Appendix D

User Manual for FinancialStatement Analysis Package (FSAP)

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INTRODUCTION TO FSAPFSAP is a user-friendly, adaptable Excel spreadsheet template. FSAP enables the user tomanually input financial statement data for a firm and then perform financial statementanalysis, forecasting, and valuation. The objective of FSAP is simply to provide users witha usable template for these computations. The objective of FSAP is not to provide thecritical analytical judgments that are required of the user. The user of FSAP must providethe 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 usingFSAP. 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 caseswith 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 instructionsand suggestions that provide a great deal of help for users. To get started using FSAP, firstdownload the FSAP template from the text’s web site, read this User Guide for anoverview of the program and its five spreadsheets, and review the completed output fromFSAP for PepsiCo in Appendix C. As you use and become familiar with FSAP, refer backto this User Guide and the output in Appendix C and review the information in the redcomment tags within FSAP for help as needed.

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

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

2. Analysis Spreadsheet: Computes various financial statement ratios, common-sizefinancial 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 prepareforecasted income statements, balance sheets, and statements of cash flows.

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

5. Valuation Spreadsheet: After the user inputs valuation parameters, the ValuationSpreadsheet computes common equity share value using the five different valua-tion models demonstrated in the text, including two free-cash-flows valuationmodels, two residual income valuation models, and the dividends valuationmodel. 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 growthrate assumptions.

The web site for this book (www.thomsonedu.com/accounting/stickney) contains theFSAP 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 SPREADSHEETThe 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 themost recent year of financial statement data in column G, regardless of the number ofyears of financial statement inputted. A user inputting four years of financial statementdata, for example, would use columns D, E, F, and G and columns B and C would remainempty. 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 sheetdata than the number of years of data for the income statement and statement of cashflows. Otherwise, ratios using average amounts of assets for the year will be inaccurate forthe earliest year of data.

Although the user can download financial statement data from other sources andpaste them into the Data Spreadsheet, we find it more efficient to input the financialstatement data manually. Online sources of financial statement data often use differenttitles and sequencing of accounts from those in FSAP. The user must conform data fromother sources to the FSAP template because the spreadsheets within FSAP use the DataSpreadsheet as their base. Thus, the user should not change, add, or delete rows orcolumns within FSAP because doing so may compromise computations throughoutFSAP that rely on the Data Spreadsheet. The user can, however, change account titles inthe Data Spreadsheet as necessary to match the account titles of the particular firm. TheData Spreadsheet contains a number of generic account titles that can be changed to fitthe 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 rows57 to 62 and rows 66 to 69. The red triangular tags describe the amounts that shouldappear on each line. When inputting data in these rows, the user must assess whether theincome 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 incomeitems is important for both assessing the past operating performance of a firm and fore-casting its likely future performance. The Analysis Spreadsheet computes certain financialratios both including and excluding unusual and nonrecurring items.

Amounts entered in row 73 (discontinued operations), row 74 (extraordinary gainsand losses), and row 75 (changes in accounting principles) should be consistent with thereporting of these three items in the firm’s income statement. These categories should notbe 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 61and 62 for operating items and rows 67 and 69 for non-operating items.

FSAP automatically computes the amounts of various subtotals and totals within theData Spreadsheet. These items are shaded in gray in the Data Spreadsheet and serve inchecking the mathematical accuracy of inputted amounts. FSAP checks to ensure thattotal assets equal total liabilities and shareholders’ equity; that total revenues and gainsminus total expenses and losses equal reported net income; and that cash flows fromoperating, investing, and financing activities equal the change in cash on the balance

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sheet. These financial data checks appear in rows 132 to 134 of the Data Spreadsheet. Anymaterial nonzero amounts (that are not due to rounding) in these rows require the userto recheck amounts inputted to identify and correct the error.

In addition to basic financial statement data, the Data Spreadsheet requires theinputting of other data in rows 122 to 129. Particular care should be exercised ininputting amounts in row 124, After-tax Effects on Nonrecurring and Unusual Items onNet Income. Recall that the user inputs the pretax effects of unusual and nonrecurringincome 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 thisrow. This is an important step because it affects the computation of financial ratios in theAnalysis Spreadsheet that distinguish between reported amounts and amounts thatexclude the effect of nonrecurring items.

