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Appendix D User Manual for Financial Statement Analysis Package (FSAP)
Appendix D
User Manual for Financial
Statement Analysis
Package (FSAP)

Appendix D

User Manual for Financial Statement Analysis Program (FSAP)

1111

INTRODUCTION TO FSAP

FSAP is a user-friendly, adaptable Excel spreadsheet template. FSAP enables the user to manually input financial statement data for a firm and then perform financial statement analysis, forecasting, and valuation. The objective of FSAP is simply to provide users with a usable template for these computations. The objective of FSAP is not to provide the critical analytical judgments that are required of the user. The user of FSAP must provide the careful analysis of whether a firm’s financial statement ratios are improving or deteri- orating, and must think carefully through what the most appropriate forecast and valua- tion assumptions should be. FSAP simply provides financial statement analysis and valu- ation calculators for the careful analyst to use. Selected problems and cases in chapters throughout the text may be worked using FSAP. For a list of these problems and cases, see the text web site (www.thomsonedu .com/accounting/stickney). The text highlights these FSAP-enabled problems and cases with an FSAP icon in the margin beside the problem. Specific cells within each spread- sheet within FSAP contain red triangular tags that link to comments with instructions and suggestions that provide a great deal of help for users. To get started using FSAP, first download the FSAP template from the text’s web site, read this User Guide for an overview of the program and its five spreadsheets, and review the completed output from FSAP for PepsiCo in Appendix C. As you use and become familiar with FSAP, refer back to this User Guide and the output in Appendix C and review the information in the red comment tags within FSAP for help as needed.

Appendix D User Manual for Financial Statement Analysis Program (FSAP) 1111 INTRODUCTION TO FSAP FSAP is

FSAP STRUCTURE

FSAP is an Excel-based financial statement analysis program that contains five spread- sheets:

  • 1. Data Spreadsheet: Contains balance sheet, income statement, statement of cash flows, and other data for a particular company.

  • 2. Analysis Spreadsheet: Computes various financial statement ratios, common-size financial statements, and percentage change financial statements using the finan- cial statement data in the Data Spreadsheet.

  • 3. Forecasts Spreadsheet: Permits the user to program the spreadsheet to prepare forecasted income statements, balance sheets, and statements of cash flows.

  • 4. Forecast Development Spreadsheet: Provides the user with space to develop other supporting computations for the Forecasts Spreadsheet, such as detailed forecasts of sales. Also provides the user with a template for forecasting capital expendi- tures; property, plant, and equipment; depreciation expense; and accumulated depreciation.

  • 5. Valuation Spreadsheet: After the user inputs valuation parameters, the Valuation Spreadsheet computes common equity share value using the five different valua- tion models demonstrated in the text, including two free-cash-flows valuation models, two residual income valuation models, and the dividends valuation model. The Valuation Spreadsheet also compares the share value estimate to mar- ket price and analyzes the sensitivity of the share value estimate to different valua- tion parameter assumptions, varying the discount rate and the long-term growth rate assumptions.

The web site for this book (www.thomsonedu.com/accounting/stickney) contains the FSAP template, which users should download to their computer. Each spreadsheet within

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FSAP contains red triangular tags that provide information for inputting items in a par- ticular row of the spreadsheets. These spreadsheets follow the usual procedures for insert- ing data into cells; adjusting cell, column, and row size; and printing within Excel. Spe- cific comments on each spreadsheet follow.

DATA SPREADSHEET

The Data Spreadsheet is designed to contain six years of financial statement data. How- ever, the user can input fewer years of data as well. It is important that the user input the most recent year of financial statement data in column G, regardless of the number of years of financial statement inputted. A user inputting four years of financial statement data, for example, would use columns D, E, F, and G and columns B and C would remain empty. Several financial ratios use average amounts of assets, liabilities, and shareholders’ equity for the year. For this reason, the user should input one more year of balance sheet data than the number of years of data for the income statement and statement of cash flows. Otherwise, ratios using average amounts of assets for the year will be inaccurate for the earliest year of data. Although the user can download financial statement data from other sources and paste them into the Data Spreadsheet, we find it more efficient to input the financial statement data manually. Online sources of financial statement data often use different titles and sequencing of accounts from those in FSAP. The user must conform data from other sources to the FSAP template because the spreadsheets within FSAP use the Data Spreadsheet as their base. Thus, the user should not change, add, or delete rows or

