my opinion, it
is a justified investment. For B8100/B7100, I suggest the following references
[and do not get compensated if you purchase them]:
- Revsine, Collins, and Johnson, Financial Reporting and Analysis, Prentice Hall (3rd Edition). This text is strongly recommended.
- White, Sondhi, and Fried, The Analysis and Use of Financial
Statements, Wiley (3rd Edition). If you do not like Revsine et. al., this text is a slightly more advanced alternative to Revsine.
- Weston, Mitchell, and Mulherin, Takeovers, Restructuring, and
Corporate Governance, Prentice Hall (4th Edition). This
book is suggested -- especially Chapters 3 [M&A accounting],
4 [M&A taxation], and 15 [ESOPs] -- if you have special interest in M&A.
Illustrative Companies
Homework assignments, class mini-cases, and exams draw from the annual reports of companies such as
Amgen, eBay, GE, Microsoft, Tyco, and Yahoo!. Your Course Packet contains two annual reports:
Method of Evaluation
4 team homeworks (10 pts each) = 40 pts
in-class midterm = 20 pts
take-home final exam = 40 pts
class participation = 0 - 8 pts
[If you do poorly on the midterm, I will weigh the final exam, class participation, and the homeworks more.]
Late homeworks will not
be graded once solutions are posted on BOLD.
The class participation grade refers particularly to participation
DURING class that enrich the learning experience of all
your classmates. There is no credit for "chatting up" the professor
after class or during office hours since that is of no benefit to your classmates.
Team Homeworks
You are required work on and submit the team homeworks in a team of 2, 3, or 4 students. Every student on the team gets the same grade for that homework. I do not keep track of teams, and you may switch teams (or not) from one homework to the next. Completing the 4 homeworks on time is
an essential part of the learning experience. If you have a busy interview schedule, please work with teammates who will deliver the product on time. If you are allergic to
submitting homework in a timely, professional manner, please take another course.
(That said, I don't believe the 4 homeworks are unreasonably
onerous. The workload is about "average".)
Homework solutions and class announcements
are posted on BOLD.
