Project 1: Analyzing Financial Statements
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Scenario

You have been chosen to join a team of consultants at Maryland Creative Solutions (MCS). Congratulations on your hiring! The group you will be working with has a history of helping transform troubled companies into profitable enterprises with a promising future. Your team is assigned to a client firm, Largo Global Inc. (LGI). LGI’s operational efficiency has declined over the past three years. The company’s board of directors has hired MCS to uncover the underlying issues and make recommendations to turn things around. 

Competencies

Your work will be evaluated using the competencies listed below.

· 3.2: Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.

· 3.4: Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.

· 6.2: Evaluate strategic implications for domestic and international markets of an organization’s industry.

· 10.2: Analyze financial statements to evaluate and optimize organizational performance.

Project 1: Analyzing Financial Statements
Step 1: Prepare for the Project

In two weeks, you will meet with your team to discuss the main reasons for LGI’s reduced operational efficiency. You need to prepare for the meeting by reviewing how to perform financial analysis, including common-size, cash flow, and ratio analysis.

Required Reading

Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). 

Fundamentals of Corporate Finance
 (2nd ed.). Wiley.

Chapter 3: Financial Statements, Cash Flows and Taxes

· Section 3.1 to 3.6

Chapter 4: Analyzing Financial Statements

· Section 4.1 to 4.6

Professionals in the Field

This video discusses how a corporate finance textbook was used in uncovering financial irregularities and a dangerous situation. It is 9:00 minutes.

Transcript

Using Financial Knowledge to Unravel a Scheme

Transcript

Using Financial Knowledge to Unravel a Scheme

I have been teaching corporate finance and investment for the past two or three decades. My training was initially in finance. I have a Ph.D. from a state university and I’ve done a lot of consulting work in my life that complemented my teaching and certainly has helped me a lot in the classroom and as well as in my research.  

I have also been a student, of course—during my MBA, where I majored in finance also, and obviously at that time I was, just like most students, struggling with accounting, but at some point I really understood that finance was starting where accounting stopped, and that really gave me a lot of confidence in myself and I really developed strong interest in the field and that has served me very well in terms of the kind of work that I’ve been doing, not only in teaching but also advising organizations, doing many consulting work for supernational organization[s], but at the same time my research was also influenced by the kind of work that I have been doing in academia and in the private sector.  

In terms of work that you do in the private sector, you need to help organizations to become stronger financially and certainly, you know, to help them understand the problem that they are facing. So this is why a lot of mission[s] that I have done in the past really have given me a lot of satisfaction in terms of, you know, making those companies more competitive and able to certainly capture market share and sustain the long run.  

One of my very first experiences in consulting had a major impact on how I perceive the importance of having a handy and reliable source of corporate finance knowledge, and my MBA finance textbook has been that knowledge for me.  

The story I’m about to share with you is really to illustrate the importance of having a reliable source of knowledge in your field of expertise. I’m going to be talking about my finance textbook that I used in my MBA program but that I kept as a reference for many, many years. No matter how many courses I taught or how many missions I was involved in, my textbook of corporate finance has always been for me a source of re-comfort and a source of knowledge that I can rely on.  

So, this is why I’m going to go to my first consulting experience that took me to a far-flung country and that really illustrates how a textbook can in itself help you to unravel a situation that could be dangerous. At the end of an academic year where I defended my dissertation proposal; that summer was about to make some money and also gain some experience, so as luck would have it, I found myself traveling a long distance in nine and a half hour flights to a far-flung destination in a continent where I had roots but, I was happy to discover. That adventure took me to a destination that basically represented some level of risk. That I started to realize as soon as I was in the terminal at JFK and saw those big signs posted by the Department of State that basically warned US citizens not to fly there. 

At my arrival and to my surprise I realized that they prepared the CEO’s office for me and they requested that I may be meeting with the bank’s client. To me, that was clearly not acceptable in the sense that I was not there to meet the clients, and it also alarmed me that this is not what they should be expecting from somebody who will be doing due diligence. So, of course I declined to sit in the CEO’s office and requested to be embedded in the team that was in charge of making investment[s] on behalf of the of the bank.  

Once I was embedded in this team and started to observe and discuss with them the kind of activity they were doing, I clearly got shocked in terms of realizing that not much activity was taking place and that was a strong indication that this institution was doing something not traditional and I had to really, you know, figure out the best way to understand the mechanism that allowed this bank to survive and then to figure out what I should be doing in terms of helping them to get back to the kind of activities that [would] allow them to sustain the long run. So, I started by crunching all the numbers and trying to analyze the cash flows and, to my dismay, as I was adding those investment and financing and operation cash flows, the numbers were not adding up. That in itself was kind of scary because in one hand you have to be confident in terms of what you are doing and, to me, it was necessary to really go back to the fundamentals and review my methodology, review my techniques; and my first reflex was to go back to my textbook. And this is why I felt relieved that I took my corporate finance textbook with me.  

So, I went back to those chapters that really helped me to refresh the fundamentals and give me enough confidence in redoing everything again and again; and I can assure you that it is still vivid in my memory how many times I did those cash flow analysis and made sure that everything was making sense.  