ANALYSIS SPREADSHEETThe Analysis Spreadsheet begins by repeating the Data Checks section of the DataSpreadsheet to remind the user that this section should contain all zeros. If not, the usershould return to the Data Spreadsheet and correct any errors before using the financialratios and other analyses in the Analysis Spreadsheet.

The Analysis Spreadsheet relies entirely on data entered into the Data Spreadsheet anddoes not require any inputs from the user. The Analysis Spreadsheet shows the amountsfor the profitability and risk ratios discussed in Chapters 4 and 5 using both reportedamounts and amounts excluding nonrecurring income items. The Analysis Spreadsheetalso 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 rows145 to 174 are based on six years of income statement data. These compound growthrates are not accurate if the user has inputted less than six years of income statementdata. If the latter is the case, the user needs to program the compound annual growthrate formula in column G to reflect the number of years of income statement datainputted. 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 Gby the amounts in column D instead of those in Column B, and then raise the result tothe 1/3 power instead of to the 1/5 power.

FORECASTS SPREADSHEETFSAP provides the user with a template to build financial statement forecasts extendingto 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 projectedincome statements, balance sheets, and statements of cash flows. For the financial state-ment projections to work properly, FSAP must be programmed for circular referencesand calculations. The user should make sure that this is the case as follows: Click on theTools menu, then click on the Options menu, then click on the Calculation tab, and thenmake 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 andincome statement amounts for the company from the Data Spreadsheet and variousfinancial ratios from the Analysis Spreadsheet to aid in developing forecasts. Theamounts shown for the statement of cash flows in the Forecasts Spreadsheet contain theimplied 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 andbalance sheet from Year +1 to Year +6. Forecasts for each financial statement item can bedeveloped 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. InFSAP, the amounts in the first row for each account are highlighted and boldfaced. Theanalyst can use the row immediately below the forecast amounts to input specific forecastassumptions, such as the revenue growth rates used to compute the revenue forecastamounts. The analyst should use the second row below the forecast amounts to inputbrief descriptions and explanations of the forecast assumptions.

The Forecasts Spreadsheet automatically computes the statements of cash flowsimplied by the income statement and balance sheet forecasts. The Forecasts Spreadsheetalso computes whether the statement of cash flows reconciles with the change in cash onthe 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-rungrowth rate in financial statement amounts. The Forecasts Spreadsheet allows the user toinput 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-rungrowth rate assumption in cell J20. The Forecast Spreadsheet automatically applies thatgrowth rate to each account in the financial statements to compute constant growth ratefinancial statements for Year +6. Assuming the user has forecasted income statement andbalance sheet amounts for Year +1 to Year +5, and that the user has entered a long-rungrowth rate for Year +6 and beyond in cell J20, then the Valuation Spreadsheet computesvaluation estimates using the forecast amounts through Year +6 and assuming that thefirm will grow at this long-term growth rate. For the forecasts and valuation estimates tobe consistent, the analyst must be sure to input the same rate of long-term growth in cellJ20 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, notespayable, 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 (includingthe account to be plugged), the user should scroll to rows 233 and 235 of the ForecastsSpreadsheet. These rows indicate the initial amount of the plug needed to balance thebalance 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 analystto 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 balancesheet (initially, this amount will equal the amount in row 235). FSAP then subtracts theamount 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 defaultplug) 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 cashbalances (before the effects of the plug) in row 124, and forecast all of the other balancesheet and income statement amounts. Then the analyst should program the common andpreferred 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. Inrow 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 assetaccount 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 E124to equal the plug amount in cell E235. After doing so for each of the forecast years, theamounts in the check figures row 233 should then be zero, indicating that the balancesheet is in balance.

FORECAST DEVELOPMENT SPREADSHEETThe FSAP user does not need to use the Forecast Development Spreadsheet. It is anoptional 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 SPREADSHEETFSAP 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 theparameters 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 inputthese assumptions in the valuation parameter cells that are highlighted in bold blue fontat 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. TheValuation Spreadsheet also automatically provides sensitivity analysis for the free-cash-flows-based valuation models and the residual income–based models by varying theassumptions for the equity cost of capital and the long-run growth rate across wideranges.

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