Few weeks back I was going thru Times Ascent and I was wondering how important it is to have a grip over US GAAP for somebody who’s thinking of a career in Financial Research. In the same breath I thought that how many guys in our college actually have a good understanding of US GAAP.I think all the people who are vying for jobs in Investment Banks,KPO’s or Boutique Research houses, need to be equipped with US GAAP. I thereby struck upon the idea of doing a plain vanilla time-series analysis of a US balance sheet. I think this exercise can be done at your respective end (in you own PC), provided you have the right material and right guidance. (I would elucidate on the exercise a little later) Anyway I would recommend doing this exercise in a group of 3-4, but if anybody wants to go solo, he’s welcome.

Now before we head towards the exercise let’s focus on few fundamental questions

• What is expected out of an Analyst?
• What an Analyst should look for?

To put it in one word I would say that an analyst is expected to be a critique. You should question everything in the Balance sheet, even the convention. KEEP ON ASKING “WHY” for the whole time, when you are in Balance sheet. I think then your real learning will begin. There’ll be lot of instances where you’ll be dumbfounded with questions and you won’t find answers easily. Don’t settle for an answer which is easily available, but not very convincing. Cause when you’ll try to unearth the answer from deep inside you’ll see a conceptual awakening and for your rest of the future, you’ll be easily able to empathize with the whole concept. I hope I’m not making you guys confuse. So let’s come back to our exercise. What we want in this exercise is just a plain-vanilla analysis. This being a beginner’s exercise I intend to keep it simple and interesting. I would try to cover as many concepts and terminology as possible. The broad idea is to make you accustomed with US GAAP numbers. We would also try to cover a simple news-run* for justifying the behavior of numbers. I think this would give you a better insight of that particular corporation in lieu of relative comparison analysis. I want you to perform this exercise by asking few fundamental questions. Lets say for e.g.

• Why Depreciation is considered an operating expense?
• Is Gordon Growth Model for valuation of cyclical stocks is justified?
• Does Harmonization^ is a utopian offshoot of globalization or it is really a pragmatic concept?
• Operating Leverage assumes fixed cost increases your risk or is there more to it?

I want all you guys who are interested in this exercise. Mail me your

Team

Number of Members

Respective Names

Any particular concept you want to include in the exercise

Batch.

.We’ll try to take a balance sheet, which contains lot of flags so that you can come across many concepts. Just remember one thing that an Analyst’s motto in a Balance sheet is to separate the real operating differences from accounting adjustments. Rest of the details about the exercise, I’ll explain in my next post... Keep watching for this space.

*News-run – Extrapolating news for a certain company in a definite time.

^Harmonization – Accepting a standard format of accounting principles for the whole Globe.