1.6 Learning with the Valuation Tutor System

The underlying theme of the previous sections is that the primary objective of Valuation Tutor is to give you an understanding of important concepts, their practical application, and their interpretation.  Learning takes place by working interactively with the financial statements, the software, and the textbook. This “experiential” approach develops your practical skills and sharpens your professional judgment.  The importance of this objective is currently transforming university education in several disciplines.  For example, in a recent Wall Street Journal (WSJ) article, titled “Law Schools Get Practical” (July 11, 2011) they noted:

“With the Tight Job Market, Course Emphasis Shifts From Textbooks to Skill Sets”

Another WSJ article observed (emphasis added):

“State universities have become the favorite of companies recruiting new hires because their big student populations and focus on teaching practical skills gives the companies more bang for their recruiting buck  …However, it should be noted that few schools, if any, would argue that practical skills alone are sufficient to gain a competitive advantage in the job market, but rather it is the combination of developing a strong conceptual framework in conjunction with practical skills that is ultimately rewarded in workplace.”

(Wall Street Journal, September 13, 2010)

The textbook, software and data also promote what is called an “active learning approach”.  Conceptually this approach is not new and has been traced back as far as Sophocles 5th Century B.C.:

“One must learn by doing the thing, for though you think you know it-- you have no certainty until you try.”

(Active Learning:  Creating Excitement in the Classroom by Charles C. Bonwell)

Our approach is grounded in learning by doing.  The textbook covers the standard material covered in both financial statement analysis and valuation courses.  These are sometimes taught in two separate or in one combined course.  In either case, the traditional textbook approach is extended to the real world by the Valuation Tutor software.  The software provides an immediate link to all the interactive statements filed with the SEC which can be used for reconciliation and comparison purposes.  You are always working with the latest statements and immersing yourself in the language, the aggregation issues, and reporting choices made by the real world companies.

One concern of this approach may be that one cannot cover the same amount of material as covered in a traditional course, even though it is usually acknowledged that active learning is deeper.  But technology has rapidly eliminated this traditional concern because technology lets you combine understanding concepts and developing practical skills.  Valuation Tutor does this by integrating the traditional textbook with the SEC’s interactive data processed for active learning.  This data is available at the click of a mouse and therefore after each concept is developed, an example is provided to let you see how it applies to data filed with the SEC. 

Active learning has an additional direct benefit.  For example, Robert Elliott, KPMG partner and current chairman of the AICPA, has identified and even placed a value upon the five stages of the “information value chain:”

·         Stage 1 activity, recording business events, is now worth no more than $10 per hour

·         Stage 2 activity, summarizing recorded events, is now worth no more than $30 per hour

·         Stage 3 activity, manipulating data to provide useful information, is now worth $100 per hour

·         Stage 4 activity, converting information to knowledge for decision makers, is now worth $300 per hour

·         Stage 5 activity, applying knowledge to make value adding decisions, is now worth $1,000 per hour

 In Valuation Tutor the position we adopt is threefold and which reinforces the characterization of the information value chain.

·         A strong conceptual framework is required and without it clearly Stages 3-5 are not possible to master.

·         A strong working knowledge of the actual real world financial reports and related information.  This a necessary condition for all stages.

·         The ongoing development of one’s professional judgment is also required by all activities in the “information value chain” and increasingly so as one moves along the information value chain. 

Valuation Tutor has been designed around these points and in the next section we briefly illustrate how.

Active Learning Example

To illustrate the above approach, Chapter 2 introduces the regulatory environment and the four major financial statements.  You learn how to access these statements and also how different companies make important choices in terms of how they present this data in terms of how they aggregate items within the financial statements and make critical accounting judgments.  The covers the analysis business events and data collection activities associated with a firm.  In Chapter 2 the basic elements for Financial Statement Analysis are developed.  This sits on top of the four major statements (and supporting schedules if needed) as the following figure depicts.

An active learning approach is adopted in Chapter 3 by first defining and motivating each important concept.  Then the linkage between the concept and elements in the bottom row of financial statements is developed explicitly by providing a reconciliation for Proctor & Gamble with their filed 10-K.  You can then immediately apply the same concept to any current or past public company’s interactive filing.  This chapter covers how to convert data into information.  In Chapter 4, the conceptual framework is developed further by defining and interpreting the concept to understand business ratios within the context of a firm’s business model and business strategy.  Now a CEO and upper management perspective is adopted and thus this chapter embraces activities associated with interpretation, creation of knowledge and applying to decision making activities of a firm.  This chapter also works directly with the relevant parts of the 10-K. Chapter 5 then extends financial statement analysis to the capital markets to further develop ones conceptual framework as well as reinforcing the other major activities previously discussed.  This chapter introduces price ratios and related important topics such as earnings’ quality and assessing solvency.  Again, this is integrated with what is happening in today’s financial markets.  Combined these chapters developed the user’s conceptual framework, practical skills and professional judgment associated with financial statement analysis in a very deep manner. 

A similar style is adopted in the valuation chapters, Chapters 6-10.

Problem Sets

Valuation Tutor comes with two types of problem sets.  The first set is end-of-chapter problems, which are traditional types of questions. 

A second set, available to instructors, is a large number of problem sets designed around actual financial statements and that reinforce the active learning approach.  These problems all have the following features:

1.            Problems are organized around the calculators in the tree diagram in the software shown at the beginning of this chapter.  This ensures a tight connection between concepts and practice.

2.            Problems are defined relative to real world statements filed by a large set of public companies with the SEC.  This guarantees you acquire important practical and judgment skills by applying concepts to the real world. 

3.            Problems usually provide you with partial information to work with.

4.            Solutions are available for a subset of problems for practice purposes and the remaining solutions are available to instructors.

5.            Technology eliminates the tedious time consuming aspects of working with real world filings and instead focuses your attention on important tasks such as building your conceptual, practical and professional judgment skills.

The simplest example of this type of problem is to access data from the financial statements necessary for the analysis of a particular topic.  The second level is to reproduce the calculations in Valuation Tutor in a spreadsheet application like Excel.  A third level is to follow the steps in the textbook but with a different financial statement than available in our dataset or described in the textbook.  All these are designed to create a practical familiarity with the statements and the concepts.