ECON 118:

INTRODUCTION
Who am I?
 Scott Fulkerson
 Audit Senior Manager at Ernst & Young LLP
- 14 years at EY
 Graduated UC-Santa Barbara 2004
- Major in Business Economics with emphasis in Accounting
- Minor in Sports Management
 Teaching Econ 3B, 118, 136A, and 132
 Interests:
- Golf, Running, Triathlons, American Ninja Warrior, Dexter,
Breaking Bad, Seinfeld, and sadly Bachelor(ette)/BIP
• Fun facts:
- Played 1 year on UCSB golf team
- Worked at In N Out on Turnpike / Intern for local CPA/Lawyer
- Thought Econ 3B and 136C were the hardest classes
- Favorite Acctg classes were 118, 132 and 136 series
- Favorite Non-acctng classes: Nutrition 3, Sports Man 130
and Admin 140 (ESS), Dance 45, Hum Sexuality 152A, Sailing
- Completed two Ironmans in Arizona in November 2018 and 2017
Financial Statement review
What positive and negative items do you see in
these financial statements?

Would you invest in this Company?

 3
Financial Statement review
What positive and negative items do you see in these financial statements?

Would you invest in this Company?

Amounts (in thousands)

 4
Financial Statement review
First Company was Circuit City, the following year they lost $8.3 million and then lost
$320 million. In 2009 they filed for bankruptcy and were out of business. Article in
January 2018 -
http://abc7.com/shopping/circuit-city-announces-february-relaunch/2928192/

 5
Financial Statement review
This Company’s EBITDA is close to a positive $90 million. It was
purchased by a Private Equity (PE) firm for almost $1 billion in 2014.

 6
Financial Statement review
Think about that. One Company that looked bad on paper, ended up
being the success of the two.

Other factors? Economic trends, risks in the market, obsolescence,

change of demand, interests, disposable income, etc.

Would you buy stock in:

Abercrombie and Fitch
American Eagle
Pinkberry
Staples
Radioshack
Toys R Us?
Barnes & Noble (bookstores used to exist for those who aren’t aware)

Speaking of Circuit City – What do people think about Best Buy?

Any others?
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What is this course? EXPLORATION

Sometimes there is no right answer to accounting analysis.

If predicting results of a Company were easy, everyone would be
millionaires from investing.

To challenge ourselves while enjoying via exploration:

1. Use financial statement analysis to better understand and

consequently reinforce your understanding of intermediate and
advanced accounting concepts;

2. Practice real world situations by working in teams and making

presentations;

3. Learn to access and filter the vast amount of information available for
performing analysis of a company.

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What is this course? EXPLORATION

Think outside the box

 Staffauditor focused only on several accounts (cash, accounts

receivable, fixed assets).
- Testing for 3 weeks
- Ask how the Company performed this year, no clue
 Can’t audit, test, perform tax, advise, unless:
- Understand the BIG PICTURE
- Corroborate evidence and explanations
 Directly correlated responses
 Analyzing trends
 Analyzing correlations in journal entry patterns (big data analytics)

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VALUATION

When investing, its important to understand all factors involved in

the Company.

Attempting to understand the Company’s past, forecasting the

future, comparing the ratios, and actually value a company will help
learn a lot more about the company than simply what is easy to
unearth.

When you work on your group projects, a component of your

analysis MUST include an estimated value for the stock that you
would advise as a “strike” price.