columns within FSAP because doing so may compromise computations throughout

FSAP that rely on the Data Spreadsheet. The user can, however, change account titles in the Data Spreadsheet as necessary to match the account titles of the particular firm. The Data Spreadsheet contains a number of generic account titles that can be changed to fit the particular firm (such as Other Current Assets (1) and (2), Other Noncurrent Assets (1) and (2), Other Current Liabilities (1) and (2), and Other Noncurrent Liabilities (1) and (2)). Particular attention should be paid to inputting income statement data items in rows 57 to 62 and rows 66 to 69. The red triangular tags describe the amounts that should appear on each line. When inputting data in these rows, the user must assess whether the income items are usual and recurring or unusual and nonrecurring for a particular firm. As Chapter 6 discusses more fully, distinguishing between these two categories of income items is important for both assessing the past operating performance of a firm and fore- casting its likely future performance. The Analysis Spreadsheet computes certain financial ratios both including and excluding unusual and nonrecurring items. Amounts entered in row 73 (discontinued operations), row 74 (extraordinary gains and losses), and row 75 (changes in accounting principles) should be consistent with the reporting of these three items in the firm’s income statement. These categories should not be used for unusual or nonrecurring items reported by a firm in the continuing opera- tions section of the income statement. The user should input the latter items in rows 61 and 62 for operating items and rows 67 and 69 for non-operating items. FSAP automatically computes the amounts of various subtotals and totals within the Data Spreadsheet. These items are shaded in gray in the Data Spreadsheet and serve in checking the mathematical accuracy of inputted amounts. FSAP checks to ensure that total assets equal total liabilities and shareholders’ equity; that total revenues and gains minus total expenses and losses equal reported net income; and that cash flows from operating, investing, and financing activities equal the change in cash on the balance

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User Manual for Financial Statement Analysis Program (FSAP)

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sheet. These financial data checks appear in rows 132 to 134 of the Data Spreadsheet. Any material nonzero amounts (that are not due to rounding) in these rows require the user to recheck amounts inputted to identify and correct the error. In addition to basic financial statement data, the Data Spreadsheet requires the inputting of other data in rows 122 to 129. Particular care should be exercised in inputting amounts in row 124, After-tax Effects on Nonrecurring and Unusual Items on Net Income. Recall that the user inputs the pretax effects of unusual and nonrecurring income items in rows 61, 62, 67, and 69. Row 124 requires the user to determine or esti- mate the tax effect of items in these four rows and enter their after-tax amounts in this row. This is an important step because it affects the computation of financial ratios in the Analysis Spreadsheet that distinguish between reported amounts and amounts that exclude the effect of nonrecurring items.

ANALYSIS SPREADSHEET

The Analysis Spreadsheet begins by repeating the Data Checks section of the Data Spreadsheet to remind the user that this section should contain all zeros. If not, the user should return to the Data Spreadsheet and correct any errors before using the financial ratios and other analyses in the Analysis Spreadsheet. The Analysis Spreadsheet relies entirely on data entered into the Data Spreadsheet and does not require any inputs from the user. The Analysis Spreadsheet shows the amounts for the profitability and risk ratios discussed in Chapters 4 and 5 using both reported amounts and amounts excluding nonrecurring income items. The Analysis Spreadsheet

also presents common-size and percentage change income statements and balance sheets,

as discussed in Chapter 1. Note that the compound growth rates in column G for rows 145 to 174 are based on six years of income statement data. These compound growth rates are not accurate if the user has inputted less than six years of income statement data. If the latter is the case, the user needs to program the compound annual growth rate formula in column G to reflect the number of years of income statement data inputted. For example, if the user has inputted four years of data, the user should repro- gram the compound growth rates to divide the Data Spreadsheet amounts in column G by the amounts in column D instead of those in Column B, and then raise the result to the 1/3 power instead of to the 1/5 power.

FORECASTS SPREADSHEET

FSAP provides the user with a template to build financial statement forecasts extending to Year +6 in the future. The user can program the Forecasts Spreadsheet to accommo- date a wide array of forecast assumptions, capturing those assumptions in projected income statements, balance sheets, and statements of cash flows. For the financial state- ment projections to work properly, FSAP must be programmed for circular references and calculations. The user should make sure that this is the case as follows: Click on the Tools menu, then click on the Options menu, then click on the Calculation tab, and then make sure that a check mark appears in the Iterations box (if the box is blank, click on it, and a check mark should appear). The first three columns of the Forecasts Spreadsheet contain actual balance sheet and income statement amounts for the company from the Data Spreadsheet and various financial ratios from the Analysis Spreadsheet to aid in developing forecasts. The amounts shown for the statement of cash flows in the Forecasts Spreadsheet contain the implied amounts that result from changes in balance sheet accounts and will not likely

