Week 8: Class Agenda

1. Ch. 8 Lecture: Financial Statement Analytics

Break: 10 min

2. Midterm Exam Guidance

3. Final Project Discussion

• Final Project Group “Speed Dating”
Upcoming Weeks
Chapter 8: Financial
Statement Analytics
Brandon Lock, Ph.D.
Baruch College, CUNY
Where we are now
2. Data
1. Data 3. Modeling 4.
Preparation
Analytics and Evaluation Visualization
and Cleaning

7. Key 8. Financial
5. The Modern 6. Audit
Performance Statement
Audit Analytics
Indicators Analytics
Learning Objectives
1. XBRL and financial reporting data
2. Financial Statement Analytics
3. Visualizations of financial statement trends using sparklines
4. Textual analysis techniques of financial text
1. XBRL and Financial
Reporting Data
XBRL is a global standard for tagging and reporting
financial information in a computer readable
format.

XBRL stands for eXtensible Business Reporting

Language and is a type of XML (extensible markup
language) used for organizing and defining
financial elements.
The use of tags allows data to be
quickly transmitted and categorized,
and the tags serve as an input for
analytics models used by financial
analysts, auditors, and regulators.
Since June 2011, the SEC requires tagging
of:
TEXT BLOCKS, INCLUDING NUMBERS AND
NUMBERS AND DATES DATES
§Balance sheet §Footnotes
§Income statement §Management discussion and analysis (MD&A)
§Statement of comprehensive income
§Statement of cash flows
§Statement of stockholders’ equity
Q. What are the benefits and costs
of XBRL for financial markets?
The XBRL Taxonomy
Each data element is tagged to identify the following within an instance
document.

• What kind of data element it is (e.g., cash)

• The relationships between data elements (e.g., current assets => cash)
• Data context (e.g., US dollars in 2014Q4)
 Example: cash and cash equivalents at the end of
quarter 4 of 2014 in USD (thousands)

<us-gaap:CashAndCashEquivalentsAtCarryingValue Tag from US GAAP

Taxonomy
contextRef="FI2014Q4" Context tag and
id="Fact-2FCE60A0E1BB610AF2F1292924554784”unique identifier
Presentation and
unitRef="iso4217_USD" decimals="-3"> currency
667593000 FACT
</us-gaap:CashAndCashEquivalentsAtCarryingValue> End of tag
Inline XBRL
• In June 2018, the SEC adopted amendments requiring the use of Inline
XBRL for financial statement information

• Inline XBRL allows filers to prepare a single document with financial

statement information that is both human- and machine-readable,
rather than separately prepare an HTML document for humans and an
XBRL exhibit for machine reading

• US filers must file financial statement information (including footnotes

and schedules) in Form 10-Q, Form 10-K, and certain non-IPO
registration statements in Inline XBRL.
Example: SEC In-line XBRL Viewer
Searching SEC Edgar Website
https://www.sec.gov/edgar/searchedgar/companysearch.html

• Search for Company

• Click on a filing (e.g., 10-K: Annual Report)
• Navigate filing using Sections
XBRL Reporting and Standardized Metrics
• Analysis of XBRL data can be difficult because different companies may use
different tags.
- The X in XBRL stand for “extensible” and means that firms can make their own tags if
they feel a data item doesn’t fit within the existing framework

• For example to show total revenue, IBM uses the Revenues tag and Apple
uses RevenuefromContractwithCustomerExcludingAssessedTax.
- Note: Apple’s more specific tag reflects its compliance with revenue recognition rules
that exclude assessed taxes for revenue from contracts with customers, which is a
significant part of Apple’s business

• XBRL analytical software (e.g., CalcBench or XBRLAnalyst) use standardized

metrics to consolidate similar tags (e.g. both Revenues and
SalesRevenuesNet appear in a standard [Revenue] metric.)