Obviously, you know, after confirming the result that I initially got, things started to unravel and the team that was working with me started to give me indication that I was about to discover what was really happening. So the picture started to emerge and I realized that was a pyramid scheme, called a Ponzi scheme, that was invented after the First World War and became quite famous in the US with Bernard Madoff, who was involved in this scandal. At that point I knew that I was in a risky situation and at the same time, you know, I was feeling that my life was in danger because I was receiving threats; and the people around me gave me some indication that the possibility to be kidnapped was really something I should be considering as a serious matter. 

So… immediately my reaction was to really leave the country, and I can’t tell you how happy I was to land in JFK and feel that I was safe. Nonetheless, you know, a few weeks after I arrived [in] New York City, I [was] informed one of my classmates, in fact, that was assigned to this very same mission flew to that destination and was continuing this mission and, unfortunately, he was kidnapped. That in itself, you know, was a confirmation of the risky situation I was there. I felt very bad and sorry for my classmate but that made me realize how lucky I was to be back to the US but [at] the same time realize how handy and how helpful this textbook was for me, and how it literally saved my life. 

Step 2: Review and Practice

Maryland Creative Solutions (MCS) has provided you with background material on how its teams approach financial analysis. Using the 
Project 1 Review and Practice Guide , review the structure and purpose of the income statement and balance sheet. Make sure you also are familiar with the DuPont equation as well as these five groups of financial ratios: liquidity, efficiency, leverage, profitability, and market value. Study how to perform common-size and cash flow analyses. Finally, apply what you have learned so far by completing the exercises referenced in the 
Project 1 Review and Practice Guide.

You must review the material provided by MCS and do the practice exercises so that you are

· prepared to have informed discussions with your team about company financial statements,

· understand what the statements reveal about operational efficiency, and

· can use this information to make recommendations for improvements.

Complete this review and practice by the end of Week 1. 

Review and Practice

You must complete the review and practice content to participate in the discussion in Step 3.

Project 1 Review and Practice Guide

Step 3: Participate in the Required Project 1 Discussion

Luis Alvarez / DigitalVision / Getty Images

You have finished reviewing the material and performing the exercises but you have some questions. Participate in the Project 1 class discussion. Respond to the two questions below by posting in the discussion; then, respond to two of your classmates’ discussion posts by the end of the week. 

Discussion

Answer the following questions:

1. Discuss the concepts that were most challenging for you in the readings and review material. How did the practice exercises help clarify these?

2. What did you learn that will help you analyze LGI’s financial statements? 

Before you participate in the discussion activity read the 

MBA discussion guidelines
.

Course Resource

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MBA Discussion Guidelines

Throughout the MBA program, you will be asked to participate in discussions. Assigned discussions, both individual and group work, are part of the process of developing your project deliverables.

In general, address your discussion posts to your classmates, rather than the instructor. Do not attach files; use only the discussion textbox. Your posts do not need the structure or format of formal business memos or reports. These discussions should be an informal exchange of ideas with your peers. You should, of course, still adhere to the norms of standard written English.

To receive the maximum benefit, you should participate in accordance with the guidelines provided below.

· timeliness

· initial posting(s) submitted by 11:59 PM ET on Saturday

· response(s) to other discussion postings submitted by 11:59 PM ET on Tuesday

· proper citation

· cite sources any time you quote or paraphrase an idea or evidence from another work

· use APA citation style (example below)

· meaningful engagement

· posts contribute to substantive scholarly discussion

· student demonstrates professionalism in interaction with peers

· posts critically discuss topics presented in the current week and, when appropriate, in previous weeks

· posts are grounded in the theories and concepts presented in the course

Example:

Based on the 

UMGC library’s guidance on APA citations
, including guidance on how to cite content from the UMGC online classroom, please use the following format for classroom resources with no author or no date:

Title of resource. (n.d.). Document posted in University of Maryland Global Campus Course Name Course Number online classroom, archived at: 
hyperlink

SWOT 
analysis. (n.d.). Document posted in University of Maryland Global Campus MBA 610 2182 online classroom, archived at:

 https://lti.umgc.edu/contentadaptor/page/topic?keyword=SWOT%20Analysis

© 2023 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Step 4: Complete the Analysis Calculation for Project 1

To help you analyze LGI’s financial situation so that you can make recommendations for improvement, you receive an Excel workbook containing the company’s key financial statements. After performing the ratio, common-size, and cash flow analyses, submit your initial findings.

Complete the analysis calculation for the project:

· Download the 
Project 1 Excel Workbook , click the Instructions tab, and read the instructions.

· Perform ratio, common-size, and cash flow analyses using the Income Statement and Balance Sheet worksheet in the Excel workbook.

· If you would like instructor feedback on this step, follow the instructions below to submit your Excel file to the Assignments folder as a milestone by the end of Week 1. This is optional. If you choose to submit the milestone, you will receive instructor feedback. To distinguish the milestone submission from the file you will submit in Step 5, label your file as follows: P1_milestone_lastname_Calculation_date

Take Action

Submit your assignment to your instructor for review and feedback.

Follow these steps to access the assignment:

· Click My Tools in the top navigation bar.

· Click Assignments.

· Select the relevant assignment.

· You should use the comments your instructor made about your optional milestone submission to revise your calculations as needed. Next, proceed to Step 5, where you will answer questions about your analysis, make recommendations for the client, and compile and submit your final report.

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