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HOW WE WILL DO IT: LEARN BY DOING

1. Homework will not be graded, but is expected to be reasonably completed

1. Does not need to be a novel, generally ½ a page to 1 ½ pages is all that is needed
2. Exam questions will consist of knowledge of the homework

2. I will provide an overview of sections and even go over homework problems during class
after being turned in;

3. During the first 2/3 of the course, we will work together by learning about accounting
analysis and using various publically traded companies as a mechanism for “learning”
how to apply certain concepts.
− Homework, Midterm, and Final are based on assignments given and lecture
− Slides will be provided
− Cameras - Phones – Sure.
 This also is not very real world.
 If material is covered too fast to take notes, just let me know

− The Textbook……

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HOW WE WILL DO IT: LEARN BY DOING

4. There will be a midterm during the course and a final exam at

the completion of the covered content, 2/3 into the course.
5. The rest of the quarter will be devoted to your completion of
analysis in groups.
− “Lecture” during this time will be used for group project team
meetings, and questions and answers. This is to ensure that there
is no “the team couldn’t find a time to meet outside of the class due
to conflicting schedules.”
 Everyone is scheduled to be at lecture and therefore reasonable
accommodations are made to ensure the team has time to work on
group project
 Likely there will be time needed outside of class to also coordinate
− Group work will be presented orally and handed in.

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 GROUP WORK:
You will work in groups. I hope that the following will serve as motivation to participate fully in
your group:
 This is how you will learn the content you will be tested on;
 You will work in groups when you go to the real world, this is an opportunity to start
developing a productive style of your own;
 THE MORE YOU PUT IN, THE MORE YOU WILL GET OUT of the group work.

The above should be enough, but you will also be evaluated by your team-mates at the end of
the course which will be factored into your final letter grade in the course.
 Slack off, and your grade will suffer;
 Be a jerk, and your grade will suffer;
 Contribute, be a valued asset to your team, and your grade will benefit!!

START WORKING TOGETHER EARLY, DON’T WAIT UNTIL THE LAST 1/3 OF THE CLASS TO “START” YOUR ANALYSIS. IF
YOU DO THIS RIGHT, YOU WILL HAVE YOUR COMPANY ANALYSIS SUBSTANTIALLY COMPLETE AND BE ABLE TO SPEND
ONE ON ONE TIME WITH ME TO MAKE IT BETTER DURING THE LAST 1/3 OF THE COURSE.

Groups will be randomly assigned. If you picked your teammates this wouldn’t be very real
world would it?

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GROUP PRESENTATIONS

Your group will present your evaluation during the 3 hour final slot
we have. There will be a “hard-stop” for your presentation at
anywhere from 10-12 minutes (depending on number of groups) to
allow 3 minute transition to the next group.
 The presentation is to a potential investor who has hired you and
another team to influence them which stock to purchase

 The audience will grade your oral presentation on a scale I

provide.

 I will grade your oral presentation on the same scale, but mine
counts for half.

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Course points

Team-mate eval 120 10%

Oral presentation 150 12%
Project 300 24%
Midterm 250 20%
Final 350 28%
Homework 90 7%
1260

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Course project

I will select teams late the first week of classes, as I try to allow time
for drops/ adds so that teams do not lose team members.

Once again this will be chosen randomly

Criteria for the project and time of presentations during final will be
posted on Gauchospace shortly.

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Class participation

Homework discussion and live discussion regarding financial

statements are vital to understanding of the class material and your
performance in the class

 Bring computer and/or printouts of the homework

 Copies of the completed homework
 Facebook financial statements
 Your ratio schedule

 Questions asked in class – please be prepared to answer

 Why?
1. Deer in headlights 2. Discussion 3. Have fun 4. Class is as
exciting as watching paint dry if no one is responding

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OUR APPROACH, LINKED TO TEXT

 Attempt is to teach real life public companies and concepts

 I am not adhering exactly to the sequence of the text, but have linked the
structure to the text so that the text will serve as a useful resource and will
provide concepts and understanding;
 Use the text as a guideline but DO NOT read cover to cover – you will be lost –
this is not a question, it’s a statement.
 Focus is to teach what I want you to learn, so pay attention to lecture and
homework assignments that we discuss in class.

SEQUENCE:
Text Chapter
SCF Valuation
0 1 2 3 4 5 6 7-9 10-12
Intro Overview
Avanced Accounting Intro
Company - Industry Risks
Cash Flow Analysis
Financial Position - Liquidity & Solvency
Profitability and Financial Flexibility
Valuation

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 Primary Focus: Financial Reporting
Concepts apply equally to public companies as well as non-public.
However, we will be focusing on public companies, only because their
financial information is “publicly” available.

