Accounting and Analysis in Practice

Overview

Undergraduate ACCT-UB-0012 concentration: Accounting

The course explains how managers communicate their strategy and financial performance via financial statements and how bankers and financial analysts use them. It teaches these practical aspects via traditional cases and discussions with industry professionals. The course leverages our NYC location by offering a unique opportunity to interact with NYC finance professionals.

Design

• How managers report financial results to shareholders and lenders: Presentation by and discussion with an executive in a CFO’s office
• How bankers use financial reports: Presentation by and discussion with investment bankers
• How shareholders analyze financial reports: Presentation by and discussion with an equity research analyst from the buy-side or the sell-side
• How lenders analyze downside risk using financial reports: Presentation by and discussion with a credit professional

We will take a comprehensive look at the strategy and resulting numbers for the following companies. You will read financial statements, investor presentations, earnings calls transcripts, and analyst reports. We will also have guest speakers that cover various aspects of these companies or industries.

• Technology
  • Amazon
  • Apple
  • Facebook
  • Google
  • Microsoft
• Healthcare
  • Hospital Corporation of America
  • Illumina
  • Pfizer
• Automotive, solar, and battery
  • Tesla
• Consulting
  • Accenture

We will examine each one of the above companies using the framework below.

The Six Pack

The course highlights how and why businesses differ along the six key drivers listed below:

1. Size
2. Growth
3. Margins
4. Volume or net asset turnover
5. Business risk
6. Financial risk

1. Size

How do we measure size? Market cap, sales, assets, or the number of employees? What are the merits or demerits of each metric? Is the industry fragmented, or do a few large firms dominate it? What are the reasons for such patterns? For example, how do economies of scale and scope affect the distribution of sizes? What role do network externalities play in industry consolidation? How do the bigger firms differ from smaller firms in the industry? How does size affect risk and return?

2. Growth

What are the drivers of growth? How does growth affect the business model of a company? How does growth affect the financing of a company? What do we know about the rate at which a wider market adopts an innovation?

3. Margins

What are the major components of costs as a percentage of sales? What are the drivers of margins? For example, is the margin driven by pricing power, conversion efficiency, or purchasing power?  Is the success driven by R&D, efficient production, or effective marketing? How do the margins change as a company matures? How do companies offset low margins with high volumes and vice versa? How does that affect its hiring and management practices?

4. Volume or net asset turnover

How asset-intensive is the business model? Does it create barriers to entry? What risks does it create? How does it affect the financing needs of the companies in that industry? Are the revenue-generating assets listed on the balance sheet?

5. Business risk

How does the extent of fixed costs, i.e., operating leverage, affect the company? Does the operating leverage lead to ruinous price competition in a down cycle? Which costs are fixed in the short-run versus the long-run? How does a company mitigate the risks arising from fixed costs?

Is the business cyclical? What do we know about business cycles? What risks do they create? How does fiscal and budgetary policy change in response to business cycles? How does that affect the business we are trying to understand? Is its business model sustainable enough to survive the downturn of a business cycle? Can and how does a company mitigate the risk of down cycles? How does cyclicality affect the financing of a company?

Is the business regulated? Why? What aspects of regulation must it manage to be successful? How does that affect risk?

6. Financial risk

How much financial leverage do companies in the industry have? Is there a wide variation? How have the business risk, industry cycle, corporate performance, and financial policy affected the leverage? What types of debt do the companies have? How does leverage change over the life cycle of a company? Why do industries differ in their borrowing costs? What is the company’s credit rating? How have the business risk and the extent of leverage affected the borrowing costs? How has debt structuring affected the interest rate?

Prerequisites

• The class relies on your participation. Attendance is mandatory, and you are expected to be on time in presentable attire when we have outside visitors. Eating/drinking in class, checking phones/email, or using a computer will be prohibited as it creates a poor impression on outside visitors.
• You will need to email me if you plan to miss a class, be late, or leave early.
• If you have a qualified disability and require academic accommodation during this course, please contact me directly. I will arrange a separate room/time for you.

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.

Materials

• I use my materials. Therefore, no textbook is required, and you need not purchase anything.

Grading

• Weekly assignments: 20%
• Class participation: 20%.
• Project 1: 20%.
• Project 2: 20%.
• Project 3: 20%
• No midterm exam and no final exam.

Schedule