ACCT 411 – Applied Financial Analysis

Spring 2023
Project Guidelines

Overview

The course project is aimed at developing students’ understanding of and practical skills in financial
statement analysis. It is also designed to enhance teamwork, analytical and communication skills.
The project is split into three parts, each with its own deadline. To complete this project, you will be
put into groups which will be determined by the instructor. The project has group and individual
components.

The project is essentially an application of the PACRA corporate rating methodology to your assigned
company. The rating methodology has already been uploaded on the LMS in the project resources
folder and this will provide detailed guidance on each section of your project. Your writing style will
be evaluated using the written communication rubric available in the LMS project resources folder.

Part I - Group Work 5% of total grade

Industry Analysis

The first section of the project is aimed at setting up the business environment context in which the
selected companies are to be analyzed. This involves understanding the industry in a global, regional
and country specific context. (You may want to consider Porter’s five forces). The industry analysis
should allow for you to develop a deep enough understanding of the business to conduct an
effective analysis in part II of the project.

Relevant sources of information would be the financial press , Sector research conducted by credit
rating agencies, industry association websites, and industry specific regulations.

Your submission must have an executive summary page which may not exceed a single A4 size page.
You will be evaluated on your ability to pick out factors which will have a material impact on your
analysis. The entire document must be in Times New Roman, single-spaced lines, font size 11 and
must not exceed 10 pages (inclusive of the executive summary and any exhibits).

Part I - Additional guidelines:

Consider the risks and advantages of operating in the industry you are assigned. What is it like for an
average company to operate in this industry? Does it face a lot of competition? Does it have to deal
with constant government intervention? Tools such as SWOT analysis, PEST Analysis and Porter’s five
forces may come in very handy.

Consider the following questions for your reference:

• How stable are the operations of companies in your industry? Have companies been operating
smoothly since a long time?
• What is the cost structure of companies like? Is it mainly fixed or variable costs?
• Key industry financials such as: total sales, total capacity, any excess capacity, compared to
previous years
• What is the nature of the sales? Cyclical or constant?
• Using Porter’s forces and your research, how competitive is the industry? What is the market
structure like? Who are the key players and what are their market shares?
• What are the key inputs of the industry, and do they pose any strategic risks or opportunities?
• What level of government support is available to the industry? What special boards (if any) have
been set up to help the industry? What kind of tax regulations are faced?
• To what extent does the industry depend on external factors such as import orders or exchange
rates?

Make sure to view industry analyses given at the following websites:

https://www.pacra.com/research
http://vis.com.pk/kc-sect.aspx

Please also consult the Industry Risk Assessment Section of the corporate rating methodology shared
with you for further guidance on how to approach part I.

Part II – Individual work 50% of total grade

Individual Company Analysis

This section is aimed at carrying out an accounting and financial statement analysis of the individual
company selected by you. This involves completing your assessment of accounting risk which
includes evaluating accounting policies, the quality of accounting information and accounting
distortions, if any.

Accounting distortions may arise from the use of estimates, earnings management and sometimes
even from accounting standards! This analysis will determine whether any adjustments need to be
made to the figures in the financial statements.

You are also required to comment on the trends in the company’s financing, investing and operating
activities over the last five years from the perspective of conducting a credit analysis. Apply the
accounting risk framework to your individual company (keep in mind that financial statements are
not the only source of information to do this). This will help you determine if there are any
MATERIAL distortions.

If there are, see if you have enough information to adjust the figures in the financial statements. If
the information is not sufficient you will have to build the potential impact into your analysis
qualitatively.

You may then proceed to entering the relevant data for the last FIVE years and doing a vertical and
horizontal analysis. This should help direct you to material financial statement line items and identify
significant trends. The next step is to calculate relevant ratios (make sure you agree with other group
members which version of the ratio to use to facilitate comparison in Part III). Now you can move on
to drawing your conclusions!
The entire document must be in Times New Roman, single-spaced lines, font size 11 and must not
exceed 15 pages (inclusive of any exhibits).

Part II – Additional Guidelines

1. First you need to conduct an accounting risk analysis according to the risk assessment framework
to identify areas where potential misstatements may occur. Bear in mind that all aspects of the
risk assessment framework may not be relevant to the company chosen. You need to identify
which aspects apply. Once you have applied the risk assessment framework and identified
potential areas, you may adjust the accounting data given in the statements IF you have sufficient
information to adjust the figures and IF the item to be adjusted is material.

2. Once the information is adjusted for any material misstatement, you need to conduct a trend
analysis for the financial statements i.e., horizontal, and vertical analysis. This is to be done for
the income statement and balance sheet only for the last 5 years.

3. Points 1 and 2 will give you a fair idea of what aspects of financial statements to focus on. For
example, during your trend analysis you may notice significant changes in PPE and may want to
include and discuss that in your Ratio Analysis which is the third part. Ratio Analysis and
application of other concepts is to be done for the most recent, full year set of financial
statements available. For this, the best practice is to start by reading the Directors Report, Key Audit
Matters and then the statements and notes. The formulae of ratios you choose must be agreed upon
by the entire group.

4. Please note that, for the purposes of this individual company analysis, using the reading on
the “corporate credit rating methodology” is highly recommended.

Part III – Group work 5% of total grade

Each group will collate the individual analyses of the companies within an industry to do a
comparative analysis and a comparison with industry data. The focus area of the analysis will be
credit analysis. Each company within the industry must be ranked.

Part III – Additional Guidelines

Each group will collate the data from their individual companies within an industry to calculate their
own industry averages. They will then do a comparative analysis with other companies in the group
and industry averages. Reasons for any significant deviations from industry averages are to be
explained. The focus area of the analysis will be credit analysis. Finally, each company within the
industry must be ranked.

General

For group deliverables, an overall mark will be awarded to each group. The instructor reserves the
right to assign individual marks for each member of the group based on their understanding of the
entire project.
Written reports, which have been passed through Turnitin, must be submitted at each deadline.
Additionally, groups may be required to formally present their findings from their group or individual
work to the instructor which may be incorporated into grades.

THERE WILL BE NO EXTENSIONS IN DEADLINES SO, PLEASE WORK ACCORDINGLY.