Spring Break: March 19 - 25, 2012

Professor: George W. Gallinger | Office: BAC 524 | Telephone: 480.965.4221
  Office Hours: Tu & Th 10 - noon & by appointment | Class: Tu & Th - BAC 323, 1:30 - 2:45 pm
Web Homepage: http://www.public.asu.edu/~bac524
  E-mail: george.gallinger@asu.edu
  Go directly to the assignments

Latest version: December 28, 2011 - 12:30 pm

Students planning careers that require an understanding of financial statements issued by corporations - private or public - should find this course valuable. These careers may be in commercial or investment banking, general management, management consulting, security analysis, or a firm's supply chain function, among other areas. Your objective in this course should be to understand a firm's quality of earnings and, thus, its risk. The course builds on foundations developed by your prior accounting and finance classes. For several weeks, we will pursue two lines of discussion: (a) reading and understanding the annual report, particularly the footnotes, and (b) analyzing the numbers. Initially there may not be much commonality between (a) and (b) but as the semester progresses you will see the relationships.

To help set the stage, I encourage you to read Letters to shareholders by Warren Buffett, Chairman and CEO of Berkshire Hathaway, Inc. He is regarded as one of the most successful investors in the world.

Here's a list of corporate scandals over the past several years. Would more insightful financial analysis have helped minimize these frauds? Maybe. Interesting disclosures in footnotes and proxy statements can be found at Morningstar. Investing Between the Lines provides interested tidbits of insight, as does the Accounting Onion.

The professional accounting bodies in the USA and London have been working on standardization of reporting for several years. Not everyone thinks it is a positive undertaking. Watch this YouTube video for some of the reasons why.

The course readings consist of the materials filed with the U.S. Securities and Exchange Commission (SEC) by Avon Products, downloads from the internet and the server for this course, handouts, Excel templates, and the following two books:

Your prior accounting texts serve as useful reference books.

You can access Avon Product's SEC filings from the internet by clicking on the Investor link at Avon's website: http://www.avon.com/.

Interesting Books

When you graduate and are looking for materials to expand your financial understanding, you might consider picking up the following books:

• Warren Buffet and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffet and David Clark (NY: Scribner, 2008)

• Hidden Financial Risk: Understanding Off-Balance Sheet Accounting by J. Edward Ketz (NJ: John Wiley & Sons, Inc., 2003)

• Profits You Can Trust: Spotting & Surviving Accounting Landminds by H. David Sherman, S. David Young and Harris Collingwood (NJ: Financial Times Prentice Hall, 2003)

• Hard Facts, Dangerous Half-Truths & Total Nonsense by Jeffrey Pfeffer and Robert I. Sutton (MA: Harvard Business School Press, 2006)

• Buy, Lie, and Sell High by D.Quinn Mills (NJ: Financial Times Prentice Hall, 2002)

• Financial Shenanigans by Howard Schilit (NY: McGraw Hill, 2002)

• Financial Warnings by Charles W. Mulford and Eugene E. Comiskey (NY: John Wiley & Sons, 1996)

• Guide to Financial Reporting and Analysis by Eugene E. Comiskey and Charles W. Mulford (NY: John Wiley & Sons, 2000)

• The Essays of Warren Buffett: Lessons for Corporate America by Lawrence A. Cunningham (NY: Cardozo Law School, 2000)

• Creating Shareholder Value: A Guide for Managers and Investors by Alfred Rappaport (NY: The Free Press, 1998)

• Shareholder Value: A Business Experience by Roy E. Johnson (UK: Butterworth Heinemann, 2001)

• Manage for Profit, Not for Market Share, Hermann Simon, Frank F. Bilstein, and Frank Luby (Boston, MA: Harvard Business School Press, 2006).

• Competition Demystified, Bruce Greenwald and Judd Kahn. (New York, NY: Penguin Group, 2005).

• Hardball: Are You Playing to Play or Playing to Win?, George Stalk and Rob Lachenauer (Boston, MA: Harvard Business School Press, 2004).

• Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael E. Porter (New York, NY: The Free Press, 1980).

• It's Not as Bad as You Think, Brian S. Wesbury (New York, NY: John Wiley & Sons, Inc., 2010).

• Ahead of the Curve, Joseph H. Ellis (Boston, MA: Harvard Business School Press, 2005).

Grading, Course Requirements & Final Examination

There is no final exam for this course. However, we will meet on the scheduled final exam date. Grades will be determined as follows:

• 30 points — Six unannounced quizzes (5 points each)
• 30 points — Detailed analysis of an assigned public company
• 30 points — Three individually written "briefs" (10 points each)
• 10 points — Classroom contribution.

Unannounced Quizzes:

Quizzes will address materials from the last class, the current class, or both.

Detailed Analysis of a Company:

You and two other students will form a team to perform a detailed written financial analysis of an assigned company. There is no page limit for this assignment. Single-space the text and integrate exhibits and graphs into the paper. Attach all pages with a staple in the upper left-hand corner or in a binding that allows the pages to turn easily. The assignment is due in class on Tuesday, April 24. There will be no make-up or replacement assignment. 

Briefs:

Briefs consist of two or three pages in length and single-spaced. Content must focus on analysis and not restatement of facts. You may attach as many pages of exhibits as you like to support the analysis. Briefs are due at the beginning of class as indicated below. There will be no make-up or replacement assignments. 

• Weldotron - Strategic choice of an inventory accounting method (Submit: February 2)
• Analysis of Avon Products, Inc. Note 7: Income Taxes (Submit: March 15)
• Analysis of Avon Products, Inc. Note 12: Pensions and Other Benefit Plans (Submit: March 29)

Classroom Contribution:

The classroom contribution grade will take account of the quality and regularity of your comments and questions. I don't take attendance but, obviously, if you aren't in class you can't contribution. Effective contribution means participating in discussion and asking questions that moves our analysis and understanding forward. I expect you to come to class on time, fully prepared, and ready to open the discussion. Preparation involves careful analysis of the available quantitative and qualitative evidence presented in the material to develop specific recommendations.

I will allocate participation points as follows:

• 9 - 10 points — Excellent contribution
• 7 - 8 points — Average contribution
• 4 - 6 points — Below average contribution
• 0 - 3 points — Simply attends class.

Be advised that I do give low grades for lack of classroom contribution, which can result in you receiving a lower grade than what your written assignments indicate.

Letter Grades:

I do not use a 90-80-70-60 grading scheme to determine letter grades. I rank total scores from high to low and look for break points. A's frequently cutoff in the mid to high 80's with the cutoff for B in the high 70's. Grades of A- and B- will never cutoff higher than 90 and 80, respectively. A score below 60 will result in a grade of either D or E. Plus and minus ticks will be used.

W. P. Carey Honor Code and Laptop Policy

You are expected to do your own writing for all briefs. I encourage you to speak to other students about the issues, but write the analysis in your own words. Do not share files that support your analysis with other students. Failure to comply will result in zero points for the assignment for both the receiver and provider (if involved) of the files if I detect non-compliance. Some of the cases used in this class may have been used before at Arizona State University or other institutions. You may not consult with students previously enrolled in this class, their class notes, or other materials that were otherwise provided in the past. Moreover, you may not use materials or solutions from other institutions (e.g., posted on the Internet), unless otherwise instructed in class for a particular assignment.

The laptop policy applies in all respects to this course. Checking email or surfing the Internet during class is not acceptable, and will be considered a violation of policy.