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equal the reported cash flows amounts from the company data file. The Forecasts Spread- sheet permits the user to build forecasts for each element of the income statement and balance sheet from Year +1 to Year +6. Forecasts for each financial statement item can be developed using three rows of the spreadsheet. In the first row, using Revenues for exam- ple, the analyst should program the computations for the Revenues forecast amounts. In FSAP, the amounts in the first row for each account are highlighted and boldfaced. The analyst can use the row immediately below the forecast amounts to input specific forecast assumptions, such as the revenue growth rates used to compute the revenue forecast amounts. The analyst should use the second row below the forecast amounts to input brief descriptions and explanations of the forecast assumptions. The Forecasts Spreadsheet automatically computes the statements of cash flows implied by the income statement and balance sheet forecasts. The Forecasts Spreadsheet also computes whether the statement of cash flows reconciles with the change in cash on the balance sheet as a quick check of whether the statements agree with one another. The Forecasts and Valuation Spreadsheets require an assumption about the long-run growth rate in financial statement amounts. The Forecasts Spreadsheet allows the user to input the long-run growth rate assumption for Year +6 and beyond in cell J20. To com- pute financial statement forecasts for Year +6, the analyst should only enter the long-run growth rate assumption in cell J20. The Forecast Spreadsheet automatically applies that growth rate to each account in the financial statements to compute constant growth rate financial statements for Year +6. Assuming the user has forecasted income statement and balance sheet amounts for Year +1 to Year +5, and that the user has entered a long-run growth rate for Year +6 and beyond in cell J20, then the Valuation Spreadsheet computes

valuation estimates using the forecast amounts through Year +6 and assuming that the

firm will grow at this long-term growth rate. For the forecasts and valuation estimates to be consistent, the analyst must be sure to input the same rate of long-term growth in cell J20 in the Forecasts Spreadsheet and in cell E27 in the Valuation Spreadsheet. The Forecasts Spreadsheet requires the user to plug a flexible financial account to bal- ance the balance sheet. The default plug account on the balance sheet in FSAP is divi- dends, but the user can easily change the plug account to an account such as cash, notes payable, or any other flexible financial account on the balance sheet. The user should ini- tially forecast the amounts in the row for the balance sheet account that will be plugged. After programming all of the income statement and balance sheet accounts (including the account to be plugged), the user should scroll to rows 233 and 235 of the Forecasts Spreadsheet. These rows indicate the initial amount of the plug needed to balance the balance sheet. Row 237 asks the user to name the account to be plugged. The computa- tions below row 237 assume that dividends will be the default plug and allow the analyst to compute the ordinary amount of dividends (for both common and preferred stock) and then adjust that amount by the amount of the plug needed to balance the balance sheet (initially, this amount will equal the amount in row 235). FSAP then subtracts the amount of the implied dividends, including the plug amount, from retained earnings. After the plug, the balance sheet check figures in row 233 should then be zero. The Forecasts Spreadsheet plug account can be changed from dividends (the default plug) to any other account on the balance sheet. To change the plug account from divi- dends to cash, for example, the user should first program the expected amounts of cash balances (before the effects of the plug) in row 124, and forecast all of the other balance sheet and income statement amounts. Then the analyst should program the common and preferred dividend amounts in rows 239 and 242 to equal the normal dividend forecasts. The analyst should also input the implied dividend amounts in row 245 to be zero. In row 235, the user should program the computation for the necessary plug to cash by sub-

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tracting from total liabilities and shareholders’ equity (row 230) the amounts for asset account other than cash. To be specific, the amount in cell E235 should be set as follows:

( E230 E127 E130 E133 E136 E139 E145 E148 E151 E154 E157 E160 E163). The user should then program the forecast for cash on cell E124 to equal the plug amount in cell E235. After doing so for each of the forecast years, the amounts in the check figures row 233 should then be zero, indicating that the balance sheet is in balance.

FORECAST DEVELOPMENT SPREADSHEET

The FSAP user does not need to use the Forecast Development Spreadsheet. It is an optional spreadsheet that provides the user with space to develop other supporting compu- tations for the Forecasts Spreadsheet, such as detailed forecasts of sales. The Forecast Devel- opment Spreadsheet provides the user with a template for forecasting capital expenditures; property, plant, and equipment; depreciation expense; and accumulated depreciation.

VALUATION SPREADSHEET

FSAP provides valuation estimates using the forecasts developed in the Forecast Spread- sheet and the following five valuation models:

Dividends Free Cash Flows for Common Equity Shareholders Free Cash Flows for All Debt and Equity Shareholders

Residual Income Residual Income—The Market-to-Book Value Approach

In order for the Valuation Spreadsheet to compute the value of a firm using these valua- tion models, the user must input the appropriate valuation parameters, such as the parameters needed to compute the equity cost of capital using the CAPM, the inputs nec- essary to compute the weighted average cost of capital, the number of shares outstanding, the long-run expected growth rate, and the current share price. The analyst must input these assumptions in the valuation parameter cells that are highlighted in bold blue font at the top of the Valuation Spreadsheet. The Valuation Spreadsheet automatically pro- vides the analyst with a comparison of the value estimate with current share price. The Valuation Spreadsheet also automatically provides sensitivity analysis for the free-cash- flows-based valuation models and the residual income–based models by varying the assumptions for the equity cost of capital and the long-run growth rate across wide ranges.