Public companies key information available:

 SEC.GOV:
− Form 10-K, includes:
 GAAP Financial statements- AUDITED
 MD&A & lots of other information!
− Form 10-Q: Like 10-K but quarterly, reviewed (not audited) and
condensed
− Form 8-K: Significant events, often accompanied by press release
− Definitive Proxy Statements:
 Who are the BOD, Executive officers AND their compensation
 Other matters of significance (such as requiring a vote of shareholders)

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 Primary Focus: Financial Reporting

 Other available information:

− “Investor relations” of a company website where you can find:
 Annual report (includes many items in 10-K and more)
 Press releases/ Earnings presentations and transcripts
 Often investors presentations
− Internet sources:
 Google finance/ yahoo finance, etc.
 Seeking alpha: Setup a free account, lots of access to things above in one
place.

 CAUTION: Anyone can write an article about a company. There is a

LOT of garbage. By the end of this course, you will understand what
I mean and hopefully be able to spot such garbage.

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FINANCIAL ANALYSIS, A PICTURE

PUBLIC INFO:
SEC.GOV
10-K Considers
10-Q Quantitative as well
8-K as qualitative
PROXY information

Investor relations
Other analysts
News
& Other…

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CAUTION: Management is generally optimistic!

EVERY business plan projects growth etc.

In MD&A, press releases, earnings calls, management can be in the

middle of a giant mess, will NEVER show panic and will generally
be optimistic.

Remember that the job of executives is to remain calm and send a

sense of control to the troops as they manage sometimes
potentially catastrophic, risks.

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USERS OF FINANCIAL STATEMENTS

MOST COMMON:
 Current owners: should I buy more? Sell? Hold?
 Prospective investors: Should I buy? What should I buy?
 Lenders: Should I lend? How much risk is there of full
repayment including interest- i.e. what rate should I charge?
 Market/ Investment Banker analysts
 Management

OTHERS:
 Mergers & Acquisitions (M&A) and partial sales
 Insurance providers
 Employees
 Customers/ Vendors/ Many others

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 GAAP: is it good enough?

If GAAP alone were enough then there would be no work for financial analysts. The
common use of the following provide compelling evidence that GAAP statements are
not sufficient on their own:

EBITDA: Earnings before Interest, taxes, depreciation & amortization.

Adjusted EBITDA: Earnings the way management views or least wants users to see
it.
 Generally includes adjustment for items that management doesn’t consider to be
indicative of future cash flows.
− Okay for management to do this, AS LONG as they reconcile to the audited
statement amounts.

GAAP FINANCIAL STATEMENTS ARE THE FOUNDATION!

It’s scary how loosely read the notes to the financial statements are! READ THE
FOOTNOTES! They are audited and tell a story and help present the big picture.

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 EBITDA

EBITDA shows the kind of earnings the company generates from their
principle operation, exclusive of how they are financed, or what tax rate
they pay.
 Useful in comparing profitability to other companies;

But if death and taxes are certain, does it make sense to ignore taxes?
Also does a company magically not have to worry about the interest on
their debt?

What do YOU think?

… there are actually varying answers in practice.

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From me to you

NOBODY, not even me, can tell you how YOU should perform YOUR analysis.

The more you think about what you are doing, considering traditional ratios and approaches
as a RESOURCE rather than a guide, the more you will understand your own analysis.

In my experience, finding my own path has lead me to many conclusions that are commonly
accepted, however, not even I can predict the weather, or the outcome of results on a stock
price.
- Insider trading
- Opposite results / market reaction

I hope this course is structured enough for you to follow but flexible enough for you to
explore.

NONETHELESS: You must understand fundamental financial statement analysis in the

common sense. Note by understanding your approach and bridging this to traditional
approach, you will develop a more solid understanding of both the concepts you are
learning, as well as the companies you are analyzing.

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