Calcbench is a data provider that analyzes XBRL information. Sign up here:

https://www.calcbench.com/baruch
XBRL and Real-Time Reporting
• Currently financial statements are tagged at the end of each period

• XBRL-GL (XBRL-General Ledger) allows numbers to be tagged as they

are inputted into a financial system

• In the future, XBRL-GL may be applied to individual transactions to

facilitate real-time reporting
2. Financial Statement
Analytics
Financial statement analysis is used
by investors, analysts, auditors, and
other interested stakeholders to
review and evaluate a company’s
financial statements and financial
performance.
Ratio analysis is a tool used to
evaluate relationships among
different financial statement items
to assess the financial health of a
business.
There are four main types of ratios:
Liquidity ratios assess the ability to Solvency (or financing) ratios help
satisfy the company’s short-term assess a company’s ability to pay its
obligations (e.g. current ratio and debts and stay in business (e.g. debt-
quick ratio) to-equity ratio)

Profitability ratios provide information

Activity ratios are a computation on the profitability of a company and
of a firm’s operating efficiency (e.g. its prospects for the future (e.g. profit
asset turnover ratio) margin, return on assets ratio)
 The DuPont ratio analysis analyzes
components of return on equity
Return on equity (ROE) = Profit margin × Asset turnover × Equity Multiplier

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡𝑠

= × ×
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦

For example, DuPont’s 2009 Q2 return on equity is

27.8% = 29.4% PM x 20.1% AT x 471.7% EM
 Exhibit 8-2 Comparison of Ratios among
Three Companies

Q: According to the DuPont analysis, which components of ROE explain why Facebook’s ROE
is higher than that of MSFT and AAPL?
3. Visualizing financial
statement ratios
Sparklines
Sparklines are small graphic trendlines that efficiently summarize numbers or
statistics in a graph without axes in a single spreadsheet cell.

To Add a Sparkline:
• Select a blank cell at the end of a row of data.
• Select Insert and pick Sparkline type, like Line, or Column.
• Select cells in the row and OK in menu.
• More rows of data? Drag handle to add a Sparkline for each row.
https://support.microsoft.com/en-us/office/use-sparklines-to-show-data-
trends-1474e169-008c-4783-926b-5c60e620f5ca
Q: Based on this DuPont
analysis, which of the
following reason(s)
explains why Walmart
experienced a decline in
ROE in 2016?

A. Declining profit
margins
B. Declining asset
turnover
C. Declining equity
multiplier

Exhibit 8-4
4. Textual Analysis of
Financial Text
Textual analysis analyzes the frequency
of words to examine the linguistic
content, meaning, and structure of text
and relationships between different
texts
Challenges of Analyzing Financial Text
• Words in general English dictionaries may express different sentiment
in a financial context:
• For example: tax, cost, liability, and depreciation are not necessarily negative in a
financial context, but could be in a general context.

• Managers and analysts may use financial jargon to discuss company

performance
Sentiment Analysis of Financial Text:
The Loughran and McDonald (2011)
financial language dictionaries categorize
words commonly used in 10-Ks
Positive Litigious
• (e.g. enable, achieve) • (e.g. mediate, petition)
Negative Modal
• (e.g. loss, adverse) • (e.g. possible, likely)
Uncertain Constraining
• (e.g. anticipate, depend) • (e.g. commit, impair)
Linguistic sentiment can be useful in predicting
investment returns.
The higher the proportion of
negative words in 10-K
disclosures, the lower the stock
returns around filings

The solid line shows a financial

dictionary (Fin-Neg), and the
dashed line shows a normal
English dictionary (H4N-Inf) with
negative word classifications.

Exhibit 8-5: (Loughran and McDonald, 2011)

Analysts can track sentiment over time
and analyze other text sources (e.g.
news articles, social media) to better
understand firm performance and risk.
Q. Which would you predict would
have more positive sentiment in a
10-K?

A. The footnotes to the financial statements

B. The MD&A section of the financial statements
Summary
• XBRL tagging facilitates accurate and timely transmission of financial
information to stakeholders.
- An extensive number of tags (over 19,000 financial elements) allows use of either
standard or company-defined tags

• Financial Statement Analytics and ratio analysis are used to review and
evaluate a company’s financial statements and financial performance
(e.g., DuPont ratios)
• Sparklines are ways to efficiently and effectively visualize firm performance.

• Using sentiment analysis to analyze financial text